<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-42127
PROSPECTUS SUPPLEMENT
(To Prospectus Dated March 25, 1998)
$204,471,645 (APPROXIMATE)
ABN AMRO MORTGAGE CORPORATION [LOGO]
DEPOSITOR
MULTI-CLASS MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-1
PRINCIPAL AND/OR INTEREST PAYABLE ON THE 25TH DAY OF EACH MONTH BEGINNING IN
APRIL 1998
------------------------
THESE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN ABN AMRO
MORTGAGE CORPORATION OR ANY OF ITS AFFILIATES. NEITHER THESE CERTIFICATES
NOR THE UNDERLYING MORTGAGE LOANS ARE GUARANTEED BY ANY AGENCY OR
INSTRUMENTALITY OF THE UNITED STATES.
------------------------
The Mortgage Pass-Through Certificates, Series 1998-1 (the 'CERTIFICATES'),
will consist of the following seventeen classes: (i) Class IA-1, Class IA-2,
Class IA-3, Class IA-4, Class IA-5, Class IA-6 and IA-X (the 'CLASS IA
CERTIFICATES'), (ii) Class IIA-1, Class IIA-X and Class IIA-P (together, the
'CLASS IIA CERTIFICATES' and together with the Class IA Certificates, the 'CLASS
A CERTIFICATES'), (iii) Class M, Class B-1 and Class B-2 (the 'SENIOR
SUBORDINATE CERTIFICATES'), (iv) Class B-3, Class B-4 and Class B-5 (the 'JUNIOR
SUBORDINATE CERTIFICATES' and, together with the Senior Subordinate
Certificates, the 'SUBORDINATE CERTIFICATES') and (iv) Class R (the 'RESIDUAL
CERTIFICATE' and, together with the Class A Certificates, the 'SENIOR
CERTIFICATES'). Only the Senior Certificates (other than the Class IA-1
Certificates) and the Senior Subordinate Certificates (collectively, the
'OFFERED CERTIFICATES') are offered hereby. The Class IA-1 Certificates and the
Junior Subordinate Certificates are not offered hereby.
APPROXIMATE
INITIAL CLASS
PRINCIPAL REMITTANCE
CLASS BALANCE RATE (1)
- ---------- -------------- ----------------
Class IA-2 $ 23,789,603 6.500%
Class IA-3 63,730,000 7.000
Class IA-4 10,043,000 7.000(2)
Class IA-5 37,632,681 6.500
Class IA-6 14,254,582 6.500
Class IA-X 0 6.750(3)
Class IIA-1 45,850,628 6.500
APPROXIMATE
INITIAL CLASS
PRINCIPAL REMITTANCE
CLASS BALANCE RATE (1)
- ---------- -------------- ----------------
Class IIA-X $ 0 6.500%(4)
Class IIA-P 333,045 (5)
Class M 5,416,841 Variable Rate(6)
Class B-1 2,280,777 Variable Rate(6)
Class B-2 1,140,388 Variable Rate(6)
Class R(7) 100 6.750
The Offered Certificates are being offered by Donaldson, Lufkin & Jenrette
Securities Corporation and ABN AMRO Incorporated (the 'UNDERWRITERS') from time
to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Sales may be made to investors at the same price
or at different prices. See 'METHOD OF DISTRIBUTION' herein. The aggregate
proceeds to ABN AMRO Mortgage Corporation (the 'COMPANY' or 'AMAC') from the
sale of the Offered Certificates, before deducting expenses payable by the
Company, will be 100.706332% of the initial aggregate Certificate Principal
Balance of the Offered Certificates plus accrued interest. The difference
between the aggregate purchase price for the Offered Certificates paid to the
Company and the aggregate proceeds from the sale of the Offered Certificates
realized by the Underwriters will constitute underwriting discounts and
commissions. The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933. See
'METHOD OF DISTRIBUTION' herein.
------------------------
SEE 'RISK FACTORS' IMMEDIATELY FOLLOWING 'SUMMARY INFORMATION' HEREIN AND
IMMEDIATELY FOLLOWING 'SUMMARY OF PROSPECTUS' IN THE PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE PURCHASING ANY OF THE
OFFERED CERTIFICATES.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE NOR HAS ANY
SUCH COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Offered Certificates are offered by the Underwriters, as specified
herein, subject to receipt and acceptance by them, and subject to its right to
reject any order in whole or in part and to certain other conditions. It is
expected that delivery of the Offered Certificates (other than the Residual
Certificate) will be made through the facilities of the Depository Trust
Company, and that delivery of the Residual Certificate will be made at the
offices of Donaldson, Lufkin & Jenrette Securities Corporation, on or about
March 30, 1998. Additional cover page information is contained on the following
three pages.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION ABN AMRO INCORPORATED
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 27, 1998
<PAGE>
(1) Interest distributed to the Offered Certificates on each Distribution
Date will have accrued during the preceding calendar month at the
applicable per annum Remittance Rate (as defined herein).
(2) On each Distribution Date on or before the Class IA-4 Accretion
Termination Date (as defined herein), an amount equal to the Class IA-4
Accrual Amount (as defined herein) will be added to the Class IA-4
Principal Balance, and such amount will be distributed as principal to
other Components (as defined herein) and Classes of Class IA
Certificates as described herein and will not be distributed as
interest to the Class IA-4 Certificates.
(3) The Class IA-X Certificates will accrue interest on the Class IA-X
Notional Amount (as defined in "Description of the Certificates --
Distributions of Interest" herein). The Class IA-X Notional Amount as
of the Closing Date will be approximately $7,010,057. Class IA-X
Certificates will not be entitled to receive distributions of
principal.
(4) The Class IIA-X Certificates will accrue interest on the Class IIA-X
Notional Amount (as defined in "Description of the Certificates --
Distributions of Interest" herein). The Class IIA-X Notional Amount as
of the Closing Date will be approximately $1,828,335. Class IIA-X
Certificates will not be entitled to receive distributions of
principal.
(5) The Class IIA-P Certificates will not be entitled to distributions of
interest and will only receive principal in respect of those Group II
Mortgage Loans with Pass-Through Rates that are less than 6.50% per
annum. For a description of the principal distributions to Class IIA-P,
see "Description of the Certificates -- Distributions of Principal --
Class IIA-P Principal Distribution Amount."
(6) The Remittance Rate on the Class M, Class B-1 and Class B-2
Certificates will vary from 6.50% to 6.75% per annum. For a more
detailed description of the Remittance Rate on the Class Senior
Subordinate Certificates, see "Description of the
Certificates--Distributions of Interest--Senior Subordinate Remittance
Rate" herein. The initial Remittance Rate for each Class of Senior
Subordinate Certificates will be approximately 6.708% per annum.
(7) The Class R Certificate will be comprised of two Components, Component
R-1, which represents the sole residual interest in REMIC I (as defined
herein), and Component R-2, which represents the sole residual interest
in REMIC II (as defined herein).
The Certificates, other than the Class R Certificate, will evidence all
of the beneficial ownership interest in a trust ("REMIC II") established by the
Company, the assets of which will evidence all of the beneficial ownership
interest in another trust (except for the interests represented by the Class R
Certificate) also established by the Company ("REMIC I"). REMIC I will consist
primarily of a pool (the "Mortgage Pool") segregated into two groups ("Mortgage
Loan Group I" and "Mortgage Loan Group II" and each, a "Mortgage Loan Group") of
conventional one- to four-family, fixed rate, first lien residential mortgage
loans ("Group I Mortgage Loans" and "Group II Mortgage Loans," respectively, and
collectively, the "Mortgage Loans"). All of the Group I Mortgage Loans have
original terms to stated maturity (based on the date of origination or any later
modification) of greater than 15 but not more than 30 years and all of the Group
II Mortgage Loans have original terms to stated maturity (based on the date of
origination or any later modification) of not more than 15 years. The
characteristics of the Mortgage Loans comprising each Mortgage Loan Group are
described herein under "The Mortgage Pool." Except in the limited circumstances
described herein, the Class IA Certificates will correspond to the Group I
Mortgage Loans, the Class IIA
S-2
<PAGE>
Certificates will correspond to the Group II Mortgage Loans and the Subordinate
Certificates will correspond to both the Group I Mortgage Loans and the Group II
Mortgage Loans.
Distributions of interest and principal on the Class IA Certificates
and distributions of interest and principal on the Class IIA Certificates will
be based on interest and principal received or advanced with respect to the
Group I Mortgage Loans and the Group II Mortgage Loans, respectively, except
under the limited circumstances described herein. The rights of the holders of
the Subordinate Certificates to receive distributions with respect to the
Mortgage Loans will be based upon interest and principal received or advanced
with respect to both Mortgage Loan Groups. Such rights in the case of the
Subordinate Certificates will be subordinate to the rights of the holders of the
Senior Certificates. The rights of holders of each Class of Subordinate
Certificates will be subordinate to the rights of any Class of Subordinate
Certificates with a lower numerical designation.
The Company intends to cause an election to be made to treat REMIC I
and REMIC II as "real estate mortgage investment conduits" (each, a "REMIC") for
federal income tax purposes. All of the Certificates issued by REMIC I and REMIC
II, other than the Class R Certificate, will represent ownership of REMIC
"regular interests". The Class R Certificate will represent ownership of the
REMIC "residual interest" in REMIC II and REMIC I. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
The Offered Certificates, other than the Class R Certificate, evidence
interests only in REMIC II and are payable solely from amounts received with
respect thereto. The Class R Certificate evidences the residual interests in
REMIC I and REMIC II.
The Company has the right to effect early retirement of the
Certificates under certain circumstances. See "Description of the
Certificates--Optional Termination of the REMIC I" herein.
The yield to maturity on any (a) Class of Class A Certificates
generally will depend on the rate and timing of principal payments (including
prepayments, defaults and liquidations) on the Mortgage Loans in the related
Loan Group, and to the extent of the limited circumstances described herein, in
the other Loan Group and (b) Class of Subordinate Certificates will depend on
the rate and timing of principal payments (including prepayments, defaults and
liquidations) on the Mortgage Loans.
The Class IA-4 Certificates will be especially sensitive to the rate of
prepayment on the Mortgage Loans because such Certificates will receive
distributions of principal on any Distribution Date only to the extent of the
portion of the Group I Senior Principal Distribution Amount (as defined herein)
remaining, if any, after principal distributions to the PACs (as defined
herein), to the extent of their respective planned principal balances for such
Distribution Date as set forth in Appendix A (each, a "Planned Principal
Balance"), and to the TACs (as defined herein), to the extent of their
respective targeted principal balances for such Distribution Date as set forth
in Appendix B (each, a "Targeted Principal Balance"). Furthermore, if the Group
I Senior Principal Distribution Amount on any Distribution Date is not
sufficient to reduce the Class or Component Principal Balances of the PACs to
their Planned Principal Balances and to reduce the Class or Component Principal
Balances of the TACs to their Targeted Principal Balances, the Class IA-4
Certificates will receive no principal distribution on such Distribution Date.
The yield to maturity on the Class IA-X Certificates will be extremely
sensitive to the level of Principal Prepayments on certain of the Group I
Mortgage Loans. The interest payable to the Class IA-X Certificates is based on
the weighted average of the Stripped Interest Rates (as defined herein) of the
Group I Mortgage Loans having Pass-Through Rates in excess of 6.750% per annum
(the "Group I Premium Rate
S-3
<PAGE>
Mortgage Loans"). Therefore the yield to maturity on the Class IA-X Certificates
will generally decrease as a result of faster than expected Principal
Prepayments on the Group I Premium Rate Mortgage Loans. Prospective investors
should fully consider the risks associated with an investment in the Class IA-X
Certificates, including the possibility that if the rate of Principal
Prepayments on the Group I Premium Rate Mortgage Loans is rapid, such investors
may not fully recoup their initial investments.
Because the interest payable on the Class IA-X Certificates is derived
from different Group I Mortgage Loans, it is possible that faster than expected
Principal Prepayments on the Group I Premium Rate Mortgage Loans may occur at
the same time as slower than expected Principal Prepayments on the Group I
Discount Mortgage Loans which would result in a lower yield to maturity for the
Class IA-X Certificates.
The yield to maturity on the Class IIA-X Certificates will be extremely
sensitive to the level of Principal Prepayments on certain of the Group II
Mortgage Loans. The interest payable to the Class IIA-X Certificates is based on
the weighted average of the Stripped Interest Rates (as defined herein) of the
Group II Mortgage Loans having Pass-Through Rates in excess of 6.500% per annum
(the "Group II Premium Rate Mortgage Loans"). Therefore the yield to maturity on
the Class IIA-X Certificates will generally decrease as a result of faster than
expected Principal Prepayments on the Group II Premium Rate Mortgage Loans.
Prospective investors should fully consider the risks associated with an
investment in the Class IIA-X Certificates, including the possibility that if
the rate of Principal Prepayments on the Group II Premium Rate Mortgage Loans is
rapid, such investors may not fully recoup their initial investments.
The yield to maturity on the Class IIA-P Certificates will be extremely
sensitive to the level of Principal Prepayments on certain of the Group II
Mortgage Loans. The principal payable to the Class IIA-P Certificates is derived
from Group II Mortgage Loans having Pass-Through Rates lower than 6.500% per
annum (the "Group II Discount Mortgage Loans"). Therefore, the yield to maturity
on the Class IIA-P Certificates will be adversely affected by slower than
expected prepayments of the Group II Discount Rate Mortgage Loans.
Because the interest payable on the Class IIA-X Certificates and the
principal distributable to the Class IIA-P Certificates are derived from
different Mortgage Loans within Loan Group II, it is possible that faster than
expected Principal Prepayments on the Group II Premium Rate Mortgage Loans may
occur at the same time as slower than expected Principal Prepayments on the
Group II Discount Mortgage Loans which would result in a lower yield to maturity
for both the Class IIA-X and Class IIA-P Certificates.
The rights of the holders of the Senior Subordinate Certificates to
receive distributions of interest and principal are subordinated to the rights
of the holders of the Senior Certificates to receive distributions of interest
and principal. In addition, the rights of the holders of the Class B-2
Certificates to receive distributions of interest and principal are subordinated
to the rights of the holders of the Class B-1 and Class M Certificates to
receive distributions of interest and principal, and the rights of the holders
of the Class B-1 Certificates to receive distributions of interest and principal
are subordinated to the rights of the holders of the Class M Certificates to
receive distributions of interest and principal. Furthermore, following the
reduction of the aggregate Class Principal Balance of the Junior Subordinate
Certificates to zero, the yield to maturity on each class of the Senior
Subordinate Certificates will be extremely sensitive to certain realized losses
on the Mortgage Loans because a disproportionate amount of such losses (rather
than a pro rata portion thereof) generally will be allocable to such
Certificates first to Class B-2, to then Class B-1 and then to Class M.
Similarly, following the reduction of the aggregate of the Class Principal
Balances of the Subordinate Certificates to zero, the yield to maturity on the
Senior Certificates will be sensitive to all realized losses on the Mortgage
Loans. See "Description of the Certificates--Subordination and Allocation of
Losses" herein.
S-4
<PAGE>
The Offered Certificates, other than the Residual Certificate, are
offered in minimum denominations equivalent to not less than $25,000 initial
Certificate Principal Balance each and multiples of $1 in excess thereof. The
Residual Certificate, which will have an initial Class Principal Balance of
$100, will be offered in registered, certificated form in a single denomination
of a 100.00% percentage interest.
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates each be rated "AAA" (except for the Class IA-X, Class IIA-P
and Class IIA-X Certificates, which will be rated "AAAr") by Standard & Poor's,
a division of The McGraw-Hill Companies, Inc. ("S&P") and "AAA" by Duff & Phelps
Credit Rating Co. ("DCR"), that the Class M Certificates be rated not less than
"AA" by DCR, that the Class B-1 Certificates be rated not less than "A" by DCR;
and that the Class B-2 Certificates be rated not less than "BBB" by DCR.
Until the expiration of 90 days after the date of this Supplement, all
dealers effecting transactions in the Offered Certificates, whether or not
participating in this distribution, may be required to deliver a Supplement and
the Prospectus to which it relates. This is in addition to the obligation of
dealers to deliver a Supplement and Prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
No person has been authorized to give any information or to make any
representations other than those contained in this Supplement and the Prospectus
to which it relates, and, if given or made, such information or representations
must not be relied upon. This Supplement does not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the Offered
Certificates offered hereby nor an offer of the Offered Certificates to any
person in any state or other jurisdiction in which such offer would be unlawful.
The delivery of this Supplement at any time does not imply that information
herein is correct as of any time subsequent to its date; however, if any
material change occurs while this Supplement is required by law to be delivered,
this Supplement will be amended or supplemented accordingly.
S-5
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
--------
<S> <C>
SUMMARY INFORMATION........................................................................................ S-8
RISK FACTORS............................................................................................... S-33
Effect of Principal Prepayments................................................................... S-33
Risks of Holding Subordinate Certificates......................................................... S-36
Limited Source of Payments--No Recourse to Company, Servicer or Trustee........................... S-36
Limited Liquidity................................................................................. S-37
Geographic Concentration.......................................................................... S-37
Book-Entry System................................................................................. S-37
THE TRUST.................................................................................................. S-38
DESCRIPTION OF THE MORTGAGE POOL........................................................................... S-38
Loan Group I...................................................................................... S-40
Loan Group II..................................................................................... S-40
GROUP I MORTGAGE LOANS..................................................................................... S-46
GROUP II MORTGAGE LOANS.................................................................................... S-51
DESCRIPTION OF THE CERTIFICATES............................................................................ S-58
General ......................................................................................... S-58
Book-Entry Registration........................................................................... S-59
Definitive Certificates........................................................................... S-61
Priority of Distributions......................................................................... S-61
Distributions of Interest......................................................................... S-66
Distributions of Principal........................................................................ S-68
Principal Prepayments............................................................................. S-74
Subordination and Allocation of Losses............................................................ S-75
The Class R Certificate........................................................................... S-78
Advances ......................................................................................... S-78
Available Distribution Amount..................................................................... S-79
Last Scheduled Distribution Date.................................................................. S-80
Optional Termination.............................................................................. S-80
SERVICING.................................................................................................. S-81
Servicing Compensation and Payment of Expenses.................................................... S-81
Special Servicing Agreements...................................................................... S-82
YIELD AND PREPAYMENT CONSIDERATIONS........................................................................ S-82
General ......................................................................................... S-82
Principal Prepayments and Compensating Interest................................................... S-83
The Subordinate Certificates...................................................................... S-83
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Rate of Payments................................................................................... S-84
Special Sensitivities.............................................................................. S-84
Basic Prepayment Assumption........................................................................ S-85
Yield Considerations with Respect to the Class IA-X,
Class IIA-X and Class IIA-P Certificates.................................................. S-87
Additional Yield Considerations Applicable Solely to the Class R Certificates...................... S-90
Additional Information............................................................................. S-90
CREDIT ENHANCEMENTS......................................................................................... S-91
Subordination...................................................................................... S-91
Shifting of Interests.............................................................................. S-91
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS UNDER CALIFORNIA LAW................................................ S-92
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................................................... S-92
New Withholding Regulations........................................................................ S-93
Special Tax Considerations Applicable to the Residual Certificate.................................. S-93
CERTAIN LEGAL INVESTMENT ASPECTS............................................................................ S-95
ERISA CONSIDERATIONS........................................................................................ S-96
Underwriters' PTE.................................................................................. S-96
Prohibited Transaction Class Exemptions............................................................ S-97
Restrictions on the Senior Subordinate and Residual Certificate.................................... S-98
METHOD OF DISTRIBUTION...................................................................................... S-98
LEGAL MATTERS............................................................................................... S-98
CERTIFICATE RATINGS......................................................................................... S-98
APPENDIX A - Planned Principal Balance Tables
APPENDIX B - Targeted Principal Balance Tables
APPENDIX C - Declining Balance Tables
</TABLE>
S-7
<PAGE>
SUMMARY INFORMATION
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned to them in the Prospectus.
<TABLE>
<S> <C>
Title of Securities........................ Mortgage Pass-Through Certificates, Series 1998-1 (the
"Certificates")
Depositor.................................. ABN AMRO Mortgage Corporation (the "Company" or
"AMAC")
Servicer................................... LaSalle Home Mortgage Corporation (the "Servicer")
Seller..................................... Standard Federal Bank, FSB, a (the "Seller")
Trustee.................................... Chase Bank of Texas, N.A. (the "Trustee")
Cut-Off Date............................... March 1, 1998 (the "Cut-Off Date")
Closing Date............................... On or about March 30, 1998 (the "Closing Date")
Certificates............................... Multi-Class Mortgage Pass-Through Certificates, Series 1998-1,
Class A (as defined below), Class M, Class B-1, Class B-2, Class
B-3, Class B-4, Class B-5 and Class R Certificates. The Class A
Certificates (other than the Class IA-1 Certificates), the Class M
Certificates, the Class B-1 Certificates, the Class B-2 Certificates
and the Class R Certificates are sometimes collectively referred to
herein as the "Offered Certificates." Only the Offered
Certificates are offered hereby.
The "Class A Certificates" will consist of the Class IA-1, IA-2,
IA-3, IA-4, IA-5, IA-6, IA-X (the "Class IA Certificates") ,
IIA-1, IIA-X and IIA-P Certificates (the "Class IIA
Certificates") .
The Offered Certificates will be issued pursuant to a Pooling and
Servicing Agreement, dated as of the Cut-Off Date, between the
Company, the Servicer and the Trustee. The approximate initial
Class Principal Balance, rate of interest borne by a certificate
(the "Remittance Rate"), and types of the Offered Certificates
will be as follows:
</TABLE>
S-8
<PAGE>
Approximate
Initial
Class
Principal Remittance
Class Balance Rate Type
Class IA-2 $23,789,603 6.500% Senior/PAC
Class IA-3 63,730,000 7.000% Senior/TAC
Class IA-4 10,043,000 7.000% Senior/Accrual
Class IA-5 37,632,681 6.500% Senior/PAC
Class IA-6 14,254,582 6.500% Senior/PAC
Class IA-X 0 6.750% Senior/Interest Only
Class IIA-1 45,850,628 6.500% Senior Fixed
Class IIA-X 0 6.500% Senior/Interest Only
Class IIA-P 333,045 0.00% Senior/Principal Only
Class M 5,416,841 Variable Senior Subordinate
Class B-1 2,280,777 Variable Senior Subordinate
Class B-2 1,140,388 Variable Senior Subordinate
Class R 100 6.750% Senior/Residual
<TABLE>
<S> <C>
The Class IIA-X and Class IA-X Certificates are interest only
Certificates. The Class IIA-X and Class IA-X Certificates will not
receive distributions of principal, but will accrue interest on
the applicable Notional Amount (as defined herein).
The Class IIA-P Certificates are principal only Certificates and
will not be entitled to payments of interest.
The Class IA-2, IA-5 and IA-6 Certificates are sometimes
collectively referred to herein as the "PACs."
The Class IA-3 Certificates, together with Component IA-1-3 of the
Class IA-1 Certificates, are sometimes collectively referred to
herein as the "TACs."
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
Components. The Class IA-1 and Class R Certificates will be
comprised of multiple components (each, a "Component"). Each
Component of the Class IA-1 Certificates will have a specified
principal balance (a "Component Principal Balance") or notional
amount (a "Component Notional Amount"), which functions in a
manner comparable to that of a Class Principal Balance or Class
Notional Amount on which interest will accrue at a designated
Remittance Rate (other than Components IA-1-1 and IA-1-4 of the
Class IA-1 Certificates, which are not entitled to distributions
of interest). Holders of a Class of Certificates comprised of
Components will be entitled to receive distributions on any
Distribution Date to the extent of the amount distributed with
respect to the related Components on such Distribution Date.
Holders of a Class of Certificates comprised of Components may not
transfer such Components separately.
For purposes of calculating distributions, the Class IA-1
Certificates, which are not offered hereby, will be comprised of
six Components having the designations, initial Component
Principal Balances or Component Notional Amounts and Remittance
Rates set forth below:
</TABLE>
<TABLE>
<CAPTION>
Approximate Initial
Component Principal Remittance
Designation Balance Rate
----------- -------------- ----------
<S> <C> <C> <C>
Component IA-1-1 $7,308,366 (1)
Component IA-1-2 0 7.000%(2)
Component IA-1-3 $47,875,996 7.000%(3)
Component IA-1-4 $423,013 (4)
Component IA-1-5 $ 22,737,148(5) 6.750%
Component IA-1-6 0 6.750%(6)
</TABLE>
<TABLE>
<S> <C>
(1) Component IA-1-1 will not be entitled to distributions of
interest and will receive principal only in respect of the Group I
Mortgage Loans.
(2) Component IA-1-2 will accrue interest on the Component IA-1- 2
Notional Amount (as defined in "Description of the Certificates --
Distributions of Interest" herein). The Component IA-1-2 Notional
Amount as of the Closing Date will be approximately $5,405,490.
Component IA-1-2 will not be entitled to receive distributions of
principal.
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
(3) On each Distribution Date on or before the Component IA-1-3
Accretion Termination Date (as defined herein), an amount equal to
the Component IA-1-3 Accrual Amount (as defined herein) will be
added to the Component IA-1-3 Principal Balance, and such amount
will be distributed as principal to other Components and Classes
of Class IA Certificates as described herein and will not be
distributed as interest to Component IA-1-3.
(4) Component 1A-1-4 will not be entitled to distributions of
interest and will only receive principal in respect of those Group
I Mortgage Loans with Pass-Through Rates that are less than 6.750%
per annum. For a description of the principal distributions to
Component IA-1-4, see "Description of the
Certificates--Distributions of Principal--Component IA-1-4
Principal Distribution Amount."
(5) Component IA-1-5 will generally not be entitled to receive any
distributions of Group I Principal Prepayments (as defined herein)
until the Distribution Date in April 2003.
(6) Component IA-1-6 will accrue interest on the Component IA-1- 6
Notional Amount (as defined in "Description of the Certificates --
Distributions of Interest" herein). The Component IA-1-6 Notional
Amount as of the Closing Date will be approximately $9,891,000.
Component IA-1-6 will not be entitled to receive distributions of
principal.
The Class R Certificate will be comprised of two Components,
Component R-1 and Component R-2. Component R-1 represents the
residual interest in REMIC I and Component R-2 represents the
residual interest in REMIC II.
The Certificates, other than the Class R Certificate, will
evidence all the beneficial ownership interest in a trust ("REMIC
II") established by the Company, the assets of which, together
with the Class R Certificate described below, will evidence all
the beneficial ownership interest in another trust (except for the
interests represented by the Class R Certificate), also
established by the Company ("REMIC I"), into which the mortgage
loans (the "Mortgage Loans") will be deposited. The Company will
cause elections to be made to treat REMIC I and REMIC II as real
estate mortgage investment conduits (each, a "REMIC"). See
"Description of the Certificates" herein.
The Mortgage Pool.......................... The Mortgage Pool will consist primarily of conventional fixed-
rate residential mortgage loans (the "Mortgage Loans") secured
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
by first liens on one-to four-family residential properties (the
"Mortgaged Properties"). The Mortgage Loans consist of
approximately 868 Mortgage Loans with an aggregate principal
balance as of the Cut-Off Date of approximately $285,096,944 (the
"Cut-Off Date Pool Principal Balance"). The principal balance at
origination of each Mortgage Loan ranged from a minimum of
approximately $225,000 to a maximum of approximately $1,000,000,
with an average principal balance at origination of $328,961. All
of the Mortgage Loans consist of Mortgage Loans with original
terms to stated maturity (based on the date of origination or any
later modification) of up to 30 years, with a weighted average
remaining term to maturity (adjusted for Curtailments) of
approximately 328 months as of the Cut-Off Date. The Mortgage
Loans are divided into two groups ("Mortgage Loan Group I" and
"Mortgage Loan Group II," each, a "Mortgage Loan Group"),
designated the Group I Mortgage Loans and the Group II Mortgage
Loans, respectively. Approximately 97.53% of the Mortgage Loans
have FICO Scores (as defined below) and approximately 95.88% of
the Mortgage Loans have ACUScores (as defined below). The weighted
average FICO Score of the Mortgage Loans that were so scored is
731. The weighted average ACUScore of the Mortgage Loans that were
so scored is 101.
The Seller expects the Group I and Group II Mortgage Loans to have
the characteristics described below.
For a further description of the Mortgage Loans, see "Description
of the Mortgage Pool" herein.
</TABLE>
S-12
<PAGE>
Selected Mortgage Loan Data
Approximate as of the Cut-Off Date
<TABLE>
<CAPTION>
Group I Mortgage Loans
- ----------------------
<S> <C>
Number of Mortgage Loans................................ 729
Aggregate Unpaid Principal Balance...................... $237,039,011
Range of Unpaid Principal Balances...................... $224,532 - $813,756
Average Unpaid Principal Balance........................ $325,156
Range of Mortgage Rates................................. 6.625% -8.500%
Weighted Average Mortgage Rate.......................... 7.482%
Range of Remaining Terms to Stated Maturity............. 348 months-360 months
Weighted Average Remaining Term to Stated Maturity...... 359 months
Weighted Average Loan Age(1)............................ 1 month
Range of Original Loan-to-Value Ratios.................. 23.40% - 95.00%
Weighted Average Original Loan-to-Value Ratio........... 74.03%
Weighted Average FICO Score(2).......................... 730
Weighted Average ACUScore(3)............................ 103
</TABLE>
- -------------------
(1) Based on the number of months from and including the first Monthly Payment
to and including the Cut-Off Date.
(2) Based on the portion of the Group I Mortgage Loans (approximately 98.44%)
that were scored.
(3) Based on the portion of the Group I Mortgage Loans (approximately 96.20%)
that were scored.
S-13
<PAGE>
<TABLE>
<CAPTION>
Group II Mortgage Loans
- ----------------------
<S> <C>
Number of Mortgage Loans 139
Aggregate Unpaid Principal Balance...................... $48,057,933
Range of Unpaid Principal Balances...................... $229,876 - $1,000,000
Average Unpaid Principal Balance........................ $345,741
Range of Mortgage Rates................................. 6.375% - 8.250%
Weighted Average Mortgage Rate.......................... 6.965%
Range of Remaining Terms to Stated Maturity............. 168 months-180 months
Weighted Average Remaining Term to Stated Maturity...... 179 months
Weighted Average Loan Age(1)............................ 1 month
Range of Original Loan-to-Value Ratios.................. 24.30% - 90.00%
Weighted Average Original Loan-to-Value Ratio........... 68.88%
Weighted Average FICO Score(2).......................... 736
Weighted Average ACUScore(3)............................ 93
</TABLE>
- -------------------
(1) Based on the number of months from and including the first Monthly Payment
to and including the Cut-Off Date.
(2) Based on the portion of the Group II Mortgage Loans (approximately 93.05%)
that were scored.
(3) Based on the portion of the Group II Mortgage Loans (approximately 94.30%)
that were scored.
S-14
<PAGE>
<TABLE>
<S> <C>
Obligations of the Servicer................ The Servicer will service all Mortgage Loans in the Mortgage Pool.
Notwithstanding anything to the contrary in the Prospectus, the
Servicer will provide all customary servicing functions with respect
to the Mortgage Loans pursuant to the Pooling and Servicing
Agreement. The Servicer will be entitled to (i) a monthly
Servicing Fee (as defined herein) with respect to each Mortgage
Loan serviced by such Servicer, (ii) any interest or investment
income earned on funds deposited in certain accounts as described
herein, and (iii) certain additional servicing compensation as
described herein.
Initial Aggregate Certificate
Principal Balance of Certificates......... $285,096,944 (approximate, subject to an upward or downward
variance of no more than 5%). The Class IA Certificates and the
Class IIA Certificates will comprise approximately 96.10%, the
Senior Subordinate Certificates will comprise approximately
3.10%, and the Junior Subordinate Certificates will comprise
approximately 0.80% of the initial aggregate Certificate Principal
Balance of the Certificates.
Group I and Group II Initial
Weighted Average Pass-Through Rate......... Initially, the weighted average Pass-Through Rates for the Group
I Mortgage Loans and the Group II Mortgage Loans will be
approximately equal to 7.219% and 6.703% per annum,
respectively.
REMIC II and
REMIC I.................................... The assets of REMIC II will consist of the Certificates (other than
Component R-1 of the Class R Certificate) issued by REMIC I.
The assets of REMIC I will consist primarily of the Mortgage
Loans. REMIC I will also contain (i) certain insurance policies and
rights thereunder related to the Mortgage Loans, (ii) any property
which secured a Mortgage Loan and which is acquired by
foreclosure or by deed in lieu of foreclosure after the Cut-Off Date,
(iii) amounts held in the Certificate Account, and (iv) certain other
assets all as described herein.
Book-Entry Registration.................... Except in certain limited circumstances as described herein, the
Offered Certificates (except for the Class R Certificate)
generally will be available only in book-entry form through the
facilities of The Depository Trust Company ("DTC"). See
"Description of the Certificates -- Book-Entry Registration"
herein.
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
Priority of Distributions.................. Commencing in April 1998, on the 25th day of each month, or if
such 25th day is not a business day, then on the immediately
succeeding business day (each, a "Distribution Date"), prior to the
Credit Support Depletion Date (as defined below), distributions
will in general be made from the Group I Available Distribution
Amount (as defined herein) in the order and priority as follows: (1)
first, Component IA-1-4 receives a certain portion of the principal
received in respect of each Group I Mortgage Loan with a Pass-
Through Rate of less than 6.75% per annum (a "Group I Discount
Mortgage Loan"), as described in "Description of the
Certificates--Distributions of Principal--Group I Certificate
Principal Distributions" herein; (2) second, interest to the Class IA
Certificates (and Components of the Class IA-1 Certificates)
entitled to receive accrued and unpaid interest, as described in
"Description of the Certificates--Distributions of Interest" herein;
provided, however, that (i) on or before the Component IA-1-3
Accretion Termination Date (as defined below), interest otherwise
distributable to Component IA-1-3 of the Class IA-1 Certificates
will be distributed, as principal, to certain Classes and Components
of Class IA Certificates as described in "Description of the
Certificates--Priority of Distributions--Component IA-1-3
Accrual" herein and (ii) on or before the Class IA-4 Accretion
Termination Date (as defined below), interest otherwise
distributable to the Class IA-4 Certificates will be distributed, as
principal, to certain Classes and Components of Class IA
Certificates as described in "Description of the Certificates--
Priority of Distributions--Class IA-4 Accrual" herein; (3) third,
principal to the Class IA Certificates entitled to principal (other
than Component IA-1-4 of the Class IA-1 Certificates) and the
Class R Certificate in the order described in "Description of the
Certificates--Distributions of Principal--Group I Certificate
Principal Distributions"; (4) fourth, to the Subordinate
Certificates, interest and then principal, as described in
"Description of the Certificates--Priority Distributions" and
"--Distributions of Principal--Subordinate Certificate Principal
Distributions" and (5) fifth, Component R-2 of the Class R
Certificate receives the remainder of the Group I Available
Distributable Amount (as defined in "Description of the
Certificates--Distributions of Principal--Group I Certificate
Principal Distributions" herein) for such Distribution Date.
On each Distribution Date, prior to the Credit Support Depletion
Date, distributions will generally be made from the Group II
Available Distribution Amount for such Distribution Date in the
order of priority as follows: (1) first, the Class IIA-P
Certificates receive a certain portion of the principal received
in respect of each
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
Group II Mortgage Loan with a Pass-Through Rate of less than 6.50%
per annum (a "Group II Discount Mortgage Loan"), as described in
"Description of the Certificates -- Distributions of Principal --
Group II Certificate Principal Distributions" herein; (2) second,
interest to the Class IIA-1 Certificates and Class IIA-X
Certificates, as described in "Descriptions of the Certificates
-Distributions of Interest" herein; (3) third, principal to the
Class IIA-1 Certificates to the extent due thereon as described in
"Description of the Certificates -- Distributions of Principal
-Group II Certificate Principal Distributions"; (4) fourth,
interest and principal on each Class of Subordinate Certificates
as described herein; (5) fifth, the remaining Group II Available
Distribution Amount for such Distribution Date will be distributed
to Component R-2 of the Class R Certificate, as described in
"Description of the Certificate--Distributions of Principal--Group
II Certificate Principal Distributions".
On any Distribution Date, with respect to the applicable Available
Distribution Amount, no distribution of interest or principal from
the Group I Available Distribution Amount or from the Group II
Available Distribution Amount will be made on any Class of
Subordinate Certificates until all distributions of interest and
principal have been made on such date on each Class of
Certificates having a higher priority of payment.
The "Credit Support Depletion Date" is the first Distribution Date
on which the aggregate of the Certificate Principal Balances of
the Subordinate Certificates has been or will be reduced to zero.
On each Distribution Date on or after the Credit Support Depletion
Date, distributions will generally be made from the Group I
Available Distribution Amount in the order and priority as
follows: (1) first, Component IA-1-4 receives a certain portion of
the principal received in respect of each Group I Discount
Mortgage Loan, as described in "Description of the
Certificates--Distributions of Principal--Group I Certificate
Principal Distributions"; (2) second, the Class IA Certificates
(and Components of the Class IA-1 Certificates) then entitled to
interest receive accrued and unpaid interest, as described in
"Description of the Certificates -- Distributions of Interest";
(3) third, the Class IA Certificates (and Components of the Class
IA-1 Certificates) entitled to principal (other than Components
1A-1-2, IA-1-4 and IA-1-6 of the Class IA-1 Certificates) receive
principal pro rata according to their respective Class Principal
Balances; and (4) fourth, Component R-2 of the Class R Certificate
receive the
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
remainder of the Group I Available Distribution Amount for such
Distribution Date.
On each Distribution Date on or after the Credit Support Depletion
Date, distributions will generally be made from the Group II
Available Distribution Amount in the order and priority as
follows: (1) first, the Class IIA-P Certificates receive a certain
portion of the principal received in respect of each Group II
Discount Mortgage Loan, as described in "Description of the
Certificates -Distributions of Principal--Group II Certificate
Principal Distributions"; (2) second, interest to the Class IIA-1
and Class IIA-X Certificates, as described in "Description of the
Certificates -- Distributions of Interest" herein; (3) third,
principal to the Class IIA-1 Certificates to the extent due
thereon as described in "Description of the Certificates --
Distributions of Principal -Group II Certificate Principal
Distributions"; and (4) fourth, the remaining Group II Available
Distribution Amount for such Distribution Date will be distributed
to Component R-2 of the Class R Certificate.
For a description of the order and priority of distributions, see
"Description of Certificates -- Priority of Distributions" herein.
Interest................................... With respect to each Class of Certificates (except the Class IIA-P
Certificates and Components IA-1-1 and IA-1-4 of the Class IA-1
Certificates, which are not entitled to interest), interest will be
passed through monthly on each Distribution Date, commencing in
April 1998, except that (i) interest accrued on the Class IA-4
Certificates on or before the Class IA-4 Accretion Termination
Date (as defined herein) will be added to the Class IA-4 Certificate
Principal Balance and (ii) interest accrued on Component IA-1-3
of the Class IA-1 Certificates on or before the Component IA-1-3
Accretion Termination Date (as defined herein) will be added to the
Component IA-1-3 Principal Balance. With respect to each
Distribution Date, an amount of interest will accrue on each Class
of the Offered Certificates at a rate generally equal to 1/12th of the
applicable Remittance Rate for such Class multiplied by the related
Class Principal Balance. The Remittance Rates for the Offered
Certificates entitled to interest are fixed as set forth on the cover
page hereof (except for the Senior Subordinate Certificates, which
bear interest at a variable rate). The Remittance Rate on the
Class M, Class B-1 and Class B-2 Certificates will vary from
6.50% to 6.75% per annum. For a more detailed description of the
Remittance Rate on the Senior Subordinate Certificates, see
"Description of the Certificates--Distributions of Interest--Senior
Subordinate Remittance Rate" herein. The initial Remittance Rate
</TABLE>
S-18
<PAGE>
<TABLE>
<S> <C>
for each Class of Senior Subordinate Certificates will be
approximately 6.708% per annum. Interest to be distributed on the
Certificates on any Distribution Date will consist of accrued and
unpaid interest as of previous Distribution Dates and interest
accrued during the preceding calendar month. All distributions of
interest for each Class of Certificates will generally be made
only to the extent of the applicable Available Distribution Amount
as described herein under "Description of the Certificates --
Priority of Distributions".
See "Description of the Certificates -- Distributions of Interest"
herein.
Compensating Interest...................... Subject to the limitations described in this Prospectus Supplement
under "Yield and Prepayment Considerations", on each
Distribution Date, the Servicer is obligated to remit to the
Certificate Account an amount equal to the lesser of (a) any
shortfall for the related month in interest collections resulting from
the timing of Payoffs (as defined herein) made from the 15th day
of the calendar month preceding such Distribution Date to the last
day of such month and (b) the monthly Servicing Fee, any
reinvestment income realized by the Servicer relating to Payoffs
made from the 15th day of the calendar month preceding such
Distribution Date to the 14th day of the month of such Distribution
Date and interest payments on Payoffs received during the period
of the second day through the 14th day of the month of such
Distribution Date. The amount so passed through will hereinafter
be referred to as "Compensating Interest". Compensating
Interest will be allocated to each Class of Certificates pro rata
according to the amount of interest accrued thereon, and any
remaining shortfall in interest collections resulting from the timing
of Payoffs will be applied pro rata according to the amount of
interest to which each Class of Certificates would otherwise be
entitled in reduction thereof. See "Description of the
Certificates--Distributions of Interest" herein.
Principal (including Principal
Prepayments)............................... General. On each Distribution Date, the Class IA Certificates will
be entitled to receive principal distributions from the Group I
Available Distribution Amount to the extent described herein; the
Class IIA Certificates will be entitled to receive principal
distributions from the Group II Available Distribution Amount to
the extent described herein; and the Subordinate Certificates will
be entitled to receive distributions from the Group I Available
Distribution Amount and the Group II Available Distribution
Amount. All distributions of principal will be made only to the
</TABLE>
S-19
<PAGE>
<TABLE>
<S> <C>
extent of the applicable Available Distribution Amount as
described herein under "Description of the Certificates--Priority
of Distributions".
The Class IA-X and Class IIA-X Certificates and Components IA- 1-2
and IA-1-6 of the Class IA-1 Certificates will not be entitled to
receive any distributions of principal.
Distributions to Class IA Certificates.
Distributions to Component IA-1-4 of the Class IA-1 Certificates.
Component IA-1-4 of the Class IA-1 Certificates will receive a
portion of the Group I Available Distribution Amount attributable
to principal received on or in respect of any Group I Discount
Mortgage Loan. In addition, on each Distribution Date for so long
as any Class of Subordinate Certificates remains outstanding,
Component IA-1-4 will receive distributions of principal equal to
a portion of certain losses on Group I Discount Mortgage Loans.
For a description of the principal distributions to Component
IA-1- 4 of the Class IA-1 Certificates, see "Description of the
Certificates--Distributions of Principal--Group I Certificate
Principal Distributions" herein.
Distributions to the Class IA Certificates (other than Component
IA-1-4 of the Class IA-1 Certificates). On each Distribution Date,
prior to the Credit Support Depletion Date, an amount, up to the
amount of the Group I Senior Principal Distribution Amount (as
defined in "Description of the Certificates--Distributions of
Principal--Class IA Certificates Principal Distributions" herein)
for such Distribution Date, will be distributed as principal to
the following Classes and Components of the Class IA Certificates
in the following order of priority:
(i) first, to Component IA-1-5 of the Class IA-1 Certificates,
an amount, up to the amount of the Lockout Principal
Distribution Amount (as defined herein) for such Distribution
Date, until the Principal Balance of Component IA-1-5 of the
Class IA-1 Certificates has been reduced to zero;
(ii) second, the portion of the Group I Senior Principal
Distribution Amount remaining after the distributions
described above, concurrently as follows:
</TABLE>
S-20
<PAGE>
<TABLE>
<S> <C>
(A) 3.5714289% to Component IA-1-1 of the Class IA-1
Certificates, until the Component IA-1-1
Principal Balance has been reduced to zero; and
(B) 96.4285711% sequentially as follows:
(1) first, to the Class IA-5 Certificates, to the
extent necessary to reduce the Class IA-5
Certificate Principal Balance of its Planned
Principal Balance (as defined herein) for
such Distribution Date;
(2) second, to the Class IA-6 Certificates, to
the extent necessary to reduce the Class
IA-6 Certificate Principal Balance to its
Planned Principal Balance for such
Distribution Date;
(3) third, to the Class IA-2 Certificates, to the
extent necessary to reduce the Class
IA-2 Certificate Principal Balance to its
Planned Principal Balance for such Distribution
Date;
(4) fourth, to the Class IA-3 Certificates, to the
extent necessary to reduce the Class IA-3
Certificate Principal Balance to its Targeted
Principal Balance for such Distribution Date;
(5) fifth, to Component IA-1-3 of the Class IIA-1
Certificates, to the extent necessary to
reduce the Component IA-1-3 Certificate
Principal Balance to its Targeted Principal
Balance for such Distribution Date;
(6) sixth, to the Class IA-4 Certificates, until the
Class IA-4 Certificate Principal Balance has been
reduced to zero;
(7) seventh, concurrently until the Class IA-3
Certificate Principal Balance has been reduced to
zero, 90% to the Class IA-3 Certificates and 10% to
Component IA-1- 3 of the Class IA-1 Certificates;
</TABLE>
S-21
<PAGE>
<TABLE>
<S> <C>
(8) eighth, to Component IA-1-3 of the Class IA-1
Certificates, until the Component IA-1-3 Principal
Balance has been reduced to zero;
(9) ninth, to the Class IA-5 Certificates, until the
Class IA-5 Certificate Principal Balance has been
reduced to zero;
(10) tenth, to the Class IA-6 Certificates, until the
Class IA-6 Certificate Principal Blance has been
reduced to zero; and
(11) eleventh, to the Class IA-2 Certificates, until
the Class IA-2 Certificate Principal
Balance has been reduced to zero; and
(iii) third, the portion of the Group I Senior Principal
Distribution Amount remaining after the distributions
described above, to Component IA-1-5 of the Class IA-1
Certificates, until the Component IA-1-5 Principal
Balance has been reduced to zero.
On each Distribution Date on and after the Credit Support
Depletion Date, principal will not be distributed in the order and
priority described above. Instead, an amount up to the Group I
Senior Principal Distribution Amount for such Distribution Date
will be distributed as principal to the Class IA Certificates and
Components thereof entitled to principal (other than Component
IA-1-4 of the Class IA-1 Certificates), pro rata according to
their respective Certificate or Component Principal Balances.
Distributions to the Class IIA Certificates.
Distributions to the Class IIA-P Certificates. The Class IIA-P
Certificates will receive a portion of the Group II Available
Distribution Amount attributable to principal received on or in
respect of any Group II Discount Mortgage Loans. In addition, on
each Distribution Date for so long as any Class of Subordinate
Certificates remains outstanding, the Class IIA-P Certificates
will receive distributions of principal in amounts equal to a
portion of certain losses on Group II Discount Mortgage Loans. For
a description of the principal distributions to the Class IIA-P
Certificates, see "Description of the Certificates--Distributions
of Principal--Group II Certificate Principal Distributions"
herein.
</TABLE>
S-22
<PAGE>
<TABLE>
<S> <C>
Distributions to the Class IIA-1 Certificates. On each
Distribution Date an amount, up to the amount of the Group II
Senior Principal Distribution Amount (as defined herein) for such
Distribution Date, will be distributed as principal to the Class
IIA-1 Certificates until the Class Principal Balance thereof has
been reduced to zero.
Distributions to the Subordinate Certificates. On each
Distribution Date, an amount, up to the aggregate amount of the
Subordinate Distribution Amount (as defined herein) for such
Distribution Date, will be distributed as principal to the
Subordinate Certificates. On each Distribution Date, each Class of
Subordinate Certificates will be entitled to receive its pro rata
share (by Class Principal Balance) of the Subordinate Principal
Distribution Amount remaining after distributions of interest and
principal to all Classes of Subordinate Certificates senior to
such Class and distributions of interest to such Class.
Notwithstanding the foregoing, on any Distribution Date on which
the Subordination Level (as defined herein) for any Class of
Subordinate Certificates is less than the Subordination Level as
of the Cut-Off Date, the portion of the Subordinate Principal
Prepayments Distribution Amount (as defined herein) otherwise
allocable to the Class or Classes of the Subordinate Certificates
junior to such Class will be allocated to the most senior Class of
Subordinate Certificates for which the Subordination Level is less
than such percentage as of the Cut-Off Date and to the Class or
Classes of Subordinate Certificates senior thereto, pro rata
according to the Certificate Principal Balances of such Classes.
See "Description of the Certificates--Priority of Distributions"
herein. See "Description of the Certificates -- Priority of
Distributions" herein. The relative seniority, from highest to
lowest, of the Subordinate Certificates shall be as follows: Class
M, Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5.
The rights of the holders of the Subordinate Certificates to
receive distributions of principal are subordinated to the rights
of the holders of the Senior Certificates to receive distributions
of principal. See "Description of the Certificates--Subordination
and Allocation of Losses" herein.
For a more detailed description of how distributions of principal
will be allocated among the various Classes of Certificates, see
"Description of the Certificates--Distributions of Principal"
herein.
</TABLE>
S-23
<PAGE>
<TABLE>
<S> <C>
Subordination and Allocation of Losses.... The Subordinate Certificates will be subordinate in right of
payment to and provide credit support for the Senior Certificates.
The Junior Subordinate Certificates will be subordinate in right of
payment to and provide credit support for the Senior Subordinate
Certificates; the Class B-2 Certificates will be subordinate in right
of payment to and provide credit support for the Class M and Class
B-1 Certificates; and the Class B-1 Certificates will be subordinate
in right of payment to and provide credit support for the Class M
Certificates, to the extent described herein. The support provided
by the Subordinate Certificates is intended to enhance the
likelihood of regular receipt by the Senior Certificates of the full
amount of the monthly distributions of interest and principal to
which they are entitled and to afford such holders protection
against certain losses. The protection afforded to the Senior
Certificates by the Subordinate Certificates will be accomplished
by the preferential right, on each Distribution Date, of the Senior
Certificates to receive the distributions of interest and principal to
which they are entitled, prior to distributions of interest or principal
to the Subordinate Certificates. The support provided by the Junior
Subordinate Certificates to the Senior Subordinate Certificates is
intended to enhance the likelihood of regular receipt by the Senior
Subordinate Certificates of the full amount of monthly distributions
of interest and principal to which they are entitled and to afford
such holders protection against certain losses. The protection
afforded the Senior Subordinate Certificates by the Junior
Subordinate Certificates will be accomplished by the preferential
right, on each Distribution Date, of the Senior Subordinate
Certificates to receive distributions of interest and principal prior
to the distributions of interest or principal to the Junior Subordinate
Certificates. The protection afforded the Class M Certificates by
the Class B-1 and Class B-2 Certificates, and the protection
afforded the Class B-1 Certificates by the Class B-2 Certificates
will be similarly accomplished by the preferential right of the Class
M Certificates to receive distributions of interest and principal prior
to such distributions of interest and principal to the Class B-1 and
Class B-2 Certificates and the preferential right of the Class B-1
Certificates to receive such distributions prior to such distributions
of interest and principal to the Class B-2 Certificates.
Except for Special Hazard Losses, Fraud Losses and Bankruptcy
Losses in excess of the designated amount of Special Hazard
Coverage, Fraud Coverage and Bankruptcy Coverage, any loss
realized with respect to a Mortgage Loan in a Mortgage Loan Group
will be allocated among the related Certificates (i) for losses
allocable to principal (a) first, to the Junior Subordinate
</TABLE>
S-24
<PAGE>
<TABLE>
<S> <C>
Certificates, until the aggregate of the Class Principal Balances
thereof have been reduced to zero, (b) second, to the Class B-2
Certificates, until the Class B-2 Certificate Principal Balance
has been reduced to zero, (c) third, to the Class B-1
Certificates, until the Class B-1 Certificate Principal Balance
has been reduced to zero, (d) fourth, to the Class M Certificates,
until the Class M Certificate Principal Balance has been reduced
to zero and (e) fifth, to the related Senior Certificates (other
than Components IA-1-4, IA-1-2 and IA-1-6 of the Class IA-1
Certificates and the Class IIA- P Certificates), pro rata,
according to their Certificate Principal Balances (or Component
Principal Balances, in the case of Components IA-1-1, IA-1-3 and
IA-1-5 of the Class IA-1 Certificates) in reduction of their
respective Class Principal Balances or Component Principal
Balances; provided however, that if the loss is recognized with
respect to a Group I Discount Mortgage Loan, the Component IA-1-4
Fraction of such loss will first be allocated to Component IA-1-4
of the Class IA-1 Certificates and the remainder of such loss will
be allocated as described above in this clause (i) and if the loss
is recognized with respect to a Group II Discount Mortgage Loan,
the Class IIA-P Fraction of such loss will first be allocated to
Class IIA-P Certificates and the remainder of such loss will be
allocated as described in this clause (i); and (ii) for losses
allocable to interest (a) first, to the Junior Subordinate
Certificates, in reduction of accrued but unpaid interest thereon
and then in reduction of the Certificate Principal Balances of the
Junior Subordinate Certificates, (b) second, to the Class B-2
Certificates, in reduction of accrued but unpaid interest thereon
and then in reduction of the Class B-2 Certificate Principal
Balance, (c) third, to the Class B-1 Certificates, in reduction of
accrued but unpaid interest thereon and then in reduction of the
Class B-1 Certificate Principal Balance, (d) fourth, to the Class
M Certificates, in reduction of accrued but unpaid interest
thereon and then in reduction of the Class M Certificate Principal
Balance, (e) fifth, to the applicable Senior Certificates (other
than Components IA-1-1 and IA-1-4 of the Class IA-1 Certificates
and the Class IIA-P Certificates), pro rata according to accrued
but unpaid interest thereon and then pro rata according to their
Class Principal Balances (or Component Principal Balances, in the
case of Components IA-1-3 and IA-1-5 of the Class IA-1
Certificates) in reduction of their respective Certificate or
Component Principal Balances, as applicable.
The allocation of the principal portion of losses relating to a
Mortgage Loan in a given Mortgage Loan Group to all Classes of the
related Senior Certificates (other than Component IA-1-4 of the
Class IA-1 Certificates and the Class IIA-P Certificates) and to
the
</TABLE>
S-25
<PAGE>
<TABLE>
<S> <C>
Subordinate Certificates pro rata according to their respective
Certificate or Component Principal Balances (except if the loss is
recognized with respect to a Group I Discount Mortgage Loan, in
which event the Component IA-1-4 Fraction of such loss will first
be allocated to Component IA-1-4 of the Class IA-1 Certificates
and the remainder of such loss will be allocated as described
above or if the loss is recognized with respect to a Group II
Discount Mortgage Loan, in which event the Class IIA-P Fraction of
such loss will first be allocated to the Class IIA-P Certificates
and the remainder of such loss will be allocated as described
above) and the allocation of the interest portion of losses pro
rata according to the amount of interest accrued on each such
Class in reduction thereof and then, pro rata, in reduction of
their related Class Principal Balance (or Component Principal
Balances) is hereinafter referred to as "Pro Rata Allocation". For
purposes of any Pro Rata Allocation in part to the Subordinate
Certificates, each Class of Subordinate Certificates will be
deemed to have a Class Principal Balance (and to accrue interest
thereon) equal to the actual Class Principal Balance thereof times
a fraction, the numerator of which is the Group I Subordinate
Amount (for a loss on a Group I Mortgage Loan) or the Group II
Subordinate Amount (for a loss on a Group II Mortgage Loan), and
the denominator of which is the aggregate of the Group I
Subordinate Amount and the Group II Subordinate Amount.
Since the Subordinate Certificates will absorb losses on Mortgage
Loans in both Mortgage Loan Groups, a disproportionate amount of
losses with respect to Mortgage Loans in either Mortgage Loan
Group will adversely impact the subordination available to the
Senior Certificates related to the other Mortgage Loan Group.
Special Hazard Losses, Fraud Losses and Bankruptcy Losses in
excess of the applicable coverage will be allocated to all
outstanding Classes of related Certificates by Pro Rata
Allocation. Each of the applicable coverages may be reduced
periodically, as described herein. See "Description of the
Certificates--Subordination and Allocation of Losses" herein.
See also "Description of the Certificates--Distributions of
Principal" herein.
Credit Enhancements....................... Subordination. The subordination of the Subordinate Certificates
and the further subordination within the Class of Subordinate
Certificates described above and in "Description of the Certificates
-- Subordination and Allocation of Losses" will provide credit
</TABLE>
S-26
<PAGE>
<TABLE>
<S> <C>
enhancement to the Senior Certificates and each Class of
Subordinate Certificates with lower Class designations.
Shifting of Interests. The Class IA Certificates entitled to
principal, other than Component IA-1-5 of the Class IA-1
Certificates, will receive 100% of Principal Prepayments received
with respect to the Group I Mortgage Loans until the earliest to
occur of the fifth anniversary of the first Distribution Date or
the Credit Support Depletion Date or until such Class IA
Certificates are retired. During the next four years, the Class IA
Certificates and Components of the Class IA-1 Certificates
entitled to principal, other than Components IA-1-5 and IA-1-4 of
the Class IA-1 Certificates, will receive a disproportionately
large, but decreasing, share of such Principal Prepayments. This
will result in an acceleration of the amortization of such Class
IA Certificates, other than the Components IA-1-5 and IA-1-4 of
the Class IA-1 Certificates, subject to the priorities described
in "Description of the Certificates --Distributions of Principal"
herein, enhancing the likelihood that holders of such Classes of
Certificates will be paid the full amount of principal to which
they are entitled.
The Class IIA Certificates entitled to principal will receive 100%
of the Principal Prepayments received with respect to the Group II
Mortgage Loans until the earliest to occur of the fifth
anniversary of the first Distribution Date or the Credit Support
Depletion Date or until such Class IIA Certificates are retired.
During the next four years, the Class IIA Certificates entitled to
principal (other than the Class IIA-P Certificates) will receive a
disproportionately large, but decreasing, share of such Principal
Prepayments. This will result in an acceleration of the
amortization of such Class IIA Certificates, subject to the
priorities described in "Description of the Certificates --
Distributions of Principal" herein, enhancing the likelihood that
holders of such Classes of Certificates will be paid the full
amount of principal to which they are entitled.
For a more detailed description of how Principal Prepayments are
allocated among the Senior Certificates and the Subordinate
Certificates, see "Description of the Certificates--Distributions
of Principal" herein.
Advances.................................. With respect to each Mortgage Loan, the Servicer will make
Advances on each Distribution Date to the Certificate Account to
cover any shortfall between (i) payments scheduled to be received
in respect of such Mortgage Loan and (ii) the amounts actually
deposited in the Certificate Account on account of such payments;
provided that the Servicer determines, in good faith, on such
</TABLE>
S-27
<PAGE>
<TABLE>
<S> <C>
Distribution Date that such Advances will be recoverable from
insurance proceeds, Liquidation Proceeds (as defined in the
Prospectus) or other amounts received with respect to such
Mortgage Loan. Advances are reimbursable to the Servicer from cash
in the Certificate Account prior to payments to the
Certificateholders if the Servicer determines that any such
Advances previously made are not recoverable from Liquidation
Proceeds or other amounts recoverable with respect to the
applicable Mortgage Loan. See "Description of the Certificates
-Advances" herein.
Yield and Prepayment
Considerations........................... The yield to maturity of each Class of Offered Certificates will
depend upon, among other things, the price at which such
Certificates are purchased, the applicable Remittance Rate, the
actual characteristics of the Mortgage Loans in the related Loan
Group, the rate of principal payments (including Principal
Prepayments) on the Mortgage Loans in the related Mortgage Loan
Group and the rate of liquidations on the Mortgage Loans in the
related Mortgage Loan Group. A higher than anticipated rate of
principal payments (including Principal Prepayments) and
liquidations would reduce the aggregate principal balance of the
Mortgage Loans more quickly than expected, thereby reducing the
aggregate interest payments with respect to such Mortgage Loans.
Therefore, a higher rate of principal payments (including Principal
Prepayments) and liquidations in a Mortgage Loan Group could
result in a lower than expected yield to maturity on Classes of
Certificates purchased at a premium. Conversely, a lower than
anticipated rate of principal payments (including Principal
Prepayments) and liquidations in a Mortgage Loan Group could
result in a lower than expected yield to maturity on Classes of
Certificates purchased at a discount, in that payments of principal
with respect to the Mortgage Loans would occur later than
anticipated. Except in limited circumstances set forth herein,
principal distributions to the Class IA Certificates and Class IIA
Certificates relate to principal payments on the Group I Mortgage
Loans and Group II Mortgage Loans, respectively. Principal
distributions to the Subordinate Certificates relate to principal
payments on both the Group I Mortgage Loans and Group II
Mortgage Loans.
The actual rate of payments of principal (including Principal
Prepayments) and liquidations on the Mortgage Loans may be
influenced by a variety of economic, geographic, social and other
factors. In general, if interest rates generally rise above the
interest rates on the Mortgage Loans, the rate of prepayment would
be
</TABLE>
S-28
<PAGE>
<TABLE>
<S> <C>
expected to decrease. Conversely, if prevailing interests rates
fall significantly below the interests rates on the Mortgage
Loans, the Mortgage Loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the
interest rates on the Mortgage Loans. See "Risk Factors" and
"Yield and Prepayment Considerations" herein.
For a discussion of special yield and prepayment considerations
applicable to the PAC, TAC, and Senior Subordinate Certificates,
see "Risk Factors" herein.
Ratings .................................. It is a condition to the issuance of the Offered Certificates that the
Senior Certificates each be rated "AAA" (except for the Class IA-
X, Class IIA-P and Class IIA-X Certificates, which will be rated
"AAAr") by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), and "AAA" by Duff & Phelps Credit
Rating Co. ("DCR"), that the Class M Certificates be rated not
less than "AA" by DCR, that the Class B-1 Certificates be rated not
less than "A" by DCR; and that the Class B-2 Certificates be rated
not less than "BBB" by DCR. See "Certificate Ratings", "Risk
Factors" and "Yield and Prepayment Considerations" herein. The
ratings on the Offered Certificates address the likelihood of the
receipt by holders of Offered Certificates of all distributions with
respect to the underlying Mortgage Loans to which they are entitled
and do not address the likely actual rate of Principal Prepayments,
which rate could, if different than originally anticipated, adversely
affect the yield realized by the Certificateholders.
Last Scheduled Distribution Date.......... The Last Scheduled Distribution Date for all Class IA Certificates
and the Subordinate Certificates is the Distribution Date in April
2028, which is the Distribution Date occurring in the month after
the scheduled maturity date for the latest maturing Group I
Mortgage Loan in the Group I Mortgage Pool.
The Last Scheduled Distribution Date for all Class IIA
Certificates is the Distribution Date in April 2013, which is the
Distribution Date occurring in the month after the scheduled
maturity date for the latest maturing Group II Mortgage Loan in
the Group II Mortgage Pool.
The actual last Distribution Date on the Certificates will depend
on the rate of payments of principal (including Principal
Prepayments) on the Mortgage Loans which, in turn, may be
influenced by a variety of economic, geographic and social
factors, as well as the level of prevailing interest rates. No
assurance can be given as to
</TABLE>
S-29
<PAGE>
<TABLE>
<S> <C>
the actual payment experience on the Mortgage Loans. See
"Description of the Certificates--Last Scheduled Distribution
Date" and "Yield and Prepayment Considerations" herein.
Legal Investment.......................... As of the date of their issuance, the Offered Certificates, other than
the Class B-1 and Class B-2 Certificates, will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). SMMEA provides that
states may override its provisions on legal investment and restrict
or condition investment in mortgage related securities by taking
statutory action prior to October 4, 1991. Certain States have
enacted legislation which has overridden the provisions of
SMMEA. See "Certain Legal Investment Aspects" herein. It is
anticipated that the Class B-1 and Class B-2 Certificates will not be
rated in one of the two highest rating categories by a nationally
recognized statistical rating organization and, therefore, will not
constitute "mortgage related securities" for purposes of SMMEA.
Institutions whose investment activities are subject to review by
certain regulatory authorities may be or may become subject to
restrictions on investment in the Offered Certificates, and such
restrictions may be retroactively imposed. The Federal Financial
Institutions Examination Council, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency, the
Board of Governors of the Federal Reserve System, the Office of
Thrift Supervision and the National Credit Union Administration
have adopted guidelines, and have proposed policies, regarding the
suitability of investments in various types of derivative
mortgage- backed securities, including securities such as the
Offered Certificates. In addition, several states have adopted or
are considering regulations that would prohibit regulated
institutions subject to their jurisdiction from holding
mortgage-backed securities such as the Offered Certificates,
including such securities previously purchased. Investors should
consult their own legal advisors in determining whether and to
what extent the Offered Certificates constitute legal investments
for such investors.
ERISA Considerations...................... See "ERISA Considerations" herein and in the Prospectus.
Certain Federal Income Tax
Consequences............................. For federal income tax purposes, the Company will cause elections
to be made to treat REMIC I and REMIC II as REMICs. The
Certificates, other than the Class R Certificate, will represent
ownership of REMIC regular interests. Such regular interest
Certificates will generally be treated as representing ownership of
debt for federal income tax purposes. Certificateholders will be
</TABLE>
S-30
<PAGE>
<TABLE>
<S> <C>
required to include in income all interest and original issue
discount ("OID") on such Certificates in accordance with the
accrual method of accounting regardless of the Certificateholders'
usual methods of accounting. For federal income tax purposes (i)
Component R-1 of the Class R Certificate will be the residual
interest in REMIC I and (ii) Component R-2 of the Class R
Certificate will be the residual interest in REMIC II.
As specified in "Certain Federal Income Tax Consequences" in this
Prospectus Supplement, certain Classes of Offered Certificates
will (and certain other Classes of Offered Certificates may) be
treated for federal income tax purposes as having been issued with
OID. The prepayment assumption that will be used in determining
the rate of accrual of OID and market discount or premium, if any,
for federal income tax purposes is 250% of the Basic Prepayment
Assumption for Group I Mortgage Loans and 225% of the Basic
Prepayment Assumption for Group II Mortgage Loans as described
herein under "Yield and Prepayment Considerations". No
representation is made that the Mortgage Loans will prepay at any
given percentage of the BPA.
If actual prepayments of Mortgage Loans differ sufficiently from
the prepayment assumption, the calculation of OID for certain
Classes of Offered Certificates might produce a negative number
for certain accrual periods. In such event, Certificateholders
will not be entitled to a deduction for such amount, but will be
required to carry such amount forward as an offset to OID, if any,
accruing in future accrual periods.
Under the REMIC Regulations (as defined in the Prospectus), the
Residual Certificate will not be regarded as having "significant
value" for purposes of applying the rules relating to "excess
inclusions". In addition, the Residual Certificate will likely
constitute "noneconomic" residual interests for purposes of the
REMIC Regulations. Transfers of interests in the Residual
Certificate will be restricted under the Pooling and Servicing
Agreement to United States Persons (as defined in the Prospectus)
in a manner designed to prevent a transfer of noneconomic residual
interests from being disregarded under the REMIC Regulations. See
"Certain Federal Income Tax Consequences--REMIC--Taxation of
Owners of Residual Certificates" in the Prospectus.
Residual Certificateholders may be required to report an amount of
taxable income with respect to early years that significantly
exceeds distributions on the Residual Certificate during such
years,
</TABLE>
S-31
<PAGE>
<TABLE>
<S> <C>
with corresponding tax deductions or losses deferred until later
years. Accordingly, on a present value basis, the tax detriments
occurring in the earlier years may substantially exceed the sum of
any tax benefits in the later years. As a result, the Residual
Certificateholders' after-tax rate of return may be zero or
negative, even if their pre-tax rate of return is positive.
The Offered Certificates will generally be treated as "qualifying
real property loans" for mutual savings banks and domestic
building and loan associations, "loans secured by an interest in
real property" for domestic building and loan associations, and
"real estate assets" for real estate investment trusts ("REITs")
in the same proportion that the assets in the REMIC would be so
treated. In addition, interest on the Offered Certificates will
generally be treated as "interest on obligations secured by
mortgages on real property" for REITs to the extent that such
Certificates are treated as "real estate assets". See "Certain
Federal Income Tax Consequences" in the Prospectus.
For further information regarding the federal income tax
consequences of investing in the Offered Certificates, see
"Certain Federal Income Tax Consequences" herein and in the
Prospectus.
</TABLE>
S-32
<PAGE>
RISK FACTORS
Effect of Principal Prepayments
The rate of principal payments, amount of each interest payment and
yield to maturity on each Class of the Certificates are directly related to the
rate of payments of principal on the Mortgage Loans in the related Mortgage Loan
Group, which may be in the form of scheduled amortization, principal prepayments
or liquidations. In general, when the level of prevailing mortgage interest
rates declines significantly below the interest rates on the Mortgage Loans, the
rate of prepayment is likely to increase, although the prepayment rate is
influenced by a number of other factors, including general economic conditions
and homeowner mobility. The rate of payment of principal will also be affected
by any repurchase by the Company of the Mortgage Loans in the related Mortgage
Loan Group. See "Maturity Considerations--Prepayment Considerations" and
"Description of Certificates--Termination" in the Prospectus and "Description of
the Certificates--Optional Termination of REMIC II" and "Yield and Prepayment
Considerations" herein. In such event, the repurchase price paid by the Company
would be passed through to related Certificateholders on the Distribution Date
following the month of repurchase. All of the Mortgage Loans contain
"due-on-sale" clauses. Consequently, acceleration of maturity as a result of
transfers of Mortgaged Properties will affect the level of Principal Prepayments
on the Mortgage Loans.
"Principal Prepayments" include prepayments in full on a Mortgage Loan
("Payoffs") and partial principal prepayments on a Mortgage Loan
("Curtailments").
The Class IA-3 Certificates (the "Accretion Directed Class") and
Component IA-1-3 of the Class IA-1 Certificates (the "Accretion Directed
Component") will receive distributions of principal otherwise payable as
interest to the Class IA-4 Certificates (on or before the Class IA-4 Accretion
Termination Date (as defined herein)) and Component IA-1-3 of the Class IA-1
Certificates (on or before the Component IA-1-3 Accretion Termination Date (as
defined herein)). Because the Accretion Directed Classes and Accretion Directed
Component receive such distributions of principal, they may amortize faster than
otherwise would be the case. The Class IA-4 Certificates are referred to as the
"Accrual Class" and Component IA-1-3 of the Class IA-1 Certificates is referred
to as the "Accrual Component" herein.
If any Certificate is purchased at a discount from its original
Certificate Principal Balance, and if a purchaser of such Certificate calculates
the yield to maturity based on an assumed rate of principal payments (including
Principal Prepayments) and liquidations faster than that actually received on
the Mortgage Loans in the related Mortgage Loan Group, the actual yield to
maturity will be lower than that so calculated. If any Certificate is purchased
at a premium from its original Certificate Principal Balance, and if a purchaser
of such Certificate calculates the yield to maturity based on an assumed rate of
principal payments (including Principal Prepayments) and liquidations slower
than that actually received on the Mortgage Loans in the related Mortgage Loan
Group, the actual yield to maturity will be lower than that so calculated.
Principal distributions on the Class IA-2, Class IA-5 and Class IA-6
Certificates (the "PACs") on any Distribution Date will generally be payable in
amounts determined on the basis of the planned principal balances for such
Classes of Certificates for such Distribution Date as set forth in Appendix A
(each, a "Planned Principal Balance"). For each PAC Class, there is a range of
constant mortgage prepayment rates (an "Effective Range") at which such Class
would receive scheduled payments. Based on the Modeling Assumptions (as defined
herein) each PAC Class would receive scheduled payments in amounts determined in
accordance with Appendix A if the related Mortgage Loans were to prepay at any
constant percentage of the Basic Prepayment Assumption within the range of
between 100% and 500% thereof. However, as
S-33
<PAGE>
discussed herein, actual principal distributions may deviate from the prescribed
amounts, because the actual prepayment rate of such Group I Mortgage Loans each
month may not occur at any constant level between approximately 100% and 500% of
the Basic Prepayment Assumption. If the Class Principal Balance of the Class
IA-3 Certificates, the Class IA-4 Certificates or the Component Principal
Balances of the Class IA-1 Certificates (except for Component IA-1-4) are
reduced to zero before the Class Principal Balances of the PACs are reduced to
zero, the weighted average life of the PACs will become significantly more
sensitive to changes in the prepayment rate of the Group I Mortgage Loans, and
principal distributions thereon will be more likely to deviate from the
described amounts.
Principal distributions on the Class IA-3 Certificates and Component
IA-1-3 of the Class IA-1 Certificates (the "TACs") on any Distribution Date will
generally be payable in amounts determined on the basis of their targeted
principal balances for such Distribution Date as set forth in Appendix B (each,
a "Targeted Principal Balance"). The Targeted Principal Balances of such Class
and Component were determined assuming that the prepayment rate of the Group I
Mortgage Loans remains constant at 250% of the Basic Prepayment Assumption.
However, as discussed herein, actual principal distributions may deviate from
the prescribed amounts, because the actual prepayment rate of the Group I
Mortgage Loans each month will not remain constant at 250% of the Basic
Prepayment Assumption. If the Class Principal Balance of the Class IA-4
Certificates is reduced to zero before the Class IA-3 Principal Balance or
Component IA-1-3 Component Principal Balance is reduced to zero, the rate of
principal distributions and the weighted average life of the Class IA-3
Certificates and the Class IA-1 Certificates (to the extent of the Component
IA-1-3 of the Class IA-1 Certificates) will become significantly more sensitive
to changes in the prepayment rate of the Group I Mortgage Loans.
On or prior to the Credit Support Depletion Date (as defined herein)
Principal Prepayments on the Group I Mortgage Loans and other unscheduled
payments of principal may result in principal available for distribution on a
Distribution Date to the PACs and the TACs on such Distribution Date in an
amount greater than the amount necessary to reduce the applicable Class
Principal Balances or Component Principal Balances of the PACs and TACs to their
scheduled amounts. The excess principal after distribution to meet the Planned
Principal Balance of the PACs and the Targeted Principal Balance of the TACs on
any Distribution Date on or prior to the Credit Support Depletion Date will be
distributed as follows: (i) to the Class IA-4 Certificates until the Class IA-4
Principal Balance has been reduced to zero; (ii) a percentage then to the Class
IA-3 Certificates without regard to its Targeted Principal Balance, until the
Class IA-3 Principal Balance has been reduced to zero and a percentage to
Component IA-1-3 of the Class IA-1 Certificates without regard to its Targeted
Principal Balance, until the Component IA-1-3 Component Principal Balance has
been reduced to zero; and (iii) the remainder of such excess will be distributed
(a) to Component IA-1-3 of the Class IA-1 Certificates without regard to its
Targeted Principal Balance, until the IA-1-3 Component Principal Balance has
been reduced to zero, (b) to the Class IA-5 Certificates without regard to its
Planned Principal Balance, until the Class IA-5 Principal Balance has been
reduced to zero, (c) to the Class IA-6 Certificates without regard to its
Planned Principal Balance, until the Class IA-6 Principal Balance has been
reduced to zero, and (d) to the Class IA-2 Certificates without regard to its
Planned Principal Balance, until the Class IA-2 Principal Balance has been
reduced to zero. Any excess remaining after all such payments will be
distributed to Component IA-1-5 of the Class IA-1 Certificates. Accordingly, the
rate of payments on the Group I Mortgage Loans is expected to have a greater
effect on the weighted average life of the TACs, under certain prepayment
scenarios, than on the weighted average lives of the PACs principally because
the rate of Principal Prepayments and other unscheduled payments of principal
could cause the principal available for distribution on the Class IA
Certificates on any Distribution Date to be less than the amounts necessary to
reduce the Class Principal Balance of the PACs to their respective Planned
Principal Balances, in which case the TACs and the Class IA-4 Certificates will
not receive any distributions of principal (other than the
S-34
<PAGE>
principal they may receive as Accretion Directed Classes or Accretion Directed
Components). Similarly, if on any Distribution Date the principal available for
distribution to the TACs is less than the amount necessary to reduce their Class
Principal Balances to their respective Targeted Principal Balances, then the
Class IA-4 Certificates will not receive any distributions of principal (other
than the principal they may receive as an Accretion Directed Class). See "Yield
and Prepayment Considerations" herein.
The yield to maturity on the Class IA-X Certificates will be
extremely sensitive to the level of Principal Prepayments on certain of the
Group I Mortgage Loans. The interest payable to the Class IA-X Certificates is
based on the weighted average of the Stripped Interest Rates (as defined herein)
of the Group I Mortgage Loans having Pass-Through Rates in excess of 6.750% per
annum (the "Group I Premium Mortgage Loans"). Therefore the yield to maturity on
the Class IA-X Certificates will generally decrease as a result of faster than
expected Principal Prepayments on the Group I Premium Rate Mortgage Loans.
Prospective investors should fully consider the risks associated with an
investment in the Class IA-X Certificates, including the possibility that if the
rate of Principal Prepayments on the Group I Premium Rate Mortgage Loans is
rapid, such investors may not fully recoup their initial investments.
Because the interest payable on the Class IA-X Certificates is derived
from different groups of Mortgage Loans within Mortgage Loan Group I, it is
possible that faster than expected Principal Prepayments on the Group I Premium
Rate Mortgage Loans may occur at the same time as slower than expected Principal
Prepayments on the Group I Discount Mortgage Loans which would result in a lower
yield to maturity for the Class IA-X Certificates.
The yield to maturity on the Class IIA-X Certificates will be extremely
sensitive to the level of Principal Prepayments on certain of the Group II
Mortgage Loans. The interest payable to the Class IIA-X Certificates is based on
the weighted average of the Stripped Interest Rates (as defined herein) of the
Group II Mortgage Loans having Pass-Through Rates in excess of 6.500% per annum
(the "Group II Premium Mortgage Loans"). Therefore the yield to maturity on the
Class IIA-X Certificates will generally decrease as a result of faster than
expected Principal Prepayments on the Group II Premium Rate Mortgage Loans.
Prospective investors should fully consider the risks associated with an
investment in the Class IIA-X Certificates, including the possibility that if
the rate of Principal Prepayments on the Group II Premium Rate Mortgage Loans is
rapid, such investors may not fully recoup their initial investments.
The yield to maturity on the Class IIA-P Certificates will be extremely
sensitive to the level of Principal Prepayments on certain of the Group II
Mortgage Loans. The principal payable to the Class IIA-P Certificates is derived
from Group II Mortgage Loans having Pass-Through Rates lower than 6.500% per
annum (the "Group II Discount Mortgage Loans"). Therefore, the yield to maturity
on the Class IIA-P Certificates will be adversely affected by slower than
expected prepayments of the Group II Discount Rate Mortgage Loans.
Because the interest payable on the Class IIA-X Certificates and the
principal distributable to the Class IIA-P Certificates are derived from
different groups of Mortgage Loans within Mortgage Loan Group II, it is possible
that faster than expected Principal Prepayments on the Group II Premium Rate
Mortgage Loans may occur at the same time as slower than expected Principal
Prepayments on the Group II Discount Mortgage Loans which would result in a
lower yield to maturity for both the Class IIA-X and Class IIA-P Certificates.
The yield to maturity on each Class of Senior Subordinate Certificates
will be extremely sensitive to realized losses on the Mortgage Loans (other than
Special Hazard Losses, Fraud Losses and Bankruptcy
S-35
<PAGE>
Losses in excess of the applicable coverage therefor provided by the Subordinate
Certificates), because a disproportionately large amount of such losses (rather
than a pro rata portion thereof) generally will be allocable to such Classes of
Certificates following the reduction of the aggregate Class Principal Balances
of the Junior Subordinate Certificates to zero, as described under "Description
of the Certificates--Subordination and Allocation of Losses" herein.
Risks of Holding Subordinate Certificates
The rights of the holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the holders of the Senior Certificates and the rights of the holders
of each Class of Subordinate Certificates (other than the Class M Certificates)
to receive such distributions with respect to the Mortgage Loans will be
subordinated to such rights of the Class or Classes of Subordinate Certificates
with lower numerical Class designations, in each case only to the extent
described herein. Delinquencies that are not advanced by or on behalf of the
Servicer (because the amounts, if advanced, would be nonrecoverable), will
adversely affect the yield on the Subordinate Certificates. Because of the
priority of distributions, shortfalls resulting from delinquencies not so
advanced will be borne first by the Subordinate Certificates, in reverse order
of their Class designations, and then by the related Senior Certificates. If, as
a result of such shortfalls, the aggregate of the Class Certificate Balances of
all Classes of Certificates exceeds the Pool Principal Balance, the Class of
Subordinate Certificates then outstanding with the highest Class designation
will be reduced by the amount of such excess.
The weighted average life of, and the yield to maturity on, the
Subordinate Certificates, in decreasing order of their priority of
distributions, will be progressively more sensitive to the rate and timing of
Mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than
those assumed by a holder of a Subordinate Certificate, the actual yield to
maturity of such Certificate may be lower than the yield expected by such holder
based on such assumption. The timing of losses on the Mortgage Loans will also
affect an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the Mortgage Loans are consistent with such
investor's expectations. In general, the earlier a loss occurs the greater the
effect on an investor's yield to maturity. Losses on the Mortgage Loans will
reduce the Class Certificate Balance of the Subordinate Certificates to the
extent of any losses allocated thereto without the receipt of cash attributable
to such reduction. See "Description of the Certificates--Allocation of Losses"
herein. As a result of such reductions, less interest will accrue on such
Classes of Subordinate Certificates than otherwise would be the case. The yield
to maturity of the Subordinate Certificates will also be affected by
disproportionate allocations of principal prepayments to the Senior
Certificates, Net Interest Shortfalls and other cash shortfalls in Available
Funds. See "Description of the Certificates--Allocation of Losses" herein.
Since the Subordinate Certificates will absorb losses on Mortgage Loans
in both Mortgage Loan Groups, a disproportionate amount of losses with respect
to Mortgage Loans in either Mortgage Loan Group will adversely impact the
availability of subordination to the Senior Certificates related to the other
Mortgage Loan Group.
Limited Source of Payments--No Recourse to Company, Servicer or Trustee
The Mortgage Loans are to be the sole source of payments on the
Certificates. The Certificates do not represent an interest in or obligation of
the Company, the Servicer, the Trustee or any of their affiliates, except for
the limited obligations of the Company with respect to certain breaches of its
representations and warranties and of the Servicer with respect to its servicing
obligations. Neither the Certificates nor the
S-36
<PAGE>
Mortgage Loans will be guaranteed by or insured by any governmental agency or
instrumentality, the Company, the Servicer, the Trustee or any of their
affiliates. Consequently, in the event that payments on the Mortgage Loans are
insufficient or otherwise unavailable to make all payments required on the
Certificates, there will be no recourse to the Company, the Servicer, the
Trustee or any of their affiliates.
Limited Liquidity
Each Underwriter intends to make a secondary market in the Certificates
being purchased by it, but no Underwriter has an obligation to do so. There is
currently no secondary market for the Offered Certificates and there can be no
assurance that such a market will develop or, if it does develop, that it will
provide Certificateholders with a sufficient level of liquidity of investment or
that it will continue for the life of the Certificates.
Geographic Concentration
Approximately 30.90% of all Mortgage Loans, 33.14% of the Group I
Mortgage Loans and approximately 19.84% of the Group II Mortgage Loans (by
Cut-Off Date Principal Balances) are secured by Mortgaged Properties located in
the State of California. Although property values of residential real estate in
California are currently improving such values have declined in recent years. If
the California residential real estate market should experience an overall
decline in property values again after the dates of origination of the Mortgage
Loans, the rates of delinquency, foreclosure, bankruptcy and loss on the
Mortgage Loans may be expected to increase, and may increase substantially, as
compared to such rates in a stable or improving real estate market. In addition,
approximately 6.25% and 5.73% of all Mortgage Loans are located in Illinois and
Texas, respectively. Approximately 6.38% and 5.13% of the Group I Mortgage Loans
are located in Illinois and New York, respectively. Approximately 10.94%, 6.91%,
5.61%, 5.49% and 5.26% of the Group II Mortgage Loans are located in Texas,
Florida, Illinois, Minnesota and Massachusetts, respectively.
Book-Entry System
Since transactions in the Class IA Certificates, the Class IIA
Certificates and the Senior Subordinate Certificates (the "Book-Entry
Certificates") generally can be effected only through The Depository Trust
Company ("DTC"), participating organizations, indirect participants and certain
banks, the ability of a Certificateholder to pledge a Book-Entry Certificate to
persons or entities that do not participate in the DTC system, or otherwise to
take actions with respect to such Certificates, may be limited due to a lack of
a physical certificate representing the Book-Entry Certificates. In addition,
the Certificateholders may experience some delay in their receipt of
distribution of interest and principal on the Book-Entry Certificates, since
such distributions will be forwarded by the Trustee (or its duly appointed
paying agent, if any) to DTC, and DTC will credit such distributions to the
accounts of DTC Participants (as defined herein) which will thereafter credit
them to the accounts of Certificateholders either directly or indirectly through
indirect participants. Also, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity thereof in any secondary trading market
that may develop therefor because investors may be unwilling to purchase
securities for which they cannot obtain delivery of physical certificates. See
"Description of the Certificates--Book-Entry Registration" herein.
S-37
<PAGE>
THE TRUST
The primary assets of REMIC I will consist of a pool of Mortgage Loans
(the "Mortgage Pool"). REMIC I will also contain (i) certain insurance policies
related to the Mortgage Loans, (ii) any property which secured a Mortgage Loan
and which is acquired by foreclosure or by deed in lieu of foreclosure after the
Cut-Off Date, (iii) amounts held in the Certificate Account, and (iv) certain
other assets all as described herein. Funds otherwise required to be held in the
Certificate Account may be held in an investment account and invested for the
benefit of the Servicer in Eligible Investments pursuant to the terms of the
Pooling and Servicing Agreement, as described herein. The Mortgage Loans will be
assigned to the Trustee, together with all principal interest due on the
Mortgage Loans after the Cut-Off Date. The Trustee will, concurrently with such
assignment, authenticate and deliver the Certificates. Each Mortgage Loan will
be identified in a schedule appearing as an exhibit to the Pooling and Servicing
Agreement (the "Mortgage Loan Schedule") which will specify with respect to each
Mortgage Loan, among other things, the applicable Mortgage Loan Group, the
original principal balance and the outstanding principal balance as of the close
of business on the Cut-Off Date, the term of the Mortgage Note and the Mortgage
Interest Rate.
DESCRIPTION OF THE MORTGAGE POOL*/
The Mortgage Pool will consist of Mortgage Loans that will have an
aggregate principal balance outstanding as of March 1, 1998 (the "Cut-Off
Date"), after deducting payments due on or before that date, of approximately
$285,096,944. The Group I Mortgage Loans and Group II Mortgage Loans have an
aggregate principal balance outstanding as of the Cut-Off Date, after deducting
payments due on or before that date, of approximately $237,039,011 and
$48,057,933, respectively. Certain of the risks of loss on certain Mortgage
Loans will be covered up to specified limits by Primary Insurance Policies.
The Mortgage Loans are secured by first mortgages or first deeds of
trust or other similar security instruments creating first liens on one- to
four-family residential properties (the "Mortgaged Properties"),
- --------
*/ The description herein of the Mortgage Pool and the Mortgaged Properties is
based upon the - Mortgage Loans at the close of business on the Cut-Off
Date, after deducting the scheduled principal payments due on or before such
date, whether or not actually received. All references herein to "principal
balance" refer to the principal balance as of the Cut-Off Date, unless
otherwise specifically stated or required by the context. References herein
to percentages of Mortgage Loans refer in each case to the percentage of the
aggregate principal balance of the related Mortgage Loan Group, based on the
outstanding principal balances of the Mortgage Loans after giving effect to
scheduled Monthly Payments due on or prior to the Cut-Off Date, whether or
not received. References to weighted averages refer, in each case, to
weighted averages by principal balance as of the Cut-Off Date of the related
Mortgage Loans (determined as described in the preceding sentence). Prior to
the issuance of the Certificates, Mortgage Loans may be removed from the
Mortgage Pool as a result of principal prepayments in full ("Payoffs"),
delinquencies or otherwise. In such event, other Mortgage Loans may be
included in the Mortgage Pool. The Company believes that the information set
forth herein with respect to the Mortgage Pool is representative of the
characteristics of the Mortgage Pool as it will actually be constituted at
the time the Certificates are issued, although the range of Mortgage
Interest Rates and certain other characteristics of the Mortgage Loans in
the Mortgage Pool may vary. See "--Additional Information" herein.
S-38
<PAGE>
which may include detached homes, duplexes, townhouses, individual condominium
units, individual units in planned unit developments and other attached dwelling
units which are part of buildings consisting of more than four units so long as
the property subject to the lien of the related Mortgage consists of no more
than four units, and having the additional characteristics described below and
in the Prospectus.
Each Mortgage Loan was acquired by the Company for inclusion in the
Mortgage Pool and was originated or acquired by the Seller, an affiliate of the
Company, during the period February, 1997 through February, 1998 and will have
an original term to maturity of greater than 15 but not more than 30 years in
the case of the Group I Mortgage Loans and not more than 15 years in the case of
Group II Mortgage Loans. None of the Mortgage Loans in the Mortgage Pool have
been originated under reduced or no documentation programs.
Approximately 95.88% the Mortgage Loans in the Mortgage Pool will have
ACUScores. The weighted average ACUScore for the Mortgage Loans that were scored
is 101. "ACUScores" are statistical mortgage scores obtained by certain mortgage
lenders in connection with loan applications to help assess a borrower's
credit-worthiness as of the time the score is obtained. ACUScores are generated
by computer models developed by United Guaranty Residential Insurance Company
("UG"). ACUScores range from 10 to 1,000, with a benchmark score of 100, which
was designed to indicate that a loan scoring 200 would be twice as risky as a
loan scoring 100 and a loan scoring 50 is only half as risky as a loan scoring
100. According to the model, the higher the score, the greater the loan's
relative risk. Any information regarding ACUScores is not intended to and does
not address matters respecting investments in the securities which are the
subject of this document. All information in this document was prepared by a
party or parties other than UG, which parties are solely responsible therefor,
and UG makes no representations as to the correctness or completeness hereof.
The Company does not make any representations or warranties as to the actual
performance of any Mortgage Loan or that a particular ACUScore will not change
over time or should be relied upon as a basis for an expectation that the
borrower will repay the Mortgage Loan according to its terms.
Approximately 97.53% of the Mortgage Loans have FICO Scores. The
weighted average FICO Score for the Mortgage Loans that were scored is 731.
"FICO Scores" are statistical credit scores obtained by many mortgage lenders in
connection with the loan application to help assess a borrower's
creditworthiness as of the time the score is obtained. FICO Scores are generated
by models developed by a third party and are made available to lenders through
three national credit bureaus. The models were derived by analyzing data on
consumers in order to establish patterns which are believed to be indicative of
the borrower's probability of default. The FICO Score is based on a borrower's
historical credit data, including, among other things, payment history,
delinquencies on accounts, levels of outstanding indebtedness, length of credit
history, types of credit, and bankruptcy experience. FICO Scores range from
approximately 250 to approximately 900, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a FICO Score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender, i.e., that a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be noted that
FICO Scores were developed to indicate a level of default probability over a
two-year period which does not correspond to a life of a mortgage loan.
Furthermore, FICO Scores were not developed specifically for use in connection
with mortgage loans, but for consumer loans in general. Therefore, a FICO Score
does not take into consideration the effect of mortgage loan characteristics on
the probability of repayment by the borrower. The company does not make any
representations or warranties as to the actual performance of any Mortgage Loan
or that a particular FICO Score will not change over time or should be relied
upon as a basis for an expectation that the borrower will repay the Mortgage
Loan according to its terms.
S-39
<PAGE>
The Company will assign the Mortgage Loans to the Trustee for the
ultimate benefit of the Certificateholders. The Servicer will service the
Mortgage Loans directly as Servicer pursuant to the Pooling and Servicing
Agreement, and will receive compensation for such services. See "Description of
the Certificates--Assignment of Mortgage Loans" in the Prospectus.
The Company will make representations and warranties regarding the
Mortgage Loans in the Pooling and Servicing Agreement, but its assignment of the
Mortgage Loans to the Trustee will be without recourse and the Company's
obligations relating to the Mortgage Loans will be limited to the
representations and warranties made by it and to its servicing obligations, if
any, under the Pooling and Servicing Agreement. The Servicer is required to make
certain advances of its own funds in respect of the Mortgage Loans to the
limited extent set forth under "Description of the Certificates--Advances and
Limitations Thereon" in the Prospectus "Description of the
Certificates--Advances" herein.
All of the Mortgage Loans will have principal and interest payable on
the first day of each month (the "Due Date"). The latest original scheduled
maturity of any Mortgage Loan will be March, 2028. Each of the Mortgage Loans
will have original terms to maturity of not more than 30 years. 100% of the
Mortgage Loans were originated pursuant to a "full documentation" program. At
origination, based upon an appraisal of the Mortgaged Property securing each
Mortgage Loan, approximately 88.60% of the Mortgage Loans will have had
Loan-to-Value Ratios less than or equal to 80%, and approximately 11.40%, of the
Mortgage Loans will have had Loan-to-Value Ratios greater than 80% but less than
or equal to 95% and all such loans were covered by a Primary Insurance Policy.
No Mortgage Loan will have had a Loan-to-Value Ratio at origination greater than
95%.
No Mortgage Loan permits negative amortization or the deferral of
accrued interest and none of the Mortgage Loans is secured by a leasehold
interest in the Mortgaged Property.
Loan Group I
The latest original scheduled maturity of any Group I Mortgage Loan
will be March 2028. Each of the Group I Mortgage Loans will have original terms
to maturity of not more than 30 years. 100% of the Group I Mortgage Loans were
originated pursuant to a "full documentation" program. At origination, based
upon an appraisal of the Mortgaged Property securing each Group I Mortgage Loan,
obtained at or about the date of origination, approximately 12.78% of the Group
I Mortgage Loans will have had Loan-to-Value Ratios greater than 80% but less
than or equal to 95% and all such loans were covered by a Primary Insurance
Policy. No Group I Mortgage Loan will have had a Loan-to-Value Ratio at
origination greater than 95%. Approximately 96.20% of the Group I Mortgage Loans
will have ACUScores. The weighted average ACUScore for the Group I Mortgage
Loans is 103. Approximately 98.44% of the Group I Mortgage Loans will have FICO
scores . The weighted average FICO score for the Group I Mortgage Loans is 730.
No more than 1.55% of the Group I Mortgage Loans will be secured by
Mortgaged Properties located in any one California zip code area.
Loan Group II
The latest original scheduled maturity of any Group II Mortgage Loan
will be March 2013. Each of the Group II Mortgage Loans will have original terms
to maturity of not more than 15 years. 100% of the Group II Mortgage Loans were
originated pursuant to a "full documentation" program. At origination, based
upon an appraisal of the Mortgaged Property securing each Group II Mortgage Loan
obtained at or about the
S-40
<PAGE>
time of origination, approximately 4.61% of the Group II Mortgage Loans will
have had Loan-to-Value Ratios greater than 80% but less than or equal to 95% and
all of such loans were covered by a Primary Insurance Policy. Approximately
94.30% of the Group II Mortgage Loans will have ACUScores. The weighted average
ACUScore for the Group II Mortgage Loans is 93. Approximately 93.05% of the
Group II Mortgage Loans will have FICO scores . The weighted average FICO score
for the Group II Mortgage Loans is 736.
The following information sets forth in tabular format certain
information, as of the Cut-Off Date, with respect to the Mortgage Loans. Other
than with respect to rates of interest, percentages (approximate) are stated by
aggregate Scheduled Principal Balance of the Mortgage Loans as of the Cut-Off
Date and have been rounded in order to total 100%.
MORTGAGE LOANS IN THE AGGREGATE
Mortgage Rates of all Mortgage Loans(1)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Number of as of the Balance as of the
Mortgage Rate (%) Mortgage Loans Cut-Off Date Cut-Off Date
- ----------------- -------------- ---------------------- ------------------
<S> <C> <C> <C>
6.000+ to 6.500 14 $ 5,188,268.11 1.82%
6.500+ to 7.000 134 45,728,979.33 16.04
7.000+ to 7.500 413 136,934,519.29 48.03
7.500+ to 8.000 303 95,912,532.70 33.64
8.000+ to 8.500 4 1,332,644.39 0.47
-- --------------- -----
Totals.... 868 $285,096,943.82 100.00%
=== =============== ======
- ----------------
(1) The interest rates (the "Mortgage Rates") borne by the Mortgage Loans
as of the Cut-Off Date ranged from 6.375% per annum to 8.500% per annum
and the weighted average Mortgage Rate on the Mortgage Loans as of the
Cut-Off Date was approximately 7.395% per annum.
S-41
<PAGE>
Geographical Distribution
of all Mortgage Loans
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Mortgage Pool by
Aggregate Aggregate Principal
Number of Principal Balance Balance as of the
State Mortgage Loans as of the Cut-Off Date Cut-Off Date
- -------------------------------- --------------------- --------------------------- ------------------------
<S> <C> <C> <C>
Alabama......................... 1 $490,494.07 0.17%
Arkansas........................ 2 589,809.77 0.21
Arizona......................... 10 2,714,978.55 0.95
California...................... 261 88,080,810.21 30.90
Colorado........................ 33 10,754,422.78 3.77
Connecticut..................... 15 4,911,479.75 1.72
Delaware........................ 1 398,751.68 0.14
Florida......................... 41 12,497,172.49 4.38
Georgia......................... 10 3,584,894.46 1.26
Iowa............................ 1 234,000.00 0.08
Idaho........................... 1 263,586.86 0.09
Illinois........................ 57 17,821,858.13 6.25
Indiana......................... 4 1,387,190.28 0.49
Kansas.......................... 3 961,988.64 0.34
Kentucky........................ 5 1,540,730.90 0.54
Louisiana....................... 5 1,662,000.35 0.58
Maryland........................ 19 7,202,161.02 2.53
Massachusetts................... 23 7,575,473.77 2.66
Michigan........................ 45 13,300,886.37 4.67
Minnesota....................... 28 9,388,159.99 3.29
Mississippi..................... 1 324,720.19 0.11
Missouri........................ 12 4,753,296.34 1.67
Montana......................... 1 399,447.63 0.14
Nebraska........................ 3 1,171,956.37 0.41
Nevada.......................... 5 1,685,130.37 0.59
New Jersey...................... 24 7,592,331.33 2.66
New Mexico...................... 4 1,240,475.11 0.44
New York........................ 37 13,253,893.08 4.65
North Carolina.................. 12 4,464,230.36 1.57
Ohio............................ 18 5,999,469.01 2.10
Oklahoma........................ 3 1,170,326.84 0.41
Oregon.......................... 14 4,765,352.51 1.67
Pennsylvania.................... 12 3,909,276.66 1.37
South Carolina.................. 6 1,892,357.61 0.66
South Dakota.................... 1 357,952.74 0.13
Tennessee....................... 12 3,191,982.12 1.12
Texas........................... 50 16,338,263.21 5.73
Utah............................ 18 5,695,414.40 2.00
Virginia........................ 28 8,427,870.86 2.96
Washington...................... 32 10,132,248.69 3.55
West Virginia................... 3 818,193.17 0.29
Wisconsin....................... 7 2,151,905.15 0.75
----- ---------------- --------
Totals............ 868 $285,096,943.82 100.00%
=== =============== =======
</TABLE>
S-42
<PAGE>
Original Principal Balance for All Mortgage Loans(2)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Original Number of as of the Balance as of the
Principal Balance ($) Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- -------------- ------------------ -------------------
<S> <C> <C> <C>
200,000.00+ to 250,000.00 163 $39,236,578.28 13.76%
250,000.00+ to 300,000.00 294 80,902,600.54 28.38
300,000.00+ to 350,000.00 176 57,037,244.68 20.01
350,000.00+ to 400,000.00 91 34,332,324.48 12.04
400,000.00+ to 450,000.00 50 21,340,034.12 7.49
450,000.00+ to 500,000.00 39 18,681,250.89 6.55
500,000.00+ to 550,000.00 23 12,074,602.25 4.24
550,000.00+ to 600,000.00 9 5,189,637.86 1.82
600,000.00+ to 650,000.00 11 7,037,325.34 2.47
650,000.00+ to 700,000.00 2 1,400,000.00 0.49
700,000.00+ to 750,000.00 4 2,928,465.70 1.03
750,000.00+ to 800,000.00 4 $ 3,123,123.79 1.10
800,000.00+ to 850,000.00 1 813,755.89 0.29
Over 850,000.00 1 1,000,000.00 0.35
--- --------------- ------
Totals.............. 868 $285,096,943.82 100.00%
=== =============== =======
</TABLE>
- ----------------
(2) The average outstanding principal balance of the Mortgage Loans as
of the Cut-Off Date was approximately $328,453. The original principal
balances of the Mortgage Loans ranged from $225,000 to $1,000,000.
Year of Origination for All Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Year of Number of as of the Balance as of the
Origination Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- --------------------------- ------------------------
<S> <C> <C> <C>
1997 313 $102,876,784.08 36.08%
1998 555 182,220,159.74 63.92
--- --------------- ------
Totals.............. 868 $285,096,943.82 100.00%
=== =============== ======
</TABLE>
S-43
<PAGE>
Original Loan-to-Value Ratio
for All Mortgage Loans(3)
<TABLE>
<CAPTION>
Aggregate Percentage of
Principal Mortgage Pool by
Original Balance Aggregate Principal
Loan-to-Value Number of as of the Balance as of the
Ratio (%) Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- -------------- --------------- -------------------
<S> <C> <C> <C>
0.0+ to 50.0 33 $12,236,854.55 4.29%
50.0+ to 55.0 30 10,954,325.07 3.84
55.0+ to 60.0 38 14,332,000.78 5.03
60.0+ to 65.0 61 21,486,299.18 7.54
65.0+ to 70.0 83 26,914,104.17 9.44
70.0+ to 75.0 170 55,494,479.59 19.47
75.0+ to 80.0 338 111,178,948.39 39.00
80.0+ to 85.0 19 5,427,681.24 1.90
85.0+ to 90.0 58 17,103,305.15 6.00
90.0+ to 95.0 38 9,968,945.70 3.50
--- --------------- ------
Totals.............. 868 $285,096,943.82 100.00%
=== =============== ======
</TABLE>
- ----------------
(3) The weighted average original Loan-to-Value Ratio of the Mortgage Loans
was approximately 73.16% as of the Cut-Off Date.
Loan Purpose
for All Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Aggregate
Balance Principal Balance
Number of as of the as of the
Loan Purpose Mortgage Loans Cut-Off Date Cut-Off Date
------------ -------------- ------------ ------------
<S> <C> <C>
Rate and Term
Refinance 460 $150,553,278.21 52.81%
Purchase 282 91,480,152.39 32.09
Cash-Out Refinance 118 39,725,426.50 13.93
Construction /Perm 8 3,338,086.72 1.17
--- --------------- --------
Totals......... 868 $285,096,943.82 100.00%
=== --------------- =======
</TABLE>
S-44
<PAGE>
Remaining Terms to Stated Maturity
for All Mortgage Loans(4)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Number of as of the Balance as of the
Months Remaining Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C>
162+ to 168 1 $ 248,524.99 0.09%
174+ to 180 138 47,809,407.61 16.77
342+ to 348 2 543,898.01 0.19
348+ to 354 5 1,358,818.41 0.48
354+ to 360 722 235,136,294.80 82.48
--- -------------- ------
Totals.............. 868 $285,096,943.82 100.00%
=== =============== ======
</TABLE>
- ----------------
(4) The weighted average remaining term to stated maturity of the Mortgage
Loans as of the Cut-Off Date was approximately 328 months.
Types of Mortgaged Properties
of All Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Aggregate
Balance Principal Balance
Number of as of the as of the
Property Type Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------- ---------------- -----------------
<S> <C> <C> <C>
Single Family 781 $255,292,316.15 89.55%
Planned Unit Development 54 19,546,773.59 6.86
Condominium 29 9,237,633.53 3.24
Townhouse 4 1,020,220.55 0.36
--- --------------- ------
Totals.............. 868 $285,096,943.82 100.00%
=== =============== ======
</TABLE>
S-45
<PAGE>
Occupancy of All Mortgage Loans(5)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Number of as of the Balance as of the
Occupancy Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- -------------- ------------------ -------------------
<S> <C> <C> <C>
Primary Residence 847 $278,449,759.80 97.67%
Second-Home 21 6,647,184.02 2.33
--- --------------- ------
Totals.............. 868 $285,096,943.82 100.00%
=== =============== ======
</TABLE>
- ----------------
(6) Based on representations by the Mortgagors at the time of the related
Mortgage Loans.
Loan Documentation for All Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Number of as of the Balance as of the
Documentation Mortgage Loans Cut-Off Date Cut-Off Date
- ------------------ -------------- ----------------- -------------------
<S> <C> <C> <C>
Full 868 $285,096,943.82 100.00%
--- --------------- ------
Totals....... 868 $285,096,943.82 100.00%
=== =============== ======
</TABLE>
GROUP I MORTGAGE LOANS
Mortgage Rates for Group I Mortgage Loans(1)
<TABLE>
<CAPTION>
Percentage of
Group I
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Group I as of the Balance as of the
Mortgage Rate (%) Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ------------------ -------------------
<S> <C> <C> <C>
6.500+ to 7.000 56 $ 18,449,029.49 7.78%
7.000+ to 7.500 371 122,706,835.80 51.77
7.500+ to 8.000 299 94,799,026.53 39.99
8.000+ to 8.500 3 1,084,119.40 0.46
--- ----------------- ------
Total............. 729 $237,039,011.22 100.00%
=== =============== ======
</TABLE>
- ----------------
(1) The interest rates (the "Mortgage Rates") borne by the Group I Mortgage
Loans as of the Cut-Off Date ranged from 6.625% per annum to 8.500% per
annum to 8.500% per annum and the weighted average Mortgage Rate on the
Group I Mortgage Loans as of the Cut-Off Date was approximately 7.482%
per annum.
S-46
<PAGE>
Geographical Distribution
of Group I Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I
Mortgage Loans by
Number of Aggregate Aggregate Principal
Group I Principal Balance Balance as of the
State Mortgage Loans as of the Cut-Off Date Cut-Off Date
- -------------------------------- ----------------------- --------------------------- ------------------------
<S> <C> <C> <C>
Arkansas........................ 1 $ 249,809.77 0.11%
Arizona......................... 7 1,879,684.57 0.79
California...................... 234 78,545,559.83 33.14
Colorado........................ 29 9,208,080.52 3.88
Connecticut..................... 14 4,530,479.75 1.91
Florida......................... 30 9,174,680.78 3.87
Georgia......................... 8 2,921,505.17 1.23
Idaho........................... 1 263,586.86 0.11
Iowa............................ 1 234,000.00 0.10
Illinois........................ 49 15,127,103.04 6.38
Indiana......................... 3 1,066,992.68 0.45
Kansas.......................... 3 961,988.64 0.41
Kentucky........................ 5 1,540,730.90 0.65
Louisiana....................... 2 545,157.33 0.23
Maryland........................ 16 5,480,582.84 2.31
Massachusetts................... 16 5,046,993.01 2.13
Michigan........................ 39 11,378,783.58 4.80
Minnesota....................... 21 6,751,023.90 2.85
Mississippi..................... 1 324,720.19 0.14
Missouri........................ 11 4,468,296.34 1.89
Montana......................... 1 399,447.63 0.17
Nebraska........................ 2 771,956.37 0.33
Nevada.......................... 5 1,685,130.37 0.71
New Jersey...................... 23 7,333,081.33 3.09
New Mexico...................... 3 999,675.11 0.42
New York........................ 34 12,170,153.76 5.13
North Carolina.................. 12 4,464,230.36 1.88
Ohio............................ 13 4,344,972.10 1.83
Oklahoma........................ 1 331,700.00 0.14
Oregon.......................... 11 3,674,286.99 1.55
Pennsylvania.................... 11 3,585,276.66 1.51
South Carolina.................. 5 1,407,357.61 0.59
South Dakota.................... 1 357,952.74 0.15
Tennessee....................... 12 3,191,982.12 1.35
Texas........................... 34 11,081,141.25 4.67
Utah............................ 15 4,866,126.07 2.05
Virginia........................ 22 6,436,107.32 2.72
Washington...................... 29 9,184,654.16 3.87
West Virginia................... 1 292,114.42 0.12
Wisconsin....................... 3 761,905.15 0.32
- --------------- ------
Totals............ 729 $237,039,011.22 100.00%
=== =============== ======
</TABLE>
S-47
<PAGE>
Original Principal Balance for Group I Mortgage Loans(2)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Original Number of as of the Balance as of the
Principal Balance ($) Mortgage Loans Cut-Off Date Cut-Off Date
- --------------------------- -------------- ------------------- -------------------
<S> <C> <C> <C>
200,000.00+ to 250,000.00 145 $34,916,996.69 14.73%
250,000.00+ to 300,000.00 249 68,481,834.70 28.89
300,000.00+ to 350,000.00 147 47,548,420.10 20.06
350,000.00+ to 400,000.00 71 26,743,178.01 11.28
400,000.00+ to 450,000.00 42 17,944,576.30 7.57
450,000.00+ to 500,000.00 31 14,799,460.85 6.24
500,000.00+ to 550,000.00 19 9,991,178.25 4.21
550,000.00+ to 600,000.00 8 4,624,137.86 1.95
600,000.00+ to 650,000.00 7 4,493,883.08 1.90
650,000.00+ to 700,000.00 2 1,400,000.00 0.59
700,000.00+ to 750,000.00 4 2,928,465.70 1.24
750,000.00+ to 800,000.00 3 2,353,123.79 0.99
800,000.00+ to 850,000.00 1 813,755.89 0.34
--- --------------- ------
Totals........ 729 $237,039,011.22 100.00%
=== =============== ======
</TABLE>
- ----------------
(2) The average outstanding principal balance of the Group I Mortgage Loans
as of the Cut-Off Date was approximately $325,156. The original principal
balances of the Mortgage Loans ranged from $225,000 to $815,000.
Year of Origination for Group I Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Year of Group I as of the Balance as of the
Origination Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- --------------------------- ------------------------
<S> <C> <C> <C>
1997 295 $96,828,526.97 40.85%
1998 434 140,210,484.25 59.15
--- --------------- -----
Totals.............. 729 $237,039,011.22 100.00%
=== =============== ======
</TABLE>
S-48
<PAGE>
Original Loan-to-Value Ratio
for Group I Mortgage Loans(3)
<TABLE>
<CAPTION>
Percentage of
Aggregate Group I
Principal Mortgage Loans by
Original Number of Balance Aggregate Principal
Loan-to-Value Group I as of the Balance as of the
Ratio (%) Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ---------------------- ------------------------
<S> <C> <C> <C>
0.0+ to 50.0 21 $8,295,524.41 3.50%
50.0+ to 55.0 18 6,614,597.09 2.79
55.0+ to 60.0 29 10,568,869.30 4.46
60.0+ to 65.0 52 18,448,428.93 7.78
65.0+ to 70.0 68 22,320,310.78 9.42
70.0+ to 75.0 143 45,813,142.42 19.33
75.0+ to 80.0 291 94,694,731.69 39.95
80.0+ to 85.0 16 4,635,631.24 1.96
85.0+ to 90.0 53 15,678,829.66 6.61
90.0+ to 95.0 38 9,968,945.70 4.21
--- --------------- --------
Totals............ 729 $237,039,011.22 100.00%
=== =============== ========
</TABLE>
- ----------------
(3) The weighted average original Loan-to-Value Ratio of the Group I
Mortgage Loans was approximately 74.03% as of the Cut-Off Date.
Loan Purpose
for Group I Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I
Aggregate Mortgage Loans by
Principal Aggregate
Number of Balance Principal Balance
Group I as of the as of the
Loan Purpose Mortgage Loans Cut-Off Date Cut-Off Date
-------------- -------------- ------------ -----------------
<S> <C> <C> <C>
Rate and Term Refinance 361 $117,878,797.71 49.73%
Purchase 263 84,541,689.87 35.67
Cash-Out Refinance 101 32,770,830.61 13.83
Construction/Perm 4 1,847,693.03 0.78
--- --------------- ------
Totals 729 $237,039,011.22 100.00%
=== =============== ======
</TABLE>
S-49
<PAGE>
Remaining Terms to Stated Maturity
for Group I Mortgage Loans(4)
<TABLE>
<CAPTION>
Percentage of
Group I
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Group I as of the Balance as of the
Months Remaining Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- -------------- ----------------- --------------------
<S> <C> <C> <C>
342+ to 348 2 $ 543,898.01 0.23%
348+ to 354 5 1,358,818.41 0.57
354+ to 360 722 235,136,294.80 99.20
--- --------------- ------
Totals.................. 729 $237,039,011.22 100.00%
=== =============== ======
</TABLE>
- ----------------
(4) The weighted average remaining term to stated maturity of the Group I
Mortgage Loans as of the Cut-Off Date was approximately 359 months.
Types of Mortgaged Properties
for Group I Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I
Aggregate Mortgage Loans by
Principal Aggregate
Number of Balance Principal Balance
Group I as of the as of the
Property Type Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ------------------- -----------------
<S> <C> <C> <C>
Single Family 653 $211,112,883.09 89.06%
Planned Unit Development 47 16,825,679.81 7.10
Condominium 25 8,080,227.77 3.41
Townhouse 4 1,020,220.55 0.43
---- --------------- ------
Totals.................... 729 $237,039,011.22 100.00%
=== =============== ======
</TABLE>
S-50
<PAGE>
Occupancy of Group I Mortgage Loans(5)
<TABLE>
<CAPTION>
Percentage of
Group I
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Group I as of the Balance as of the
Occupancy Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- --------------------------- ---------------------
<S> <C> <C> <C>
Primary Residence 712 $231,522,811.58 97.67%
Second-Home 17 5,516,199.64 2.33
---- --------------- ------
Totals.................... 729 $237,039,011.22 100.00%
=== =============== ======
</TABLE>
- ----------------
(5) Based on representations by the Mortgagors at the time of the related
Mortgage Loans.
Loan Documentation for Group I Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group I
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Group I as of the Balance as of the
Documentation Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- --------------------------- ------------------------
<S> <C> <C> <C>
Full 729 $237,039,011.22 100.00%
--- --------------- ------
Totals.................... 729 $237,039,011.22 100.00%
=== =============== ======
</TABLE>
GROUP II MORTGAGE LOANS
Mortgage Rates for Group II Mortgage Loans(1)
<TABLE>
<CAPTION>
Percentage of
Group II
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Group I as of the Balance as of the
Mortgage Rate (%) Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C>
6.000+ to 6.500 14 $ 5,188,268.11 10.80%
6.500+ to 7.000 78 27,279,949.84 56.76
7.000+ to 7.500 42 14,227,683.49 29.61
7.500+ to 8.000 4 1,113,506.17 2.32
8.000+ to 8.500 1 248,524.99 0.52
--- -------------- ------
Totals.................... 139 $48,057,932.60 100.00%
=== ============== ======
</TABLE>
- ----------------
(1) The interest rates (the "Mortgage Rates") borne by the Group II Mortgage
Loans as of the Cut-Off Date ranged from 6.375% per annum to 8.250% per
annum and the weighted average Group II Mortgage Rate on the Mortgage
Loans as of the Cut-Off Date was approximately 6.965% per annum.
S-51
<PAGE>
Geographical Distribution
of Group II Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group II
Mortgage Loans by
Number of Aggregate Aggregate Principal
Group II Principal Balance Balance as of the
State Mortgage Loans as of the Cut-Off Date Cut-Off Date
- -------------------------------- ----------------------- ------------------------- ------------------------
<S> <C> <C> <C>
Alabama......................... 1 $ 490,494.07 1.02%
Arkansas........................ 1 340,000.00 0.71
Arizona......................... 3 835,293.98 1.74
California...................... 27 9,535,250.38 19.84
Colorado........................ 4 1,546,342.26 3.22
Connecticut..................... 1 381,000.00 0.79
Delaware........................ 1 398,751.68 0.83
Florida......................... 11 3,322,491.71 6.91
Georgia......................... 2 663,389.29 1.38
Illinois........................ 8 2,694,755.09 5.61
Indiana......................... 1 320,197.60 0.67
Louisiana....................... 3 1,116,843.02 2.32
Maryland........................ 3 1,721,578.18 3.58
Massachusetts................... 7 2,528,480.76 5.26
Michigan........................ 6 1,922,102.79 4.00
Minnesota....................... 7 2,637,136.09 5.49
Missouri........................ 1 285,000.00 0.59
Nebraska........................ 1 400,000.00 0.83
New Jersey...................... 1 259,250.00 0.54
New Mexico...................... 1 240,800.00 0.50
New York........................ 3 1,083,739.32 2.26
Ohio............................ 5 1,654,496.91 3.44
Oklahoma........................ 2 838,626.84 1.75
Oregon.......................... 3 1,091,065.52 2.27
Pennsylvania.................... 1 324,000.00 0.67
South Carolina.................. 1 485,000.00 1.01
Texas........................... 16 5,257,121.96 10.94
Utah............................ 3 829,288.33 1.73
Virginia........................ 6 1,991,763.54 4.14
Washington...................... 3 947,594.53 1.97
Wisconsin....................... 4 1,390,000.00 2.89
West Virginia................... 2 526,078.75 1.09
- ------------- ------
Totals.................. 139 $48,057,932.60 100.00%
=== -------------- ======
</TABLE>
S-52
<PAGE>
Original Principal Balance for Group II Mortgage Loans(2)
<TABLE>
<CAPTION>
Percentage of
Group II
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Original Group II as of the Balance as of the
Principal Balance ($) Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ------------------ -------------------
<S> <C> <C> <C>
200,000.00+ to 250,000.00 18 $ 4,319,581.59 8.99%
250,000.00+ to 300,000.00 45 12,420,765.84 25.84
300,000.00+ to 350,000.00 29 9,488,824.58 19.74
350,000.00+ to 400,000.00 20 7,589,146.47 15.79
400,000.00+ to 450,000.00 8 3,395,457.82 7.07
450,000.00+ to 500,000.00 8 3,881,790.04 8.08
500,000.00+ to 550,000.00 4 2,083,424.00 4.34
550,000.00+ to 600,000.00 1 565,500.00 1.18
600,000.00+ to 650,000.00 4 2,543,442.26 5.29
750,000.00+ to 800,000.00 1 770,000.00 1.60
Over 850,000.00 1 1,000,000.00 2.08
--- -------------- ------
Totals.................... 139 $48,057,932.60 100.00%
=== ============== ======
</TABLE>
- ----------------
(2) The average outstanding principal balance of the Group II Mortgage Loans
as of the Cut-Off Date was approximately $345,741. The original
principal balances of the Group II Mortgage Loans ranged from $231,000
to $1,000,000.
Year of Origination of Group II Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group II
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Year of Group II as of the Balance as of the
Origination Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- -------------- ------------------ -------------------
<S> <C> <C> <C>
1997 18 $ 6,048,257.11 12.59%
1998 121 42,009,675.49 87.41
--- -------------- ------
Totals.................... 139 $48,057,932.60 100.00%
=== ============== ======
</TABLE>
S-53
<PAGE>
Original Loan-to-Value Ratio
for Group II Mortgage Loans(3)
<TABLE>
<CAPTION>
Percentage of
Aggregate Group II
Principal Mortgage Loans by
Original Number of Balance Aggregate Principal
Loan-to-Value Group II as of the Balance as of the
Ratio (%) Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ---------------- -------------------
<S> <C> <C> <C>
0.0+ to 50.0 12 $ 3,941,330.14 8.20%
50.0+ to 55.0 12 4,339,727.98 9.03
55.0+ to 60.0 9 3,763,131.48 7.83
60.0+ to 65.0 9 3,037,870.25 6.32
65.0+ to 70.0 15 4,593,793.39 9.56
70.0+ to 75.0 27 9,681,337.17 20.15
75.0+ to 80.0 47 16,484,216.70 34.30
80.0+ to 85.0 3 792,050.00 1.65
85.0+ to 90.0 5 1,424,475.49 2.96
--- -------------- ------
Totals.................... 139 $48,057,932.60 100.00%
=== ============== ======
</TABLE>
- ----------------
(3) The weighted average original Loan-to-Value Ratio of the Group II
Mortgage Loans was approximately 68.88% as of the Cut-Off Date.
Loan Purpose
for Group II Mortgage Loans
Percentage of
Group II
Aggregate Mortgage Loans by
Principal Aggregate
Number of Balance Principal Balance
Group II as of the as of the
Loan Purpose Mortgage Loans Cut-Off Date Cut-Off Date
------------ -------------- --------------- -----------------
Rate and Term
Refinance 99 $32,674,480.50 67.99%
Purchase 19 6,938,462.52 14.44
Cash-Out Refinance 17 6,954,595.89 14.47
Construction/Perm 4 1,490,393.69 3.10
--- --------------- ------
Totals...... 139 $48,057,932.60 100.00%
=== ============== ======
S-54
<PAGE>
Remaining Terms to Stated Maturity
for Group II Mortgage Loans(4)
<TABLE>
<CAPTION>
Percentage of
Group II Mortgage
Aggregate Loans by
Number of Principal Balance Aggregate Principal
Group II as of the Balance as of the
Months Remaining Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ------------------- -------------------
<S> <C> <C> <C>
162+ to 168 1 $ 248,524.99 0.52%
174+ to 180 138 47,809,407.61 99.48
--- --------------- ------
Totals.................... 139 $48,057,932.60 100.00%
=== ======
</TABLE>
- ----------------
(4) The weighted average remaining term to stated maturity of the Group II
Mortgage Loans as of the Cut-Off Date was approximately 179 months.
Types of Mortgaged Properties
for Group II Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group II
Aggregate Mortgage Loans by
Principal Aggregate
Number of Balance Principal Balance
Group II as of the as of the
Property Type Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ------------------ -------------------
<S> <C> <C> <C>
Single Family 128 $44,179,433.06 91.93%
Planned Unit Development 7 2,721,093.78 5.66
Condominium 4 1,157,405.76 2.41
--- ---------------- ------
Totals.................... 139 $48,057,932.60 100.00%
=== ============== ======
</TABLE>
S-55
<PAGE>
Occupancy of Group II Mortgage Loans(5)
<TABLE>
<CAPTION>
Percentage of
Group II
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Group II as of the Balance as of the
Occupancy Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- ------------------- --------------------
<S> <C> <C> <C>
Primary Residence 135 $46,926,948.22 97.65%
Second-Home 4 1,130,984.38 2.35
--- -------------- ------
Totals.................... 139 $48,057,932.60 100.00%
=== ============== ======
</TABLE>
- ----------------
(5) Based on representations by the Mortgagors at the time of the related
Group II Mortgage Loans.
Loan Documentation for
Group II Mortgage Loans
<TABLE>
<CAPTION>
Percentage of
Group II
Aggregate Mortgage Loans by
Number of Principal Balance Aggregate Principal
Group II as of the Balance as of the
Documentation Mortgage Loans Cut-Off Date Cut-Off Date
- ---------------------------------- ---------------------- --------------------------- ------------------------
<S> <C> <C> <C>
Full 139 $48,057,932.60 100.00%
--- -------------- ------
Totals.................... 139 $48,057,932.60 100.00%
=== ============== ======
</TABLE>
A Standard Hazard Insurance Policy is required to be maintained by the
Mortgagor with respect to each Mortgage Loan in an amount equal to the maximum
insurable value of the improvements securing such Mortgage Loan or the principal
balance of such Mortgage Loan, whichever is less. See "Servicing of the Mortgage
Loans -- Hazard Insurance" in the Prospectus. No Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy or Mortgagor Bankruptcy Insurance will be
maintained with respect to the Mortgage Pool, nor will any Mortgage Loan be
insured by the FHA or guaranteed by the VA.
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as presently
constituted. Prior to the issuance of the Certificates, Mortgage Loans may be
removed from the Mortgage Pool if the Company deems such removal necessary or
appropriate.
Delinquency and Foreclosure Experience of the Seller
The following delinquency tables set forth certain information
concerning the delinquency and foreclosure experience on one -to four-family,
first lien residential mortgage loans originated, directly and indirectly, and
serviced by the Seller.
S-56
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------
Delinquent Mortgage Loans at Period End (1) 1995 1996 1997
- ------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
30 to 59 days 0.31% 0.39% 0.29%
60 to 89 days 0.11% 0.13% 0.12%
90 days and over (2) 0.27% 0.51% 0.49%
-------------- -------------- --------------
Total Delinquencies 0.69% 1.03% .90%
============== ============== ==============
</TABLE>
(1) As a percentage of the total dollar amount of loans serviced in the Seller's
owned portfolio at Period End.
(2) Includes Foreclosures.
The above delinquency and foreclosure statistics represent the total
portfolio experience of the Seller for the indicated periods. There can be no
assurance, however, that the delinquency experience on the Mortgage Loans will
be comparable. In addition, the foregoing statistics include mortgage loans with
a variety of payment and other characteristics that may not correspond to those
of the Mortgage Loans. Further, the Mortgage Loans were not chosen from the
Seller's portfolio on the basis of any methodology which could or would make
them representative of the total pool of mortgage loans in the Seller's
portfolio. The actual delinquency experience on the Mortgage Loans will depend,
among other things, upon the value of the real estate securing such Mortgage
Loans and the ability of the mortgagors to make required payments.
The likelihood that mortgagors will become delinquent in the payment of
their mortgage loans and the rate of any subsequent foreclosures may be affected
by a number of factors related to mortgagors' personal circumstances, including,
but not limited to, unemployment or change in employment (or in the case of
self-employed mortgagors or mortgagors relying on commission income,
fluctuations in income), marital separation and a mortgagor's equity in the
related mortgaged property. In addition, delinquency and foreclosure experience
may be sensitive to adverse economic conditions, either nationally or
regionally, may exhibit seasonal variations and may be influenced by the level
of interest rates and servicing decisions on the applicable mortgage loans.
Regional economic conditions (including declining real estate values) may
particularly affect delinquency and foreclosure experience on mortgage loans to
the extent that mortgaged properties are concentrated in certain geographic
areas.
The Seller does not track ultimate investor losses resulting from the
foreclosure and subsequent disposition of mortgaged properties relating to
mortgage loans sold to such investors where the investor completes the sale of
the mortgaged property. Historically, the Seller has sold substantially all of
its mortgaged properties relating to mortgage loans to investors prior to
completion of the foreclosure of the mortgaged properties.
S-57
<PAGE>
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") to be dated as of the Cut-Off
Date between the Company, as Depositor, LaSalle Home Mortgage Corporation, as
Servicer, and Chase Bank of Texas, N.A., as trustee (the "Trustee"), a form of
which is filed as an exhibit to the Registration Statement of which this
Prospectus Supplement is a part. Reference is made to the Prospectus for
important additional information regarding the terms and conditions of the
Pooling and Servicing Agreement and the Certificates. It is a condition to the
issuance of the Offered Certificates that they receive the ratings from one or
more of Standard & Poor's, a division of The McGrawHill Companies, Inc. ("S&P")
and Duff & Phelps Credit Rating Co. ("DCR") indicated under "Certificate
Ratings" herein. As of the date of their issuance, the Offered Certificates,
other than the Class B-1 and Class B-2 Certificates, will qualify as "mortgage
related securities" within the meaning of the Secondary Mortgage Market
Enhancement Act of 1984.
The Servicer will be obligated to make Advances with respect to delinquent
payments on the Mortgage Loans as described herein under "--Advances".
The Certificates, other than the Class R Certificate, will evidence all
the beneficial ownership in a trust ("REMIC I") established by the Company into
which the mortgage loans (the "Mortgage Loans") will be deposited. The Mortgage
Pass-Through Certificates, Series 1998-1 (the "Certificates"), will consist of
the following seventeen classes: (i) Class IA-1, Class IA-2, Class IA-3, Class
IA-4, Class IA-5, Class IA-6, and Class IA-X (the "Class I-A Certificates"),
(ii) Class IIA-1, Class IIA-X and Class IIA-P (together, the Class IIA
Certificates and, together with the Class IA Certificates, the "Class A
Certificates"), (iii) Class M, Class B-1 and Class B-2 (the "Senior Subordinate
Certificates"), (iv) Class B-3, Class B-4 and Class B-5 (the "Junior Subordinate
Certificates" and, together with the Senior Subordinate Certificates,
"Subordinate Certificates") and (v) Class R (the "Residual Certificate" and,
together with the Class A Certificates, the "Senior Certificates"). Only the
Senior Certificates (other than the Class IA-1 Certificates) and the Senior
Subordinate Certificates (collectively, the "Offered Certificates") are offered
hereby. The Class IA-1 Certificates and the Junior Subordinate Certificates are
not offered hereby. The Class IA Certificates, the Class IIA Certificates and
the Subordinate Certificates are each a "Certificate Group". The "Class
Principal Balance" for any Class of Certificates (other than the Class IA-1
Certificates) will equal the aggregate amount of principal to which such Class
is entitled, after giving effect to prior (i) distributions of principal to such
Class, (ii) allocations of losses required to be borne by such Class and (iii)
in the case of the Accrual Class and the Accrual Component, increases resulting
from all interest accrued and added to the Class Principal Balance thereof.
Notwithstanding the foregoing, the Class Principal Balance of the most
subordinate Class of Certificates outstanding at any time is equal to the
aggregate Scheduled Principal Balance of all of the Mortgage Loans less the
Class Principal Balance of all other Classes of Certificates. The "Class
Principal Balance" of the Class IA-1 Certificates will equal the sum of the
Component Principal Balances (as defined below) thereof. As used herein the
"Principal Balance" of a Class or Component means the Class Principal Balance or
Component Principal Balance thereof, as applicable.
The Class IA-1 Certificates (which are not offered hereby) will be
comprised of six components (each, a "Component"), each of which (except for
Components IA-1-2 and IA-1-6) will have a specified principal balance (a
"Component Principal Balance"), which functions in a manner comparable to that
of a Class Principal Balance, on which interest will accrue at a designated
Remittance Rate. Holders of Class IA-1 Certificates will be entitled to receive
distributions on any Distribution Date to the extent of the amount
S-58
<PAGE>
distributed with respect to the related Components on such Distribution Date.
Holders of Class IA-1 Certificates may not transfer such Components separately.
The Class IA-1 Certificates will be comprised of Components IA-1-1, IA-1-2,
IA-1-3, IA-1-4, IA-1-5 and IA-1-6 with initial Component Principal Balances or
Component Notional Principal Balances of $7,308,366, $5,405,490, $47,875,996,
$423,013, $22,737,148, and $9,891,000, respectively. The Class Principal Balance
of the Class IA-1 Certificates will equal the sum of the Component Principal
Balances thereof. The Component Principal Balance for each Component will equal
the aggregate amount of principal to which such Component is entitled, after
giving effect to (i) prior distributions of principal to such Component, (ii)
allocations of losses required to be borne by such Component and (iii) increases
resulting from all interest accrued and added to the Component Principal
Balances thereof.
The "Certificate Principal Balance" for any Certificate will be the
portion of the corresponding Class Principal Balance represented by such
Certificate. The aggregate initial Certificate Principal Balance will be
approximately equal to the aggregate principal balance of the Mortgage Loans as
of the Cut-Off Date. The Offered Certificates, other than the Class R
Certificate, are offered in minimum denominations equivalent to not less than
$25,000 initial Certificate Principal Balance each and multiples of $1 in excess
thereof. The Class R Certificate will be offered in registered, certificated
form in a single denomination of a 100% percentage interest.
Book-Entry Registration
Each Class of Book-Entry Certificates will initially be represented by a
global Certificate registered in the name of the nominee of DTC. DTC has advised
the Company that DTC's nominee will be Cede & Co. ("Cede"). Accordingly, Cede is
expected to be the holder of record of the Book-Entry Certificates. No
Book-Entry Certificateholder will be entitled to receive a certificate
representing such person's interest in such Certificate. Unless and until
Definitive Certificates (as defined below) are issued under the limited
circumstances described herein, all references herein to actions by Book-Entry
Certificateholders shall refer to actions taken by DTC upon instructions from
DTC Participants (as defined below), and all references herein to distributions,
notices, reports, and statements to Book-Entry Certificateholders shall refer to
distributions, notices, reports, and statements to Cede, as the registered
holder of such Certificates, for distribution to Book-Entry Certificateholders
in accordance with DTC procedures.
Certificateholders may hold their Book-Entry Certificates through DTC, if
they are DTC Participants (as defined below), or indirectly through
organizations which are DTC Participants. Transfers between DTC Participants
will occur in the ordinary way in accordance with DTC rules. Cede, as nominee of
DTC, will hold the global Certificates for the Book-Entry Certificates.
DTC has advised the Company that it is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, 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 the provisions of Section
17A of the Securities Exchange Act of 1934, as amended. DTC holds securities
that its participants ("DTC Participants") deposit with DTC. DTC also
facilitates the settlement among DTC Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in DTC Participants' accounts, thereby
eliminating the need for physical movement of securities certificates. DTC
Participants include the Underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Indirect
access to the DTC system also is available to other entities, such as
S-59
<PAGE>
banks, brokers, dealers, and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
("Indirect DTC Participants").
Certificateholders 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, unless Definitive
Certificates are issued, Certificateholders will receive all distributions of
principal and interest on the Book-Entry Certificates through DTC Participants.
Under a book-entry format, Certificateholders will receive payments after the
related Distribution Date because, while payments are required to be forwarded
to Cede, as nominee for DTC, on each such date, DTC will forward such payments
to DTC Participants which thereafter will be required to forward them to
Indirect DTC Participants or Certificateholders. It is anticipated that the sole
"Certificateholder" (as such term is used in the Pooling and Servicing
Agreement) for each Class of BookEntry Certificates will be Cede, as nominee of
DTC, and that Book-Entry Certificateholders will not be recognized by the
Trustee as Certificateholders under the Pooling and Servicing Agreement.
Book-Entry Certificateholders will be permitted to exercise the rights of
Certificateholders under the Pooling and Servicing Agreement only indirectly
through DTC Participants, who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers among
DTC Participants on whose behalf it acts with respect to the Book-Entry
Certificates and is required to receive and transmit payments of principal and
interest, if any, on such Book-Entry Certificates. DTC Participants and Indirect
DTC Participants with whom BookEntry Certificateholders have accounts with
respect to the Book-Entry Certificates are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective Book-Entry
Certificateholders. Accordingly, although owners of Book-Entry Certificates will
not possess Definitive Certificates, the Rules provide a mechanism by which
owners of the Book-Entry Certificates through their DTC Participants will
receive payments and will be able to transfer their interest.
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
Book-Entry Certificateholder to pledge Book-Entry Certificates to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of a
physical certificate for such Book-Entry Certificates.
DTC has advised the Company that it will take any action permitted to be
taken by a Book-Entry Certificateholder under the Pooling and Servicing
Agreement only at the direction of one or more DTC Participants to whose account
with DTC the Certificates are credited. Additionally, DTC has advised the
Company that it will take such actions with respect to a Book-Entry Certificate
only at the direction of and on behalf of the DTC Participant whose holdings
include that Certificate. DTC may take conflicting actions with respect to other
Book-Entry Certificates to the extent that such actions are taken on behalf of
DTC Participants whose holdings include such Book-Entry Certificates.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of Book-Entry Certificates among DTC Participants, it is under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
S-60
<PAGE>
Definitive Certificates
The Book-Entry Certificates will be issued in fully registered,
certificated form to Certificateholders or their nominees ("Definitive
Certificates"), rather than to DTC or its nominee, only if (i) the Company
advises the Trustee 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 Company is unable to locate a
qualified successor, (ii) the Company, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an Event of
Default, Certificateholders of Book-Entry Certificates evidencing not less than
66% of the aggregate outstanding Certificate Principal Balance advise the
Trustee and DTC through DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interest of the Certificateholders.
Upon notice of the occurrence of any of the events described in the
immediately preceding paragraph, DTC is required to notify all DTC Participants
of the availability of Definitive Certificates. Upon surrender by DTC of the
global Certificates and receipt from DTC of instructions for re-registration,
the Trustee will issue the Book-Entry Certificates in the form of Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders under the Pooling and Servicing
Agreement.
Distributions of principal and interest on the Definitive Certificates, as
well as the other Classes of Certificates, will be made by the Trustee (or its
duly appointed paying agent, if any) directly to holders of such Certificates in
accordance with the procedures set forth herein and in the Pooling and Servicing
Agreement. Distributions of principal and interest on each Distribution Date
will be made to holders in whose names such Certificates were registered at the
close of business on the last business day of the month preceding the month of
such Distribution Date. Distributions will be made by wire transfer in
immediately available funds for the account of each such holder or, if a holder
has not provided wire instructions, by check mailed to the address of such
holder as it appears on the register maintained by the Certificate Registrar.
The final payment on any Certificate (whether a Definitive Certificate or the
global Certificates registered in the name of Cede) will be made only upon
presentation and surrender of such Certificate at the offices of the Trustee or
its agent or such office or agency as is specified in the notice of final
distribution to holders of Certificates being retired. The Trustee will provide
such notice to registered Certificateholders not later than the fifteenth day of
the month in which all remaining outstanding Certificates will be retired.
Definitive Certificates, as well as the other Classes of Certificates,
will be transferable and exchangeable at the offices of the Trustee or its
agent. A reasonable service charge may be imposed for any registration of
transfer or exchange, and the Trustee or such agent may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
Priority of Distributions
Commencing in April 1998, on the 25th day of each month, or if such 25th
day is not a business day, on the immediately succeeding business day (each, a
"Distribution Date"). On each Distribution Date prior to the Credit Support
Depletion Date (as defined herein), distributions will be made in the order and
priority as follows:
(a) with respect to the Class IA Certificates, Subordinate
Certificates and Class R Certificate, prior to the Credit
Support Depletion Date (as defined herein), to the extent of
the Group I Available Distribution Amount on such Distribution
Date:
S-61
<PAGE>
(i) first, to Component IA-1-4 of the Class IA-1
Certificates, the Component IA-1-4 Fraction (as
defined herein) of all principal received on or in
respect of each Group I Discount Mortgage Loan (as
defined herein);
(ii) second, to the Class IA and Class R Certificates (and
Components of the Class IA-1 Certificates) then
entitled to receive accrued and unpaid interest at
their respective Remittance Rates on their respective
Certificate Principal Balances, Component Principal
Balances, Class Notional Amounts or Component
Notional Amounts, as the case may be (as described in
"--Distributions of Interest"); provided, however,
that (i) on or before the Component IA-1-3 Accretion
Termination Date (as defined below), interest
otherwise distributable to Component IA-1-3 will be
distributed, as principal, to certain Classes and
Components of Class IA Certificates in the manner
described below and (ii) on or before the Class IA-4
Accretion Termination Date (as defined below),
interest otherwise distributable to the Class IA-4
Certificates will be distributed, as principal, to
certain Classes and Components of Class IA
Certificates as described below;
(iii) third, to the Class IA Certificates then entitled to
principal (other than Component IA-1-4 of the Class
IA-1 Certificates) and the Class R Certificates in
the order described in "Description of the
Certificates--Distributions of Principal--Group I
Certificate Principal Distributions";
(iv) fourth, to the Component IA-1-4 of the Class IA-1
Certificates, the Component IA- 1-4 Principal
Shortfall (as defined herein) for such Distribution
Date;
(v) fifth, to the Subordinate Certificates, interest and
then principal, as described in "Description of the
Certificates--Distributions of Interest" and
"--Distributions of Principal--Subordinate
Certificate Principal Distributions"; and
(vi) sixth, the R-2 Component of the Class R Certificate
receives the remainder of the Group I Available
Distributable Amount (as defined in "Description of
the Certificates--Available Distribution Amount"
herein) for such Distribution Date.
(b) with respect to the Class IIA Certificates, prior to the
Credit Support Depletion Date, to the extent of the Group II
Available Distribution Amount on such Distribution Date:
(i) first, to the Class IIA-P Certificates, the Class
IIA-P Fraction (as defined herein) of all principal
received on or in respect of each Group II Discount
Mortgage Loan;
(ii) second, to the Class IIA-1 Certificates and Class
IIA-X Certificates, accrued and unpaid interest on
their respective Certificate Principal Balance and
Class Notional Amount at their respective Remittance
Rates as described in "--Distributions of Interest";
(iii) third, to the Class IIA-1 Certificates, principal as
described in "--Distributions of Principal--Group II
Certificate Principal Distributions";
S-62
<PAGE>
(iv) fourth, to the Class IIA-P Certificates, the Class
IIA-P Principal Shortfall (as defined herein) for
such Distribution Date;
(v) fifth, to pay interest and principal on each class of
Subordinate Certificates as described herein; and
(vi) sixth, to Component R-2 of the Class R Certificate,
the remaining portion, if any, of the Group II
Available Distribution Amount for such Distribution
Date.
With respect to the Subordinate Certificates, notwithstanding the
foregoing, on any Distribution Date on which the Subordination Level (as defined
herein) for any Class of Subordinate Certificates is less than the Subordination
Level as of the Closing Date, the portion of the Subordinate Principal
Prepayments Distribution Amount (as defined herein) for each Certificate Group
otherwise allocable to the Class or Classes of the Subordinate Certificates
junior to such Class will be allocated to the most senior Class of Subordinate
Certificates for which the Subordination Level is less than such percentage as
of the Closing Date and to the Class or Classes of Subordinate Certificates
senior thereto, pro rata according to the Class Principal Balances of such
Classes.
The "Subordination Level" on any specified date with respect to any Class
of Subordinate Certificates is the percentage obtained by dividing the sum of
the Class Principal Balances of all Classes of Certificates which are
subordinate in right of payment to such Class by the sum of the Class Principal
Balances of all Classes of Certificates as of such date prior to giving effect
to distributions or allocations of realized losses on the Mortgage Loans on such
date.
On each Distribution Date on or after the Credit Support Depletion Date,
distributions will be made in the order and priority as follows:
(a) with respect to the Class IA Certificates, and Class R
Certificate, the extent of the Group I Available Distribution
Amount on such Distribution Date:
(i) first, to Component IA-1-4, the Component IA-1-4
Fraction (as defined herein) of all principal
received on or in respect of each Group I Discount
Mortgage Loan (as defined herein);
(ii) second, to the Class IA and Class R Certificates
(other than Components IA-1-1 and Component IA-1-4 of
the Class IA-1 Certificates) accrued and unpaid
interest at their respective Remittance Rates on
their respective Class Principal Balances or Class
Notional Amounts and Component Principal Balances or
Component Notional Amounts;
(iii) third, to the Senior Certificates (other than
Components IA-1-2, IA-1-4 and IA-1-6 of the Class
IA-1 Certificates), principal, in the order described
in "Description of the Certificates--Distributions of
Principal--Group I Certificate Principal
Distributions";
(iv) fourth, to Component R-2 of the Class R Certificate,
the remaining portion, if any, of the Group I
Available Distribution Amount for such Distribution
Date.
S-63
<PAGE>
(b) with respect to the Class IIA Certificates to the extent of
the Group II Available Distribution Amount on such
Distribution Date:
(i) first, to the Class IIA-P Certificates, the Class
IIA-P Fraction (as defined herein) of all principal
received on or in respect of each Group II Discount
Mortgage Loan;
(ii) second, to the Class IIA-1 Certificates and the Class
IIA-X Certificates, accrued and unpaid interest on
their respective Class Principal Balance and Class
Notional Amount at their respective Remittance Rates;
(iii) third, to the Class IIA-1 Certificates, principal, as
described in "--Distributions of Principal--Group II
Certificate Principal Distributions";
(iv) fourth, to Component R-2 of the Class R Certificate,
the remaining portion, if any, of the Group II
Available Distribution Amount for such Distribution
Date.
The "Credit Support Depletion Date" is the first Distribution Date on
which the aggregate of the Class Principal Balances of the Subordinate
Certificates has been or will be reduced to zero.
Cross-Collateralization Provisions. In addition to the foregoing
distributions, the Class IA or Class IIA Certificates may receive additional
principal distributions on any Distribution Date prior to the Credit Support
Depletion Date under the circumstances specified in (A) and (B) below:
(A) On any Distribution Date on or after the date on which the
aggregate Principal Balance of the Class IA Certificates (excluding
Component IA-1-4) or the Class IIA-1 Certificate Principal Balance has
been reduced to zero, all principal (in excess of that needed to reduce
such aggregate Principal Balance of the Class IA Certificates (excluding
Component IA-1-4) or Class IIA-1 Certificate Principal Balance to zero) on
the Mortgage Loans in the Mortgage Loan Group relating to such Class A
Certificates that have been paid in full, other than the portion thereof
distributable to Component IA-1- 4 or the Class IIA-P Certificates, will
be paid as principal to the remaining Class A Certificates (other than
Component IA-1-4 or the Class IIA-P Certificates) in accordance with the
order set forth under "--Distributions of Principal--Group I Certificate
Principal Distributions" or "--Group II Certificate Principal
Distributions", in reduction of the Principal Balances thereof, provided
that on such Distribution Date either (a) the Aggregate Subordinate
Percentage for such Distribution Date is less than 200% times the initial
Aggregate Subordinate Percentage, or (b) the average outstanding principal
balance of the Mortgage Loans in either Mortgage Loan Group delinquent 60
days or more over the last six months, as a percentage of the
corresponding Group I or Group II Subordinate Amount, is greater than or
equal to 50%. For purposes of the foregoing, the "Aggregate Subordinate
Percentage" for any Distribution Date is equal to the aggregate of the
Class Principal Balances of the Subordinate Certificates immediately prior
to such Distribution Date divided by the aggregate Scheduled Principal
Balance of all of the Mortgage Loans immediately prior to such
Distribution Date.
(B) If on any Distribution Date on which the aggregate
Principal Balance of the Class IA or Class IIA Certificates would be
greater than the aggregate Scheduled Principal Balance of the Mortgage
Loans in the related Mortgage Loan Group (the "Undercollateralized
Group"), after giving effect to distributions to be made on such
Distribution Date, the portion of Available Funds in respect of principal
on the Mortgage Loans in other Mortgage Loan Group (the
"Overcollateralized Group") otherwise allocable to the Subordinate
Certificates will be distributed to the Classes of Certificates of the
S-64
<PAGE>
Certificate Group relating to the Undercollateralized Group (in accordance
with the priorities set forth herein), in reduction of the Certificate and
Component Principal Balances thereof, until the aggregate Principal
Balance of the Certificates and Components included in the
Undercollateralized Group is equal to the aggregate Scheduled Principal
Balance of the Mortgage Loans in the related Mortgage Loan Group.
Moreover, the Available Funds from the Overcollateralized Group will be
further reduced (after distributions of interest to Classes and Components
of Classes included in the Undercollateralized Group) in an amount equal
to one month's interest on the amount by which the Undercollateralized
Group is undercollateralized at 6.75% per annum (if Loan Group I is the
Undercollateralized Group) or 6.50% per annum (if Loan Group II is the
Undercollateralized Group), plus any shortfall of such amounts from prior
Distribution Dates, with accrued interest thereon. Such amounts will be
distributed to the applicable Classes of Certificates in the priority of
interest payable on such Distribution Date.
In the event the Group I Certificates are the Undercollateralized Group,
the reduction in the Available Distribution Amount of the Overcollateralized
Group to pay interest to the Undercollateralized Group as described above may
cause a shortfall in the amount of principal and interest otherwise
distributable to the Subordinate Certificates and further to the amount of
principal otherwise distributable to the Group IIA Certificates because the
Group IIA Certificates have Remittance Rates less than the Group IA
Certificates. Such shortfall shall be payable from amounts otherwise
distributable first from the Subordinate Certificates in reverse order of their
priority of payment and then from the Group IIA Certificates in respect of
principal.
Class IA-4 Accrual. The "Class IA-4 Accretion Termination Date" is the
earlier to occur of (i) the Distribution Date on which the Component IA-1-3
Principal Balance has been reduced to zero and (ii) the Credit Support Depletion
Date. On each Distribution Date on or before the Class IA-4 Accretion
Termination Date, an amount (for any Distribution Date, the "Class IA-4 Accrual
Amount") equal to the accrued interest that would otherwise be distributable in
respect of the Class IA-4 Certificates on such Distribution Date will be added
to the Class IA-4 Principal Balance (such amount to thereafter accrue interest
at the Class IA-4 Remittance Rate) and such amount will be distributed, as
principal, to the following Certificates:
(1) first, to the Class IA-3 Certificates, to the extent necessary
to reduce the Class IA-3 Principal Balance to its Targeted
Principal Balance for such Distribution Date;
(2) second, to Component IA-1-3 of the Class IA-1 Certificates, to
the extent necessary to reduce the Component IA-1-3 Principal
Balance to its Targeted Principal Balance for such
Distribution Date; and
(3) third, to the Class IA-4 Certificates.
Class IA-1-3 Accrual. The "Class IA-1-3 Accretion Termination Date" is the
earlier to occur of (i) the Distribution Date on which the Class IA-3 Principal
Balance has been reduced to zero and (ii) the Credit Support Depletion Date. On
each Distribution Date on or before the Class IA-1-3 Accretion Termination Date,
an amount (for any Distribution Date, the "Class IA-1-3 Accrual Amount") equal
to the accrued interest that would otherwise be distributable in respect of
Component IA-1-3 of the Class IA-1 Certificates on such Distribution Date will
be added to the Component IA-1-3 Principal Balance (such amount to thereafter
accrue interest at the Class IA-1-3 Remittance Rate) and such amount will be
distributed, as principal, to the following Certificates:
(1) first, to the Class IA-3 Certificates, to the extent necessary
to reduce the Class IA-3 Principal Balance to its Targeted
Principal Balance for such Distribution Date;
S-65
<PAGE>
(2) second, concurrently, until the Principal Balance of the Class
IA-3 Certificates has been reduced to zero, 90% to the Class
IA-3 Certificates without regard to its Targeted Principal
Balance, and 10% to Component IA-1-3 of the Class IA-1
Certificates; and
(3) third, to Component IA-1-3 of the Class IA-1 Certificates.
Except under the limited circumstances set forth herein distributions of
interest and principal to the Class IA Certificates and the Class IIA
Certificates will be based solely on payments received with respect to the Group
I Mortgage Loans and the Group II Mortgage Loans, respectively. Except in the
event of an Undercollateralized Group, distributions of interest and principal
on the Subordinate Certificates and the Residual Certificate will be based on
payments received with respect to both the Group I Mortgage Loans and the Group
II Mortgage Loans.
Distributions of Interest
With respect to each Class of Certificates (except for Components IA-1-1
and IA-1-4 of the Class IA-1 Certificates and the Class IIA-P Certificates,
which are not entitled to interest), interest will be passed through monthly on
each Distribution Date, commencing in April 1998, except that (1) interest
accrued on the Class IA-4 Certificates on or before the Class IA-4 Accretion
Termination Date will be added to the Class IA-4 Principal Balance, and (2)
interest accrued on Component IA-1-3 of the Class IA-1 Certificates prior to the
Component IA-1-3 Accretion Termination Date will be added to the Component
IA-1-3 Principal Balance. With respect to each Distribution Date, an amount of
interest will accrue or accrete, as applicable, on each Class of Certificates,
or on each Component of the Class IA-1 Certificates (other than Components
IA-1-1 and IA-1-4 of such Certificates), generally equal to 1/12th of the
applicable Remittance Rate for such Class or Component multiplied by the related
Class Principal Balance, Class Notional Balance, Component Principal Balance or
Component Notional Amount, as applicable. Interest to be distributed on the
Certificates on any Distribution Date will consist of accrued and unpaid
interest as of the previous Distribution Dates and interest accrued during the
preceding calendar month. All distributions of interest for each Class of
Certificates (or in the case of the Class IA-1 Certificates, each Component of
such Class other than Components IA-1-1 and IA-1-4) will generally be made only
to the extent of the Available Distribution Amount for the related Loan Group as
described herein under "--Priority of Distributions".
The Remittance Rates for the Class A Certificates are fixed as set forth
on the cover page hereof.
The "Component IA-1-2 Notional Amount" with respect to any Distribution
Date will equal the product of (x) the aggregate Class Principal Balances of the
Class IA-5, Class IA-6 and Class IA-2 Certificates as of any date of
determination and (y) a fraction, the numerator of which is the difference
between the Remittance Rate for Component IA-1-2 of the Class IA-1 Certificates
and the Remittances Rates for the Class IA-5, IA-6 and Class IA-2 Certificates
as of such date of determination and the denominator of which is the Remittance
Rate for Component IA-1-2 of the Class IA-1 Certificates. The Component IA-1-2
Notional Amount as of the Closing Date will be approximately $5,405,490.
The "Group I Notional Amount" with respect to any Distribution Date will
equal the product of (x) the aggregate Scheduled Principal Balance, as of the
second preceding Due Date after giving effect to payments scheduled to be
received as of such Due Date, whether or not received, or with respect to the
initial Distribution Date, as of the Cut-Off Date, of the Group I Premium Rate
Mortgage Loans and (y) a fraction, the numerator of which is the weighted
average of the Stripped Interest Rates for the Group I Premium Rate
S-66
<PAGE>
Mortgage Loans as of such Due Date and the denominator of which is 6.750%. The
Group I Notional Amount as of the Closing Date will be approximately
$16,901,058.
The "Component 1A-1-6 Notional Amount" with respect to any Distribution
Date will equal 58.52296451% of the Group I Notional Amount. The Component
1A-1-6 Notional Amount as of the Closing Date will be approximately $9,891,000.
The "Class IA-X Notional Amount" with respect to any Distribution Date
will equal 41.47703549% of the Group I Notional Amount. The Class IA-X Notional
Amount as of the Closing Date will be approximately $7,010,057.
The "Group I Premium Rate Mortgage Loans" means all Group I Mortgage Loans
having PassThrough Rates in excess of 6.75% per annum.
The "Class IIA-X Notional Amount" with respect to any Distribution Date
will equal the product of (x) the aggregate Scheduled Principal Balance, as of
the second preceding Due Date after giving effect to payments scheduled to be
received as of such Due Date, whether or not received, or with respect to the
initial Distribution Date of the Group II Premium Rate Mortgage Loans, as of the
Cut-Off Date, and (y) a fraction, the numerator of which is the weighted average
of the Stripped Interest Rates for the Group II Premium Rate Mortgage Loans as
of such Due Date and the denominator of which is 6.500%. The Class IIA-X
Notional Amount as of the Closing Date will be approximately $1,828,336.
The "Group II Premium Rate Mortgage Loans" means all Group II Mortgage
Loans having PassThrough Rates in excess of 6.500% per annum.
The "Stripped Interest Rate" means, (i) for each Group I Premium Rate
Mortgage Loan, the excess, if any, of the Pass-Through Rate for such Mortgage
Loan over 6.750% per annum and (ii) for each Group II Premium Rate Mortgage
Loan, the excess, if any, of the Pass-Through Rate for such Mortgage Loan over
6.500% per annum. The "Pass-Through Rate" for each Mortgage Loan is equal to the
Mortgage Interest Rate thereon less the rate at which the related Servicing Fee
is calculated.
Senior Subordinate Remittance Rate. The Remittance Rate on the Subordinate
Certificates will equal on any Distribution Date, the quotient expressed as a
percentage of (a) the sum of (i) the product of (x) 6.75% and (y) the excess of
the aggregate Scheduled Principal Balance of the Group I Mortgage Loans over the
Class IA Certificate Principal Balance (the "Group I Subordinate Amount") and
(ii) the product of (x) 6.50% and (y) the excess of the aggregate Scheduled
Principal Balance of the Group II Mortgage Loans over the Class IIA Certificate
Principal Balance (the "Group II Subordinate Amount"), over (b) the sum of (i)
the Group I Subordinate Amount and (ii) the Group II Subordinate Amount. The
initial Remittance Rate for each Class of the Senior Subordinate Certificates
will be approximately 6.708% per annum.
Compensating Interest. The Servicer, is obligated to remit to the
Certificate Account on the day prior to each Distribution Date with respect to
the Mortgage Loans in each Mortgage Loan Group an amount equal to the lesser of
(a) any shortfall for the related month of interest collections resulting from
the timing of Payoffs on the related Mortgage Loans made from the 15th day of
the calendar month preceding such Distribution Date to the last day of such
month and (b) the applicable monthly Servicing Fee payable to the Servicer, any
reinvestment income realized by the Servicer, relating to Payoffs on the related
Mortgage Loans made during the related Prepayment Period and interest payments
on such Payoffs received during the period of the first day through the 14th day
of the month of such Distribution Date.
S-67
<PAGE>
Distributions of Principal
General. On each Distribution Date, Certificateholders of each Certificate
Group will be entitled to receive principal distributions from the related
Available Distribution Amount to the extent and in the priority described
herein. See "--Priority of Distributions" herein. Except in the limited
circumstances described herein, the Class IA Certificates will receive principal
collected from Group I Loans and the Class IIA Certificates will receive
principal collected from the Group II Loans. The Subordinate Certificates will
receive principal collected from each Mortgage Loan Group.
The Class IA-X and Class IIA-X Certificates and Components IA-1-2 and
IA-1-6 of the Class IA-1 Certificates will not receive any distributions of
principal.
Class IA Certificate Principal Distributions
Component IA-1-4 Principal Distribution Amount. On each Distribution Date,
Component IA-1-4 of the Class IA-1 Certificates will receive a portion of the
Group I Available Distribution Amount attributable to principal received on or
in respect of any Group I Mortgage Loan with a Pass-Through Rate of less than
6.750% per annum (a "Group I Discount Mortgage Loan"), equal to the amount of
such principal so attributable multiplied by a fraction, the numerator of which
is 6.750% minus the Pass-Through Rate on such Discount Mortgage Loan and the
denominator of which is 6.750% (the "Component IA-1-4 Fraction"). In addition,
on each Distribution Date for so long as any of the Subordinate Certificates
remain outstanding, Component IA-1-4 of the Class IA-1 Certificates will also be
allocated principal, to the extent of amounts available to pay aggregate of the
Subordinate Principal Distribution Amounts for each Mortgage Loan Group on such
Distribution Date, in an amount generally equal to (i) the Component IA-1-4
Fraction of any loss on a Group I Discount Mortgage Loan other than a Special
Hazard Loss in excess of the Group I Special Hazard Coverage, a Fraud Loss in
excess of the Group I Fraud Coverage or a Bankruptcy Loss in excess of the Group
I Bankruptcy Coverage (each, as defined herein) and (ii) the sum of amounts, if
any, by which the foregoing amount on each prior Distribution Date exceeded the
amount actually distributed in respect thereof on such prior Distribution Dates
and not subsequently distributed (the "Component IA-1-4 Principal Shortfall");
provided, however, that such payments in respect of losses shall not cause a
further reduction of the outstanding Component IA-1-4 Principal Balance. The
aggregate of the amounts payable to Component IA-1- 4 of the Class IA-1
Certificates described in this paragraph are referred to herein as the
"Component IA-1-4 Principal Distribution Amount".
Group I Senior Principal Distribution Amount. On each Distribution Date
prior to the Credit Support Depletion Date, an amount, up to the amount of the
Group I Senior Principal Distribution Amount (as defined below) for such
Distribution Date, will be distributed as principal from the Group I Available
Distribution Amount (after payments made in respect of interest to the Class IA
Certificates, principal of the Component IA-1-4 Principal Distribution Amount
(exclusive of principal attriutale to pay the Component IA-1-4 Principal
Shortfall)) and, in certain limited circumstances set forth herein, from the
Group II Available Distribution Amount allocable to principal to the following
Classes of Class IA Certificates and Class R Certificate in the following order
of priority:
(i) first, to Component IA-1-5 of the Class IA-1 Certificates, an amount,
up to the amount of the Lockout Principal Distribution Amount (as defined
herein) for such Distribution Date, until the Principal Balance of Component
IA-1-5 of the Class IA-1 Certificates has been reduced to zero;
S-68
<PAGE>
(ii) second, to the Class R Certificate, the portion of the Group I Senior
Principal Distribution Amount remaining after the distributions described above,
until the Certificate Principal Balance of the Class R Certificate has been
reduced to zero;
(iii) third, the portion of the Group I Senior Principal Distribution
Amount remaining after the distributions described above, concurrently as
follows:
(A) 3.5714289% to Component IA-1-1 of the Class IA-1 Certificates,
until the Component IA-1- 1 Principal Balance has been reduced
to zero; and
(B) 96.4285711% sequentially as follows:
(1) first, to the Class IA-5 Certificates, to the extent
necessary to reduce the Class IA-5 Certificate
Principal Balance to its Planned Principal Balance
(as defined herein) for such Distribution Date;
(2) second, to the Class IA-6 Certificates, to the extent
necessary to reduce the Class IA- 6 Certificate
Principal Balance to its Planned Principal Balance
for such Distribution Date;
(3) third, to the Class IA-2 Certificates, to the extent
necessary to reduce the Class IA-2 Certificate
Principal Balance to its Planned Principal Balance
for such Distribution Date;
(4) fourth, to the Class IA-3 Certificates, to the extent
necessary to reduce the Class IA- 3 Certificate
Principal Balance to its Targeted Principal Balance
for such Distribution Date;
(5) fifth, to Component IA-1-3 of the Class IA-1
Certificates, to the extent necessary to reduce the
Component IA-1-3 Principal Balance to its Targeted
Principal Balance for such Distribution Date;
(6) sixth, to the Class IA-4 Certificates, until the
Class IA-4 Principal Balance has been reduced to
zero;
(7) seventh, concurrently, until the Class IA-3 Principal
Balance has been reduced to zero, 90% to the Class
IA-3 Certificates (without regard to its Targeted
Principal Balance) and 10% to Component IA-1-3 of the
Class IA-1 Certificates;
(8) eighth, to Component IA-1-3 of the Class IA-1
Certificates, until the Component IA- 1-3 Principal
Balance has been reduced to zero;
(9) ninth, to the Class IA-5 Certificates until the Class
IA-5 Principal Balance has been reduced to zero;
(10) tenth, to the Class IA-6 Certificates until the Class
IA-6 Certificate Principal Balance has been reduced
to zero; and
S-69
<PAGE>
(11) eleventh, to the Class IA-2 Certificates, until the
Class IA-2 Certificate Principal Balance has been
reduced to zero; and
(iv) fourth, the portion of the Group I Senior Principal Distribution
Amount remaining after the distributions described above, to Component IA-1-5 of
the Class IA-1 Certificates, until the Component IA-1- 5 Principal Balance has
been reduced to zero.
On each Distribution Date on and after the Credit Support Depletion Date,
an amount up to the Group I Available Principal Distribution Amount for such
Distribution Date will be distributed as provided above under "--Priority of
Distributions."
The "Scheduled Principal Balance" of a Mortgage Loan as of any
Distribution Date is the unpaid principal balance of such Mortgage Loan as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such schedule by reason of bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period) as of the first day of the month
preceding the month of such Distribution Date, after giving effect to any
previously applied Curtailments, the payment of principal due on such first day
of the month and any reduction of the principal balance of such Mortgage Loan by
a bankruptcy court, irrespective of any delinquency in payment by the related
Mortgagor.
The "Group I Senior Principal Distribution Amount" for any Distribution
Date will equal the sum of (i) the Group I Senior Percentage (as defined below)
of the Principal Payment Amount (as defined herein) for Group I Mortgage Loans
(exclusive of the portion thereof attributable to the Component IA-1-4 Principal
Distribution Amount), (ii) the Group I Senior Prepayment Percentage (as defined
under "--Principal Prepayments" below) of the Principal Prepayment Amount for
Group I Mortgage Loans (exclusive of the portion thereof attributable to the
Component IA-1-4 Principal Distribution Amount), and (iii) the Group I Senior
Liquidation Amount (as defined below).
The "Group I Senior Percentage" for any Distribution Date will equal the
sum of the Class Principal Balances of the Class IA and the Class R Certificates
divided by the aggregate Scheduled Principal Balance of all Group I Mortgage
Loans immediately preceding such Distribution Date (exclusive of the Component
IA-1-4 Fraction thereof). The Group I Senior Percentage as of the Closing Date
will be approximately 96.093%.
The "Group I Senior Liquidation Amount" is the aggregate, for each Group I
Mortgage Loan which became a Liquidated Mortgage Loan during the calendar month
preceding the month of the Distribution Date, of the lesser of (i) the Group I
Senior Percentage of the principal balance of such Mortgage Loan (exclusive of
the Component IA-1-4 Fraction thereof, with respect to any Group I Discount
Mortgage Loan) and (ii) the Group I Senior Prepayment Percentage of the
Liquidation Principal with respect to such Mortgage Loan.
"Liquidation Principal" is the principal portion of Liquidation Proceeds
received with respect to each Mortgage Loan which became a Liquidated Mortgage
Loan (as defined herein) (but not in excess of the principal balance thereof)
during the calendar month preceding the month of the Distribution Date,
exclusive of the portion thereof attributable to, with respect to Group I
Mortgage Loans, the applicable Component 1A- 1-4 Fraction thereof and with
respect to a Group II Mortgage Loan, the Class IIA-P Fraction thereof. A
"Liquidated Mortgage Loan" is a Mortgage Loan as to which the Servicer or
servicer has determined that all amounts which it expects to recover from or on
account of such Mortgage Loan, whether from insurance proceeds, Liquidation
Proceeds or otherwise have been recovered.
S-70
<PAGE>
The "Lockout Principal Distribution Amount" for any Distribution Date will
equal the sum of (i) the Lockout Percentage (as defined below) of the Scheduled
Principal Payment Amount for Group I Mortgage Loans (exclusive of the portion
thereof attributable to the Component IA-1-4 Principal Distribution Amount),
(ii) the Lockout Prepayment Percentage (as defined herein) of the Principal
Prepayment Amount for Group I Mortgage Loans (exclusive of the portion thereof
attributable to the Component IA-1-4 Principal Distribution Amount) and (iii)
the Lockout Liquidation Amount (as defined below).
The "Lockout Percentage" for any Distribution Date will equal the sum of
the Class IA-1-5 Principal Balance divided by the aggregate Scheduled Principal
Balance of all Group I Mortgage Loans immediately preceding such Distribution
Date (exclusive of the Component IA-1-4 Fraction thereof). The Lockout
Percentage as of the Closing Date will be approximately 9.609%.
The "Lockout Liquidation Amount" is the aggregate, for each Group I
Mortgage Loan which became a Liquidated Mortgage Loan during the calendar month
preceding the month of the Distribution Date, of the lesser of (i) the Lockout
Percentage of the principal balance of such Mortgage Loan (exclusive of the
Component IA-1-4 Fraction thereof, if applicable) and (ii) the Lockout
Percentage on any Distribution Date occurring prior to the fifth anniversary of
the first Distribution Date, and the Lockout Prepayment Percentage (as defined
herein) on any Distribution Date thereafter, in each case, of the Liquidation
Principal with respect to such Mortgage Loan.
The "Lockout Prepayment Percentage" will equal the product of (a) the
Lockout Percentage and (b) the Step Down Percentage.
The "Step Down Percentage" for any Distribution Date will be the
percentage indicated below:
STEP DOWN
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
April 1998 through March 2003............ 0%
April 2003 through March 2004............ 30%
April 2004 through March 2005............ 40%
April 2005 through March 2006............ 60%
April 2006 through March 2007............ 80%
April 2008 and thereafter................ 100%
Group II Certificate Principal Distributions
Class IIA-P Principal Distribution Amount. On each Distribution Date,
the Class IIA-P Certificates will receive a portion of the Group II Available
Distribution Amount attributable to principal received on or in respect of any
Group II Discount Mortgage Loan, equal to the amount of such principal so
attributable multiplied by a fraction, the numerator of which is 6.500% minus
the Pass-Through Rate on such Discount Mortgage Loan and the denominator of
which is 6.500% (the "Class IIA-P Fraction"). In addition, on each Distribution
Date for so long as any of the Subordinate Certificates remain outstanding,
Class IIA-P will also be allocated principal, to the extent of amounts available
to pay the aggregate of the Subordinate Principal Distribution Amounts for each
Mortgage Loan Group on such Distribution Date, in an amount generally equal to
(i) the Class IIA-P Fraction of any loss on a Group II Discount Mortgage Loan
other than a Special Hazard Loss in excess of the Group II Special Hazard
Coverage, a Fraud Loss in excess of the Group II Fraud Coverage or a Bankruptcy
Loss in excess of the Group II Bankruptcy Coverage (each, as defined herein) and
S-71
<PAGE>
(ii) the sum of amounts, if any, by which the foregoing amount on each prior
Distribution Date exceeded the amount actually distributed in respect thereof on
such prior Distribution Dates and not subsequently distributed (the "Class IIA-P
Principal Shortfall"); provided, however, that such payments in respect of
losses shall not cause a further reduction of the outstanding Class IIA-P
Certificate Principal Balance. The aggregate of the amounts payable to the Class
IIA-P Certificates described in this paragraph are referred to herein as the
"Class IIA-P Principal Distribution Amount").
Group II Senior Principal Distribution Amount. On each Distribution
Date, an amount, up to the Group II Senior Principal Distribution Amount (as
defined below) for such Distribution Date will be distributed as principal from
the Group II Available Distribution Amount (after payments made in respect of
interest to the Class IIA Certificates and principal of the Class IIA-P
Principal Distribution Amount (exclusive of the Class IIA-P Principal
Shortfall)) and, in certain limited circumstances set forth herein, from the
Group I Available Distribution Amount allocable to principal, to the Class IIA
Certificates.
The "Group II Senior Principal Distribution Amount" for any
Distribution Date will equal the sum of (i) the Group II Senior Percentage (as
defined herein) of the Principal Payment Amount (as defined herein) for Group II
Mortgage Loans (exclusive of the portion thereof attributable to the Class IIA-P
Principal Distribution Amount), (ii) the Group II Senior Prepayment Percentage
(as defined under "--Principal Prepayments" below) of the Principal Prepayment
Amount (as defined below) for Group II Mortgage Loans (exclusive of the portion
thereof attributable to the Class IIA-P Principal Distribution Amount) and (iii)
the Group II Senior Liquidation Amount as defined below).
The "Group II Senior Percentage" for any Distribution Date will equal
the sum of the Class Principal Balances of the Class IIA Certificates divided by
the aggregate Scheduled Principal Balance of all Group II Mortgage Loans
immediately preceding such Distribution Date (exclusive of the Class IIA-P
Fraction thereof). The Group II Senior Percentage as of the Closing Date will be
approximately 96.073%.
The "Group II Senior Liquidation Amount" is the aggregate, for each
Group II Loan, which became a Liquidated Mortgage Loan during the calendar month
preceding the month of the Distribution Date, of the lesser of (i) the Group II
Senior Percentage of the principal balance of such Mortgage Loan (exclusive of
the Class IIA-P Fraction) and (ii) the Group II Senior Prepayment Percentage of
the Liquidation Principal with respect to such Mortgage Loan.
Subordinate Certificate Principal Distributions
Subordinate Principal Distribution Amount. On each Distribution Date,
an amount calculated for each Mortgage Loan Group, up to the applicable
Subordinate Principal Distribution Amount (as defined below) for such
Distribution Date, will be distributed as principal to the Subordinate
Certificates. On each Distribution Date, except Distribution Dates on which the
Subordination Level for any Class of the Subordinate Certificates is less than
such Subordination Level as of the Closing Date, each Class of the Subordinate
Certificates will be entitled to receive its pro rata (by Class Principal
Balance) share of each Subordinate Principal Distribution Amount, to the extent
of the Available Distribution Amount for each Mortgage Loan Group remaining
after distributions of interest and principal to the applicable Senior
Certificates, distributions of interest and principal to all Classes of
Subordinate Certificates senior to such Class and distributions of interest to
such Class. See "--Priority of Distributions" herein. The relative seniority,
from highest to lowest, of the Subordinate Certificates shall be as follows:
Class M, Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5.
S-72
<PAGE>
The "Subordinate Principal Distribution Amount" for any Distribution
Date for each Mortgage Loan Group will be equal to the sum of (i) the applicable
Subordinate Percentage of the Principal Payment Amount for such Mortgage Loan
Group (exclusive of the portion thereof attributable to the Component IA-1- 4
Principal Distribution Amount for Group I Mortgage Loans and the portion thereof
attributable to the Class IIA-P Principal Distribution Amount for Group II
Mortgage Loans), (ii) the applicable Subordinate Principal Prepayments
Distribution Amount (as defined below) and (iii) the applicable Subordinate
Liquidation Amount (as defined below); provided, however, that the Subordinate
Distribution Amount applicable to Group I Mortgage Loans shall be reduced by the
amounts required to be distributed to Component IA-1-4 of the Class IA-1
Certificates with respect to the Component IA-1-4 Principal Shortfall on such
Distribution Date and the Subordinate Distribution Amount applicable to Group II
Mortgage Loans shall be reduced by the amounts required to be distributed to
Class IIA-P Certificates with respect to the Class IIA-P Principal Shortfall on
such Distribution Date; and provided further, that the Subordinate Principal
Distribution Amount for any Distribution Date shall be reduced to the extent of
any amounts required to be distributed to the Class A Certificates pursuant to
the provisions described under "Priority of Distributions--Cross-
Collateralization Provisions". The "Subordinate Principal Prepayments
Distribution Amount" as of any Distribution Date is the Subordinate Prepayment
Percentage of the Principal Prepayment Amount for such Mortgage Loan Group
(exclusive, with respect to the Group I Mortgage Loans, of the Component IA-1-4
Fraction thereof and with respect to the Group II Mortgage Loans, of the Class
IIA-P Fraction thereof ); provided, however, that the Subordinate Principal
Prepayment Distribution Amount applicable to Group I Mortgage Loans shall be
reduced by the portion thereof attributable to the Component IA-1-4 Principal
Shortfall and provided further, that the Subordinate Principal Prepayment
Distribution Amount applicable to Group II Mortgage Loans shall be reduced by
the Class IIA-P Principal Shortfall. Any reduction in the Group I Subordinate
Principal Distribution Amount or the Group II Subordinate Principal Distribution
Amount pursuant to the provisos above, shall each first offset the amount
calculated pursuant to clause (i), second clause (iii) and then clause (ii), in
each case of the definition thereof.
The "Subordinate Percentage" as to each Mortgage Loan Group is equal to
100% minus the applicable Senior Percentage of such Mortgage Loan Group.
Initially, the Subordinate Percentage for the Group I Mortgage Loans and the
Group II Mortgage Loans will be approximately 3.907% and 3.927%, respectively.
The "Subordinate Liquidation Amount" will equal the excess, if any, of
the aggregate Liquidation Principal for each Mortgage Loan Group which became
Liquidated Mortgage Loans during the calendar month preceding the month of the
Distribution Date, over the applicable Senior Liquidation Amount for such
Distribution Date.
The "Subordinate Prepayment Percentage" for any Distribution Date will
equal the excess of 100% over the applicable Senior Prepayment Percentage.
Initially the Subordinate Prepayment Percentage for the Group I Mortgage Loans
and the Group II Mortgage Loans will be approximately 0% and 0%, respectively.
The rights of the holders of the Subordinate Certificates to receive
distributions of interest and principal are subordinated to the rights of the
holders of the Class IA Certificates and Class IIA Certificates to receive
scheduled distributions of interest and principal. See "--Subordination and
Allocation of Losses" herein.
For any Distribution Date and for any Mortgage Loan Group, the
"Principal Payment Amount" is the sum with respect to the Mortgage Loans in such
group of (i) scheduled principal payments on the
S-73
<PAGE>
Mortgage Loans due on the related Due Date, (ii) the principal portion of
repurchase proceeds received with respect to any Mortgage Loan which was
repurchased as permitted or required by the Pooling and Servicing Agreement
during the calendar month preceding the month of the Distribution Date and (iii)
any other unscheduled payments of principal which were received on the Mortgage
Loans during the preceding calendar month, other than Payoffs, Curtailments or
Liquidation Principal. For any Distribution Date and for any Mortgage Loan
Group, the "Principal Prepayment Amount" is the sum with respect to the Mortgage
Loans in such group of all Curtailments and all Payoffs from the Mortgage Loans
in such group which were received during the applicable Prepayment Period.
Principal distributions to each of the Class IA Certificates, the Class IIA
Certificates and the Subordinate Certificates will be based on the Principal
Payment Amount, Principal Prepayment Amount and Liquidation Principal for the
related Mortgage Loan Group.
With respect to each Distribution Date and each Payoff and Curtailment
with respect to each Mortgage Loan, the related "Prepayment Period" will be the
calendar month preceding the month in which the related Distribution Date
occurs.
Principal Prepayments
The "Group I Senior Prepayment Percentage" and "Group II Senior
Prepayment Percentage" for any Distribution Date occurring prior to the month of
the fifth anniversary of the first Distribution Date will equal 100%. The "Group
I Senior Prepayment Percentage" and "Group II Senior Prepayment Percentage" in
each of the months of the fifth through ninth anniversaries of the first
Distribution Date will be as follows: for any Distribution Date in or after the
month of the fifth anniversary of the month of the first Distribution Date but
before the sixth anniversary of the month of the first Distribution Date, the
Group I or Group II Senior Percentage, as applicable, for such Distribution Date
plus 70% of the related Subordinate Percentage for such Distribution Date; for
any Distribution Date in or after the month of the sixth anniversary of the
month of the first Distribution Date but before the seventh anniversary of the
month of the first Distribution Date, the Group I or Group II Senior Percentage,
as applicable, for such Distribution Date plus 60% of the related Subordinate
Percentage for such Distribution Date; for any Distribution Date in or after the
month of the seventh anniversary of the month of the first Distribution Date but
before the eighth anniversary of the month of the first Distribution Date, the
Group I or Group II Senior Percentage, as applicable, for such Distribution Date
plus 40% of the related Subordinate Percentage for such Distribution Date; and
for any Distribution Date in or after the month of the eighth anniversary of the
month of the first Distribution Date but before the ninth anniversary of the
month of the first Distribution Date, the Group I or Group II Senior Percentage,
as applicable, for such Distribution Date plus 20% of the related Subordinate
Percentage for such Distribution Date. For any Distribution Date in or after the
month of the ninth anniversary of the month of the first Distribution Date, the
Group I or Group II Senior Prepayment Percentage will be the Group I or Group II
Senior Percentage, respectively, for such Distribution Date.
Notwithstanding the foregoing, if on any Distribution Date either the
Group I or Group II Senior Percentage for such Distribution Date exceeds the
initial Group I or Group II Senior Percentage, respectively, as of the Closing
Date, then both the Group I and Group II Senior Prepayment Percentage for such
Distribution Date will equal 100%. The scheduled reductions in the Group I and
Group II Senior Prepayment Percentages for Distribution Dates occurring on or
after the month of the fifth anniversary of the month of the first Distribution
Date will be subject to certain conditions specified in the Pooling Agreement.
Such conditions may include requirements that no such reduction may occur if
delinquencies or losses on the Mortgage Loans in the related Mortgage Loan Group
exceed specified limits at the time of, or on a date preceding, the Distribution
Date for which such reduction would otherwise be applicable. Notwithstanding the
foregoing, on any Distribution Date if the delinquencies or losses on the
Mortgage Loans in a Mortgage
S-74
<PAGE>
Loan Group exceed such limits such that the Pooling and Servicing Agreement
restricts a reduction of the Group I or Group II Senior Prepayment Percentage,
as applicable, then the Group I or Group II Senior Prepayment Percentage, as
applicable, for such Distribution Date will equal 100% for such Distribution
Date. If on any Distribution Date the allocation to the Group I or Group II
Senior Certificates (other than Component IA-1-4 of the Class IA-1 Certificates
and the Class IIA-P Certificates) in the percentage required would reduce the
sum of the Class Principal Balances of such Certificates below zero, the Group I
or Group II Senior Prepayment Percentage, as applicable, for such Distribution
Date will be limited to the percentage necessary to reduce such sum to zero.
Subordination and Allocation of Losses
The Subordinate Certificates will be subordinate in right of payment to
and provide credit support to the Senior Certificates, the Junior Subordinate
Certificates will be subordinate in right of payment to and provide credit
support to the Senior Subordinate Certificates and each Class of Senior
Subordinate Certificates will be subordinate in right of payment to and provide
credit support to each Class of Senior Subordinate Certificates with a lower
Class designation. The support provided by the Subordinate Certificates is
intended to enhance the likelihood of regular receipt by the Senior Certificates
of the full amount of the monthly distributions of interest (except with respect
to Components IA-1-1 and IA-1-4 of the Class IA-1 Certificates, and the Class
IIA-P Certificates which are not entitled to interest) and principal (except
with respect to the Components IA-1-2 and IA-1-6 of the Class IA-1 Certificates
and the Class IA-X and Class IIA-X Certificates, which are not entitled to
principal) to which they are entitled and to afford such Certificates protection
against certain losses. The protection afforded to the Senior Certificates by
the Subordinate Certificates will be accomplished by the preferential right on
each Distribution Date of such Senior Certificates to receive distributions of
interest (except with respect to Components IA-1-1 and IA-1-4 of the Class IA-1
Certificates and the Class IIA-P Certificates) and principal (except with
respect to Components IA-1-2 and IA-1-6 of the Class IA-1 Certificates and the
Class IA-X and the Class IIA-X Certificates) prior to distributions of interest
or principal to such Subordinate Certificates. The protection afforded a Class
of Senior Subordinate Certificates by the Classes of Senior Subordinate
Certificates with higher Class designations will be similarly accomplished by
the preferential right of those Classes with lower Class designations to receive
distributions of principal and interest prior to distributions of principal and
interest to those Classes of Senior Subordinate Certificates with higher Class
designations. The support provided by the Junior Subordinate Certificates to the
Senior Subordinate Certificates is intended to enhance the likelihood of regular
receipt by such Senior Subordinate Certificates of the full amount of monthly
distributions of interest and principal to which they are entitled and to afford
such Certificateholders protection against certain losses. The protection
afforded to the Senior Subordinate Certificates by the Junior Subordinate
Certificates will be accomplished by the preferential right on each Distribution
Date of such Senior Subordinate Certificates to receive distributions of
interest and principal, prior to distributions of interest and principal to such
Junior Subordinate Certificates.
Except for Special Hazard Losses, Fraud Losses and Bankruptcy Losses in
excess of the designated amounts of the applicable Special Hazard Coverage,
Fraud Coverage and Bankruptcy Coverage (each, as defined herein) for a Mortgage
Loan Group, any loss realized with respect to a Mortgage Loan will be allocated
among the Certificates related to such Mortgage Loan (i) for losses allocable to
principal (a) first, to the Junior Subordinate Certificates, until the aggregate
of the Class Principal Balances thereof has been reduced to zero, (b) second, to
the Class B-2 Certificates, until the Class Principal Balance thereof has been
reduced to zero, (c) third, to the Class B-1 Certificates, until the Class
Principal Balance thereof has been reduced to zero, (d) fourth, to the Class M
Certificates, until the Class Principal Balance thereof has been reduced to
zero, and (e) fifth, to the Senior Certificates related to such Mortgage Loan
(other than the Class
S-75
<PAGE>
IA-X, the Class IIA-X Certificates, Class IIA-P Certificates, and Components
1A-1-2, 1A-1-4 and 1A-1-6 of the Class IA-1 Certificates), pro rata, according
to their Class or Component Principal Balances in reduction of their respective
Class or Component Principal Balances, as applicable; provided, however, that if
the loss is recognized with respect to a Group I Discount Mortgage Loan, the
applicable Component IA-1-4 Fraction of such loss will first be allocated to
Component IA-1-4 of the Class IA-1 Certificates and the remainder of such loss
will be allocated as described above in this clause (i) and if the loss is
recognized with respect to a Group II Discount Mortgage Loan, the Class IIA-P
Fraction of such loss will first be allocated to Class IIA-P and the remainder
of such loss will be allocated as described above in this clause (i); and (ii)
for losses allocable to interest (a) first, to the Junior Subordinate
Certificates, in reduction of accrued but unpaid interest thereon and then in
reduction of the Class Principal Balances of such Certificates, (b) second, to
the Class B-2 Certificates, in reduction of accrued but unpaid interest thereon
and then in reduction of the Class Principal Balance of such Certificates, (c)
third, to the Class B-1 Certificates, in reduction of accrued but unpaid
interest thereon and then in reduction of the Class Principal Balance of such
Certificates, (d) fourth, to the Class M Certificates, in reduction of accrued
but unpaid interest thereon and then in reduction of the Class Principal Balance
of such Certificates, and (e) fifth, to the applicable Senior Certificates
related to such Mortgage Loan (other than the Class IIA-P Certificates and
Components 1A-1-1 and 1A-1-4 of the Class IA-1 Certificates), pro rata according
to accrued but unpaid interest thereon and then pro rata according to their
Class Principal Balances (or Component Principal Balances, in the case of
Components IA-1-3 and IA-1-5 of the Class IA-1 Certificates) in reduction of
their respective Class or Component Principal Balances, as applicable.
The allocation of the principal portion of losses relating to a
Mortgage Loan in a given Loan Group to all Classes of Certificates in the
related Certificate Group (other than Component 1A-1-4 of the Class IA-1
Certificates and the Class IA-X and the Class IIA-X Certificates) and to the
Subordinate Certificates (in the limited circumstances described below) pro rata
according to their respective Certificate or Component Principal Balances
(except if the loss is recognized with respect to a Group I Discount Mortgage
Loan, in which event the applicable Component IA-1-4 Fraction of such loss will
first be allocated to Component IA- 1-4 of the Class IA-1 Certificates, and the
remainder of such loss will be allocated as described above or if the loss is
recognized with respect to a Group II Discount Mortgage Loan, in which event the
Class IIA-P Fraction of such loss will first be allocated to the Class IIA-P
Certificates and the remainder of such loss will be allocated as described
above), and the allocation of the interest portion of such losses to the
Certificates related to such Mortgage Loan pro rata according to the amount of
interest accrued but unpaid on each such Class or Component (other than
Component 1A-1-4 of the Class IA-1 Certificates) in reduction thereof and then
in reduction of their related Class or Component Principal Balances, is
hereinafter referred to as "Pro Rata Allocation". For purposes of any Pro Rata
Allocation in part to the Subordinate Certificates, each Class of Subordinate
Certificates will be deemed to have a Class Principal Balance (and to accrue
interest thereon) equal to the actual Class Principal Balance thereof times a
fraction, the numerator of which is the Group I Subordinate Amount (for a loss
on a Group I Mortgage Loan) or the Group II Subordinate Amount (for a loss on a
Group II Mortgage Loan), and the denominator of which is the aggregate of the
Group I Subordinate Amount and the Group II Subordinate Amount.
On each Distribution Date, if the aggregate Class Principal Balance of
all outstanding Classes of Certificates exceeds the aggregate principal balance
of the Mortgage Loans in both Mortgage Loan Groups (after giving effect to
distributions of principal and the allocation of all losses on the Classes of
Certificates in such Certificate Group on such Distribution Date), such excess
will be deemed a principal loss and will be allocated to the most junior Class
of Subordinate Certificates then outstanding.
S-76
<PAGE>
Investors in the Senior Certificates should be aware that because the
Subordinate Certificates represent interests in both Mortgage Loan Groups, the
Certificate Principal Balances of Subordinate Certificates could be reduced to
zero as a result of a disproportionate amount of losses on the Mortgage Loans in
one Mortgage Loan Group. Therefore, notwithstanding that losses on the Mortgage
Loans in one Mortgage Loan Group may only be allocated to the related Senior
Certificates (except for Special Hazard Losses, Fraud Losses and Bankruptcy
Losses in excess of the applicable coverage amounts), the allocation to the
Subordinate Certificates of losses on the Mortgage Loans in the other Mortgage
Loan Group will increase the likelihood that losses may be allocated to such
Senior Certificates.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy
court may establish the value of the Mortgaged Property at an amount less than
the then outstanding Principal Balance of the Mortgage Loan secured by such
Mortgaged Property (a "Deficient Valuation"). The amount of the secured debt
could be reduced to such value, and the holder of such Mortgage Loan thus would
become an unsecured creditor to the extent the outstanding Principal Balance of
such Mortgage Loan exceeds the value so assigned to the Mortgaged Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding, including the reduction
of the amount of the Monthly Payment on the related Mortgage Loan (a "Debt
Service Reduction;" Debt Service Reductions and Deficient Valuations,
collectively, are defined as "Bankruptcy Losses"). "Fraud Losses" are losses on
Mortgage Loans arising from fraud, dishonesty or misrepresentation of the
Mortgagor in the origination of such Mortgage Loans. "Special Hazard Losses" are
losses relating to Mortgage Loans that become liquidated and have been the
subject of certain hazards (including earthquakes, tidal waves and related water
damage, war, civil insurrection, certain governmental actions, errors in design,
faulty workmanship or materials, nuclear reaction and chemical contamination)
not insured against under any applicable insurance policy and not resulting from
reasonable wear and tear.
Special Hazard Losses incurred on a Mortgage Loan in excess of the
Special Hazard Coverage will be allocated to the outstanding Class or Classes of
Senior Certificates and to the Subordinate Certificates by Pro Rata Allocation.
The "Special Hazard Coverage" is expected to equal approximately $3,974,271.95
as of the Cut-Off Date. On each anniversary of the Cut-Off Date, the Special
Hazard Coverage will be reduced, but not increased, to an amount equal to the
lesser of (i) the greatest of (a) the aggregate principal balance of the
Mortgage Loans located in the single California zip code area containing the
largest aggregate principal balance of such Mortgage Loans, (b) 1.0% of the
aggregate unpaid principal balance of the Mortgage Loans and (c) twice the
unpaid principal balance of the largest single Mortgage Loan, in each case
calculated as of the Due Date in the immediately preceding month and (ii) the
Special Hazard Coverage as of the Cut-Off Date as reduced by the Special Hazard
Losses allocated to the Certificates since the Cut-Off Date.
Fraud Losses incurred on a Mortgage Loan in excess of the Fraud
Coverage will be allocated to the outstanding related Class or Classes of Senior
Certificates and to the Subordinate Certificates by Pro Rata Allocation. The
"Fraud Coverage" is expected to equal approximately $5,701,938.88 as of the
Cut-Off Date. Fraud Coverage will be reduced, from time to time, by the amount
of Fraud Losses allocated to the Certificates. As of any date of determination
after the Cut-Off Date, the Fraud Coverage will generally be equal to (a) prior
to the first anniversary of the Cut-Off Date, an amount equal to 2.00% of the
aggregate principal balance of all Mortgage Loans as of the Cut-Off Date minus
the aggregate amounts allocated to the Certificates with respect to Fraud Losses
on such Mortgage Loans up to such date of determination and (b) from the first
to the fifth anniversary of the Cut-Off Date, an amount equal to (i) 1.00% of
the aggregate principal of all of the Mortgage Loans as of the most recent
anniversary of the Cut-Off Date minus (ii) the aggregate amounts allocated to
the Certificates with respect to Fraud Losses on the Mortgage Loans since the
S-77
<PAGE>
most recent anniversary of the Cut-Off Date up to such date of determination. On
and after the fifth anniversary of the Cut-Off Date, the Fraud Coverage will be
zero.
Bankruptcy Losses incurred on a Mortgage Loan in excess of the
Bankruptcy Coverage will be allocated to the outstanding related Class or
Classes of Senior Certificates and to the Subordinate Certificates by Pro Rata
Allocation. The "Bankruptcy Coverage" is expected to equal approximately
$100,000 as of the Cut-Off Date. Bankruptcy Coverage will be reduced, from time
to time, by the amount of Bankruptcy Losses allocated to the Certificates.
Special Hazard Coverage, Fraud Coverage or Bankruptcy Coverage may also
be reduced upon written confirmation from the Rating Agencies that such
reduction will not adversely affect the then current ratings assigned to the
Offered Certificates by the Rating Agencies. Such a reduction, in the event of
Special Hazard Losses, Fraud Losses or Bankruptcy Losses on the Mortgage Loans,
could adversely affect the level of protection afforded the Senior Certificates
by subordination of the Subordinate Certificates or the level of protection
afforded the Senior Subordinate Certificates by subordination of the Junior
Subordinate Certificates.
Investors in the Senior Certificates should be aware that the
applicable coverages for such losses cover Mortgage Loans in both Mortgage Loan
Groups. Therefore, in the event Mortgage Loans in a Mortgage Loan Group suffer a
high level of Special Hazard Losses, Fraud Losses or Bankruptcy Losses, it will
reduce the available coverage for the Senior Certificates in both Mortgage Loan
Groups and may cause Senior Certificates relating to the other Mortgage Loan
Group to suffer losses in the event Mortgage Loans in either Mortgage Loan Group
suffer such losses after the available coverage has been exhausted.
The Class R Certificate
The Class R Certificate will be comprised of two Components, Component
R-1 and Component R-2. Component R-1 represents the residual interest in REMIC I
and Component R-2 represents the residual interest in REMIC II.
On each Distribution Date, in addition to payments of interest and
principal to Component R-2 of the Class R Certificate described herein, any
amounts remaining (which are expected to be zero) in the Certificate Account
from the Available Distribution Amount for each Loan Group after distributions
of interest and principal on the Certificates and payment of expenses, if any,
of REMIC II will be distributed to the Class R Certificateholders, together with
Excess Liquidation Proceeds (as defined below), if any. Distributions of such
remaining amounts to Component R-2 of the Class R Certificateholders will be
subordinate to all payments required to be made with respect to the other
Offered Certificates on any Distribution Date.
Any amounts remaining in the Certificate Account upon reduction of the
aggregate Certificate Principal Balance to zero, payment of any outstanding
expenses and termination of the REMIC II will be distributable to Component R-2
the Class R Certificateholders. Such remaining assets are expected to be
minimal. See "--Optional Termination of the Trust" herein.
Advances
With respect to each Mortgage Loan, the Servicer will make Advances to
the Certificate Account on each Distribution Date to cover any shortfall between
(i) payments scheduled to be received in respect of such Mortgage Loan and (ii)
the amounts actually deposited in the Certificate Account on account of such
S-78
<PAGE>
payments; provided that the Servicer determines, in good faith, on such
Distribution Date that such Advances will be recoverable from insurance
proceeds, Liquidation Proceeds or other amounts received with respect to such
Mortgage Loan. Advances are reimbursable to the Servicer from cash in the
Certificate Account remitted by the Servicer with respect to Mortgage Loans in
the same Mortgage Loan Group prior to payments to the Certificateholders if the
Servicer determines that such Advances previously made are not recoverable from
insurance proceeds, Liquidation Proceeds or other amounts recoverable with
respect to the applicable Mortgage Loan and so notifies the Trustee.
Available Distribution Amount
On each Distribution Date, the Available Distribution Amount for any
Distribution Date which will be determined separately with respect to each
Mortgage Loan Group, and, in each case, will generally include scheduled
principal and interest payments due on the related Due Date, Curtailments
received in the previous calendar month (as set forth below), Payoffs received
in the applicable Prepayment Period to the extent set forth below and amounts
received with respect to liquidations of Mortgage Loans with respect to such
Mortgage Loan Group in the previous calendar month, will be distributed by or on
behalf of the Trustee to the Certificateholders, as specified herein.
The Due Date related to each Distribution Date is the first day of the
month in which such Distribution Date occurs. The determination date (the
"Determination Date") is a day not later than the 10th day preceding the related
Distribution Date in the month in which such Distribution Date occurs.
The "Available Distribution Amount" for any Distribution Date for each
Mortgage Loan Group, as more fully described in the Pooling and Servicing
Agreement, will equal the sum, with respect to the Mortgage Loans in such
Mortgage Loan Group, of the following amounts:
(1) the total amount of all cash received by or on behalf of the
Servicer with respect to such Mortgage Loans by the
Determination Date for such Distribution Date and not
previously distributed (including Liquidation Proceeds),
except:
(a) all scheduled payments of principal and interest
collected but due on a date subsequent to the
related Due Date;
(b) all Curtailments received after the previous calendar
month (together with any interest payment received
with such prepayments to the extent that it
represents the payment of interest accrued on such
Mortgage Loans for the period subsequent to the
previous calendar month);
(c) all Payoffs received after the applicable Prepayment
Period immediately preceding such Determination Date
(together with any interest payment received with
such Payoffs to the extent that it represents the
payment of interest accrued on the Mortgage Loans for
the period subsequent to the previous calendar
month);
(d) Liquidation Proceeds and insurance proceeds received
on such Mortgage Loans after the previous calendar
month;
(e) all amounts in the Certificate Account which are due
and reimbursable to the Servicer pursuant to the
terms of the Pooling and Servicing Agreement;
S-79
<PAGE>
(f) the Servicing Fee for each such Mortgage Loan; and
(g) the excess, if any, of aggregate Liquidation Proceeds
on such Mortgage Loans received during the previous
calendar month over the amount that would have been
received if Payoffs had been made with respect to
such Mortgage Loans on the date such Liquidation
Proceeds were received ("Excess Liquidation
Proceeds");
(2) the total, to the extent not previously distributed, of the
following amounts, to the extent advanced or received, as
applicable, by the Servicer:
(a) all Advances made by the Servicer to the Trustee with
respect to such Distribution Date relating to such
Mortgage Loans; and
(b) any amounts payable as Compensating Interest by the
Servicer on such Distribution Date relating to such
Mortgage Loans; and
(3) the total amount of any cash received by the Trustee or the
Servicer in respect of the obligation of the Company to
repurchase any such Mortgage Loans.
Last Scheduled Distribution Date
The Last Scheduled Distribution Date for the Class IA Certificates, the
Subordinate Certificates and the Class R Certificates is the Distribution Date
in April 2028, which is the Distribution Date occurring in the month after the
scheduled maturity date for the latest maturing Group I Mortgage Loan.
The Last Scheduled Distribution Date for the Class IIA Certificates is
the Distribution Date in April 2013, which is the Distribution Date occurring in
the month after the scheduled maturity date for the latest maturing Group II
Mortgage Loan.
The actual last Distribution Date on the Certificates will depend on
the rate of payments of principal (including Principal Prepayments) on the
related Mortgage Loans which, in turn, may be influenced by a variety of
economic, geographic and social factors, as well as the level of prevailing
interest rates. No assurance can be given as to the actual payment experience on
the Mortgage Loans.
Optional Termination
On any Distribution Date after the first date on which the aggregate
outstanding principal balance of the Mortgage Loans is less than 5% of the
aggregate principal balance of the Mortgage Loans as of the Cut-Off Date, the
Company may repurchase the Mortgage Loans and all property acquired in respect
of any Mortgage Loan remaining in REMIC I, and thereby effect the termination of
REMIC I, REMIC II and the retirement of the Certificates. The repurchase price
will equal, after deductions of related advances by the Servicer, the sum of (1)
100% of the aggregate outstanding principal balance of such Mortgage Loans
(other than Liquidated Mortgage Loans), plus accrued interest thereon at the
applicable Pass-Through Rates through the last day of the month of such
repurchase, less any Bankruptcy Losses realized with respect to the Mortgage
Loans not already allocated to the Certificates and (2) the fair market value of
all other property. The proceeds of such repurchase will be treated as a
prepayment of the Mortgage Loans for purposes of distributions to
Certificateholders. Accordingly, an optional termination of REMIC II will cause
the outstanding principal balance of the Certificates to be paid in full through
the distribution of such proceeds
S-80
<PAGE>
and the allocation of the associated Realized Losses, if any, on each Mortgaged
Property in REMIC I the fair market value of which is less than the aggregate
principal balance of the related Mortgage Loans as of the time that REMIC I
acquired such Mortgaged Property, and upon such payment in full REMIC II and
REMIC I will be terminated. In no event will either the REMIC I or REMIC II
continue beyond the expiration of 21 years from the death of the survivor of
certain persons identified in the Pooling and Servicing Agreement.
See "Description of Certificates-Termination" in the Prospectus.
SERVICING
Servicing Compensation and Payment of Expenses
The Mortgage Loans will be serviced by LaSalle Home Mortgage
Corporation (in such capacity, the "Servicer") pursuant to the Agreement. The
Servicer is an Illinois corporation.
The executive offices of the Servicer are located at 4242 North Harlem
Avenue, Norridge IL 60634, telephone number (708) 456-0400.
At February 28, 1998, the Servicer provided servicing for approximately
$14.22 billion aggregate principal amount of one-to-four unit mortgage loans,
substantially all of which are being serviced for third parties.
The following table summarizes the delinquency and foreclosure
experience, respectively, as of December 31, 1995, 1996 and 1997 on
approximately $12.59 billion, $13.88 billion and $14.35 billion, respectively,
in outstanding principal balances of one-to-four unit mortgage loans serviced by
the Servicer.
One-to-Four-Unit Residential Mortgage Loans
As of December 31,
--------------------------------
1995 1996 1997
---------------------- ------
Delinquent Mortgage Loans at Period End(1):
30 to 59 days 2.28% 2.46% 2.36%
60 to 89 days 0.38% 0.47% 0.44%
90 to 119 days 0.13% 0.12% 0.12%
120 days or more 0.12% 0.10% 0.06%
Total Delinquencies 2.91% 3.15% 2.98%
Foreclosures: 0.30% 0.43% 0.38%
Total Delinquencies, and Foreclosures: 3.21% 3.58% 3.36%
- ----------------
(1) as a percentage of the total number of loans serviced
S-81
<PAGE>
There can be no assurance that the delinquency and foreclosure experience
on the Mortgage Loans comprising the Mortgage Pool will correspond to the
delinquency and foreclosure experience of the Servicer's mortgage portfolio set
forth in the foregoing table. Indeed, the statistics shown above represent the
delinquency and foreclosure experience for the total one-to-four-unit
residential mortgage portfolios for each of the years presented, whereas the
aggregate delinquency and foreclosure experience on the Mortgage Loans will
depend on the results obtained over the life of the Mortgage Pool. In addition,
the foregoing statistics include mortgage loans with a variety of payment and
other characteristics that may not correspond to those of the Mortgage Loans.
Moreover, if the one-to-four-unit real estate market should experience an
overall decline in property values such that the Principal Balances of the
Mortgage Loans comprising the Mortgage Pool become equal to or greater than the
value of the related Mortgaged Properties, the actual rates of delinquencies and
foreclosures could be significantly higher than those previously experienced by
the Servicer. In addition, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by Mortgagors of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the rates of delinquencies, foreclosures, bankruptcies and losses
with respect to the Mortgage Pool. To the extent that such losses are not
covered by subordination provisions or shifting interest credit enhancement
described herein, such losses will be borne, at least in part, by the holders of
the Class A Certificates. See "Description of the Certificates" herein and in
the Prospectus.
The Servicer will receive a fee (the "Servicing Fee") for its services as
Servicer under the Pooling and Servicing Agreement. The Servicer will retain as
its Servicing Fee an amount which will be calculated as a per annum percentage
for each related Mortgage Loan equal to .2625% out of which the Servicer will
pay the Trustee .0125% for Trustee Fees.
The Servicer will pay all expenses incurred in connection with its
activities as Servicer. The Servicer is entitled to reimbursement for certain
expenses incurred by it in connection with the liquidation of defaulted Mortgage
Loans. In addition, the Servicer is entitled to reimbursement of expenditures
incurred by it in connection with the restoration of a damaged Mortgaged
Property.
Special Servicing Agreements
The Agreement may permit the Servicer to enter into a special servicing
agreement with an unaffiliated holder of a Class of Subordinate Certificates or
of a class of securities representing interests in the Subordinate Certificates
and/or other subordinated mortgage pass-through certificates. Pursuant to such
agreement, such holder may, among other things, instruct the Servicer to
commence or delay foreclosure proceedings with respect to delinquent Mortgage
Loans. In such case, such commencement or delay at such holder's direction will
be taken by the Servicer only after such holder deposits a specified amount of
cash with the Servicer. Such cash will be available for distribution to
Certificateholders if Liquidation Proceeds are less than they otherwise may have
been had the Servicer acted pursuant to its normal servicing procedures.
YIELD AND PREPAYMENT CONSIDERATIONS
General
The yield to maturity of each Class of Certificates will depend upon,
among other things, the price at which such Certificates are purchased, the
applicable Remittance Rate, the actual characteristics of the Mortgage Loans in
the related Loan Group, the rate of principal payments (including Principal
Prepayments) on the Mortgage Loans in the related Loan Group and the rate of
liquidations on the Mortgage Loans in the related Loan Group. The yield to
maturity to holders of the Certificates will be lower than the yield to
S-82
<PAGE>
maturity otherwise produced by the applicable Remittance Rate and purchase price
of such Certificates because principal and interest distributions will not be
payable to such Certificateholders until the 25th day of the month following the
month of accrual (without any additional distribution of interest or earnings
thereon with respect to such delay). Except in the limited circumstances set
forth herein, distributions to the Group I Certificates and the Group II
Certificates relate to payments on the Group I Mortgage Loans and Group II
Mortgage Loans, respectively. Distributions of the Subordinate Certificates and
the Residual Certificate relate to payments on both the Group I Mortgage Loans
and Group II Mortgage Loans.
Principal Prepayments and Compensating Interest
When a Mortgagor prepays a Mortgage Loan in full between Due Dates for
such Mortgage Loan, the Mortgagor pays interest on the amount prepaid only to
the date of prepayment instead of for the entire month. Also, when a Curtailment
is made on a Mortgage Loan together with the scheduled Monthly Payment for a
month on or after the related Due Date, the principal balance of the Mortgage
Loan is reduced by the amount of the Curtailment as of such Due Date, but such
principal is not distributed to related Certificateholders until the
Distribution Date in the next month; therefore, one month of interest shortfall
accrues on the amount of such Curtailment.
In order to reduce the adverse effect on Certificateholders from the
deficiency in interest payable as a result of a Payoff on a Mortgage Loan
between its Due Dates, the Servicer will pass through Compensating Interest to
the related Certificateholders to the limited extent and in the manner set forth
below. The Servicer is obligated to remit to the Certificate Account on the day
prior to each Distribution Date with respect to the Mortgage Loans in each Loan
Group an amount equal to the lesser of (a) any shortfall for the related month
in interest collections resulting from the timing of Payoffs on the related
Mortgage Loans made from the 15th day of the calendar month preceding such
Distribution Date to the last day of such month and (b) the monthly Servicing
Fee payable to the Servicer, any reinvestment income realized by the Servicer
relating to Payoffs on the related Mortgage Loans made during the related
Prepayment Period and interest payments on such Payoffs received during the
period of the first day through the 14th day of the month of such Distribution
Date. Accordingly, no Compensating Interest will be payable with respect to
Payoffs in the related Loan Group received during such period. Payoffs received
during the period from the 15th day through the last day of any month will be
passed through on the Distribution Date in the following month, and, in order to
provide for a full month's interest payment with respect to the prior month,
Compensating Interest will be passed through to related Certificateholders with
respect to such period.
To the extent that the amount allocated to a Mortgage Loan Group to pay
Compensating Interest is insufficient to cover the deficiency in interest
payable as a result of a Payoff or Curtailment on a Mortgage Loan, such
remaining deficiency will be allocated to the Certificates of the related
Certificate Group pro rata according to the amount of interest to which each
related Class of Certificates would otherwise be entitled in reduction thereof.
The Subordinate Certificates
The weighted average life of, and the yield to maturity on, the
Subordinate Certificates, in decreasing order of their priority of
distributions, will be progressively more sensitive to the rate and timing of
Mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than
those assumed by a holder of a Subordinate Certificate, the actual yield to
maturity of such Certificate may be lower than the yield expected by such holder
based on such assumption. The timing of losses on the Mortgage Loans will also
affect an investor's
S-83
<PAGE>
actual yield to maturity, even if the rate of defaults and severity of losses
over the life of the Mortgage Loans are consistent with such investor's
expectations. In general, the earlier a loss occurs the greater the effect on an
investor's yield to maturity. Losses on the Mortgage Loans will reduce the Class
Certificate Balance of the Subordinate Certificates to the extent of any losses
allocated thereto without the receipt of cash attributable to such reduction.
See "Description of the Certificates--Allocation of Losses" herein. As a result
of such reductions, less interest will accrue on such Classes of Subordinate
Certificates than otherwise would be the case. The yield to maturity of the
Subordinate Certificates will also be affected by disproportionate allocations
of principal prepayments to the Senior Certificates, Net Interest Shortfalls and
other cash shortfalls in Available Funds. See "Description of the
Certificates--Allocation of Losses" herein.
Rate of Payments
The rate of principal payments on the Certificates entitled to receive
principal generally is directly related to the rate of principal payments on the
Mortgage Loans in the related Mortgage Loan Group, which may be in the form of
scheduled payments or Principal Prepayments. See "Risk Factors" herein and
"Yield Considerations" in the Prospectus. Mortgagors may prepay the Mortgage
Loans at any time without penalty. A higher than anticipated rate of Principal
Prepayments would reduce the aggregate principal balance of the Mortgage Loans
more quickly than expected. As a consequence, aggregate interest payments with
respect to the Mortgage Loans would be substantially less than expected,
therefore, a higher rate of Principal Prepayments in a Mortgage Loan Group could
result in a lower than expected yield to maturity on each related Class of
Certificates purchased at a premium and in certain circumstances such investors
may not fully recoup their initial investments. Conversely, a lower than
anticipated rate of Principal Prepayments in a Mortgage Loan Group would reduce
the return to investors on any related Classes of Certificates purchased at a
discount, in that principal payments with respect to the Mortgage Loans would
occur later than anticipated. There can be no assurance that Certificateholders
will be able to reinvest amounts received with respect to the Certificates at a
rate which is comparable to the applicable Remittance Rate. Investors should
fully consider all of the associated risks.
Special Sensitivities
The Class IA-4 Certificates will be especially sensitive to the rate of
prepayments on the Group I Mortgage Loans because such Certificates will receive
distributions of principal on any Distribution Date only to the extent of the
portion of the Group I Senior Principal Distribution Amount (as defined herein,
remaining, if any, after (i) the Lockout Certificates receive their
distributions of the Lockout Principal Distribution Amount, if any, for such
Distribution Date, (ii) the PACs receive principal on such Distribution Date to
the extent of their Planned Principal Balances, and (iii) the TACs receive
principal on such Distribution Date to the extent of their Targeted Principal
Balances. Furthermore, if the Group I Senior Principal Distribution Amount on
any Distribution Date is not sufficient to reduce each PAC to its Planned
Principal Balance and each TAC to its Targeted Principal Balance, the Class IA-4
Certificates will receive no principal distributions on such Distribution Date.
The Class IA-2, Class IA-5 and IA-6 Certificates are PACs. If a higher
than expected rate of Principal Prepayments is to occur with respect to the
Group I Mortgage Loans, and the Class IA-4 Certificates and TACs are retired,
the PACs would receive distributions of principal in excess of the amount
necessary to reduce its Principal Balance to the related Planned Principal
Balance.
The Class IA-3 Certificates are TACs. lf a higher than expected rate of
Principal Prepayments is to occur with respect to the Group I Mortgage Loans,
and the Class IA-4 Certificates are retired, the Class IA-3
S-84
<PAGE>
Certificates would receive distributions of principal in excess of the amount
necessary to reduce its Principal Balance to its related Targeted Principal
Balance.
The yield to maturity on the Class IA-X Certificates will be extremely
sensitive to the level of Principal Prepayments on certain of the Group I
Mortgage Loans. The interest payable to the Class IA-X Certificates is based on
the weighted average of the Stripped Interest Rates (as defined herein) of the
Group I Mortgage Loans having Pass-Through Rates in excess of 6.750% per annum
(the "Group I Premium Mortgage Loans"). Therefore the yield to maturity on the
Class IA-X Certificates will generally decrease as a result of faster than
expected Principal Prepayments on the Group I Premium Rate Mortgage Loans.
Prospective investors should fully consider the risks associated with an
investment in the Class IA-X Certificates, including the possibility that if the
rate of Principal Prepayments on the Group I Premium Rate Mortgage Loans is
rapid, such investors may not fully recoup their initial investments.
Because the interest payable on the Class IA-X Certificate is derived from
different groups of Mortgage Loans within Mortgage Loan Group I, it is possible
that faster than expected Principal Prepayments on the Group I Premium Rate
Mortgage Loans may occur at the same time as slower than expected Principal
Prepayments on the Group I Discount Mortgage Loans which would result in a lower
yield to maturity for the Class IA-X Certificates.
The yield to maturity on the Class IIA-X Certificates will be extremely
sensitive to the level of Principal Prepayments on certain of the Group II
Mortgage Loans. The interest payable to the Class IIA-X Certificates is based on
the weighted average of the Stripped Interest Rates (as defined herein) of the
Group II Mortgage Loans having Pass-Through Rates in excess of 6.500% per annum
(the "Group II Premium Rate Mortgage Loans"). Therefore the yield to maturity on
the Class IIA-X Certificates will generally decrease as a result of faster than
expected Principal Prepayments on the Group II Premium Rate Mortgage Loans.
Prospective investors should full consider the risks associated with an
investment in the Class IIA-X Certificates, including the possibility that if
the rate of Principal Prepayments on the Group II Premium Rate Mortgage Loans is
rapid, such investors may not fully recoup their initial investments.
The yield to maturity on the Class IIA-P Certificates will be extremely
sensitive to the level of Principal Prepayments on certain of the Group II
Mortgage Loans. The principal payable to the Class IIA-P Certificates is derived
from Group II Mortgage Loans having Pass-Through Rates lower than 6.500% per
annum (the "Group II Discount Mortgage Loans"). Therefore, the yield to maturity
on the Class IIA-P Certificates will be adversely affected by slower than
expected prepayments of the Group II Discount Rate Mortgage Loans.
Because the interest payable on the Class IIA-X Certificates and the
principal distributable to the Class IIA-P Certificates are derived from
different groups of Mortgage Loans within Group II Mortgage Loans, it is
possible that faster than expected Principal Prepayments on the Group II Premium
Rate Mortgage Loans may occur at the same time as slower than expected Principal
Prepayments on the Group II Discount Mortgage Loans which would result in a
lower yield to maturity for both the Class IIA-X and Class IIA-P Certificates.
Basic Prepayment Assumption
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this Prospectus
Supplement (the "Basic Prepayment Assumption" or "BPA") represents an assumed
rate of prepayment each month relative to the then outstanding principal
S-85
<PAGE>
balance of a pool of mortgage loans. For all Mortgage Loans, a 100% Basic
Prepayment Assumption assumes a per annum rate of prepayment of 0.2% of the then
outstanding principal balance of a pool mortgage loans in the first month of the
life of such mortgage loan, following which, such annual prepayment rate
increases by 0.2% each month until the 30th month after origination of such
mortgage loan and remains constant at 6% per annum in the 30th month after
origination of such mortgage loan and in each month thereafter. As used in the
tables below, a 50% BPA assumes current rates equal to 50% of the BPA.
Correspondingly, a 250% BPA assumes prepayment rates equal to 250% of the BPA,
and so forth.
BPA does not purport to be either an historical description of the
prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Pool, and there is no assurance that the Mortgage Loans in any group of
Mortgage Loans will prepay at any given percentage of the BPA. The actual rate
of Principal Prepayments on the Mortgage Loans may be influenced by a variety of
economic, geographic, social and other factors. In general, if prevailing
interest rates fall significantly below the interest rates on the Mortgage
Loans, the Mortgage Loans are likely to be subject to higher prepayment rates
than if prevailing rates remain at or above the interest rates on the Mortgage
Loans. Conversely, if interest rates rise above the interest rates on the
Mortgage Loans, the rate of prepayment would be expected to decrease. A
comparatively low interest-rate environment may result in a higher than expected
rate of prepayments on the Mortgage Loans and an earlier than expected
retirement of the Certificates.
The Company makes no representation as to the specific factors that will
affect the prepayment of the Mortgage Loans or the relative importance of such
factors. Factors not identified by the Company or discussed herein may
significantly affect the prepayment rate of the Mortgage Loans. In particular,
the Company makes no representation as to the percentage of the principal amount
of the Mortgage Loans that will be paid as of any date or as to the overall rate
of prepayment.
For purposes of the tables set forth in Appendix C, it is assumed that the
Mortgage Loans included in the Mortgage Pool on the Closing Date have the actual
characteristics of the Mortgage Loans described herein and that (i) scheduled
payments on all Mortgage Loans are received on the first day of each month
beginning April 1, 1998, (ii) any Payoffs on the Mortgage Loans are received on
the last day of each month beginning on March 31, 1998 and include 30 days of
interest thereon, (iii) there are no defaults or delinquencies on the Mortgage
Loans, (iv) optional termination of the REMIC II does not occur, (v) there are
no partial prepayments on the Mortgage Loans and prepayments are computed after
giving effect to scheduled payments received on the following day, (vi) the
Mortgage Loans in each Mortgage Loan Group prepay at the indicated constant
percentages of the BPA, (vii) the date of issuance for the Certificates is March
31, 1998, (viii) cash distributions are received by the Certificateholders on
the 25th day of each month when due and (ix) the scheduled monthly payments for
each Mortgage Loan are computed based upon its unpaid principal balance,
Mortgage Interest Rate and amortized remaining term such that the Mortgage Loan
will fully amortize on its maturity date (collectively, the "Modeling
Assumptions"). The approximate Class Principal Balances of the Junior
Subordinate Certificates as of the Closing Date will be as follows: Class B-3,
$1,140,387, Class B-4 $570,194 and Class B-5 $570,194.
Any discrepancy between the actual characteristics of the Mortgage Loans
and the characteristics of the Mortgage Loans set forth above may affect the
percentages of the initial Class Principal Balances set forth in the tables and
the weighted average lives of the Offered Certificates. In addition, to the
extent that the characteristics of the Mortgage Loans differ and the initial
Class Principal Balances differ from those assumed in preparing the tables in
Appendix C, the outstanding Class Principal Balance of any Class of Offered
Certificates may be reduced to zero earlier or later than indicated by such
tables.
S-86
<PAGE>
Variations in actual prepayment experience may increase or decrease the
percentages of the original outstanding Class Principal Balances and the
weighted average lives shown in the tables in Appendix C. Such variations may
occur even if the average prepayment experience of all the Mortgage Loans equals
the indicated percentage of the applicable Basic Prepayment Assumption or
Standard Prepayment Assumption. There is no assurance, however, that prepayment
of the Mortgage Loans of any Loan Group will conform to any given percentage of
the applicable Basic Prepayment Assumption. The Company makes no representations
that the actual rates of prepayments on the Mortgage Loans will in any way
correspond to any of the assumptions made herein.
Based on the foregoing assumptions, the tables in Appendix C indicate the
weighted average lives of the Offered Certificates and set forth the percentages
of the initial outstanding Class Principal Balances of each such Class of
Offered Certificates that would be outstanding after each of the dates shown at
various constant percentages of the applicable Basic Prepayment Assumption.
There are no historical prepayment data available for the Mortgage Pool,
and comparable data is not available because the Mortgage Loans do not
constitute a representative sample of mortgage loans generally. In addition,
historical data available with respect to mortgage loans underlying mortgage
pass through certificates issued by GNMA, FNMA and FHLMC may not be comparable
to prepayments expected to be experienced by the Mortgage Pool because the
Mortgage Loans may have characteristics which differ from the mortgage loans
underlying certificates issued by GNMA, FNMA and FHLMC.
The Company makes no representation that the Mortgage Loans will prepay in
the manner or at any of the rates assumed above. Each investor must make its own
decision as to the appropriate prepayment assumptions to be used in deciding
whether or not to purchase any of the Certificates. Since the rate of principal
payments (including prepayments) with respect to, and repurchases of, the
Mortgage Loans will significantly affect the yields to maturity on the Offered
Certificates, prospective investors are urged to consult their investment
advisors as to both the anticipated rate of future principal payments (including
prepayments) on the Mortgage Loans and the suitability of the Certificates to
their investment objectives.
Yield Considerations with Respect to the Class IA-X, Class IIA-X and Class IIA-P
Certificates
The yields to maturity on the Class IA-X, Class IIA-X and Class IIA-P
Certificates will be extremely sensitive to the level of Principal Prepayments
on certain of the Mortgage Loans in the related Mortgage Loan Group. Because the
interest payable on the Class IA-X and Class IIA-X Certificates is based on the
weighted average of the Stripped Interest Rates of the related Premium Rate
Mortgage Loans, the yield to maturity on such Certificates will generally
decrease as a result of faster than expected Principal Prepayments on the
related Premium Rate Mortgage Loans. Prospective investors should fully consider
the risks associated with an investment in the Class IA-X and Class IIA-X
Certificates, including the possibility that if the rate of Principal
Prepayments on the related Premium Rate Mortgage Loans is rapid, such investors
may not fully recoup their initial investments. Because the principal payable to
the Class IIA-P Certificates is derived from the Group II Discount Mortgage
Loans, the yield to maturity on such Certificates will be adversely affected by
slower than expected prepayments of such Mortgage Loans. Because the interest
distributable on the Class IIA-X Certificates related to Loan Group II and the
principal distributable to the Class IIA-P Certificates related to the Loan
Group II are derived from different groups of Mortgage Loans within such Loan
Group, it is possible that faster than expected Principal Prepayments on the
Mortgage Loans related to the Class IIAX Certificates may occur at the same time
as slower than expected Principal Prepayments on the Mortgage Loans related to
the Class of Class IIA-P Certificates. This occurrence would result in a lower
yield to maturity for both the Class IIA-X Certificates and Class IIA-P
Certificates.
S-87
<PAGE>
To illustrate the significance of different rates of prepayment on the
distributions to the Class IA-X and Class IIA-X and Class IIA-P Certificates,
the following tables indicate the approximate pre-tax yields to maturity (on a
corporate bond equivalent basis) under the different percentages of the BPA
indicated. Because the rate of distribution of interest on the Class IA-X and
Class IIA-X Certificates, and the rate of distribution of principal on the Class
IIA-P Certificates, will be directly related to the actual amortization
(including prepayments) of the Mortgage Loans in related Loan Group, which will
include Mortgage Loans that have remaining terms to maturity shorter or longer
than those assumed and interest rates higher or lower than those assumed, the
pre-tax yields to maturity on the Class IA-X and Class IIA-X and Class IIA-P
Certificates are likely to differ from those shown in the following tables even
if all the Mortgage Loans in related Loan Group prepay at the indicated constant
percentages of the applicable BPA and the weighted average remaining terms to
maturity of the Mortgage Loans in related Loan Group are as assumed. Any
differences between such assumptions and the actual characteristics and
performance of the Mortgage Loans and of the Certificates may result in yields
to maturity being different from those shown in such tables. Discrepancies
between assumed and actual characteristics and performances underscore the
hypothetical nature of the tables, which are provided only to give a general
sense of the sensitivity of yields to maturity in varying prepayment scenarios.
In addition, it is highly unlikely that the Mortgage Loans will prepay at a
constant level of the BPA until maturity or that all of such Mortgage Loans will
prepay at the same rate. The timing of changes to the rate of Principal
Prepayments may significantly affect the actual yield to maturity to an
investor, even if the average rate of Principal Prepayments is consistent with
an investor's expectation. In general, the earlier a payment of principal of the
Mortgage Loans, the greater the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield to maturity of Principal Prepayments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Certificates will
not be equally offset by a subsequent like reduction (or increase) in the rate
of Principal Prepayments.
In addition, the yield to maturity on the Class IA-X and the Class IIA-X
Certificates may be adversely affected if an optional termination of the REMIC
II occurs.
The sensitivity tables for the Class IA-X, Class IIA-X and Class IIA-P
Certificates set forth below are based on the Modeling Assumptions and assume
further that the Certificates are purchased at prices equal to those set forth
in the tables. There can be no assurance that the Mortgage Loans will have the
assumed characteristics, will prepay at any of the rates shown herein, or that
the purchase prices of the Certificates will be assumed or that the pre-tax
yields to maturity will correspond to any of the pre-tax yields shown herein.
The actual prices to be paid on the Class IA-X, Class IIA-X and Class IIA-P
Certificates have not been determined and will be dependent on the
characteristics of the Mortgage Pool as ultimately constituted. In addition to
any other factors an investor may deem material, each investor must make its own
decision as to the appropriate prepayment assumptions to be used in deciding
whether or not to purchase a Class of Certificates.
<TABLE>
<CAPTION>
Sensitivity of Pre-Tax Yield to Maturity
of the Class IA-X Certificates to Principal Prepayments
at an Assumed Purchase Price of 20.250% of the Class IA-X Notional Amount
Percentage of the BPA
0% 100% 250% 500% 600%
------------------- -------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Yield...... 33.48% 28.47% 20.79% 7.57% 2.14%
</TABLE>
S-88
<PAGE>
On the basis of a constant prepayment rate of approximately 639% of the
BPA used with respect to Loan Group I, a purchase price of $1,458,968, which
includes accrued interest, and the assumptions described above, the pre-tax
yield to maturity of the Class IA-X Certificates would be approximately 0%.
Sensitivity of Pre-Tax Yield to Maturity
of the Class IIA-X Certificates to Principal Prepayments
at an Assumed Purchase Price of 17.875% of the Class IIA-X Notional Amount
<TABLE>
<CAPTION>
Percentage of the BPA
0% 100% 225% 500% 600%
------------------- -------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Yield...... 31.68% 27.10% 21.26% 7.99% 3.03%
</TABLE>
On the basis of a constant prepayment rate of approximately 660% of the
BPA and a purchase price of $336,719, which includes accrued interest, and the
assumptions described above, the pre-tax yield to maturity of the Class IIA-X
Certificates would be approximately 0%.
Sensitivity of Pre-Tax Yield to Maturity
of the Class IIA-P Certificates to Principal
Prepayments at a Assumed Purchase Price of 70.000% of the Class
IIA-P Certificate Principal Balance
<TABLE>
<CAPTION>
Percentage of the BPA
0% 100% 225% 500% 600%
------------------- -------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Yield...... 4.34% 5.68% 7.53% 11.71% 13.17%
</TABLE>
The pre-tax yields to maturity set forth in the preceding tables were
calculated by determining the monthly discount rates (whether positive or
negative) which, when applied to the assumed streams of cash flows to be paid on
the Class IA-X, Class IIA-X and Class IIA-P Certificates, would cause the
discounted present values of such assumed streams of cash flows to equal the
assumed purchase price, including accrued interest, where applicable. These
monthly discount rates were converted to corporate bond equivalent rates, which
are higher than the monthly discount rates because they are based on semiannual
compounding. These yields to maturity do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the Class IA-X, Class IIA-X or Class IIA-P Certificates and
thus do not reflect the return on any investment in the Class IA-X, Class IIA-X
or Class IIA-P Certificates when any reinvestment rates other than the discount
rates are considered.
There are no historical prepayment data available for the Mortgage Pool,
and comparable data are not available because the Mortgage Loans do not
constitute a representative sample of mortgage loans generally. In addition,
historical data available with respect to mortgage loans underlying mortgage
pass-through certificates issued by the Government National Mortgage Association
("GNMA"), FNMA and FHLMC may not be comparable to prepayments expected to be
experienced by the Mortgage Pool because the Mortgage Loans may have
characteristics which differ from the mortgage loans underlying certificates
issued by GNMA, FNMA and FHLMC.
S-89
<PAGE>
The Company makes no representation that the Mortgage Loans will prepay in
the manner or at any of the rates assumed above. Each investor must make its own
decision as to the appropriate prepayment assumptions to be used in deciding
whether or not to purchase any of the Certificates. Since the rate of principal
payments (including prepayments) with respect to, and repurchases of, the
Mortgage Loans will significantly affect the yields to maturity on the Offered
Certificates, prospective investors are urged to consult their investment
advisors as to both the anticipated rate of future principal payments (including
prepayments) on the Mortgage Loans and the suitability of the Certificates to
their investment objectives.
Additional Yield Considerations Applicable Solely to the Class R Certificates
Holders of interests in the Class R Certificate may have tax liabilities
with respect to their Certificates during the early years of the REMIC's term
that substantially exceed any distributions payable thereon during any such
period. In addition, holders of interests in the Class R Certificate may have
tax liabilities with respect to their Certificates the present value of which
substantially exceeds the present value of distributions payable thereon and of
any tax benefits that may arise with respect thereto. Accordingly, the after-tax
rate of return on the Class R Certificate may be negative or may otherwise be
significantly adversely affected. The timing and amount of taxable income
attributable to the Class R Certificate will depend on, among other things, the
timing and amounts of prepayments and losses experienced with respect to the
Mortgage Pool.
The Class R Certificateholders should consult their own tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the acquisition of interests in the Class R Certificate on
after-tax rates of return on the Class R Certificate. See "Certain Federal
Income Tax Consequences" herein and in the Prospectus.
Additional Information
The Company intends to file with the Securities and Exchange Commission
certain additional yield tables and other computational materials with respect
to one or more Classes of the Offered Certificates on a Current Report on Form
8-K. Such tables and materials were prepared by the Donaldson, Lufkin & Jenrette
at the request of certain prospective investors, based on assumptions provided
by, and satisfying the special requirements of, such prospective investors. Such
tables and materials are preliminary in nature, and the information contained
therein is subject to, and superseded by, the information in this Supplement.
S-90
<PAGE>
CREDIT ENHANCEMENTS
Subordination
The Senior Certificates of a Certificate Group are entitled to receive
distributions of interest (except with respect to Class IIA-P and Components
IA-1-1 and IA-1-4 of the Class IA-1 Certificates, which are not entitled to
interest) and principal (except with respect to the Class IA-X and Class IIA-X
Certificates and Components IA-1-2 and IA-1-6 of the Class IA-1 Certificates,
which are not entitled to principal) before distributions of interest or
principal to the Subordinate Certificates. No Subordinate Certificates will
receive distributions of interest or principal on any Distribution Date until
the Senior Certificates have received all distributions of interest and
principal due on or before such Distribution Date. See "Description of the
Certificates--Priority of Distributions" herein.
Losses on Mortgage Loans in a Mortgage Loan Group will be allocated, in
each case until the applicable Class or Component Principal Balances of the
Classes or Components of the related Certificates have been reduced to zero,
first, to the Junior Subordinate Certificates; second, to the Class B-2
Certificates; third, to the Class B-1 Certificates; fourth, to the Class M
Certificates; and fifth, to the outstanding Classes of Senior Certificates in
the related Certificate Group by Pro Rata Allocation: provided, however, that
only a certain specified amount of Special Hazard Losses, Fraud Losses and
Bankruptcy Losses in a Mortgage Loan Group will be allocated solely to the
Subordinate Certificates, following which such losses will be allocated among
all outstanding Classes of Senior Certificates related to such Mortgage Loan
Group and to the Subordinate Certificates by Pro Rata Allocation, provided,
further, that in the event any loss is incurred with respect to a Group I
Discount Mortgage Loan, the applicable Component IA-1-4 Fraction of such loss
will first be allocated to the related Component IA-1-4 of the Class IA-1
Certificates and the remainder of such loss will be allocated as described above
and in the event any loss is incurred with respect to a Group II Discount
Mortgage Loan, the applicable Class IIA-P Fraction of such loss will first be
allocated to the Class IIA-P Certificates and the remainder of such loss will be
allocated as described above.
Shifting of Interests
The Senior Certificates of a Certificate Group entitled to principal,
other than the Lockout Certificates (unless the Credit Support Depletion Date
has occurred), will receive 100% of Principal Prepayments received with respect
to the Mortgage Loans in the related Mortgage Loan Group until the fifth
anniversary of the first Distribution Date or until retired. During the next
four years, such Senior Certificates, other than the Lockout Certificates
(unless the Credit Support Depletion Date has occurred) will receive a
disproportionately large, but decreasing, share of Principal Prepayments
received with respect to the Mortgage Loans in the related Mortgage Loan Group.
This will result in an acceleration of the amortization of such Senior
Certificates, other than the Lockout Certificates, subject to the priorities
described in "Description of the Certificates --Distributions of Principal"
herein, enhancing the likelihood that holders of such Classes of Certificates
will be paid the full amount of principal to which they are entitled.
Although the Lockout Certificates are Senior Certificates, Component
IA-1-5 of the Class IA-1 Certificates will generally not be entitled to receive
principal distributions (other than the Lockout Liquidation Amount) until the
Distribution Date in April 2003 and thereafter will not be entitled to receive
the disproportionate allocation of Principal Prepayments from Group I Mortgage
Loans that the other Class IA Certificates are entitled to receive.
See "Description of the Certificates--Distributions of Principal" herein.
S-91
<PAGE>
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS UNDER CALIFORNIA LAW
As of the Cut-Off Date, approximately 30.90% of the Initial Principal
Balance of the Mortgage Loans, are secured by liens on Mortgaged Properties
located in California. The following discussion contains a general summary of
legal aspects of loans secured by residential properties in California. The
summary does not purport to be complete nor does the summary reflect the laws of
any other state. The summary relates only to the topics covered and are
qualified in their entirety by reference to the applicable state laws being
discussed. See also "Certain Legal Aspects of Mortgage Loans" in the Prospectus.
Mortgage loans in California are generally secured by deeds of trust.
Provided the deed of trust contains a private power of sale, a lender may
foreclose either non-judicially or judicially. Most lenders choose non-judicial
foreclosure because the process typically may be completed within a much shorter
time frame; however, a lender is barred from obtaining a deficiency judgment
after a non-judicial foreclosure. If the lender opts for judicial foreclosure,
an application for a deficiency judgment must be filed with the court within
three months of the foreclosure sale. A deficiency judgment may not exceed the
difference between the indebtedness and the fair value of the property, as
determined by the court. Unless the lender waives the right to a deficiency
judgment, the borrower has a right to redeem the property following a judicial
foreclosure sale for a period of three months from the date of sale if the
proceeds from the sale were sufficient to satisfy the debt, or for a period of
one year if the proceeds were insufficient to satisfy the debt. Junior
lienholders do not have a right to redeem the property following a judicial
foreclosure sale unless the junior lien was created before July 1, 1983.
California's form of the "one action rule" requires the lender to look first to
the property for satisfaction of the debt if the lender wants to pursue a
deficiency judgment. In general, a lender who takes any action to enforce the
debt other than judicial or non-judicial foreclosure violates the one-action
rule and may be deemed to have waived its security for the indebtedness and, in
some cases, may be prevented from collecting the indebtedness altogether.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Company will cause an election to be made to treat each of REMIC I and
REMIC II as a REMIC for federal income tax purposes. The Certificates issued by
REMIC II, other than the Class R Certificate, will be designated as REMIC
regular interests. As REMIC regular interests, such Certificates will generally
be treated as representing ownership of debt for federal income tax purposes.
Certificateholders will be required to include in income all interest and
original issue discount ("OID") on such Certificates in accordance with the
accrual method of accounting regardless of the Certificateholders' usual methods
of accounting. For federal income tax purposes, the Class R Certificate will
represent two residual interests, one in each of REMIC I and REMIC II.
The Class IA-4 and IIA-P Certificates will (and certain other Offered
Certificate Classes may) be issued with OID. The prepayment assumption that will
be used in determining the rate of accrual of OID, and market discount or
premium, if any, for federal income tax purposes is 250% of the BPA for Loan
Group I and 225% of the BPA for Loan Group II as described herein under "Yield
and Prepayment Considerations". No representation is made that the Mortgage
Loans will prepay at any given percentage of the BPA.
It is not entirely clear how income should be accrued with respect to
regular interest Certificates such as the Class IA-X and Class IIA-X
Certificates, the payments on which consist solely of interest on a notional
principal amount. However, the most reasonable interpretation would be to treat
all of the income derived from such Certificates as constituting OID, and this
is the position which will be taken by REMIC II. Among
S-92
<PAGE>
other possibilities, the IRS could assert that the Class IA-X and the Class
IIA-X Certificates should instead be taxable under certain regulation provisions
governing bonds issued with contingent payments.
If actual prepayments differ sufficiently from the prepayment assumption,
the calculation of OID for certain Classes of Offered Certificates might produce
a negative number for certain accrual periods. In such event, Certificateholders
will not be entitled to a deduction for such amount, but will be required to
carry such amount forward as an offset to OID, if any, accruing in future
accrual periods.
Certain Classes of Certificates may be treated for federal income tax
purposes as having been issued at a premium. Holders should consult their own
tax advisors regarding the possibility of making an election to amortize any
such premium. See "Certain Federal Income Tax Consequences--REMIC--Taxation of
Owners of Regular Certificates" in the Prospectus.
The Offered Certificates will generally be treated as "qualifying real
property loans" for mutual savings banks and domestic building and loan
associations, "loans secured by an interest in real property" for domestic
building and loan associations, and "real estate assets" for real estate
investment trusts ("REITs") in the same proportion that the assets in the REMICs
would be so treated. In addition, interest on the Offered Certificates will
generally be treated as "interest on obligations secured by mortgages on real
property" for REITs to the extent that such Offered Certificates are treated as
"real estate assets". See "Certain Federal Income Tax Consequences--REMIC--
Characterization of Investments in Certificates" in the Prospectus.
New Withholding Regulations
The Treasury Department has issued new regulations (the "New Regulations")
which make certain modifications to the withholding, backup withholding and
information reporting rules described in the Prospectus. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will be effective for payments made after December 31, 1998,
subject to certain transition rules. Prospective investors are urged to consult
their own tax advisors regarding the New Regulations.
Special Tax Considerations Applicable to the Residual Certificate
The REMIC Regulations (as defined in "Certain Federal Income Tax
Consequences" in the Prospectus) impose restrictions on the transfer or
acquisition of certain residual interests, including the Class R Certificate. In
addition, the REMIC Regulations contain restrictions that apply to the transfer
of "noneconomic" residual interests to United States persons. Pursuant to the
Pooling and Servicing Agreement, the Class R Certificate may not be transferred
to non-United States persons.
The Small Business Job Protection Act of 1996 provides three rules for
determining the effect on excess inclusions on the alternative minimum taxable
income of a residual holder. First, alternative minimum taxable income for such
residual holder is determined without regard to the special rule that taxable
income cannot be less than excess inclusions. Second, a residual holder's
alternative minimum taxable income for a tax year cannot be less than excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deductions must be computed without regard to any excess
inclusions.
The REMIC Regulations provide that a transfer to a United States person of
"noneconomic" residual interests will be disregarded for all federal income tax
purposes, and that the purported transferor of "noneconomic" residual interests
will continue to remain liable for any taxes due with respect to the income
S-93
<PAGE>
on such residual interests, unless "no significant purpose of the transfer was
to impede the assessment or collection of tax". The Class R Certificate will
likely constitute noneconomic residual interests during all of its term for
purposes of the REMIC Regulations and, accordingly, unless no significant
purpose of a transfer is to impede the assessment or collection tax, transfers
of interests in the Class R Certificate will likely be disregarded and purported
transferors will likely remain liable for any taxes due with respect to the
income on the Class R Certificate. All transfers of interests in the Class R
Certificate will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded. See "Certain Federal Income Tax
Consequences--REMIC--Taxation of Owners of Residual Certificates" in the
Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect the early accrual periods that significantly exceeds
the amount of cash distributions received by such Class R Certificateholders
with respect to such periods. Consequently, the Class R Certificateholders
should have other sources of funds sufficient to pay any federal income taxes
due in the early years as a result of their ownership of interests in such Class
R Certificate. In addition, the required inclusion of this amount of taxable
income during the early accrual periods and the deferral of corresponding tax
losses or deductions until later accrual periods or until the ultimate sale or
disposition of interests in the Class R Certificate (or possibly later under the
"wash sale" rules of Section 1091 of the Code) may cause the Class R
Certificateholders' after-tax rate of return to be zero or negative even if the
Class R Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Class R Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on such Class R Certificate over its life.
As discussed above and in the Prospectus, the rules for accrual of
original issue discount with respect to certain Classes of Offered Certificates
(and other REMIC Certificates) are subject to significant complexity and
uncertainty. Because original issue discount on certain Certificates will be
deducted in determining REMIC taxable income, any changes required by the
Internal Revenue Service in the application of those rules to such Certificates
may significantly affect the timing of the REMIC's original issue discount
deductions and therefore the amount of taxable income allocable to holders of
interests in the Class R Certificate.
Purchasers of interests in the Class R Certificate are strongly advised to
consult their own tax advisors as to the economic and tax consequences of an
investment in such Certificate.
For further information regarding the federal income tax consequences of
investing in the Class R Certificate, see "Certain Yield and Prepayment
Considerations-- Additional Yield Considerations Applicable Solely to the Class
R Certificates" herein and "Certain Federal Income Tax Consequences-- REMIC
- --Taxation of Owners of Residual Certificates" in the Prospectus.
An individual, trust or estate that holds (whether directly or indirectly
through certain pass-through entities) an interest in the Class R Certificate
may have significant additional gross income with respect to, but may be subject
to limitations on the deductibility of, servicing and trustee's fees and other
administrative expenses properly allocable to the related REMIC in computing
such Certificateholder's regular tax liability and will not be able to deduct
such fees or expenses to any extent in computing such Certificateholder's
alternative minimum tax liability. Such expenses will be allocated for federal
income tax information reporting purposes entirely to the Class R Certificate.
See "Certain Federal Income Tax Consequences--REMIC --Taxation of Owners of
Residual Certificates and Pass-Through of Miscellaneous Itemized Deductions" in
the Prospectus.
S-94
<PAGE>
For further information regarding the federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences" in
the Prospectus.
CERTAIN LEGAL INVESTMENT ASPECTS
As of the date of their issuance, the Offered Certificates, other than the
Class B-1 and Class B-2 Certificates, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), and as such will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies, and pension funds)
created pursuant to or existing under the laws of the United States or of any
state whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Under SMMEA, if a state
enacted legislation prior to October 4, 1991 specifically limiting the legal
investment authority of any of such entities with respect to "mortgage related
securities", the Offered Certificates, other than the Class B-1 and Class B-2
Certificates, will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Certain states have enacted
such legislation. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments for such investors.
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 with the Offered
Certificates, other than the Class B-1 and Class B-2 Certificates, without
limitation as to the percentage of their assets represented thereby, federal
credit unions may invest in the Offered Certificates, other than the Class B-1
and Class B-2 Certificates, and national banks may purchase the Offered
Certificates, other than the Class B-1 and Class B-2 Certificates, for their own
accounts without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), in each case subject to such
regulations as the applicable federal regulatory authority may prescribe.
Institutions whose investment activities are subject to review by certain
regulatory authorities hereafter may be or may become subject to restrictions on
investment in the Offered Certificates, and such restrictions may be
retroactively imposed. The Federal Financial Institutions Examination Council,
the Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Office of
Thrift Supervision and the National Credit Union Administration have adopted
guidelines, and have proposed policies, regarding the suitability of investments
in various types of derivative mortgage-backed securities, including securities
such as the Offered Certificates. In addition, several states have adopted or
are considering regulations that would prohibit regulated institutions subject
to their jurisdiction from holding mortgage-backed securities such as the
Offered Certificates, including such securities previously purchased. Investors
should consult their own legal advisors in determining whether and to what
extent the Offered Certificates constitute legal investments for such investors.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase the Offered Certificates
or to purchase the Offered Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Offered Certificates
constitute legal investments for such investors.
S-95
<PAGE>
ERISA CONSIDERATIONS
Any fiduciary of an employee benefit plan or other benefit plan or
arrangement which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986
(the "Code") (each, a "Plan"), or other person that proposes to use "plan
assets" of any Plan to acquire any Offered Certificates should consult with its
counsel with respect to the potential consequences under ERISA and Section 4975
of the Code of the acquisition and ownership of such Certificates by, on behalf
of or with "plan assets" of any Plan. See "ERISA Considerations" in the
Prospectus.
Underwriters' PTE
The Underwriters are recipient of a final prohibited transaction exemption
(the "Underwriters' PTE") which may afford protection from violations under
Sections 406 and 407 of ERISA and Section 4975 of the Code for Plans that
acquire Offered Certificates (other than the Senior Subordinate Certificates and
the Residual Certificates). Exemptive relief is not available under the
Underwriters' PTE for Plans that acquire interests in the Senior Subordinate
Certificates and the Residual Certificate, and therefore those Certificates are
not eligible for purchase by employee benefit plans or with the assets of
employee benefit plans, except as provided in this "ERISA CONSIDERATIONS"
section under the subheading "Restrictions on the Senior Subordinate and
Residual Certificates" relating those Certificates that are purchased in
reliance upon PTCE 95-60. Plans (or persons using "plan assets" of any Plan)
that acquire Offered Certificates (other than the Senior Subordinate
Certificates and the Residual Certificate) may be eligible for exemptive relief
under the Underwriters' PTE if:
(a) The Class of such Certificates acquired by the Plan is not
subordinated to other Classes of Certificates with respect to the right to
receive payment in the event of defaults or delinquencies on the underlying
Mortgage Loans;
(b) The Plan is an "accredited investor"(as defined in Rule 50l(a)(I)of
Regulation D under the Securities Act of 1933, as amended (the "Act"));
(c) The acquisition of such Certificates by the Plan is on terms
(including the price paid for the Certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an unrelated
party;
(d) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of such Certificates represents not more than
reasonable compensation for underwriting such Certificates; the sum of all
payments made to and retained by the Company pursuant to the sale of the
Mortgage Loans to the REMIC I represents not more than the fair market value of
the Mortgage Loans, and the sum of all payments made to and retained by the
Company or any other servicer represents not more than reasonable compensation
for their services under the Pooling and Servicing Agreement and reimbursement
of their reasonable expenses in connection therewith;
(e) The Certificates acquired by the Plan have received a rating from S&P,
Fitch or DCR that is in the three highest generic rating categories; and
(f) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below).
S-96
<PAGE>
The Underwriters' PTE will not provide exemptive relief for certain
transactions prohibited by Section 406(b)(1) and 406(b)(2) of ERISA or Section
4975(c)(1)(E) of the Code that may result from an investment of any "plan
assets" of any Plan in such Certificates if:
(a) The Plan's investment in any Class of such Certificates exceeds 25% of
the outstanding Certificates of that Class at the time of acquisition;
(b) 25% or more of the Plan assets with respect to which the investing
fiduciary has discretionary authority or renders investment advice are invested
in certificates evidencing interests in trusts sponsored or containing assets
sold or serviced by the Company;
(c) The Plan is sponsored by the Company, the Underwriters, the Trustee,
any servicer, the obligor under any credit support mechanism, or any mortgagor
with respect to Mortgage Loans constituting more than 5% of the aggregate
unamortized principal balance of the Mortgage Loans on the Closing Date (a
"Major Obligor") or their affiliates (collectively, the "Restricted Group");
(d) The Plan fiduciary responsible for the decision to invest or any of
its affiliates is a Major Obligor; or
(e) In connection with an acquisition of Certificates in the initial
issuance, less than 50% of each Class of Certificates in which Plans have
invested and less than 50% of the aggregate interests in the REMIC I are
acquired by persons independent of members of the Restricted Group.
Whether the conditions of the Underwriters' PTE will be satisfied with
respect to Offered Certificates of a particular Class will depend upon the facts
and circumstances existing at the time the Plan acquires (or "plan assets" of
the Plan are used to acquire) Certificates of that Class. Any Plan fiduciary or
other person that proposes to use "plan assets" of any Plan to acquire such
Offered Certificates in reliance upon the Underwriters' PTE should determine
whether such acquisition will satisfy all applicable conditions and should
consult with its counsel regarding other factors that may affect the
applicability of the Underwriters' PTE. Purchasers using insurance company
general account assets to effect the purchase of the Senior Subordinate
Certificates should consider the availability of exemptive relief under Sections
I and III of PTCE 95-60. See "ERISA Considerations" in the Prospectus.
Prohibited Transaction Class Exemptions
To qualify for exemption under PTCE 83-1 (see "ERISA Considerations" in
the Prospectus), a Certificate (i) must entitle its holder to more than nominal
pass-through payments of both principal and interest from the Mortgage Loans,
(ii) must not be subordinated to other Classes of Certificates with respect to
the right to receive payments in the event of defaults or delinquencies on the
underlying Mortgage Loans and (iii) must not be issued by a trust which holds
cooperative apartment Mortgage Loans. See "ERISA Considerations" in the
Prospectus for additional requirements. Because the REMIC II will not hold
cooperative apartment Mortgage Loans, PTCE 83-1 will afford exemptive relief to
Plans (or persons using "plan assets" of any Plan) that acquire Class IA or
Class IIA Certificates from the prohibited transaction rules of ERISA or Section
4975 of the Code.
S-97
<PAGE>
Restrictions on the Senior Subordinate and Residual Certificate
Because the Senior Subordinate Certificates and the Residual Certificate
will not qualify for exemptive relief under the Underwriters' PTE or PTCE 83-1,
purchases of such Certificates by, on behalf of or with "plan assets" of any
Plan are prohibited and are not to be registered unless the transferee
represents that it is an insurance company using assets of its general account
to effect such purchase and satisfies all the requirements for exemptive relief
under Sections I and III of PTCE 95-60.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriters, and the
Underwriters have agreed to purchase, all of the Offered Certificates. The
aggregate proceeds (excluding accrued interest) to the Company from the sale of
the Offered Certificates, before deducting expenses payable by the Company, will
be approximately 100.706332% of the initial aggregate Certificate Principal
Balance of the Offered Certificates. Under the terms and conditions of the
Underwriting Agreement, the Underwriters are committed to take and pay for all
of such Offered Certificates, if any are taken. Distribution of such Offered
Certificates will be made by the Underwriters from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The difference between the purchase price for the Offered Certificates
paid to the Company and the proceeds from the sale of such Certificates realized
by the Underwriters will constitute underwriting discounts and commissions.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Kirk Flores,
Counsel of the Company and by Mayer, Brown & Platt, Chicago, Illinois. Mayer,
Brown & Platt will also pass upon certain legal matters for ABN AMRO
Incorporated. Thacher Proffitt & Wood, New York, New York, will pass upon
certain legal matters on behalf of Donaldson, Lufkin & Jenrette.
CERTIFICATE RATINGS
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates each be rated "AAA" (except for the Class IIA-P, the Class
IIA-X and the Class IA-X Certificates, which will be rated "AAAr") by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and "AAA" by Duff
& Phelps Credit Rating Co. ("DCR"), that the Class M Certificates be rated not
less than "AA" by DCR, that the Class B-1 Certificates be rated not less than
"A" by DCR; and that the Class B-2 Certificates be rated not less than "BBB" by
DCR.
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. Each security rating should be evaluated independently of any other
security rating on the Class IA-X and the Class IIA-X Certificates..
The ratings by DCR assigned to this issue do not constitute a
recommendation to purchase or sell these securities. Rather they are an
indication of the likelihood of the payment of principal and interest as set
forth in the transaction documentation. The ratings on the Class IIA-X
Certificates do not address the effect on the Certificates' yield attributable
to prepayments or recoveries on the
S-98
<PAGE>
underlying Mortgage Loans. The rating on the Class IIA-P Certificates addresses
only the return of the Certificate Principal Balance and the rating on the Class
R Certificates addresses only the return of the Certificate Principal Balance
and interest thereon at the stated rate.
S&P's ratings on mortgage pass-through certificates address the likelihood
of receipt by Certificateholders of payments required under the operative
agreements. S&P assigns the additional rating of "r" to highlight classes of
securities that S&P believes may experience high volatility or high variability
in expected returns due to non-credit risks. S&P's ratings take into
consideration the credit quality of the mortgage pool including any credit
support providers, structural and legal aspects associated with the
certificates, and the extent to which the payment stream of the mortgage pool is
adequate to make payment required under the Certificates, S&P's ratings on
mortgage pass-through certificates do not, however, constitute a statement
regarding the frequency of prepayments on the mortgage loans. S&P's ratings do
not address the possibility that investors may suffer a lower than anticipated
yield.
The ratings on the Offered Certificates address the likelihood of the
receipt by Certificateholders of all distributions with respect to the
underlying Mortgage Loans to which they are entitled. The ratings do not
represent any assessment of the likelihood that the rate of Principal
Prepayments by Mortgagors might differ from those originally anticipated. As a
result of such differences in the rate of Principal Prepayments,
Certificateholders might suffer a lower than anticipated yield to maturity. See
"Risk Factors" and "Yield and Prepayment Considerations" herein.
The Company has not requested a rating on the Offered Certificates by any
rating agency other than S&P and DCR. 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 any such other rating agency. A rating on
the Offered Certificates by another rating agency, if assigned at all, may be
lower than the rating assigned to the Offered Certificates by S&P and DCR.
S-99
<PAGE>
GLOSSARY
Set forth below is a list of certain of the more significant terms
used in this Prospectus Supplement and the pages on which the definitions
of such terms may be found.
Accretion Directed Class...............................................S-33
Accretion Directed Component...........................................S-33
Accrual Classes........................................................S-33
Accrual Component......................................................S-33
Act ............................................................S-96
ACU scores ............................................................S-39
AMAC ........................................................S-1, S-8
Available Distribution Amount..........................................S-79
Bankruptcy Losses......................................................S-77
Basic Prepayment Assumption............................................S-85
Book-Entry Certificates................................................S-37
BPA ......................................................S-31, S-85
Cede ............................................................S-59
Certificate Group......................................................S-58
Certificate Principal Balance..........................................S-59
Certificates.................................................S-1, S-8, S-58
Class A Certificates..............................................S-1, S-58
Class I-A Certificates.................................................S-58
Class IA Certificates..............................................S-1, S-8
Class IA-1-3 Accretion Termination Date................................S-65
Class IA-1-3 Accrual Amount............................................S-65
Class IIA Certificates..................................................S-8
Class IIA-P Fraction...................................................S-71
Class IIA-P Principal Distribution Amount..............................S-72
Class IIA-P Principal Shortfall........................................S-72
Class Principal Balance................................................S-58
Closing Date............................................................S-8
Code ............................................................S-96
Company ........................................................S-1, S-8
Compensating Interest..................................................S-19
Component ......................................................S-10, S-58
Component IA-1-2 Notional Amount.......................................S-66
Component IA-1-4 Fraction..............................................S-68
Component IA-1-4 Principal Distribution Amount.........................S-68
Component IA-1-4 Principal Shortfall...................................S-68
Component Notional Amount..............................................S-10
Component Principal Balance......................................S-10, S-58
Credit Support Depletion Date....................................S-17, S-64
Curtailments...........................................................S-33
Cut-Off Date......................................................S-8, S-38
DCR ...........................................S-5, S-29, S-58, S-98
Debt Service Reduction.................................................S-77
Deficient Valuation....................................................S-77
S-100
<PAGE>
Definitive Certificates................................................S-61
Determination Date.....................................................S-79
Discount Mortgage Loan.................................................S-68
Distribution Date................................................S-16, S-61
DTC ......................................................S-15, S-37
DTC Participants.......................................................S-59
Due Date ............................................................S-40
ERISA ............................................................S-96
Excess Liquidation Proceeds............................................S-80
FICO Scores............................................................S-39
Fraud Losses...........................................................S-77
Group I Discount Mortgage Loan.........................................S-16
Group I Fraud Coverage.................................................S-77
Group I Mortgage Loans..................................................S-2
Group I Premium Rate Mortgage Loans....................................S-67
Group I Senior Liquidation Amount......................................S-70
Group I Senior Percentage..............................................S-70
Group I Senior Prepayment Percentage...................................S-74
Group I Senior Principal Distribution Amount...........................S-70
Group II Discount Mortgage Loans..................................S-4, S-85
Group II Mortgage Loans.................................................S-2
Group II Premium Rate Mortgage Loans...................................S-85
Group II Senior Liquidation Amount.....................................S-72
Group II Senior Percentage.............................................S-72
Group II Senior Prepayment Percentage..................................S-74
Group II Senior Principal Distribution Amount..........................S-72
Indirect DTC Participants..............................................S-60
Junior Subordinate Certificates...................................S-1, S-58
Liquidated Mortgage Loan...............................................S-70
Liquidation Principal..................................................S-70
Lockout Liquidation Amount.............................................S-71
Lockout Percentage.....................................................S-71
Lockout Prepayment Percentage..........................................S-71
Lockout Principal Distribution Amount..................................S-71
Major Obligor..........................................................S-97
Modeling Assumptions...................................................S-86
Mortgage Loan Group...............................................S-2, S-12
Mortgage Loan Group I.............................................S-2, S-12
Mortgage Loan Group II............................................S-2, S-12
Mortgage Loan Schedule.................................................S-38
Mortgage Loans..............................................S-2, S-11, S-58
Mortgage Pool.....................................................S-2, S-38
Mortgage Trust.........................................................S-58
Mortgaged Properties.............................................S-12, S-38
New Regulations........................................................S-93
Offered Certificates.........................................S-1, S-8, S-58
OID ......................................................S-31, S-92
Overcollateralized Group...............................................S-64
S-101
<PAGE>
PACs .......................................................S-9, S-33
Payoffs ............................................................S-33
Plan ............................................................S-96
Planned Principal Balance....................................S-2, S-3, S-33
Pooling and Servicing Agreement........................................S-58
Prepayment Period......................................................S-74
Principal Payment Amount...............................................S-73
Principal Prepayment Amount............................................S-74
Principal Prepayments..................................................S-33
Pro Rata Allocation..............................................S-26, S-76
REITs ......................................................S-32, S-93
REMIC .......................................................S-3, S-11
REMIC I ............................................................S-11
REMIC II .......................................................S-2, S-11
Remittance Rate.........................................................S-8
Residual Certificate..............................................S-1, S-58
Restricted Group.......................................................S-97
Rules ............................................................S-60
S&P .................................................S-5, S-29, S-98
Scheduled Principal Balance.......................................S-1, S-70
Senior Certificates...............................................S-1, S-58
Senior Subordinate Certificates........................................S-58
Servicer .............................................................S-8
SMMEA ......................................................S-30, S-95
Special Hazard Losses..................................................S-77
Step Down Percentage...................................................S-71
Stripped Interest Rate.................................................S-67
Subordinate Certificates..........................................S-1, S-58
Subordinate Liquidation Amount.........................................S-73
Subordinate Percentage.................................................S-73
Subordinate Prepayment Percentage......................................S-73
Subordinate Principal Distribution Amount..............................S-73
Subordination Level....................................................S-63
TACs ............................................................S-34
Targeted Principal Balance........................................S-3, S-34
Trustee .......................................................S-8, S-58
UG ............................................................S-39
Undercollateralized Group..............................................S-64
Underwriters' PTE......................................................S-96
Underwriters............................................................S-1
S-102
<PAGE>
Appendix A
Planned Principal Balance Table
<TABLE>
<CAPTION>
Distribution Date Class IA-5 Class IA-6 Class IA-2
- ----------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial 37,632,681.00 14,254,582.00 23,789,603.00
April, 1998 37,632,681.00 14,254,582.00 23,789,603.00
May, 1998 37,632,681.00 14,254,582.00 23,789,603.00
June, 1998 37,632,681.00 14,254,582.00 23,789,603.00
July, 1998 37,632,681.00 14,254,582.00 23,789,603.00
August, 1998 37,632,681.00 14,254,582.00 23,789,603.00
September, 1998 37,632,681.00 14,254,582.00 23,789,603.00
October, 1998 37,632,681.00 14,254,582.00 23,789,603.00
November, 1998 37,632,681.00 14,254,582.00 23,789,603.00
December, 1998 37,632,681.00 14,254,582.00 23,789,603.00
January, 1999 37,632,681.00 14,254,582.00 23,789,603.00
February, 1999 37,632,681.00 14,254,582.00 23,789,603.00
March, 1999 36,962,613.83 14,254,582.00 23,789,603.00
April, 1999 36,255,789.00 14,254,582.00 23,789,603.00
May, 1999 35,512,497.45 14,254,582.00 23,789,603.00
June, 1999 34,733,093.66 14,254,582.00 23,789,603.00
July, 1999 33,917,941.28 14,254,582.00 23,789,603.00
August, 1999 33,067,386.30 14,254,582.00 23,789,603.00
September, 1999 32,181,910.32 14,254,582.00 23,789,603.00
October, 1999 31,261,932.43 14,254,582.00 23,789,603.00
November, 1999 30,307,890.52 14,254,582.00 23,789,603.00
December, 1999 29,320,236.67 14,254,582.00 23,789,603.00
January, 2000 28,299,642.48 14,254,582.00 23,789,603.00
February, 2000 27,246,704.76 14,254,582.00 23,789,603.00
March, 2000 26,161,932.94 14,254,582.00 23,789,603.00
April, 2000 25,046,166.96 14,254,582.00 23,789,603.00
May, 2000 23,900,077.98 14,254,582.00 23,789,603.00
June, 2000 22,725,081.58 14,254,582.00 23,789,603.00
July, 2000 21,523,795.62 14,254,582.00 23,789,603.00
August, 2000 20,308,336.68 14,254,582.00 23,789,603.00
September, 2000 19,091,544.02 14,254,582.00 23,789,603.00
October, 2000 17,881,127.73 14,254,582.00 23,789,603.00
November, 2000 16,677,056.77 14,254,582.00 23,789,603.00
December, 2000 15,479,300.29 14,254,582.00 23,789,603.00
January, 2001 14,287,827.57 14,254,582.00 23,789,603.00
February, 2001 13,102,608.10 14,254,582.00 23,789,603.00
March, 2001 11,923,611.53 14,254,582.00 23,789,603.00
April, 2001 10,750,807.66 14,254,582.00 23,789,603.00
May, 2001 9,584,166.48 14,254,582.00 23,789,603.00
June, 2001 8,423,658.14 14,254,582.00 23,789,603.00
July, 2001 7,269,252.94 14,254,582.00 23,789,603.00
August, 2001 6,120,921.38 14,254,582.00 23,789,603.00
September, 2001 4,978,634.08 14,254,582.00 23,789,603.00
October, 2001 3,842,361.87 14,254,582.00 23,789,603.00
November, 2001 2,712,075.70 14,254,582.00 23,789,603.00
</TABLE>
S-103
<PAGE>
<TABLE>
<S> <C> <C> <C>
December, 2001 1,587,746.73 14,254,582.00 23,789,603.00
January, 2002 469,346.23 14,254,582.00 23,789,603.00
February, 2002 0.00 13,611,427.66 23,789,603.00
March, 2002 0.00 12,504,798.65 23,789,603.00
April, 2002 0.00 11,404,012.97 23,789,603.00
May, 2002 0.00 10,309,042.54 23,789,603.00
June, 2002 0.00 9,219,859.46 23,789,603.00
July, 2002 0.00 8,136,435.99 23,789,603.00
August, 2002 0.00 7,058,744.52 23,789,603.00
September, 2002 0.00 5,986.757.62 23,789,603.00
October, 2002 0.00 4,920,448.00 23,789,603.00
November, 2002 0.00 3,859,788.53 23,789,603.00
December, 2002 0.00 2,804,752.24 23,789,603.00
January, 2003 0.00 1,755,312.30 23,789,603.00
February, 2003 0.00 711,442.04 23,789,603.00
March, 2003 0.00 0.00 23,462,717.94
April, 2003 0.00 0.00 22,474,832.11
May, 2003 0.00 0.00 21,492,262.61
June, 2003 0.00 0.00 20,514,982.75
July, 2003 0.00 0.00 19,542,965.97
August, 2003 0.00 0.00 18,576,185.87
September, 2003 0.00 0.00 17,614,616.16
October, 2003 0.00 0.00 16,658,230.72
November, 2003 0.00 0.00 15,707,003.56
December, 2003 0.00 0.00 14,760,908.82
January, 2004 0.00 0.00 13,819,920.79
February, 2004 0.00 0.00 12,884,013.90
March, 2004 0.00 0.00 11,956,458.40
April, 2004 0.00 0.00 11,138,049.10
May, 2004 0.00 0.00 10,350,396.61
June, 2004 0.00 0.00 9,592,503.93
July, 2004 0.00 0.00 8,863,404.73
August, 2004 0.00 0.00 8,162,162.35
September, 2004 0.00 0.00 7,487,868.98
October, 2004 0.00 0.00 6,839,644.78
November, 2004 0.00 0.00 6,216,636.99
December, 2004 0.00 0.00 5,618,019.18
January, 2005 0.00 0.00 5,042,990.42
February , 2005 0.00 0.00 4,490,774.51
March, 2005 0.00 0.00 3,960,619.26
April, 2005 0.00 0.00 3,580,963.02
May, 2005 0.00 0.00 3,217,793.66
June, 2005 0.00 0.00 2,870,523.22
July, 2005 0.00 0.00 2,538,583.04
August, 2005 0.00 0.00 2,221,423.07
September, 2005 0.00 0.00 1,918,511.31
October, 2005 0.00 0.00 1,629,333.28
November, 2005 0.00 0.00 1,353,391.42
December, 2005 0.00 0.00 1,090,204.57
January, 2006 0.00 0.00 839,307.48
February, 2006 0.00 0.00 600,250.30
March, 2006 0.00 0.00 372,598.06
April, 2006 0.00 0.00 258,533.30
</TABLE>
S-104
<PAGE>
<TABLE>
<S> <C> <C> <C>
May, 2006 0.00 0.00 150,531.75
June, 2006 0.00 0.00 48,346.77
July, 2006 and thereafter 0.00 0.00 0.00
</TABLE>
S-105
<PAGE>
Targeted Principal Balance Table
<TABLE>
<CAPTION>
Distribution Date Class IA-3 Component IA-1-3
- ----------------- ---------- ----------------
<S> <C> <C>
Initial 63,730,000.00 47,875,996.00
April, 1998 62,985,040.84 48,155,272.64
May, 1998 62,142,074.81 48,436,178.40
June, 1998 61,201,352.47 48,718,722.77
July, 1998 60,163,149.91 49,002,915.32
August, 1998 59,027,970.42 49,288,765.66
Spetember, 1998 57,796,330.87 49,576,283.46
October, 1998 56,468,870.51 49,865,478.45
November, 1998 55,046,350.64 50,156,360.41
December, 1998 53,529,779.91 50,448.939.18
January, 1999 51,920,156.84 50,743,224.66
February, 1999 50,218,599.32 51,039,226.80
March, 1999 49,096,410.50 51,336,955.62
April, 1999 47,921,633.21 51,636,421.20
May, 1999 46,695,443.41 51,937,633.65
June, 1999 45,419,177.65 52,240,603.18
July, 1999 44,094,246.31 52,545,340.03
August, 1999 42,722,092.15 52,851,854.52
September, 1999 41,304,417.58 53,160,157.00
October, 1999 39,842,882.06 53,470,257.92
November, 1999 38,339,224.09 53,782,167.76
December, 1999 36,795,251.49 54,095,897.07
January, 2000 35,213,136.51 54,411,456.47
February, 2000 33,594,973.92 54,728,856.63
March, 2000 31,942,765.28 55,048,108.29
April, 2000 30,259,021.90 55,369,222.26
May, 2000 28.546,027.04 55,692,209.39
June, 2000 26,807,147.61 56,017,080.61
July, 2000 25,047,441.14 56,343,846.91
August, 2000 23,285,403.45 56,672,519.35
September, 2000 21,539,939.20 57,003,109.05
October, 2000 19,821,987.71 57,335,627.19
November, 2000 18,131,073.74 57,670,085.01
December, 2000 16,466,728.53 58,006,493.84
January, 2001 14,828,489.67 58,344,865.06
February, 2001 13,215,901.06 58,685,210.10
March, 2001 11,628,512.76 59,027,540.49
April, 2001 10,065,880.98 59,371,867.81
May, 2001 8,527,567.91 59,718,203.71
June, 2001 7,013,141.71 60,066,559.90
July, 2001 5,522,176.38 60,416,948.16
August, 2001 4,054,251.70 60,769,380.36
September, 2001 2,608,953.14 61,123,868.41
</TABLE>
S-106
<PAGE>
<TABLE>
<S> <C> <C>
October, 2001 1,185,871.76 61,480,424.31
November, 2001 0.00 61,623,664.32
December, 2001 0.00 60,604,540.48
January, 2002 0.00 59,608,544.21
February, 2002 0.00 58,635,300.53
March, 2002 0.00 57,684,439.77
April, 2002 0.00 56,755,597.47
May, 2002 0.00 55,848,414.34
June, 2002 0.00 54,962,536.17
July, 2002 0.00 54,097,613.76
August, 2002 0.00 53,253,302.84
September, 2002 0.00 52,429,264.04
October, 2002 0.00 51,625,162.78
November, 2002 0.00 50,840,669.22
December, 2002 0.00 50,075,458.21
January, 2003 0.00 49,329,209.20
February, 2003 0.00 48,601,606.17
March, 2003 0.00 47,892,337.62
April, 2003 0.00 47,273,676.53
May, 2003 0.00 46,672,166.08
June, 2003 0.00 46,087,509.46
July, 2003 0.00 45,519,414.13
August, 2003 0.00 44,967,591.66
September, 2003 0.00 44,431,757.79
October, 2003 0.00 43,911,632.28
November, 2003 0.00 43,406,938.88
December, 2003 0.00 42,917,405.31
January, 2004 0.00 42,442,763.16
February, 2004 0.00 41,982,747.85
March, 2004 0.00 41,533,802.89
April, 2004 0.00 41,031,622.59
May, 2004 0.00 40,517,106.54
June, 2004 0.00 39,990,979.84
July, 2004 0.00 39,453,940.65
August, 2004 0.00 38,906,661.04
September, 2004 0.00 38,349,787.83
October, 2004 0.00 37,783,943.46
November, 2004 0.00 37,209,726.70
December, 2004 0.00 36,627,713.48
January, 2005 0.00 36,038,457.63
February, 2005 0.00 35,442,491.57
March, 2005 0.00 34,840,327.04
April, 2005 0.00 34,171,127.32
May, 2005 0.00 33,499,730.72
June, 2005 0.00 32,826,505.71
July, 2005 0.00 32,151,804.56
August, 2005 0.00 31,475,963.85
September, 2005 0.00 30,799,305.06
October, 2005 0.00 30,122,135.08
November, 2005 0.00 29,444,746.69
December, 2005 0.00 28,767,419.10
January, 2006 0.00 28,090,418.40
February, 2006 0.00 27,413,998.00
</TABLE>
S-107
<PAGE>
<TABLE>
<S> <C> <C>
March, 2006 0.00 26,738,399.12
April, 2006 0.00 26,021,731.63
May, 2006 0.00 25,309,525.10
June, 2006 0.00 24,601,860.01
July, 2006 0.00 23,850,550.83
August, 2006 0.00 23,060,927.39
September, 2006 0.00 22,281,177.08
October, 2006 0.00 21,511,142.71
November, 2006 0.00 20,750,669.27
December, 2006 0.00 19,999,603.88
January, 2007 0.00 19,257,795.79
February, 2007 0.00 18,525,096.29
March, 2007 0.00 17,801,358.75
April, 2007 0.00 17,138,546.01
May, 2007 0.00 16,482,972.94
June, 2007 0.00 15,834,526.56
July, 2007 0.00 15,193,095.39
August, 2007 0.00 14,558,569.39
September, 2007 0.00 13,930,839.93
October, 2007 0.00 13,309,799.82
November, 2007 0.00 12,695,343.25
December, 2007 0.00 12,087,365.79
January, 2008 0.00 11,485,764.33
February, 2008 0.00 10,890,437.14
March, 2008 0.00 10,301,283.77
April, 2008 0.00 9,718,205.09
May, 2008 0.00 9,141,103.24
June, 2008 0.00 8,569,881.62
July, 2008 0.00 8,004,444.87
August, 2008 0.00 7,444,698.87
September, 2008 0.00 6,890.550.69
October, 2008 0.00 6,341,908.62
November, 2008 0.00 5,798,682.10
December, 2008 0.00 5,260,781.74
January, 2009 0.00 4,728,119.30
February, 2009 0.00 4,200,607.64
March, 2009 0.00 3,678,160.77
April, 2009 0.00 3,160,693.77
May, 2009 0.00 2,648,122.80
June, 2009 0.00 2,140,365.10
July, 2009 0.00 1,637,338.95
August, 2009 0.00 1,138,963.68
September, 2009 0.00 645,159.01
October, 2009 0.00 1 55,848.09
November, 2009 and thereafter 0.00 0.00
</TABLE>
S-108
<PAGE>
Appendix C
Precent of Initial Class Principal Balance
Outstanding At Various Percentages of the
Basic Prepayment Assumption
<TABLE>
<CAPTION>
Class IA-2
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- -----------------
<S> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100
March, 1999 100 100 100 100 100
March, 2000 100 100 100 100 100
March, 2001 100 100 100 100 100
March, 2002 100 100 100 100 100
March, 2003 100 99 99 99 42
March, 2004 100 50 50 50 0
March, 2005 100 17 17 17 0
March, 2006 100 2 2 2 0
March, 2007 100 0 0 0 0
March, 2008 100 0 0 0 0
March, 2009 100 0 0 0 0
March, 2010 100 0 0 0 0
March, 2011 100 0 0 0 0
March, 2012 100 0 0 0 0
March, 2013 100 0 0 0 0
March, 2014 94 0 0 0 0
March, 2015 69 0 0 0 0
March, 2016 41 0 0 0 0
March, 2017 11 0 0 0 0
March, 2018 0 0 0 0 0
March, 2019 0 0 0 0 0
March, 2020 0 0 0 0 0
March, 2021 0 0 0 0 0
March, 2022 0 0 0 0 0
March, 2023 0 0 0 0 0
March, 2024 0 0 0 0 0
March, 2025 0 0 0 0 0
March, 2026 0 0 0 0 0
March, 2027 0 0 0 0 0
March, 2028 0 0 0 0 0
Weighted Average Life (Years)(1) 17.7 6.2 6.2 6.2 5.0
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the amount of each assumed principal distribution on such
Class of Certificates by the number of years from the date of issuance of
the Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the total amount of principal
distributed on such Class of Certificates.
S-109
<PAGE>
<TABLE>
<CAPTION>
Class IA-3
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- -----------------
<S> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100
March, 1999 91 86 77 77 74
March, 2000 84 79 50 28 13
March, 2001 76 71 18 0 0
March, 2002 68 63 0 0 0
March, 2003 59 54 0 0 0
March, 2004 50 45 0 0 0
March, 2005 40 31 0 0 0
March, 2006 29 11 0 0 0
March, 2007 18 0 0 0 0
March, 2008 6 0 0 0 0
March, 2009 0 0 0 0 0
March, 2010 0 0 0 0 0
March, 2011 0 0 0 0 0
March, 2012 0 0 0 0 0
March, 2013 0 0 0 0 0
March, 2014 0 0 0 0 0
March, 2015 0 0 0 0 0
March, 2016 0 0 0 0 0
March, 2017 0 0 0 0 0
March, 2018 0 0 0 0 0
March, 2019 0 0 0 0 0
March, 2020 0 0 0 0 0
March, 2021 0 0 0 0 0
March, 2022 0 0 0 0 0
March, 2023 0 0 0 0 0
March, 2024 0 0 0 0 0
March, 2025 0 0 0 0 0
March, 2026 0 0 0 0 0
March, 2027 0 0 0 0 0
March, 2028 0 0 0 0 0
Weighted Average Life (Years)(1) 5.7 4.9 2.0 1.5 1.4
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the amount of each assumed principal distribution on such
Class of Certificates by the number of years from the date of issuance of
the Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the total amount of principal
distributed on such Class of Certificates.
S-110
<PAGE>
<TABLE>
<CAPTION>
Class IA-4
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- -----------------
<S> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100
March, 1999 107 107 107 14 0
March, 2000 115 115 115 0 0
March, 2001 123 123 123 0 0
March, 2002 132 132 132 0 0
March, 2003 142 142 142 0 0
March, 2004 152 152 152 0 0
March, 2005 163 163 163 0 0
March, 2006 175 175 175 0 0
March, 2007 187 187 187 0 0
March, 2008 201 201 201 0 0
March, 2009 215 215 215 0 0
March, 2010 231 231 209 0 0
March, 2011 248 248 173 0 0
March, 2012 266 266 142 0 0
March, 2013 285 285 117 0 0
March, 2014 305 305 95 0 0
March, 2015 328 328 78 0 0
March, 2016 351 351 63 0 0
March, 2017 377 376 50 0 0
March, 2018 404 332 40 0 0
March, 2019 433 289 32 0 0
March, 2020 464 250 25 0 0
March, 2021 498 212 19 0 0
March, 2022 534 176 14 0 0
March, 2023 573 142 10 0 0
March, 2024 550 110 7 0 0
March, 2025 422 79 5 0 0
March, 2026 285 50 3 0 0
March, 2027 137 23 1 0 0
March, 2028 0 0 0 0 0
Weighted Average Life (Years)(1) 27.9 23.9 16.4 0.7 0.6
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the amount of each assumed principal distribution on such
Class of Certificates by the number of years from the date of issuance of
the Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the total amount of principal
distributed on such Class of Certificates.
S-111
<PAGE>
<TABLE>
<CAPTION>
Class IA-5
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- -----------------
<S> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100
March, 1999 100 98 98 98 98
March, 2000 94 70 70 70 70
March, 2001 89 32 32 32 32
March, 2002 82 0 0 0 0
March, 2003 76 0 0 0 0
March, 2004 69 0 0 0 0
March, 2005 61 0 0 0 0
March, 2006 53 0 0 0 0
March, 2007 44 0 0 0 0
March, 2008 34 0 0 0 0
March, 2009 24 0 0 0 0
March, 2010 13 0 0 0 0
March, 2011 1 0 0 0 0
March, 2012 0 0 0 0 0
March, 2013 0 0 0 0 0
March, 2014 0 0 0 0 0
March, 2015 0 0 0 0 0
March, 2016 0 0 0 0 0
March, 2017 0 0 0 0 0
March, 2018 0 0 0 0 0
March, 2019 0 0 0 0 0
March, 2020 0 0 0 0 0
March, 2021 0 0 0 0 0
March, 2022 0 0 0 0 0
March, 2023 0 0 0 0 0
March, 2024 0 0 0 0 0
March, 2025 0 0 0 0 0
March, 2026 0 0 0 0 0
March, 2027 0 0 0 0 0
March, 2028 0 0 0 0 0
Weighted Average Life (Years)(1) 7.9 2.5 2.5 2.5 2.5
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the amount of each assumed principal distribution on such
Class of Certificates by the number of years from the date of issuance of
the Certificates to the related Distribution Date, (ii) summing the
results, and (iii) dividing the sum by the total amount of principal
distributed on such Class of Certificates.
S-112
<PAGE>
<TABLE>
<CAPTION>
Class IA-6
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- -----------------
<S> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100
March, 1999 100 100 100 100 100
March, 2000 100 100 100 100 100
March, 2001 100 100 100 100 100
March, 2002 100 88 88 88 61
March, 2003 100 0 0 0 0
March, 2004 100 0 0 0 0
March, 2005 100 0 0 0 0
March, 2006 100 0 0 0 0
March, 2007 100 0 0 0 0
March, 2008 100 0 0 0 0
March, 2009 100 0 0 0 0
March, 2010 100 0 0 0 0
March, 2011 100 0 0 0 0
March, 2012 67 0 0 0 0
March, 2013 30 0 0 0 0
March, 2014 0 0 0 0 0
March, 2015 0 0 0 0 0
March, 2016 0 0 0 0 0
March, 2017 0 0 0 0 0
March, 2018 0 0 0 0 0
March, 2019 0 0 0 0 0
March, 2020 0 0 0 0 0
March, 2021 0 0 0 0 0
March, 2022 0 0 0 0 0
March, 2023 0 0 0 0 0
March, 2024 0 0 0 0 0
March, 2025 0 0 0 0 0
March, 2026 0 0 0 0 0
March, 2027 0 0 0 0 0
March, 2028 0 0 0 0 0
Weighted Average Life (Years)(1) 14.5 4.4 4.4 4.4 4.1
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the amount of each assumed principal distribution on
such Class of Certificates by the number of years from the date of
issuance of the Certificates to the related Distribution Date, (ii)
summing the results, and (iii) dividing the sum by the total amount of
principal distributed on such Class of Certificates.
S-113
<TABLE>
<CAPTION>
Class IIA-1
DISTRIBUTION DATE 0% 100% 225% 500% 600%
- -----------------
<S> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100
March, 1999 96 95 93 89 87
March, 2000 92 87 81 68 63
March, 2001 87 78 66 45 38
March, 2002 82 69 54 29 22
March, 2003 77 60 43 18 12
March, 2004 72 52 34 11 6
March, 2005 66 45 27 7 3
March, 2006 59 38 21 4 2
March, 2007 52 32 16 2 1
March, 2008 45 26 12 1 0
March, 2009 37 20 8 1 0
March, 2010 29 14 6 0 0
March, 2011 20 9 3 0 0
March, 2012 10 4 1 0 0
March, 2013 0 0 0 0 0
March, 2014 0 0 0 0 0
March, 2015 0 0 0 0 0
March, 2016 0 0 0 0 0
March, 2017 0 0 0 0 0
March, 2018 0 0 0 0 0
March, 2019 0 0 0 0 0
March, 2020 0 0 0 0 0
March, 2021 0 0 0 0 0
March, 2022 0 0 0 0 0
March, 2023 0 0 0 0 0
March, 2024 0 0 0 0 0
March, 2025 0 0 0 0 0
March, 2026 0 0 0 0 0
March, 2027 0 0 0 0 0
March, 2028 0 0 0 0 0
Weighted Average Life (Years)(1) 8.8 6.8 5.2 3.3 2.9
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the amount of each assumed principal distribution on
such Class of Certificates by the number of years from the date of
issuance of the Certificates to the related Distribution Date, (ii)
summing the results, and (iii) dividing the sum by the total amount of
principal distributed on such Class of Certificates.
S-114
<PAGE>
<TABLE>
<CAPTION>
Class IIA-P
DISTRIBUTION DATE 0% 100% 225% 500% 600%
- -----------------
<S> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100
March, 1999 96 95 93 89 88
March, 2000 92 87 81 69 65
March, 2001 87 78 67 46 40
March, 2002 82 69 55 31 24
March, 2003 77 60 44 20 14
March, 2004 71 53 35 13 9
March, 2005 65 45 28 8 5
March, 2006 58 38 22 5 3
March, 2007 52 32 17 3 2
March, 2008 44 26 12 2 1
March, 2009 36 20 9 1 0
March, 2010 28 14 6 1 0
March, 2011 19 9 3 0 0
March, 2012 10 4 2 0 0
March, 2013 0 0 0 0 0
March, 2014 0 0 0 0 0
March, 2015 0 0 0 0 0
March, 2016 0 0 0 0 0
March, 2017 0 0 0 0 0
March, 2018 0 0 0 0 0
March, 2019 0 0 0 0 0
March, 2020 0 0 0 0 0
March, 2021 0 0 0 0 0
March, 2022 0 0 0 0 0
March, 2023 0 0 0 0 0
March, 2024 0 0 0 0 0
March, 2025 0 0 0 0 0
March, 2026 0 0 0 0 0
March, 2027 0 0 0 0 0
March, 2028 0 0 0 0 0
Weighted Average Life (Years)(1) 8.7 6.8 5.3 3.4 3.0
</TABLE>
(1) The weighted average life of any Class of Certificates is determined
by (i) multiplying the amount of each assumed principal distribution
on such Class of Certificates by the number of years from the date of
issuance of the Certificates to the related Distribution Date, (ii)
summing the results, and (iii) dividing the sum by the total amount of
principal distributed on such Class of Certificates.
S-115
<PAGE>
<TABLE>
<CAPTION>
Class M, Class B-1 and Class B-2
DISTRIBUTION DATE 0% 100% 250% 500% 600%
- -----------------
<S> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100
March, 1999 99 99 99 99 99
March, 2000 97 97 97 97 97
March, 2001 95 95 95 95 95
March, 2002 94 94 94 94 94
March, 2003 92 92 92 92 92
March, 2004 90 88 85 81 78
March, 2005 87 84 78 68 64
March, 2006 85 78 69 54 48
March, 2007 82 72 59 39 32
March, 2008 80 66 48 26 20
March, 2009 77 59 39 18 12
March, 2010 73 54 32 12 8
March, 2011 70 48 26 8 5
March, 2012 66 43 21 5 3
March, 2013 62 38 17 3 2
March, 2014 60 34 14 2 1
March, 2015 57 31 11 2 1
March, 2016 55 28 9 1 0
March, 2017 52 24 7 1 0
March, 2018 48 22 6 0 0
March, 2019 45 19 5 0 0
March, 2020 41 16 4 0 0
March, 2021 37 14 3 0 0
March, 2022 33 11 2 0 0
March, 2023 28 9 1 0 0
March, 2024 23 7 1 0 0
March, 2025 18 5 1 0 0
March, 2026 12 3 0 0 0
March, 2027 6 1 0 0 0
March, 2028 0 0 0 0 0
Weighted Average Life (Years)(1) 18.2 13.8 10.7 8.5 8.0
</TABLE>
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the amount of each assumed principal distribution on
such Class of Certificates by the number of years from the date of
issuance of the Certificates to the related Distribution Date, (ii)
summing the results, and (iii) dividing the sum by the total amount of
principal distributed on such Class of Certificates.
S-116
<PAGE>
ABN AMRO MORTGAGE CORPORATION
(Depositor)
MORTGAGE PASS-THROUGH CERTIFICATES
(Issuable in Series)
ABN AMRO Mortgage Corporation (the 'Depositor') may sell, from time to time
on terms to be determined at the time of sale, one or more series (each a
'Series') of Mortgage Pass-Through Certificates (the 'Certificates') evidencing
beneficial ownership interests in assets deposited into a trust (a 'Trust Fund')
by the Depositor pursuant to a Pooling and Servicing Agreement (the 'Agreement')
executed by the Depositor, the Trustee and the Master Servicer for each Series.
Each Trust Fund will consist of separate pools (the 'Pools') of mortgage assets
('Mortgage Assets'), which may include adjustable or fixed rate, conventional,
one-to-four-unit residential first mortgage loans, including loans secured by
shares in cooperative corporations ('Mortgage Loans'), certificates backed by
mortgage loans ('Mortgage Certificates') or any combination of the foregoing,
including any principal and/or interest payments relating thereto. If specified
in the related Prospectus Supplement, a Trust Fund may also include one or more
of the following: reinvestment income, reserve accounts, insurance policies,
guarantees or similar instruments or agreements intended to decrease the
likelihood that Certificateholders will experience delays in distributions of
scheduled payments on, or losses in respect of, the assets in such Trust Fund.
The Mortgage Loans will have been originated or purchased by one or more
qualified mortgage lenders as described herein (a 'Qualified Lender') and sold
to the Depositor by such Qualified Lender or another seller (in such capacity, a
'Mortgage Asset Seller'). The Qualified Lenders and Mortgage Asset Sellers may
include affiliates of the Depositor, and certain of the mortgage loans
underlying the Mortgage Certificates may have been originated or purchased by
affiliates of the Depositor. The Prospectus Supplement for a Series will name
the entity or entities, which may include an affiliate of the Depositor, which
will act directly or through one or more other qualified mortgage loan
servicers, as master servicer (individually and collectively, the 'Master
Servicer') of the Mortgage Loans for such Series. The Pass-Through Rate or Rates
with respect to each Series of Certificates and specific information regarding
the Mortgage Assets comprising each Pool will be set forth in the related
Prospectus Supplement.
Each Series of Certificates will consist of one or more Classes of
Certificates, which may include one or more senior Classes of Certificates and
one or more subordinate Classes of Certificates (respectively, the 'Senior
Certificates' and the 'Subordinate Certificates'). A Class of Certificates of a
Series may be divided into two or more Classes representing interests in
specified percentages of principal or interest, or both, in the Mortgage Assets
comprising the related Pool, as set forth in the related Prospectus Supplement.
Certain Series or Classes of Certificates may be covered by one or more forms of
credit enhancement, in each case as described in the related Prospectus
Supplement.
(Continued on next page)
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 15 HEREIN AND IN THE RELATED
PROSPECTUS SUPPLEMENT FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS BEFORE PURCHASING CERTIFICATES OF ANY
SERIES.
------------------------
THE CERTIFICATES WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. THE CERTIFICATES WILL NOT BE SAVINGS ACCOUNTS OR DEPOSITS AND
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS WILL BE INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY NOR HAS THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY PASSED UPON THE ACCURACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MARCH 25, 1998
<PAGE>
(Continued from previous page)
The obligations of the Master Servicer with respect to the Certificates
will be limited to its contractual servicing obligations, supervision of other
Servicers, if any, and the obligation, if the amount available for distribution
to holders of Certificates evidencing interests in the related Pool on any
Distribution Date is less than the amount due them, to advance cash to such
Certificateholders to the extent the Master Servicer determines such advances
are recoverable from future payments and collections on the Mortgage Assets or
otherwise. See 'Description of the Certificates--Advances and Limitations
Thereon' herein.
The Trust Fund relating to a Series of Certificates may elect to be treated
as one or more 'real estate mortgage investment conduits' (each, a 'REMIC') for
Federal income tax purposes. See 'Certain Federal Income Tax Consequences'
herein.
Prior to issuance there will have been no market for the Certificates and
there can be no assurance that a secondary market for the Certificates will
develop. This Prospectus may not be used to consummate sales of a Series of
Certificates unless accompanied by a Prospectus Supplement. Certificates may be
offered through one or more different plans of distribution, including offerings
through underwriters. See 'Plan of Distribution' herein. Affiliates of the
Depositor may from time to time act as agents or underwriters in connection with
the sale of the Certificates.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to each Series of Certificates to be
offered hereunder will set forth with respect to such Series of Certificates,
among other things, (i) the aggregate principal balance of the Mortgage Loans,
Notional Amount, if any, Pass-Through Rate or Rates (or the manner of
determining such rate or rates) and authorized denominations of each Class of
such Certificates; (ii) certain information concerning the Mortgage Assets
comprising the Pool, including the type and characteristics of the Mortgage
Assets included in each such Pool on the date of issue and insurance policies or
other forms of credit enhancement relating to such Mortgage Assets; (iii) the
order of the application of payments to each Class of Certificates and the
specified aggregate original percentage interest of each such Class in the
Mortgage Assets comprising the Pool; (iv) the identity of each Class of
Subordinate Certificates included in such Series of Certificates, if any; (v)
information regarding any Subordinated Amount, Shifting Interest Credit
Enhancement and Reserve Fund; (vi) the Installment Due Dates, Determination
Dates and Distribution Dates; (vii) additional information regarding yield
considerations, maturity considerations and prepayment considerations, if
applicable; (viii) whether the Trust Fund will elect to be treated as one or
more REMICs; (ix) additional information with respect to the plan of
distribution of such Certificates; and (x) certain risk factors that should be
considered by investors in connection with the purchase of the Certificates of
such Series. If specific information respecting any Series of Certificates is
not known to the Depositor at the time a Series of Certificates is initially
offered, general information of the nature described above will be provided in
the related Prospectus Supplement, and specific information will be set forth in
a report on Form 8-K which will be available to investors in such Series of
Certificates at or before the initial issuance thereof and will be filed with
the Commission within 15 days after such initial issuance.
REPORTS TO CERTIFICATEHOLDERS
Unless and until Replacement Certificates (as defined herein) are issued,
the related Trust Fund will provide to CEDE & Co., as nominee of The Depository
Trust Company ('DTC') and registered holder of the Certificates and, upon
request, to DTC Participants (as defined herein), periodic and annual reports
concerning the related Trust Fund. Such reports may be made available to the
beneficial owners of the certificates (the 'Certificate Owners') upon request to
their DTC Participants. Such reports will not constitute financial statements
prepared in accordance with generally accepted accounting principles. Such
reports will not be examined and reported on by an independent public
accountant. See 'Description of the Certificates--Reports to Certificateholders'
herein.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
All documents filed by the Depositor on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Securities and Exchange
Commission (the 'Commission') pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended (the 'Exchange Act'), on or
after the date of such Prospectus Supplement and prior to the termination of any
offering of the Certificates issued by such Trust Fund ('Subsequent Documents')
shall be deemed to be incorporated by reference in this Prospectus and to be a
part of this Prospectus from the date of filing of such Subsequent Documents. To
the extent that statements contained in Subsequent Documents modify or supersede
statements contained in the Prospectus, the statements contained in the
Subsequent Documents shall be deemed to modify and supersede statements
contained in this Prospectus.
The Depositor will provide or cause to be provided without charge to each
person to whom this Prospectus is delivered in connection with the offering of
one or more classes of Certificates, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to: ABN AMRO Mortgage Corporation, 181 West Madison
Street, Suite 3250, Chicago, Illinois 60602-4510, Attention: Maria
Fregosi--Director--ABN AMRO Mortgage Operations.
ADDITIONAL INFORMATION
In connection with the issuance of each Series of Certificates registered
pursuant to the Registration Statement of which this Prospectus and the related
Prospectus Supplement are a part, the Depositor will be subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will, if required by
3
<PAGE>
law, periodically file reports and other information with the Commission. Such
reports and other information filed can be inspected and copied at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, Washington, D.C. 20549, at prescribed rates. Such
material may also be accessed electronically by means of the Commission's
website on the Internet at www.gov.sec.
This Prospectus contains, and the Prospectus Supplement for each Series of
Certificates will contain, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor will contain all the
information set forth in the Registration Statement of which this Prospectus is
a part. For further information, reference is made to such Registration
Statement and the exhibits thereto which the Depositor has filed with the
Commission, Washington, D.C., under the Securities Act of 1933, as amended (the
'Securities Act'). Statements contained in this Prospectus and any Prospectus
Supplement as to the contents of any contract or other document referred to are
summaries, and in each instance, reference is made to the copy of the contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement may be obtained from the Commission, upon payment of the
prescribed charges, or may be examined free of charge at the Commission's
offices. Copies of the Pooling and Servicing Agreement will be provided to each
person to whom a Prospectus is delivered upon written or oral request directed
to: ABN AMRO Mortgage Corporation, 181 West Madison Street, Suite 3250, Chicago,
Illinois 60602-4510, Attention: Maria Fregosi--Director--ABN AMRO Mortgage
Operations. (Telephone: 312-904-8507).
Copies of the most recent Prospectus for certificates issued by FNMA and
FNMA's annual report and other quarterly financial statements as well as other
financial information may be obtained from FNMA by writing or calling its MBS
Helpline at 3900 Wisconsin Avenue, N.W., Area 2H-3S, Washington, D.C. 20016,
telephone 1-800-BEST-MBS or 202-752-6547. Neither the Depositor nor any of the
underwriters which might be designated to offer the Certificates participated in
the preparation of any such documents, and no such entity has conducted any
independent inquiry to verify the accuracy or completeness of the information
set forth in FNMA's Prospectus, annual report or other reports or statements.
Copies of the most recent Offering Circular for certificates issued by
FHLMC as well as FHLMC's most recent Information Statement and Information
Statement Supplement can be obtained by writing or calling the Investor Inquiry
Department of FHLMC at 8200 Jones Branch Drive, McLean, Virginia 22102
(telephone 1-800-336-FMPC). Neither the Depositor nor any of the underwriters
which might be designated to offer the Certificates participated in the
preparation of any of such documents, and no such entity has conducted any
independent inquiry to verify the accuracy or completeness of the information
set forth in FHLMC's Offering Circular, Information Statement or Information
Statement Supplement.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES COVERED BY SUCH PROSPECTUS
SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION THEREOF, MAY BE
REQUIRED TO DELIVER SUCH PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS OF THE SERIES OF CERTIFICATES COVERED BY
SUCH PROSPECTUS SUPPLEMENT AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CERTIFICATES
OFFERED HEREBY AND THEREBY NOR AN OFFER OF THE CERTIFICATES TO ANY PERSON IN ANY
STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY
OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE.
4
<PAGE>
SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement which will be prepared in connection with each Series of
Certificates. THE SUPPLEMENT FOR EACH SERIES WILL SPECIFY THE EXTENT (IF ANY) TO
WHICH THE TERMS OF SUCH SERIES OR THE RELATED MORTGAGE ASSETS VARY FROM THE
DESCRIPTION OF CERTIFICATES AND MORTGAGE ASSETS IN GENERAL WHICH IS CONTAINED IN
THIS PROSPECTUS. All capitalized terms used in this Prospectus but not defined
herein shall have the meanings given them in the Agreement.
<TABLE>
<S> <C>
Securities Offered........................ Mortgage Pass-Through Certificates (Issuable in Series).
Issuer.................................... With respect to each Series of Certificates, a trust will be formed
by the Depositor pursuant to a Pooling and Servicing Agreement
between the Depositor, the Master Servicer and the Trustee.
Depositor................................. ABN AMRO Mortgage Corporation (the 'Depositor') is a limited purpose,
wholly owned indirect subsidiary of ABN AMRO Bank N.V. The Depositor
will acquire Mortgage Loans and/or Mortgage Certificates from
Mortgage Asset Sellers or Qualified Lenders, and will deposit such
Mortgage Assets with the Trustee to form the Pool underlying the
Certificates.
Master Servicer........................... One or more entities, which may include an affiliate of the
Depositor, will be named in the related Prospectus Supplement as the
Master Servicer for a Series of Certificates. The Master Servicer
will be responsible for the servicing and administration of the
Mortgage Assets as set forth in the related Prospectus Supplement.
Any Master Servicer or any successor Master Servicer may contract
with Servicers, who also may be Qualified Lenders or Mortgage Asset
Sellers, to perform all or a portion of the servicing functions on
behalf of such Master Servicer. See 'Description of the
Certificates.'
[Back-Up Master Servicer.................. ABN AMRO Bank N.V.]
Trustee................................... The Trustee with respect to a Series, which may be an affiliate of
the Depositor, will be specified in the related Prospectus
Supplement. See 'Description of the Certificates' herein for a
description of the Trustee's rights and obligations.
The Pools................................. Each Pool will consist of Mortgage Loans, Mortgage Certificates, or
any combination of the foregoing ('Mortgage Assets'), together with
certain accounts, reserve funds, insurance policies, letters of
credit and related agreements specified in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement, the
Mortgage Assets may be divided into asset groups (each an 'Asset
Group') and the Certificates of separate Classes will evidence
ownership interests of a corresponding Asset Group. The Pool for a
Series will also include the Certificate Account and may include
certain policies of insurance relating to the Mortgage Assets and
various credit enhancements, all as specified in the related
Prospectus Supplement. See 'The Pools' and 'Description of the
Certificates' herein.
(1) THE MORTGAGE LOANS
Each Mortgage Loan included in a Pool will be originated or purchased
by a Qualified Lender and will be acquired by the Depositor from a
Qualified Lender or a Mortgage Asset Seller.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Qualified Lenders and Mortgage Asset Sellers may be affiliates of the
Depositor. The Mortgage Loans relating to any Series of Certificates
may, as set forth in the related Prospectus Supplement, be adjustable
or fixed rate conventional one-to-four unit residential first
Mortgage Loans. Adjustable Rate Mortgage Loans ('ARMs') will, as
described herein and in the related Prospectus Supplement, permit or
require periodic changes in the interest rates borne by such Mortgage
Loans (the 'Mortgage Interest Rates'), and in the scheduled monthly
payments of principal and interest (the 'Monthly Payments') made on
such Mortgage Loans. See 'The Pools--The Mortgage Loans' herein.
The Mortgage Loans will be secured by one- to four-unit residential
properties or by shares in cooperative corporations. The residential
properties or cooperative corporations relating to the Mortgage Loans
shall be located in any jurisdiction within the United States of
America ('USA'), as specified in the related Prospectus Supplement.
See 'The Mortgage Pool' in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will have a 5- to 40-year term to maturity at
origination and a principal balance at origination of not more than
$2,000,000. The related Prospectus Supplement will specify whether
any of the Mortgage Loans will be covered by primary mortgage
guaranty insurance.
In addition, to the extent set forth in the related Prospectus
Supplement, the beneficial interests in the Mortgage Loans relating
to a Series of Certificates may be in the form of participation
interests therein which will represent REMIC 'regular interests' in a
Trust Fund which contains the Mortgage Loans relating to such Series.
(2) THE MORTGAGE CERTIFICATES
A Pool may include certain assets (the 'Mortgage Certificates') which
may consist of GNMA Certificates, FHLMC Certificates, FNMA
Certificates, Private Certificates or any combination thereof.
Private Certificates, as used herein, may evidence beneficial
interests in mortgage loans or mortgage-backed securities including
pass-through certificates representing beneficial interests in
certain securities consisting in whole or in part of interests in
governmental certificates (e.g., GNMA Certificates, FHLMC
Certificates and FNMA Certificates), or any combination thereof. Any
GNMA Certificates included in a Pool will be guaranteed as to full
and timely payment of principal and interest by GNMA, which guaranty
is backed by the full faith and credit of the United States. Any
FHLMC Certificates included in the Pool will be guaranteed as to the
timely payment of interest and ultimate collection (and if so
specified in the related Prospectus Supplement timely payment of
principal) by FHLMC. Any FNMA Certificates included in a Pool will be
guaranteed as to timely payment of scheduled payments of principal
and interest by FNMA.
Each Mortgage Certificate will evidence an interest in a pool of
mortgage loans and/or in principal distributions and interest
distributions thereon. Such loans may have been originated or
purchased by affiliates of the Depositor. The Prospectus Supplement
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
for each Series will specify the aggregate approximate principal
balance of GNMA, FHLMC and FNMA Certificates and of Private
Certificates included in a Pool and will describe the principal
characteristics of the underlying mortgage loans or cooperative loans
and any insurance, guaranty or other credit support applicable to
such loans, the Mortgage Certificates or both. In addition, the
related Prospectus Supplement will describe the terms upon which
distributions will be made to the Trustee as the holder of the
Mortgage Certificates. The Mortgage Certificates included in any Pool
will be registered in the name of the Trustee or its nominee or in
the case of book-entry Mortgage Certificates in the name of a
financial intermediary with a Federal Reserve Bank or a clearing
corporation and will be held by the Trustee only for the benefit of
the related Series of Certificates. See 'The Pools--Mortgage
Certificates--Additional Information.'
Agreement................................. The Certificates of each Series offered by this Prospectus and the
related Prospectus Supplement will be issued pursuant to a separate
Pooling and Servicing Agreement (the 'Agreement') among the Depositor
and the Master Servicer and the Trustee specified in such Prospectus
Supplement. See 'Description of the Certificates.'
Forward Commitments;
Pre-Funding Account..................... If specified in the related Prospectus Supplement relating to any
Series, the Trustee or the Master Servicer may, on behalf of the
related Trust Fund, enter into an agreement (each, a 'Forward
Purchase Agreement') with the Depositor whereby the Depositor will
agree to transfer additional Mortgage Loans to such Trust Fund
following the date on which such Trust Fund is established and the
related Certificates are issued. Any Forward Purchase Agreement will
require that any Mortgage Loans so transferred to a Trust Fund
conform to the requirements specified in such Forward Purchase
Agreement. If a Forward Purchase Agreement is to be utilized, and
unless otherwise specified in the related Prospectus Supplement, the
Trustee will be required to deposit in a segregated account (each, a
'Pre-Funding Account') all or a portion of the proceeds received by
the Trustee in connection with the sale of one or more classes of
Certificates of the related Series; subsequently, the additional
Mortgage Loans will be transferred to the related Trust Fund in
exchange for money released to the Depositor from the related Pre-
Funding Account in one or more transfers. Each Forward Purchase
Agreement will set a specified period during which any such transfers
must occur. The Forward Purchase Agreement or the related Agreement
will require that, if all moneys originally deposited to such
Pre-Funding Account are not so used by the end of such specified
period, then any remaining moneys will be applied as a mandatory
prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, the specified period
for the acquisition by a Trust Fund of additional Mortgage Loans will
not exceed three months from the date such Trust Fund is established.
Description of the Certificates........... Each Class of Certificates within a Series will evidence the interest
specified in the related Prospectus Supplement in the Pool
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
established for such Series together with amounts held in a trust
account established and maintained by the Master Servicer or the
Trustee under the Agreement (the 'Certificate Account') and certain
other property held in trust for the benefit of the
Certificateholders (collectively, the 'Trust Fund'). Each Series of
Certificates may consist of one or more subclasses of Certificates of
equivalent priority or may consist of one or more Classes of senior
Certificates (the 'Senior Certificates') and one or more Classes of
subordinate Certificates (the 'Subordinate Certificates' and,
together with the Senior Certificates, the 'Certificates'). The
Subordinate Certificates of a Series will be subordinated in certain
respects described in the related Prospectus Supplement to the Senior
Certificates of the same Series. A Series may also contain one or
more classes of Compounding Certificates, Stripped Certificates,
Prepayment Certificates, Non-Accelerated Certificates and other types
of Certificates or a combination thereof, all as set forth in the
related Prospectus Supplement. Each Class of a Series may bear
interest at a different Pass-Through Rate and may evidence the right
to receive a specified portion of each distribution of principal or
interest or both, in the order specified in the related Prospectus
Supplement. The Certificates will be issuable in most instances in
book-entry form in the authorized denominations specified in the
related Prospectus Supplement. See 'Description of the Certificates'
herein.
Any Class of Certificates of a Series offered hereby and by the
related Prospectus Supplement will be rated by at least one
nationally recognized statistical rating agency or organization that
initially rates the Series at the request of the Depositor and is
identified in the related Prospectus Supplement ('Rating Agency') in
one of such Rating Agency's four highest rating categories
('Investment Grade'). A rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or withdrawal at
any time by the assigning Rating Agency. Further, such ratings do not
address the effects of prepayments on the yield anticipated by an
investor.
Certain Series or Classes of Certificates may be enhanced by certain
forms of credit enhancement, in each case as described in the related
Prospectus Supplement. The Certificates will not be guaranteed or
insured by any government agency or other insurer and, except as
described below and in the related Prospectus Supplement, the
Mortgage Assets comprising the Pool relating to a Series of
Certificates will not be guaranteed or insured by any government
agency or other insurer. See 'Credit Enhancements' herein.
Registration of Certificates.............. Unless otherwise specified in the related Prospectus Supplement,
Certificateholders may elect to hold their Certificate interests
through DTC, in the United States, or Centrale de Livraison de
Valeurs Mobilieres S.A. ('CEDEL') or the Euroclear System
('Euroclear'), in Europe. Transfers within DTC, CEDEL or Euroclear,
as the case may be, will be in accordance with the usual rules and
operating procedures of the relevant system. Cross-market transfers
between persons holding directly or indirectly through DTC, on the
one hand, and counterparties holding directly or
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
indirectly through CEDEL or Euroclear, on the other, will be effected
in DTC through Citibank, N.A. ('Citibank') or Morgan Guaranty Trust
Company of New York ('Morgan'), the relevant depositaries
(collectively, the 'Depositaries') of CEDEL or Euroclear,
respectively, and each participating member of DTC. The Certificates
will initially be registered in the name of CEDE & Co., the nominee
of DTC. The interests of the Certificateholders will be represented
by book-entries on the records of DTC and participating members
thereof. Certificates will be available in definitive form only under
the limited circumstances described herein. See 'Risk Factors' and
'Description of the Certificates--Registration of Certificates'
herein.
Interest.................................. Each class of Certificates of a Series will accrue interest from the
date and at the fixed or adjustable Pass-Through Rate set forth (or
determined as set forth) in the related Prospectus Supplement, except
for any class of Certificates which are entitled to receive
distributions of principal on Mortgage Loans and/or Mortgage
Certificates, but not to receive distributions of interest thereon
('PO Certificates').
Accrued interest will be distributed (to the extent of available
funds and subject to negative amortization, if any, on the underlying
Mortgage Loans) at the times and in the manner specified in such
Prospectus Supplement. Distributions of interest on any class of
Compounding Certificates will commence at the time specified in such
Prospectus Supplement; until then, interest on the Compounding
Certificates will be added to the Certificate Balance thereof and
will thereafter accrue interest.
Interest on each Mortgage Loan that does not provide for negative
amortization will be passed through to the Certificateholders monthly
at the Mortgage Pass-Through Rate for that Mortgage Loan from the
date identified in the related Prospectus Supplement. Interest on
Mortgage Loans that provide for negative amortization will accrue on
the Principal Balance thereof at the Mortgage Interest Rates
identified in the related Prospectus Supplement. In the event the
amount of interest paid by an obligor on a Mortgage Note (a
'Mortgagor') on such a Mortgage Loan in any month is less than the
amount of interest accrued on the Principal Balance thereof, such
excess interest ('Deferred Interest') will be added to the Principal
Balance of such negatively amortizing Mortgage Loan. The amount of
interest that will be deposited into the Certificate Account with
respect to each Mortgage Loan in any month will equal the amount of
interest paid by a Mortgagor less a fee for the servicing of the
Mortgage Loan and related expenses payable to the Master Servicer
specified in the related Prospectus Supplement (the 'Administration
Fee'). The Administration Fee may be fixed or may adjust as specified
in the related Prospectus Supplement. See 'Prepayment and Yield
Considerations' and 'Description of the Certificates' herein.
In the event a Mortgagor prepays all or part of the principal balance
of a Mortgage Loan, such Mortgagor will only pay interest on the
amount prepaid to the date of prepayment. Unless otherwise specified
in the related Prospectus Supplement, in order to minimize
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
any resulting shortfall in interest for the corresponding month in
which the prepayment was made (such shortfall, a 'Prepayment Interest
Shortfall'), the Master Servicer will adjust or forego a portion of
the current Administration Fees due to the Master Servicer, to the
extent available, so that up to a full month's interest payment on
such Mortgage Loans will be passed through to the Certificateholders
at the applicable Mortgage Pass-Through Rate. See 'Description of the
Certificates--Adjustment to Master Servicing Fees in Connection with
Prepayment Interest Shortfall' herein.
Principal (Including Prepayments)......... Each class of Certificates of a Series (except for Certificates
entitled to receive distributions of interest only on the Mortgage
Loans and/or Mortgage Certificates, but not distributions of
principal thereon and are denominated in Notional Balances (the 'IO
Certificates')) will (to the extent of available funds) receive
distributions of principal in the amounts, at the times and in the
manner specified in the related Prospectus Supplement until its
initial aggregate Certificate Balance has been fully amortized. The
aggregate amount distributed as principal for a Series will generally
be equal to (or determined pursuant to a formula based on) the amount
of principal received on the related Pool during the period specified
in the related Prospectus Supplement. Allocations of distributions of
principal will be made to the Certificates of each class in the
proportions, during the periods and in the order specified in the
related Prospectus Supplement. The Certificate Balance of a class or
classes of Certificates may increase in accordance with any negative
amortization experienced by Mortgage Loans and Mortgage Certificates
in the related Pool. Distributions will be made pro rata among the
Certificates of each class then entitled to receive such
distributions. See 'Maturity Considerations' and 'Description of the
Certificates' herein.
Credit Enhancement........................ Credit enhancement in the form of reserve funds, subordination,
insurance policies, letters of credit or other types of credit
enhancement may be provided with respect to the Mortgage Assets or
with respect to one or more Classes of Certificates of a Series. If
Mortgage Assets are divided into separate Asset Groups, the
beneficial ownership of which is evidenced by a separate Class or
Classes of a Series, credit enhancement may be provided by a cross-
support feature which requires that distributions be made with
respect to Certificates evidencing beneficial ownership of one Asset
Group prior to distributions to Subordinate Certificates evidencing
beneficial ownership in another Asset Group within the Trust Fund.
The type, characteristics and amount of credit enhancement will be
determined based upon the characteristics of the Mortgage Assets and
other factors and will be established on the basis of requirements of
each Rating Agency rating the Certificates of such Series to enable
the Certificates of such Series to receive a rating from a Rating
Agency set forth below. See 'Credit Enhancements' and 'Rating'
herein. The protection against losses provided by such credit
enhancement will be limited. See 'Description of the Certificates'
and 'Credit Enhancements.'
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
A. SUBORDINATE CERTIFICATES; SHIFTING INTEREST; RESERVE FUND
One or more Classes of any Series may be Subordinate Certificates, as
specified in the related Prospectus Supplement. The rights of the
Subordinate Certificateholders to receive any or a specified portion
of distributions with respect to the Mortgage Loans will be
subordinated to the rights of the Senior Certificateholders to the
extent specified in the related Prospectus Supplement (the
'Subordinated Amount').
If so specified in the related Prospectus Supplement, the
subordination feature may be enhanced by distributing to the Senior
Certificateholders on certain Distribution Dates, as payment of
principal, a certain percentage of all Principal Prepayments received
during the prior Prepayment Period ('Shifting Interest Credit
Enhancement'). This will have the effect of accelerating the
amortization of the Senior Certificates while increasing the
respective interest in the Trust Fund evidenced by the Subordinate
Certificates. Increasing the respective interest of the Subordinate
Certificates relative to that of the Senior Certificates is intended
to preserve the availability of the subordination provided by
the Subordinate Certificates. See 'Credit Enhancements--
Subordination' and '--Shifting Interest Credit Enhancement' herein.
In addition to the preferential right of the Senior
Certificateholders to receive current distributions from the Pool, to
the extent specified in the related Prospectus Supplement, a reserve
fund may be established relating to such Series of Certificates (the
'Reserve Fund'). The related Prospectus Supplement will specify
whether or not the Reserve Fund is part of the Trust Fund. Unless
otherwise specified in the related Prospectus Supplement, the Reserve
Fund, if any, will be created with an initial cash deposit by the
Depositor (the 'Initial Deposit') in an amount specified in the
related Prospectus Supplement and augmented by the retention of
distributions otherwise available to the Subordinate
Certificateholders until the Reserve Fund reaches an amount (the
'Specified Reserve Fund Balance') specified in the related Prospectus
Supplement. See 'Credit Enhancements--Reserve Fund' herein.
The subordination feature will enhance the likelihood of timely
receipt by Senior Certificateholders of the full amount of scheduled
monthly payments of principal and interest due them and will protect
the Senior Certificateholders against certain losses; however, in
certain circumstances the Reserve Fund, if any, could be depleted and
temporary shortfalls could result. If on any Distribution Date, after
taking into account the aggregate amount of payments received from
the Mortgage Loans, any Advances (as described below) and amounts
available in the Reserve Fund, if any, as specified in the related
Prospectus Supplement, do not provide sufficient funds to make full
disbursements to the Senior Certificateholders of such Series, unless
otherwise specified in the related Prospectus Supplement, the amount
of such shortfall (the 'Shortfall'), plus interest at the applicable
Pass-Through Rate or Rates, will be added to the amount the Senior
Certificateholders are entitled to receive on the next Distribution
Date in the order and the proportions as
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
specified in the related Prospectus Supplement. In the event the
Reserve Fund, if any, is depleted before the Subordinated Amount is
reduced to zero, such Senior Certificateholders will nevertheless
have a preferential right to receive current distributions from the
Pool to the extent of the then outstanding Subordinated Amount.
Unless otherwise specified in the related Prospectus Supplement,
until the Subordinated Amount is reduced to zero, on any Distribution
Date any amounts otherwise distributable to the Subordinate
Certificates or, to the extent specified in the Agreement, in the
Reserve Fund, if any, shall generally be used to offset the amount of
any losses realized ('Realized Losses') with respect to the Mortgage
Loans. Realized Losses remaining after application of such amounts
shall generally be applied to reduce the ownership interest of the
Subordinate Certificates in the Pool. If the Certificate Balance of
the Subordinate Certificates has been reduced to zero, the Senior
Certificates will bear all Realized Losses whether or not there is
any remaining Subordinated Amount.
B. ALTERNATIVE CREDIT ENHANCEMENT INCLUDING INSURANCE, LETTERS OF
CREDIT AND SURETY BONDS
As an alternative, or in addition to the credit enhancement afforded
by the Subordinate Certificates, credit enhancement with respect to a
Series of Certificates may be provided by mortgage insurance, hazard
insurance, by the deposit of cash, certificates of deposit, letters
of credit, surety bonds, a separate pool of mortgage loans or
mortgage certificates, a limited guaranty insurance policy issued by
one or more insurance companies, or by such other methods as may be
set forth in the Prospectus Supplement for such Series.
To the extent described in the related Prospectus Supplement and to
the extent it will not result in the downgrading of any rating on the
related Certificates by the Rating Agency rating such Certificates,
certain insurance policies (or deposits in lieu thereof) may cover
more than one Series of Certificates.
Advances.................................. Unless otherwise specified in the related Prospectus Supplement, in
the event of delinquencies in payments on the Mortgage Loans, the
Master Servicer will make advances of cash ('Advances') to the
holders of each Class of Certificates, but only to the extent that it
determines such Advances will be recoverable from future payments and
collections on the Mortgage Loans or otherwise. Any such Advances
will be recoverable to the Master Servicer as described herein or in
the applicable Prospectus Supplement. See 'Description of the
Certificates--Advances and Limitations Thereon.'
Optional Termination...................... Unless otherwise specified in the related Prospectus Supplement, the
Depositor may, at its option with respect to any Series of
Certificates, repurchase all Mortgage Assets remaining outstanding at
such time as the aggregate outstanding Principal Balance of such
Mortgage Assets is less than 10% of the aggregate outstanding
principal balance of the Mortgage Assets as of the Cut-off Date
specified with respect to such Series. Unless otherwise provided in
the related Prospectus Supplement, and if the Trust Fund issuing a
particular Series of Certificates elects real estate mortgage
investment conduit ('REMIC') status under the Internal Revenue
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Code of 1986, as amended (the 'Code'), the repurchase price will
equal the sum of (a) the principal balance of each such Mortgage
Asset, plus accrued interest thereon at the applicable Mortgage Pass-
Through Rate or Mortgage Certificate interest rate to the date
specified in the related Prospectus Supplement, less any unreimbursed
Advances made with respect to any such Mortgage Asset and (b) the
fair market value of all acquired property in respect of any Mortgage
Asset, less any unreimbursed Advances made with respect to any such
Mortgage Asset. See 'Description of the Certificates--Termination'
herein.
Federal Income Tax Considerations......... The Federal income tax consequences to Certificateholders will vary
depending on the characteristics of a Trust Fund and whether the
Trust Fund issuing a particular Series of Certificates elects REMIC
status under the Code. See 'Certain Federal Income Tax Consequences'
herein. Generally, if a Trust Fund elects REMIC status, one or more
classes of Certificates will be treated as REMIC 'regular interests'
(the 'Regular Certificates'). For Federal income tax purposes, a
Regular Certificate will be treated as a debt instrument issued by
the REMIC. The amounts includible in the income of a Regular
Certificate holder will be determined under the accrual method of
accounting. One or more Series of Regular Certificates may be issued
with 'original issue discount' that is not de minimis. Holders of any
such Series of Regular Certificates will be required to include such
original issue discount in gross income for Federal income tax
purposes as it is deemed to accrue, in advance of the receipt of the
cash attributable to such income. If a Regular Certificate is issued
at a premium, the holder will be entitled to make an election to
amortize such premium on a constant yield method as an offset to the
interest income on such Certificate.
If no REMIC election is made, the Trust Fund will be treated as a
grantor trust and not as an association taxable as a corporation. The
treatment of a particular Series of Certificates will depend on the
characteristics of such Series. The holders of Certificates will
either be treated as holders of undivided pro rata interests in the
underlying Mortgage Loans or as owners of stripped bonds or stripped
coupons. If the stripped bond rules do not apply with respect to a
particular Series, the holders of such Series must include in income
their allocable share of interest income of the Trust Fund and may,
subject to applicable limitations, deduct their allocable share of
the expenses of the Trust Fund. If the stripped bond rules do apply
with respect to a particular Series, the income with respect to such
Series generally will be accounted for under the original issue
discount rules under a constant yield to maturity method, which may
require inclusion prior to the receipt of the cash associated with
such income.
ERISA..................................... A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or the
Code should carefully review with its own legal advisors whether the
purchase or holding of Certificates could give rise to a transaction
prohibited or otherwise impermissible under ERISA or the Code. See
'ERISA Considerations' herein and in the related Prospectus
Supplement.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Legal Investment.......................... The Certificates offered hereby and by the related Prospectus
Supplement will generally constitute 'mortgage-related securities'
under the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA')
so long as they are rated by a Rating Agency in one of its two
highest rating categories. Any such Certificates would be 'legal
investments' for certain types of institutional investors to the
extent provided in SMMEA, subject to state laws overriding SMMEA. A
number of states have enacted legislation overriding the legal
investment provisions of SMMEA. Certificates that do not constitute
'mortgage-related securities' under SMMEA will require registration,
qualification or an exemption under applicable state securities laws
and may not be 'legal investments' to the same extent as
'mortgage-related securities.' See 'Legal Investment' herein.
Rating.................................... Each Class of Certificates offered by means of this Prospectus and
the related Prospectus Supplement will be rated in an Investment
Grade rating category by the Rating Agency or Agencies identified in
such Prospectus Supplement. A rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or withdrawal
at any time by the assigning Rating Agency. Further, such ratings do
not address the effects of prepayments on the yield anticipated by an
investor.
Risk Factors.............................. In considering an investment in any Series of the Certificates,
investors should recognize that there are risk factors associated
with such an investment. See 'Risk Factors' herein and in the related
Prospectus Supplement.
</TABLE>
14
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, among other things, the
following risk factors in connection with the purchase of the Certificates:
1. Limited Obligations and Assets of the Depositor. The Certificates will
not represent an interest in or obligation of the Depositor or any of its
affiliates. The Certificates will not be insured or guaranteed by any government
agency or instrumentality, nor, unless expressly provided in the related
Prospectus Supplement, by the Depositor or any of its affiliates, any Servicer
or the Master Servicer. Unless otherwise set forth in the Prospectus Supplement
for a Series, the Trust Fund for a Series will be the only available source of
funds to make distributions on the Certificates of such Series. The only
obligations of the Depositor with respect to the Certificates of any Series will
be pursuant to certain representations and warranties. See 'Description of the
Certificates--Representations and Warranties.' The Depositor does not have, and
is not expected in the future to have, any significant assets with which to meet
any obligation to repurchase Mortgage Assets with respect to which there has
been a breach of any representation or warranty. If, for example, the Depositor
were required to repurchase a Mortgage Asset, its only sources of funds to make
such repurchase would be from funds obtained from the enforcement of a
corresponding obligation, if any, on the part of the originator of the Mortgage
Asset, the Mortgage Asset Seller, the Servicer or the Master Servicer, as the
case may be, or from a reserve fund established to provide funds for such
repurchases. See 'The Depositor.'
2. Average Life of Certificates Affecting Yield to Certificateholders:
Prepayment Considerations.
Prepayments on the Mortgage Assets in any Trust Fund generally will result in a
faster rate of principal payments on one or more Classes of the related
Certificates than if payments on such Mortgage Assets were made as scheduled.
Thus, the prepayment experience on the Mortgage Assets may affect the average
life of each Class of related Certificates. Prepayments also may result from
mandatory prepayments relating to unused moneys held in Pre-Funding Accounts.
The rate of principal payments on pools of mortgage loans varies between pools
and from time to time is influenced by a variety of economic, demographic,
geographic, social, tax, legal and other factors. There can be no assurance as
to the rate of prepayment on the Mortgage Assets in any Trust Fund or that the
rate of payments will conform to any model described herein or in any Prospectus
Supplement. If prevailing interest rates fall significantly below the applicable
mortgage rates, principal prepayments are likely to be higher than if prevailing
rates remain at or above the rates borne by the mortgage loans underlying or
comprising the Mortgage Assets in any Trust Fund. As a result, the actual
maturity of any Class of Certificates could occur significantly earlier than
expected. A Series of Certificates may include one or more Classes of
Certificates with priorities of payment and, as a result, yields on other
classes of Certificates of such Series may be more sensitive to prepayments on
Mortgage Assets. A Series of Certificates may include one or more Classes
offered at a significant premium or discount. Yields on such Classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on Mortgage Assets and, where the amount of interest payable with
respect to a Class is disproportionately high as compared to the amount of
principal, as with certain Classes of Stripped Certificates, a holder might, in
some prepayment scenarios, fail to recoup its original investment. A Series of
Certificates may include one or more Classes of Certificates that provide for
distribution of principal thereof from amounts attributable to interest accrued
but not currently distributable on one or more classes of Compounding
Certificates and, as a result, yields on such Certificates will be sensitive to
(a) the provisions of such Certificates relating to the timing of distributions
of interest thereon and (b) if such Compounding Certificates accrue interest at
a variable or adjustable Pass-Through Rate, changes in such rate. [In addition,
the Depositor may, solely at its option and subject to the terms of the
applicable Pooling and Servicing Agreement, purchase any defaulted Mortgage Loan
or any Mortgage Loan as to which default is imminent from the Trust Fund.] See
'Prepayment and Yield Considerations' and 'Maturity Considerations' herein.
3. Limitations of Subordinated Amounts. With respect to Certificates of a
Series having a Class of Subordinated Certificates, while the subordination
feature is intended to enhance the likelihood of timely payment of principal and
interest to Senior Certificateholders, the Subordinated Amount may be limited,
as specified in the Prospectus Supplement, the Subordinated Amount, if any,
could be depleted in certain circumstances, and payments applied to the Senior
Certificates which are otherwise due to the Subordinated Certificates may be
less than losses. See 'Credit Enhancements--Subordination' herein and
'Description of the Certificates' in the related Prospectus Supplement.
15
<PAGE>
4. Limitations of Insurance and Credit Enhancements. If insurance policies
or other credit enhancement are provided with respect to a Series of
Certificates, the insurance policies or credit enhancement on the Mortgage
Assets, the Pools or all or any part of a Trust Fund will not cover all
contingencies and will cover certain contingencies only to a limited extent. See
'Credit Enhancements.'
5. Limited Liquidity of the Certificates. There can be no assurance that a
secondary market will develop for the Certificates of any Series or, if it does
develop, that it will provide the holders of Certificates of such Series with
liquidity of investment or that it will remain for the term of such Series of
Certificates. Although the Certificateholders of each Series will receive
monthly statements containing certain statistical information with respect to
the related Pool, initially the Depositor does not intend to publish information
relating to the Certificates of any Series or any Pool. The limited availability
of any such published information may affect the liquidity of the Certificates.
In addition, the issuance of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates. See 'Description of the Certificates--Registration of
Certificates' herein.
6. Certain Federal Tax Considerations Regarding REMIC Residual
Certificates. Holders of REMIC Residual Certificates will be required to report
on their federal income tax returns as ordinary income their pro rata share of
taxable income of the REMIC regardless of the amount or timing of their receipt
of cash payments as described in 'Certain Federal Income Tax Considerations
- --Qualification as a REMIC--Taxation of Owners of Residual Certificates.'
Accordingly, under certain circumstances, holders of Residual Certificates might
have taxable income and tax liabilities arising from such investment during a
taxable year in excess of the cash received during such period. The requirement
that holders of Residual Certificates report their pro rata share of the taxable
income and net loss of the REMIC will continue until the principal balances of
all Classes of Certificates of the related Series have been reduced to zero,
even though holders of Residual Certificates have received full payment of their
stated interest and principal. A portion (or, in certain circumstances, all) of
a Residual Certificateholder's share of the REMIC taxable income may be treated
as 'excess inclusion' income to such holder which (i) except in the case of
certain thrift institutions, will not be subject to offset by losses from other
activities, (ii) for a tax-exempt Holder, will be treated as unrelated business
taxable income and (iii) for a foreign holder, will not qualify for exemption
from withholding tax. Individual holders of Residual Certificates may be limited
in their ability to deduct servicing fees and other expenses of the REMIC.
Because of the special tax treatment of REMIC residual interests, the taxable
income arising in a given year on a REMIC residual interest will not be equal to
the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Residual Certificates may be significantly
less than that of a corporate bond or stripped instrument having similar cash
flow characteristics. See 'Certain Federal Income Tax Consequences' herein.
7. General Risk Factors Affecting Mortgage Loans. An investment in
Certificates may be affected, among other things, by a decline in real estate
value or changes in mortgage market interest rates. If the residential real
estate market in the locale of properties securing the Mortgage Loans (or the
mortgage loans underlying the Mortgage Certificates) should experience an
overall decline in property values such that the outstanding balances of such
loans, and any secondary financing on the Mortgaged Properties underlying a
particular Pool, become equal to or greater than the value of Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. To
the extent that such losses are not covered by any applicable insurance policies
or other credit enhancement, holders of the Certificates of a Series evidencing
interests in such Pool will bear all risk of loss resulting from default by
mortgagors and will depend primarily upon the value of the Mortgaged Properties
for recovery of the outstanding principal and unpaid interest of the defaulted
loans. See 'The Pools--The Mortgage Loans.'
8. Limited Nature of Ratings. Any rating assigned by a Rating Agency to a
Class of Certificates will reflect such Rating Agency's assessment solely of the
likelihood that holders of Certificates of such Class will receive payments to
which such Certificateholders are entitled under the related Agreement. Such
rating will not constitute an assessment of the likelihood that principal
prepayments on the related Mortgage Assets will be made, the degree to which the
rate of such prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the Series of Certificates. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a
16
<PAGE>
lower than anticipated yield or that an investor purchasing a Certificate at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. See 'Rating' herein.
9. ERISA Considerations. Generally, ERISA applies to investments made by
employee benefit plans and transactions involving the assets of such plans. Due
to the complexity of regulations which govern such plans, prospective investors
that are subject to ERISA are urged to consult their own counsel regarding
consequences under ERISA of acquisition, ownership and disposition of the
Certificates of any Series. See 'ERISA Considerations.'
10. Difficulty in Pledging. Since most transactions in the Certificates
can be effected only through DTC, CEDEL, Euroclear, participating organizations,
indirect participants and certain banks, the ability of a Certificate Owner to
pledge a Certificate to persons or entities that do not participate in the DTC,
CEDEL or Euroclear systems, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
the Certificates. See 'Description of the Certificates--Registration of
Certificates' herein.
11. Potential Delays in Receipt of Distributions. Certificate Owners may
experience some delay in their receipt of distributions of interest and
principal on the Certificates since such distributions will be forwarded by the
Trustee to DTC and DTC will credit such distributions to the accounts of its DTC
Participants (as defined herein) which will thereafter credit them to the
accounts of Certificate Owners either directly or indirectly through indirect
participants. See 'Description of the Certificates--Registration of
Certificates' herein.
THE POOLS*
GENERAL
Unless otherwise specified in the Prospectus Supplement for a Series, the
Pool evidenced by the Certificates of that Series will have the general
characteristics set forth below.
For each Series, the Depositor will convey a Trust Fund to the trustee
identified in the related Prospectus Supplement (the 'Trustee') for the benefit
of the Certificateholders consisting of a pool of assets ('Pool'). Each Pool
will consist of (i) Mortgage Assets, (ii) amounts held from time to time in the
Certificate Account and the Pre-Funding Account, if any, (iii) the lender's
interest in any Insurance Policies relating to a Mortgage Loan, (iv) any
property which initially secured a Mortgage Loan and which has been acquired by
foreclosure or deed in lieu of foreclosure and (v) rights under any form of
credit enhancement as may be specified in the Prospectus Supplement. Each
Certificate will represent an undivided ownership interest in the Trust Fund
established for that Series of Certificates as described in the related
Prospectus Supplement. See 'Description of the Certificates-- Assignment of
Mortgage Loans' herein. If so specified in the related Prospectus Supplement,
the Mortgage Assets may be divided into Asset Groups and the Certificates of
separate Classes will evidence ownership interests of a corresponding Asset
Group.
Mortgage Assets in the Pool may consist of any combination of the following
to the extent and as specified in the related Prospectus Supplement, Mortgage
Loans or participation interests therein which will represent REMIC 'regular
interests' in a Trust Fund which contains the Mortgage Loans relating to such
Series, and Mortgage Certificates.
The Depositor will make certain representations and warranties regarding
certain characteristics of the Mortgage Assets comprising a Pool and as to the
accuracy in all material respects of certain information furnished to the
Trustee in respect of each such Mortgage Asset. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the related Certificateholders in Mortgage Assets, the Depositor will be
obligated either to cure the breach in all material respects, to purchase the
Mortgage Assets or, if the related Agreement so provides, to substitute in its
place a comparable qualifying mortgage asset pursuant to
- ------------------
* Whenever in this Prospectus terms such as 'Pool,' 'Trust Fund,' 'Agreement' or
'Pass-Through Rate' are used, those terms respectively apply, unless the
context otherwise indicates, to one specific Pool, Trust Fund, Pooling and
Servicing Agreement and the Pass-Through Rate or Rates applicable to the
related Series of Certificates.
17
<PAGE>
the conditions set forth therein. This repurchase or substitution obligation
constitutes the sole remedy available to the Certificateholders or the Trustee
for a breach of any such representation or warranty by the Depositor. The
Depositor will not advance any of its own funds to the Trust Fund or to the
Certificateholders, except to the limited extent set forth under 'Description of
the Certificates--Advances and Limitations Thereon.'
THE MORTGAGE LOANS
General
The Prospectus Supplement for each Series will specify for each Pool, among
other things, the years of origination of the Mortgage Loans; the original
Loan-to-Value Ratios; the range of aggregate principal balances of the Mortgage
Loans at origination and the aggregate outstanding principal balance thereof as
of the Cut-off Date; the original maturities of the Mortgage Loans and the last
maturity date of any Mortgage Loan; insurance policies, letters of credit or
other forms of credit enhancement, if any, applicable to any Mortgage Loan; and
the Mortgage Interest Rates. A Pool may be comprised of fully or negatively
amortizing adjustable rate Mortgage Loans ('ARMs') with Mortgage Interest Rates
adjusted periodically (with corresponding adjustments in the amount of monthly
payments) to equal the sum of a fixed margin and an index, subject to applicable
minimum and maximum rates and maximum adjustments for any period. In such case
the Prospectus Supplement will specify the Initial Mortgage Interest Rates, the
index or formula, if any, used to determine the adjustable Mortgage Interest
Rate (the 'Index'), the weighted average Minimum Rate (if any), the weighted
average Maximum Rate, the Maximum Adjustment, if applicable, and the
then-current Mortgage Interest Rate. The Prospectus Supplement will also specify
whether ARMs included in a Pool provide for adjustments to the Mortgage Interest
Rates more frequent than changes to the scheduled monthly payments of principal
and interest (the 'Monthly Payments') made on such ARMs, which together could
result in negative amortization. See 'Description of ARMs' below. The Prospectus
Supplement will also describe any other special payment features of the Mortgage
Loans included in a Pool. If specific information respecting the Mortgage Loans
is not known to the Depositor at the time a Series of Certificates is initially
offered, general information of the nature described above will be provided in
the related Prospectus Supplement, and specific information will be set forth in
a report on Form 8-K which will be available to investors in such Series of
Certificates at or before the initial issuance thereof and will be filed with
the Commission within 15 days after such initial issuance.
The entity or entities named as Master Servicer in the related Prospectus
Supplement will service the Mortgage Loans, and will receive a fee for such
services, pursuant to the related Agreement. See 'Description of the
Certificates--Administration Fees, Compensation and Payment of Expenses.' With
respect to those Mortgage Loans serviced through a Servicer, such Servicer will
be required to service the related Mortgage Loans in accordance with the
applicable agreement between such Servicer and the Master Servicer (a 'Servicing
Agreement') and will receive the fee for such services specified in such
Servicing Agreement; however, the Master Servicer will remain liable for its
servicing obligations under the Agreement as if the Master Servicer alone were
servicing such Mortgage Loans.
General Characteristics of the Mortgage Loans
Both ARMs and fixed-rate Mortgage Loans are eligible for inclusion in
Pools. Unless otherwise specified in the applicable Prospectus Supplement, all
of the Mortgage Loans in a Pool will (i) have individual principal balances at
origination of not more than $2,000,000, (ii) have monthly payments due on the
first day of each month (each, an 'Installment Due Date'), (iii) have a 5- to
40-year term at origination, (iv) have an adjustable or fixed rate of interest,
(v) have level or variable monthly payments over the term of the Mortgage Loan,
and (vi) be secured by a lien on the underlying Mortgaged Property or by a
leasehold interest therein.
Unless otherwise specified in a Prospectus Supplement, the Mortgage Loans
will be secured by Mortgages on Mortgaged Properties that may be located in any
jurisdiction within the USA. The geographic distribution of Mortgaged Properties
will be set forth in the Prospectus Supplement.
The applicable Prospectus Supplement will also set forth the number and
aggregate unpaid principal balances of the Mortgage Loans in each Pool that are
secured by one-to-four-unit residential properties, condominium units,
townhouses and units located within planned unit developments ('PUDs') and that
are
18
<PAGE>
secured by shares of cooperative corporations ('Co-op Loans'). For condominiums,
townhouses and PUDs, the Depositor has developed project approval guidelines
which substantially conform to the FNMA and/or the FHLMC project approval
guidelines.
A Pool may contain certain Mortgage Loans ('Buydown Loans') which include
provisions whereby the originator or a third party partially subsidizes the
monthly payments of the Mortgagor during the early years of the Mortgage Loan,
the difference to be made up from a fund (a 'Buydown Fund') contributed by the
originator or third party at the time of origination of the Mortgage Loan. A
Buydown Fund will be in an amount equal either to the discounted value or full
aggregate amount of future payment subsidies. The underlying assumption of
buydown plans is that the income of the Mortgagor will increase during the
buydown period as a result of normal increases in compensation and of inflation,
so that the Mortgagor will be able to meet the full mortgage payments at the end
of the buydown period. To the extent that this assumption as to increased income
is not fulfilled, the possibility of defaults on Buydown Loans is increased. The
related 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.
Description of ARMs
General. Unless otherwise specified in the related Prospectus Supplement,
ARMs eligible for inclusion in a Pool provide for a fixed Initial Mortgage
Interest Rate for an initial period of time ranging from one month to 120
months. Thereafter, the interest rates (the 'Mortgage Interest Rates') are
subject to periodic adjustment based, subject to the applicable limitations
discussed below, on changes in the applicable Index to a rate equal to the Index
plus a fixed percentage spread over the Index established contractually for each
ARM at the time of its origination (the 'Gross Margin'). Certain ARMs can be
converted into fixed-rate mortgage loans at the option of the Mortgagor upon the
fulfillment of certain conditions set forth in the related Mortgage Note within
a set period after origination of the related Mortgage Loan. To the extent
specified in the related Prospectus Supplement, any ARM so converted may be
subject to repurchase by the Depositor.
Adjustable interest rates can cause payment increases that some Mortgagors
may find difficult to make. However, many ARMs provide that no Mortgage Interest
Rate may be adjusted to a rate above the applicable lifetime Maximum Rate or
below the applicable lifetime Minimum Rate for such ARMs. In addition, certain
ARMs provide for limitations on the maximum amount by which Mortgage Interest
Rates may adjust for any single adjustment period (the 'Maximum Adjustment').
Certain ARMs are payable in self amortizing payments of principal and
interest. Other ARMs ('Negatively Amortizing ARMs') provide instead for
limitations on changes in the Monthly Payment on such ARMs ('Payment Caps'). As
discussed below, limitations on Monthly Payments can result in Monthly Payments
which are greater or less than the amount to amortize a Negatively Amortizing
ARM by its maturity at the Mortgage Interest Rate in effect in any particular
month. In the event that a Monthly Payment is not sufficient to pay the interest
accruing on a Negatively Amortizing ARM, any such excess interest ('Deferred
Interest') is added to the Principal Balance of such Mortgage Loans, causing
negative amortization thereof, and will be repaid through future Monthly
Payments. In the event that a Monthly Payment exceeds the sum of the interest
accrued at the applicable Mortgage Interest Rate and the principal payment which
would have been necessary to amortize the outstanding principal balance over the
remaining term of the loan, the excess (or 'accelerated amortization') reduces
the principal balance of the ARM. See 'Maturity Considerations--Prepayment
Considerations.' Negatively Amortizing ARMs do not provide for the extension of
their original maturity to accommodate changes in their Mortgage Interest Rate.
See 'Initial Mortgage Interest Rate and Interest Rate Changes' below. All of the
limitations on periodic increases in interest rates and on changes in Monthly
Payments protect borrowers from unlimited interest rate and payment increases.
With respect to any Pool consisting of ARMs, the related Prospectus Supplement
will specify whether the Pool includes Negatively Amortizing ARMs.
The Index. The Index applicable to any ARMs comprising a Pool will be
specified in the Prospectus Supplement for the related Series.
Initial Mortgage Interest Rate and Interest Rate Changes. During the
initial period following origination, generally ranging from one month to 120
months, ARMs bear interest at the initial Mortgage Interest Rate that may be set
by the lender independently of the Index otherwise applicable at the time of
origination. The Initial
19
<PAGE>
Mortgage Interest Rate is based on competitive factors and on other various
factors including the lender's (i) lending policy at the time of origination;
(ii) availability of funds for lending purposes; (iii) rate of return obtainable
on other investments; and (iv) cost of doing business. The Initial Mortgage
Interest Rate may be higher for mortgage loans with a relatively higher Loan-to-
Value Ratio. After the initial period, the Mortgage Interest Rate will be set
periodically in accordance with the applicable Index and the Gross Margin that
is set by the lender at the time of origination of the ARM, subject to the
lifetime Maximum Rate and lifetime Minimum Rate and the periodic Maximum
Adjustment. The Index applicable as of any interest adjustment date will be the
most recent index figure available during a period specified in the related
Prospectus Supplement.
The Mortgage Interest Rates on ARMs that do not provide for negative
amortization adjust at certain intervals which will be specified in the related
Prospectus Supplement. To accommodate changes in the adjustable Mortgage
Interest Rate, the Monthly Payment for an ARM which does not provide for
negative amortization will be adjusted at the time the rate adjustment occurs to
an amount that would fully amortize the Mortgage Loan over its remaining term at
the Mortgage Interest Rate in effect as of the date of such adjustment. The
Mortgage Loans which comprise any Pool may have been originated at different
times and therefore the Monthly Payments with respect to such Mortgage Loans
will adjust periodically in different months.
Maximum Rates, Minimum Rates and the Maximum Adjustment. There are
lifetime limits with respect to the maximum and minimum Mortgage Interest Rates
for each ARM (the 'Maximum Rate' and the 'Minimum Rate,' respectively). If no
Minimum Rate is specified in a Mortgage Note, the Minimum Rate is equal to the
Gross Margin for such Mortgage Loan. In addition, the Maximum Adjustment limits
the amount by which the Mortgage Interest Rate on any ARM may increase or
decrease as of the date of any Mortgage Interest Rate adjustment. Such limits
are established at the time of origination of the ARM and are based on a variety
of factors, including competitive conditions at the time of origination in the
area in which the Mortgaged Property is located. Because of the lifetime Maximum
Rate, lifetime Minimum Rate and, if applicable, the periodic Maximum Adjustment,
the Mortgage Interest Rate in effect from time to time on an ARM may not be
equal to the applicable Index plus the Gross Margin.
Description of the Fixed-Rate Mortgage Loans
The fixed-rate Mortgage Loans eligible for inclusion in a Pool (the
'Fixed-Rate Mortgage Loans') bear simple interest at fixed annual rates and have
original terms to maturity ranging up to 40 years. Such Mortgage Loans provide
for monthly payments of principal and interest in substantially equal
installments for the contractual term of the Mortgage Note in sufficient amounts
to fully amortize the principal thereof by maturity.
Assumption
Although all of the Mortgage Loans included in a Pool are by their terms
assumable under certain limited conditions, such Mortgage Loans also contain
'due-on-sale' provisions under which the Mortgage Loans become due and payable,
at the option of the holder thereof, upon the sale of the related Mortgaged
Property. It is expected that the Master Servicer will enforce 'due-on-sale'
provisions with respect to most fixed-rate Mortgage Loans and some ARMs;
however, where such provisions are not enforced the prospective purchaser must
meet the Master Servicer's creditworthiness standards and applicable law at the
time of transfer must not limit the Master Servicer's ability to make the
interest rate and payment adjustments permitted by the related Mortgage Note.
Upon any such assumption, a fee based on a percentage of the outstanding
principal balance of the Mortgage Loan generally must be paid, which sum
generally will be retained by the Master Servicer as additional servicing
compensation. In some cases the Maximum Rate or Minimum Rate applicable to ARMs
may change upon assumption. Upon assumption, the terms of Fixed-Rate Mortgage
Loans generally are not modified to current market rates, unless the loan bears
a higher interest rate than the prevailing market rate.
Description of Qualified Lenders
Each Mortgage Loan will be originated or purchased by a Qualified Lender
and acquired by the Depositor from such Qualified Lender or a Mortgage Asset
Seller. Qualified Lenders and Mortgage Asset Sellers may be affiliates of the
Depositor. All Qualified Lenders will be, or will have been at the time of the
origination of such Mortgage Loans, mortgagees approved by the Secretary of
Housing and Urban Development ('HUD'), the
20
<PAGE>
Federal Home Loan Mortgage Corporation ('FHLMC'), or the Federal National
Mortgage Association ('FNMA'), or state-chartered or federally-chartered savings
and loan associations, banks or similar financial institutions whose deposits or
accounts are insured by either the Savings Association Insurance Fund (the
'SAIF') or the Bank Insurance Fund (the 'BIF') administered by the Federal
Deposit Insurance Corporation (the 'FDIC'). The Depositor has approved (or will
approve) individual institutions as eligible Qualified Lenders by applying
certain criteria, including the Qualified Lender's depth of mortgage origination
experience and financial stability. In general, each Qualified Lender must have
experience in originating residential mortgages and net worth acceptable to the
Depositor and must use the services of qualified underwriters, appraisers and
attorneys. However, from time to time, the Depositor may purchase Mortgage Loans
for inclusion in a Pool from Qualified Lenders which lenders, while not meeting
the generally applicable criteria used by the Depositor, as described above,
have been reviewed by the Depositor and found to be otherwise acceptable. In
connection with such purchases by the Depositor, the Depositor will reunderwrite
such Mortgage Loans. See '--Underwriting Policies' below.
Payment Provisions of the Mortgage Loans
Each Mortgage Loan may be fully amortizing or require a substantial payment
(a 'Balloon Payment') due on its stated maturity date, in each case as described
in the related Prospectus Supplement. Each such Mortgage Loan may require
payment of a premium or a yield maintenance penalty (a 'Prepayment Premium') in
connection with a prepayment, in each case as described in the related
Prospectus Supplement. In the event that holders of any Class or Classes of
Certificates offered hereby will be entitled to all or a portion of any
Prepayment Premiums collected in respect of Mortgage Loans, the related
Prospectus Supplement will specify the method or methods by which any such
amounts will be allocated.
Underwriting Policies
The Mortgage Loans to be included in each Mortgage Pool will be subject to
the various credit, appraisal and underwriting standards described herein. The
Depositor's credit, appraisal and underwriting standards with respect to certain
Mortgage Loans will generally conform to those published in the Depositor's
Selling Guide (together with the Depositor's Servicing guide, the 'Guide', as
modified from time to time). The credit, appraisal and underwriting standards as
set forth in the Guide are continuously revised based on opportunities and
prevailing conditions in the residential mortgage market and the market for the
Depositor's mortgage pass-through certificates. The Mortgage Loans may be
underwritten by the Depositor or by designated third parties.
In addition, the Depositor may purchase Mortgage Loans which do not conform
to the underwriting standards set forth in the Guide. Such Mortgage Loans may be
purchased from Qualified Lenders and Mortgage Asset Sellers who will represent
that the Mortgage Loans have been originated in accordance with credit,
appraisal and underwriting standards agreed to by the Depositor. The Depositor
will generally review only a limited portion of the Mortgage Loans in any
delivery of such Mortgage Loans for conformity with the applicable credit,
appraisal and underwriting standards. Certain other Mortgage Loans will be
purchased from Qualified Lenders and Mortgage Asset Sellers who will represent
that the Mortgage Loans were originated pursuant to credit, appraisal and
underwriting standards determined by a mortgage insurance company acceptable to
the Depositor. The Depositor will accept a certification from such insurance
company as to a Mortgage Loan's insurability in a mortgage pool as of the date
of certification as evidence that such Mortgage Loan conforms to applicable
underwriting standards. Such certifications will likely have been issued before
the purchase of the Mortgage Loans by the Depositor. The Depositor will perform
only random quality assurance reviews on Mortgage Loans delivered with such
certifications.
The credit, appraisal and underwriting standards utilized in negotiated
transactions and the credit, appraisal and underwriting standards of insurance
companies issuing certificates may vary substantially from the credit, appraisal
and underwriting standards set forth in the Guide. All of the credit, appraisal
and underwriting standards will provide an underwriter with sufficient
information to evaluate the borrower's repayment ability and the adequacy of the
Mortgaged Property as collateral. Due to the variety of underwriting standards
and review procedures that may be applicable to the Mortgage Loans included in
any Mortgage Pool, the related Prospectus Supplement will not distinguish among
the various credit, appraisal and underwriting standards applicable to the
Mortgage Loans nor describe any review for compliance with applicable credit,
appraisal and
21
<PAGE>
underwriting standards performed by the Depositor. Moreover, there can be no
assurance that every Mortgage Loan was originated in conformity with the
applicable credit, appraisal and underwriting standards in all material
respects, or that the quality or performance of Mortgage Loans underwritten
pursuant to varying standards as described above will be equivalent under all
circumstances.
The Depositor's underwriting standards are intended to evaluate the
prospective Mortgagor's credit standing and repayment ability, and the value and
adequacy of the proposed Mortgaged Property as collateral. The Depositor expects
that each prospective Mortgagor will be required to complete an application
which will include information with respect to the applicant's assets,
liabilities, income, credit history, employment history and other related items,
and furnish an authorization to apply for a credit report which summarizes the
Mortgagor's credit history. With respect to establishing the prospective
Mortgagor's ability to make timely payments, the Depositor will require evidence
regarding the Mortgagor's employment and income, and of the amount of deposits
made to financial institutions where the Mortgagor maintains demand or savings
accounts. In some instances, Mortgage Loans which were originated under a
limited mortgage documentation program (a 'Limited Mortgage Documentation
Program') may be sold to the Depositor. For a mortgage loan originated under a
Limited Mortgage Documentation Program to qualify for purchase by the Company,
the prospective mortgagor must have a good credit history and be financially
capable of making a larger cash down payment in a purchase, or be willing to
finance less of the appraised value, in a refinancing, than would otherwise be
required by the Depositor. Currently, the Depositor's underwriting standards
provide that only mortgage loans with certain loan-to-value ratios will qualify
for purchase. If the mortgage loan qualifies, the Depositor waives some of its
documentation requirements and eliminates verification of income and employment
for the prospective mortgagor.
The Depositor's underwriting standards generally follow guidelines
acceptable to FNMA and FHLMC. In determining the adequacy of the property as
collateral, an independent appraisal is made of each property considered for
financing. The appraiser is required to inspect the property and verify that it
is in good condition and that construction, if new, has been completed. The
appraisal is based on the appraiser's judgment of values, giving appropriate
weight to both the market value of comparable homes and the cost of replacing
the property. With respect to a Mortgage Loan made in connection with the
borrower's purchase of the Mortgaged Property, the 'appraised value' is the
lower of the purchase price or the amount determined by the appraiser. The
Loan-to-Value Ratio of a Mortgage Loan is generally equal to the original
principal amount of the Mortgage Loan divided by the appraised value of the
related Mortgaged Property.
Certain states where the Mortgaged Properties may be located are
'anti-deficiency' states where, in general, lenders providing credit on one- to
four-family properties look solely to the property for repayment in the event of
foreclosure. See 'Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency
Legislation and Other Limitations on Lenders.' The Depositor expects that the
underwriting standards applied with respect to the Mortgage Loans (including
anti-deficiency states) will require that the underwriting officers be satisfied
that the value of the property being financed, as indicated by the independent
appraisal, currently supports and is anticipated to support in the future the
outstanding loan balance, and provides sufficient value to mitigate the effects
of adverse shifts in real estate values. The general appreciation of real estate
values experienced in the past has been a factor in limiting the general loss
experience on conventional one-to-four-unit residential first mortgage loans.
There can be no assurance, however, that the past pattern of appreciation in
value of the real property securing these loans will continue.
The Depositor will obtain representations and warranties from the
applicable Qualified Lender (which may or may not be the Qualified Lender that
originated the Mortgage Loan) that the Mortgage Loan was originated in
accordance with the underwriting guidelines described above or such other
policies as the Depositor may require or approve from time to time. Unless
otherwise specified in the applicable Prospectus Supplement, the Depositor, not
later than 90 days following delivery of a Series of Certificates, will review
or cause to be reviewed, all or a representative sample of the Mortgage Loans,
and perform such other reviews as it deems appropriate to determine compliance
with such standards. Any Mortgage Loan found to be not in compliance with such
standards after inclusion in a Pool must be repurchased or substituted for by
the Mortgage Loan Seller, unless such Mortgage Loan is otherwise demonstrated to
be includible in the Pool to the satisfaction of the Depositor. See 'Description
of the Certificates--Representations and Warranties.'
22
<PAGE>
The foregoing underwriting policies may be varied for particular Series of
Certificates to the extent set forth in the related Prospectus Supplement.
MORTGAGE CERTIFICATES
General
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 in principal distributions and
interest distributions thereon.
GNMA, FHLMC and FNMA Certificates
The descriptions of GNMA, FHLMC and FNMA Certificates and of Private
Certificates that are set forth below are descriptions of certificates
representing proportionate interests in a pool of mortgage loans and in the
payments of principal and interest thereon. GNMA, FHLMC, FNMA or the issuer of a
particular series of Private Certificates may also issue mortgage-backed
securities representing a right to receive distributions of interest only or
principal only or disproportionate distributions of principal or interest or to
receive distributions of principal and/or interest prior or subsequent to
distributions on other certificates representing interests in the same pool of
mortgage loans. In addition, any of such issuers may issue certificates
representing interests in mortgage loans having characteristics that are
different from the types of mortgage loans described below. The terms of any
such certificates to be included in a Pool (and of the underlying mortgage
loans) will be described in the related Prospectus Supplement, and the
descriptions that follow are subject to modification as appropriate to reflect
the terms of any such certificates that are actually included in a Pool.
GNMA. GNMA is a wholly owned corporate instrumentality of the United
States within 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 by the United States Federal
Housing Administration (the 'FHA') under the Housing Act or Title V of the
Housing Act of 1949, or guaranteed 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.' In order to meet
its obligations under such guaranty, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount.
GNMA Certificates. All of the GNMA Certificates (the 'GNMA Certificates')
will be mortgage-backed certificates issued and serviced by GNMA- or
FNMA-approved mortgage servicers. The mortgage loans underlying GNMA
Certificates may consist of FHA Loans secured by mortgages on one- to
four-family residential properties or multi-family residential properties, loans
secured by mortgages on one- to four-family residential properties or
multi-family residential properties, mortgage loans which are partially
guaranteed by the VA and other mortgage loans eligible for inclusion in mortgage
pools underlying GNMA Certificates.
Each GNMA Certificate provides for the payment by or on behalf of the
issuer of the GNMA Certificate to the registered holder of such GNMA Certificate
of monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly scheduled
principal and interest payments on each underlying eligible mortgage loan, less
servicing and guaranty fees aggregating the excess of the interest on each such
mortgage loan over the GNMA Certificate pass-through rate. In addition, each
payment to a GNMA Certificateholder will include proportionate pass-through
payments to such holder of any prepayments of principal of the mortgage loan
underlying the GNMA Certificate, and the holder's proportionate interest in the
remaining principal balance in the event of a foreclosure or other disposition
of any such mortgage loan.
23
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the GNMA
Certificates included in a Pool may be issued under either or both of the GNMA I
program ('GNMA I Certificates') and the GNMA II program ('GNMA II
Certificates'). All mortgages underlying a particular GNMA I Certificate must be
of the same type (for example, all single-family level payment mortgage loans)
and have the same annual interest rate (except for pools of mortgages secured by
mobile homes). The annual interest rate on each GNMA I Certificate is one-half
percentage point less than the annual interest rate on the mortgage loans
included in the pool of mortgages backing such GNMA I Certificate. Mortgages
underlying a particular GNMA II Certificate must be of the same type (for
example, all single-family level payment mortgage loans), but may have annual
interest rates that vary from each other by up to one percentage point. The
annual interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points less than the highest
annual interest rate on any mortgage loan included in the pool of mortgages
backing such GNMA II Certificate.
GNMA will have approved the issuance of each of the GNMA Certificates in
accordance with a guaranty agreement between GNMA and the servicer of the
mortgage loans underlying such GNMA Certificate. Pursuant to such agreement, the
servicer is required to advance its own funds in order to make timely payments
of all amounts due on the GNMA Certificate, even if the payments received by
such servicer on the mortgage loans backing the GNMA Certificate are less than
the amounts due on such GNMA Certificate. If a servicer is unable to make
payments on a GNMA Certificate as it becomes due, it must promptly notify GNMA
and request GNMA to make such payment. Upon such notification and request, GNMA
will make such payments directly to the registered holder of the GNMA
Certificate. In the event no payment is made by such servicer and such servicer
fails to notify and request GNMA to make such payment, the registered holder of
the GNMA Certificate has recourse only against GNMA to obtain such payment. The
registered holder of the GNMA Certificates included in a Pool is entitled to
proceed directly against GNMA under the terms of each GNMA Certificate or the
guaranty agreement or contract relating to such GNMA Certificate for any amounts
that are not paid when due under each GNMA Certificate.
As described above, the GNMA Certificates included in a Pool, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FHLMC. FHLMC is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
'FHLMC Act'). FHLMC is a stockholder-owned corporation. FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of urgently needed housing. It seeks to provide an enhanced degree
of liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional one-to-four-unit residential
first mortgages. The principal activity of FHLMC currently consists of the
purchase of first lien conventional one-to-four-unit residential first
residential mortgage loans or participation interests in such mortgage loans and
the resale of the mortgage loans so purchased in the form of mortgage
securities. FHLMC is confined to purchasing, so far as practicable, conventional
one-to-four-unit residential first mortgage loans and participation interests
therein which it deems to be of such quality, type and class as to meet
generally the purchase standards imposed by private institutional mortgage
investors.
FHLMC Certificates. FHLMC Certificates (the 'FHLMC Certificates')
represent an undivided interest in a group of mortgage loans purchased by FHLMC.
Mortgage loans underlying the FHLMC Certificates included in a Pool will consist
principally of fixed- or adjustable-rate mortgage loans with original terms to
maturity of approximately 5, 7, 15, 20 and 30 years, which are secured by first
liens on one- to four-family residential properties.
FHLMC Certificates are issued and maintained and may be transferred only on
the book-entry system of a Federal Reserve Bank and may only be held of record
by entities eligible to maintain book-entry accounts at a Federal Reserve Bank.
Beneficial owners will hold FHLMC Certificates ordinarily through one or more
financial intermediaries. The rights of a beneficial owner of a FHLMC
Certificate against FHLMC or a Federal Reserve Bank may be exercised only
through the Federal Reserve Bank on whose book-entry system such Certificate is
held.
Under its Cash and Guarantor programs, FHLMC guarantees to each registered
holder of a FHLMC Certificate the timely payment of interest at the rate
provided for by such FHLMC Certificate on the registered holder's pro rata share
of the unpaid principal balance outstanding of the related mortgage loans,
whether or not
24
<PAGE>
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
ultimate collection of all principal of the related mortgage loans, without any
offset or deduction, to the extent of such holder's pro rata share thereof, but
does not guarantee the timely payment of scheduled principal. Pursuant to its
guarantees, FHLMC generally indemnifies holders of FHLMC Certificates against
any diminution in principal by reason of charges for property repairs,
maintenance and foreclosure. FHLMC may remit the amount due on account of its
guarantee of ultimate collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of the claim by any mortgage insurer, or (iii) the expiration
of any right of redemption, whichever occurs later, but in any event no later
than one year after demand has been made upon the mortgagor for accelerated
payment of principal or for payment of principal due on the maturity of the
mortgage. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its servicing
judgment with respect to the mortgages in the same manner as for mortgages that
it has purchased but not sold. In lieu of guaranteeing only the ultimate
collection of principal payments in the manner described above, FHLMC may, but
will not be obligated to, enter into one or more agreements with the issuer and
the trustee of the FHLMC Certificates pursuant to which FHLMC will agree to
guarantee the timely receipt of scheduled principal payments. If such an
agreement is entered into and is applicable to all or any part of the FHLMC
Certificates included in a Pool, its existence will be disclosed in the related
Prospectus Supplement.
Under its Gold PC Program, FHLMC guarantees to each registered holder of a
FHLMC Certificate the timely payment of interest calculated in the same manner
as described above, as well as timely installments of scheduled principal
calculated on the basis of the weighted average remaining term to maturity of
the mortgage loans in the pool underlying the related FHLMC Certificate.
As described above, the FHLMC Certificates included in a Pool, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States.
FNMA. FNMA is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended. FNMA was originally established in 1938 as a United States
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder-owned and privately managed corporation by
legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing. Operating
nationwide, FNMA helps to redistribute mortgage funds from capital-surplus to
capital-short areas. In addition, FNMA issues mortgage-backed securities
primarily in exchange for pools of mortgage loans from lenders.
FNMA Certificates. 'FNMA Certificates' represent fractional interests in a
pool of mortgage loans formed by FNMA.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing scheduled principal and interest at the
applicable pass-through rate on the underlying mortgage loans, whether or not
received, and such holder's proportionate share of the full principal amount of
any foreclosed or other finally liquidated mortgage loan, whether or not such
principal amount is actually recovered. If FNMA were unable to perform such
obligations, distributions on FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly,
delinquencies and defaults would affect monthly distributions to holders of FNMA
Certificates. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States. The FNMA Certificates are not guaranteed by the United
States and do not constitute debts or obligations of the United States.
25
<PAGE>
As described above, the FNMA Certificates included in a Pool, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
Private Certificates
Each 'Private Certificate' will evidence an undivided interest in a pool of
FNMA, FHLMC or GNMA Certificates or any combination thereof. It is expected that
Private Certificates will be issued pursuant to participation or pooling and
servicing agreements entered into from time to time between the related seller
and the related Trustee for the Certificates or custodian. In addition, an
affiliate of such seller or of the depositor under such pooling and servicing
agreement may be a servicer for such Certificates or for the mortgage loans in
which such Mortgage Certificates represent a beneficial interest. The mortgage
loans underlying the Private Certificates may be subserviced by one or more loan
servicing institutions under the supervision of the servicer. Each Private
Certificate will have been acquired in a secondary transaction and not from the
issuer or any affiliate of the issuer of such Private Certificate and, unless
otherwise specified in the related Prospectus Supplement, each Private
Certificate will evidence an interest in, or will be secured by a pledge of
mortgage loans that conform to the descriptions of Mortgage Loans herein.
It is expected that all collections received by the servicers on the
mortgage loans (net of servicing fees to be retained by the servicers and such
other amounts as may be specified in the related pooling and servicing
agreement) will be deposited with the Trustee for the Certificates. Monthly
distributions of the principal and interest components of such collections
(adjusted to the stated rate or pass-through rate (as the case may be) borne by
such Private Certificate) will be made to the Trustee for the Certificates of
the related Series for deposit into the Certificate Account for such Series.
More specific information concerning the Private Certificates underlying a
particular Series of Certificates, the mortgage loans underlying such Private
Certificates, and related servicing and insurance, subordination or other credit
support arrangements will be set forth in the related Prospectus Supplement.
THE DEPOSITOR
The Depositor was incorporated in Delaware in 1991 and is a wholly owned
limited purpose indirect subsidiary of ABN AMRO Bank N.V. The limited purposes
of the Depositor are, in general, to acquire, own, pledge and sell mortgage
loans and certificates representing proportionate interests in pools of mortgage
loans; to issue, acquire, own, pledge and sell mortgage pass-through securities
which represent ownership interests in mortgage loans and certificates
representing proportionate interests in pools of mortgage loans, collections
thereon and related properties; and to engage in any acts which are incidental
to, or necessary, suitable or convenient to accomplish the foregoing. It is not
expected that the Depositor will have any business operations other than
offering Series of Certificates and related activities. The principal executive
offices of the Depositor are located at 181 West Madison Street, Suite 3250,
Chicago, Illinois 60602-4510, and its telephone number is (312) 904-5005.
Unless otherwise specified in the related Prospectus Supplement, neither
the Depositor, its parents nor any of the Depositor's affiliates will ensure or
guarantee distributions on the Certificates of any Series. As described herein,
the only obligations of the Depositor will be pursuant to certain
representations and warranties with respect to the Mortgage Assets. See
'Description of the Certificates--Representations and Warranties.' The Depositor
will have no ongoing servicing responsibilities or other responsibilities with
respect to any Mortgage Asset. The Depositor does not have nor is it expected in
the future to have any significant assets with which to meet any obligations
with respect to any Trust Fund. If the Depositor were required to repurchase or
substitute a Mortgage Asset, its only source of funds to make the required
payment would be funds obtained from the related Mortgage Asset Seller or, if
applicable, the Master Servicer or the Servicer.
The Depositor is part of ABN AMRO Bank N.V.'s U.S. operations, which are
managed by ABN AMRO North America, Inc. ABN AMRO North America, Inc. began
addressing the Year 2000 Compliance issue for the entire U.S. operations in
1997, by assembling a corporate project team that engaged in an initial
assessment of the scope of the project. ABN AMRO North America, Inc. expects to
have all systems and applications in place and fully tested by the end of 1998,
allowing time in 1999 for any systems refinements that may be needed. The
26
<PAGE>
potential impact of the year 2000 issue is dependent upon not only the
corrective measures ABN AMRO North America, Inc. undertakes, but also how the
issue is addressed by unaffiliated third parties. The way in which the year 2000
issue is addressed by governmental agencies, businesses, and other entities who
provide data to, or receive data from, ABN AMRO North America, Inc. and the
Depositor is very important. ABN AMRO North America, Inc. is communicating with
these parties to learn how they are addressing the Year 2000 issue, and to
evaluate any potential impact on ABN AMRO North America, Inc.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used either by the Depositor to purchase the
Mortgage Assets related to that Series or to return to the Depositor the amounts
previously used to effect such a purchase (including the repayment of any loans
made to the Depositor by any of its affiliates), the costs of carrying the
Mortgage Loans and/or Mortgage Certificates until the sale of the Certificates
and other expenses connected with pooling the Mortgage Loans and/or Mortgage
Certificates and issuing the Certificates. Any remaining proceeds will be used
for the general corporate purposes of the Depositor which are related to the
foregoing activities.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Determination of Mortgage Pass-Through Rates
Unless otherwise specified in the related Prospectus Supplement, the
'Mortgage Pass-Through Rate' for each Mortgage Loan included in a Pool will be
determined by deducting from the Mortgage Interest Rate borne by or accruing on
such loan an Administration Fee. The Administration Fee may be uniform with
respect to all Mortgage Loans in a Pool or may vary on a loan-by-loan basis.
With respect to ARMs and the Administration Fee, will generally vary on a
loan-by-loan basis to produce a uniform margin (the 'Net Margin') by which the
Mortgage Pass-Through Rate with respect to each Mortgage Loan in a Pool will
exceed the applicable Index for such loan. For example, if the Net Margin for a
Class or Series of Certificates were established to be 125 basis points over the
Index applicable to the ARMs included in the Pool for such class or series, an
individual Mortgage Loan whose terms provide for a Mortgage Interest Rate of 200
basis points over the applicable Index would be assigned an Administration Fee
totaling 75 basis points and a Mortgage Loan whose Mortgage Interest Rate is 175
basis points over the Index would be assigned an Administration Fee totaling 50
basis points. The related Prospectus Supplement will specify whether the
Administration Fee assigned to that Mortgage Loan at the time of formation of a
Pool will be fixed throughout the term of the related Agreement, except to the
limited extent described below, or will vary. If the lifetime Maximum Rate or
the periodic Maximum Adjustment applicable to a Mortgage Loan prevents its
Mortgage Interest Rate from adjusting at any Adjustment Date to the full extent
of the Index plus the Gross Margin applicable to such loan, the Mortgage
Pass-Through Rate for such loan may be less than the Index plus the Net Margin
applicable to the related Class or Series of Certificates that is specified in
the Prospectus Supplement for such class or series. Similarly, if the lifetime
Minimum Rate or, if applicable, the periodic Maximum Adjustment prevents the
Mortgage Interest Rate from fully adjusting, the Mortgage Pass-Through Rate for
such loan may exceed the Index plus the Net Margin.
Determination of Certificate Pass-Through Rate
Unless otherwise specified in the related Prospectus Supplement, the
Pass-Through Rate for each Class of Certificates of a Series will, for Pools
consisting of ARMs, and may, for Pools consisting of Fixed-Rate Mortgage Loans,
be all, or a portion specified in the related Prospectus Supplement, of the
weighted average of the Mortgage Pass-Through Rates of the Mortgage Loans
included in the Pool. The weighted average Mortgage Pass-Through Rate with
respect to Pools comprised of ARMs generally will change with any changes in the
adjustable Mortgage Interest Rates borne by or accruing on the underlying ARMs
and may change with principal prepayments, negative amortization or accelerated
amortization of the ARMs. The weighted average Mortgage Pass-Through Rate for a
Pool consisting of Fixed-Rate Mortgage Loans with different Mortgage
Pass-Through
27
<PAGE>
Rates may change due to differing prepayment rates and differing amortization
rates of the Mortgage Loans included in the Pool.
YIELD
The yield on any Certificate will depend on, among other things, the price
paid by the Certificateholder, the Pass-Through Rate of the Certificate in
effect from time to time and the prepayment experience with respect to the
Mortgage Assets represented by the Certificate. If any Certificate is offered at
a discount from or premium over its original principal amount or is offered
without any principal amount or with a lower proportionate share of the
principal amount of the Mortgage Assets, the actual yield to maturity realized
on such Certificate may be dramatically affected by the prepayment experience on
the Mortgage Assets comprising the related Pool. In extreme cases, as described
below, holders of certain Certificates could fail to recoup their investment.
The following discussions of certain yield considerations is intended to be
general in nature and reference is made to the discussion in each Prospectus
Supplement regarding yield and prepayment considerations and other risks.
Price
Subject to the effect of the amount of interest payable in connection with
prepayments as described in the Prospectus Supplement relating to a Series of
Certificates, prepayments of principal in whole or in part or accelerated
amortization, if any, on the Mortgage Assets comprising a Pool will increase the
yield on a Certificate purchased at a price less than the aggregate Principal
Balance of the Mortgage Assets represented by such Certificate and will decrease
the yield on a Certificate purchased at a price equal to, slightly less than
(due to effects of payment delays), or greater than the aggregate Principal
Balance of the Mortgage Assets represented by such Certificate. Additionally,
and as more fully described in the Prospectus Supplement relating thereto, if
any Certificate is offered without any principal amount or with a lower
disproportionate share of the principal amount of the underlying Mortgage
Assets, the yield realized on such Certificate will be extremely sensitive to
levels of prepayments of the Mortgage Assets represented thereby. In extreme
cases, holders of any such Certificates could fail to recoup their original
investment.
Effective Pass-Through Rate
Each monthly installment of interest due on a Mortgage Loan is calculated
as one-twelfth of the product of the applicable Mortgage Interest Rate and the
principal balance outstanding on the scheduled payment Installment Due Date for
such Mortgage Loan in the preceding month. The Mortgage PassThrough Rate with
respect to each Mortgage Loan will be similarly calculated on a loan-by-loan
basis, after subtracting the Administration Fee applicable to each Mortgage Loan
from the applicable Mortgage Interest Rate, unless otherwise specified in the
related Prospectus Supplement. In the case of a Pool with a range of Mortgage
Pass-Through Rates, disproportionate prepayments of Mortgage Loans with higher
Mortgage Pass-Through Rates will result in a lower effective pass-through rate
to Certificateholders.
The yield on interest bearing Classes of Certificates evidencing Pools
comprised of Mortgage Loans will be slightly lower than the yield otherwise
produced by the applicable Pass-Through Rate because while interest will accrue
on each Mortgage Loan from the Installment Due Date for such Mortgage Loan each
month, in each case as specified in the related Prospectus Supplement, the
distribution in respect of interest will not be made until the Distribution Date
in the month following the month of accrual. When a Mortgage Loan is prepaid in
full between Installment Due Dates, the Mortgagor is required to pay interest on
the amount prepaid only to the date of prepayment and not thereafter. In
addition, if a partial prepayment is applied by the Master Servicer to reduce
the principal balance of the related Mortgage Loan as of a date prior to the
receipt of such payment, on the following Installment Due Date, the Mortgagor
would pay interest on the lower principal balance. In the event a Mortgagor
prepays all or part of the Principal Balance on a Mortgage Loan and there is a
Prepayment Interest Shortfall, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer may adjust or forego all or part of
the current Administration Fees due to it, to the extent available, so that up
to a full month's interest payment will be passed through to the
Certificateholders at the Mortgage Pass-Through Rate. To the extent sufficient
current Administration Fees due to the Master Servicer are not so available, the
yield to
28
<PAGE>
Certificateholders will be slightly less than it would be if such current
Administration Fees due to the Master Servicer were available. See 'Description
of the Certificates--Example of Distribution' herein.
Other Yield Considerations
Mortgage Interest Rates on Negatively Amortizing ARMs. Since a portion of
the interest accrued on Negatively Amortizing ARMs may be deferred and payable
at a future time, the interest paid by a Mortgagor on such a Mortgage Loan on a
given Installment Due Date (the 'Interest Remittance Amount') which is
distributed to Certificateholders may not be equal to interest at the applicable
Mortgage Pass-Through Rates on such Mortgage Loan. During periods of negative
amortization, any Deferred Interest that is added to the Principal Balance of a
Mortgage Loan bears interest at the applicable Mortgage Pass-Through Rate. The
distribution to Certificateholders of the Interest Remittance Amount, rather
than interest calculated at the applicable Mortgage Pass-Through Rate, will not
materially affect the yield to Certificateholders if the Certificates are
purchased at or near par. Negative Amortization will lengthen the average life
of the Certificates, and if the Certificates are purchased at a discount or
premium, a yield effect can occur. See '--Price' and 'Maturity Considerations--
Prepayment Considerations.' Any Deferred Interest will be includible in taxable
income of classes entitled thereto as it accrues, rather than when it is
received. See 'Certain Federal Income Tax Consequences.'
Mortgage Interest Rates on Non Negatively Amortizing ARMs. The Mortgage
Interest Rates on ARMs adjust periodically in response to movements in the
applicable Index. The Index applicable as of any interest adjustment date will
be the most recent index figure available during a period before such
adjustments are made as specified in the related Prospectus Supplement. In
addition, because ARMs included in a Pool may have different origination dates,
the Mortgage Interest Rates on the ARMs comprising a Pool will not necessarily
adjust at the same dates. At any given time, the Mortgage Interest Rates on any
of the ARMs included in a Pool could be scheduled to adjust within one to 12
months. Accordingly, the yield to Certificateholders on Pools comprised of ARMs
will be adjusted on a delayed basis relative to movements in the applicable
Index.
MAXIMUM AND MINIMUM RATES, MAXIMUM ADJUSTMENT, PAYMENT CAPS AND DEFERRED
INTEREST
In the case of a Pool comprised of ARMs, and as more fully described above
under the caption 'The Pools--The Mortgage Loans--Description of ARMs' herein
and 'Description of the Mortgage Notes' in the related Prospectus Supplement,
the lifetime Maximum and Minimum Rates, the periodic Maximum Adjustment, and
Payment Caps and Deferred Interest, in the case of Negatively Amortizing ARMs,
on the ARMs could affect the yield on the related Series of Certificates. In the
event that despite prevailing market interest rates the Mortgage Interest Rate
on an ARM cannot increase due to the Maximum Rate or, if applicable, the Maximum
Adjustment, the yield on the related Certificates could be impacted adversely.
Conversely, should the Mortgage Interest Rate on an ARM not be able to decrease
due to the Minimum Rate or, if applicable, the Maximum Adjustment at a time when
market interest rates are below such level, the yield on the related
Certificates could be higher than that which would otherwise be the case. In
that event, the Mortgagor may be more likely to prepay the Mortgage Loan in full
and obtain refinancing at a lower rate. In addition, to the extent that a
Payment Cap on a Negatively Amortizing ARM restricts an increase in the related
Mortgagor's Monthly Payment or because the adjustable Mortgage Interest Rate
changes more frequently than the adjustments in a Monthly Payment, Deferred
Interest could result and impact the yield on the related Certificates.
DISTRIBUTION SHORTFALLS
If on any Distribution Date the aggregate amount of payments received from
Mortgagors on the related Mortgage Loans, any Advances, funds otherwise payable
to the Subordinate Certificateholders and monies available in the Reserve Fund,
if any, do not provide sufficient funds to make full distributions to the Senior
Certificateholders, unless otherwise specified in the related Prospectus
Supplement, the amount of the shortfall together with interest at the related
applicable Pass-Through Rate or Rates will be added to the amount the Senior
Certificateholders are entitled to receive on the next Distribution Date. The
allocation of any such shortfall and recoveries thereof between the Classes of
Senior Certificates if the Senior Certificates are comprised of more than one
class, and the effect of any such shortfall on yield will be discussed in the
Prospectus Supplement relating to such Certificates.
29
<PAGE>
CLASSES OF CERTIFICATES
The Certificates of a Series may be divided into two or more classes, in
which each class will evidence interests in specified allocations of the
principal payments only, or of the interest payments only, or both principal and
interest payments in respect of the Mortgage Assets in the related Trust Fund.
In the event Certificates are so subdivided, the yield of any class evidencing
interest payments only will be adversely impacted by prepayments and partial
prepayments. If appropriate, the Prospectus Supplement for such Series will
offer examples of cash flows on the Certificates, based on specified Mortgage
Interest Rates.
MATURITY CONSIDERATIONS
GENERAL
The weighted average life of the Certificates will be dependent in large
part on the principal prepayment experience on the Mortgage Assets comprising a
Pool. Although a number of factors may affect the prepayment experience of a
particular Pool, there can be no assurance that any Pool will conform to the
Depositor's past experience or any published prepayment forecast.
The following discussion of certain maturity considerations is intended to
be general in nature and reference is made to the discussion in the related
Prospectus Supplement regarding prepayment and maturity considerations and other
risks.
MATURITY
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans will have original terms to maturity of not more than 40 years.
PREPAYMENT CONSIDERATIONS
A substantial portion of the Mortgage Loans will be secured by the
principal residence of the related Mortgagors. Each Mortgage Loan may contain
prohibitions on prepayment or require payment of a Prepayment Premium, in each
case as described in the related Prospectus Supplement. The prepayment
experience of the Mortgage Loans, and of the mortgage loans underlying the
Mortgage Certificates, comprising a Pool will affect the weighted average life
of the related Series of Certificates. Based on public information with respect
to the mortgage industry, a significant number of the Mortgage Loans, and of the
mortgage loans underlying the Mortgage Certificates, could be paid in full prior
to maturity.
The payment behavior of the Mortgage Loans and of the mortgage loans
underlying the Mortgage Certificates may be influenced by a variety of
political, economic, tax, geographic, demographic, social and other factors.
These factors may include the age, payment terms and geographic distribution of
such loans; characteristics of the Mortgagors; amount of the Mortgagors' equity;
the availability of mortgage financing in general; changes in local industry and
population as they affect population migration; local housing availability and
apartment vacancy rates; and the use of junior liens or other individualized
financing arrangements. In a fluctuating interest rate environment, payment
behavior may be influenced by the difference between the interest rates of the
Mortgage Loans and of the mortgage loans underlying the Mortgage Certificates
and the prevailing mortgage rates for both fixed and adjustable rate mortgages;
the availability of fixed-rate mortgages with interest rates that are
competitive with those of the Mortgage Loans and of the mortgage loans
underlying the Mortgage Certificates and the availability of adjustable rate
mortgages with interest rates determined by indices which are different from the
applicable Index; and the extent to which the Mortgage Loans and the mortgage
loans underlying the Mortgage Certificates are assumed or refinanced or the
Mortgaged Properties are sold or conveyed. The relative contribution of these
factors may vary over time.
In the event the Depositor substitutes a Mortgage Loan for another Mortgage
Loan (upon the satisfaction of the conditions set forth in the Agreement) and
the principal balance of such substituted Mortgage Loan is less than the
principal balance of the Mortgage Loan replaced, the amount of such difference
shall be required to be paid by the Depositor to the Trust Fund and such amount
will be passed through to the Certificateholders as a prepayment. See
'Description of the Certificates--Assignment of Mortgage Loans.'
30
<PAGE>
Assumptions of the mortgage loans will reduce the level of principal
prepayments in the related Pool that would otherwise occur if such mortgage
loans had been accelerated. To the extent it has knowledge of any conveyance or
prospective conveyance by any Mortgagor of the related Mortgaged Property, the
Master Servicer will retain the right to accelerate the maturity of such
Mortgage Loan under any applicable 'due-on-sale' clause if credit or other
factors warrant such enforcement. However, as discussed above, the Mortgage
Loans provide for assumption by qualifying buyers, and the Master Servicer may
in certain cases encourage the assumption of Mortgage Loans by persons meeting
relevant underwriting standards and in no event will it exercise any such right
of acceleration if prohibited by law. If the Master Servicer determines not to
enforce such a 'due-on-sale' clause, it will enter into an assumption and
modification agreement with the person to whom such property has been conveyed
or is proposed to be conveyed, pursuant to which such person becomes liable
under the Mortgage Loan. Any fees collected by the Master Servicer in connection
with the execution of an assumption agreement may be retained by the Master
Servicer or the applicable Servicer as additional servicing compensation. See
'Description of the Certificates--Collection and Other Servicing Procedures'
herein.
The rate of prepayments with respect to conventional one-to-four-unit
residential first mortgage loans, including ARMs and fixed-rate loans, has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates at the time of origination,
mortgage loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above those at the time such mortgage loans were
originated because the availability of fixed-rate loans at competitive interest
rates may encourage borrowers to refinance their ARMs or above market fixed-rate
loans to 'lock-in' low fixed interest rates. Conversely, if prevailing interest
rates rise appreciably above the interest rates at the time of origination,
mortgage loans are likely to experience a lower prepayment rate than if
prevailing rates remain at or below those at the time such mortgage loans were
originated. However, there can be no assurance that any Pool will conform to
past experience or any published prepayment forecast.
The Maximum and Minimum Rates, Maximum Adjustments, Gross Margins, Payment
Caps and other features of the ARM programs of mortgage lenders during recent
years have significantly varied in response to market conditions such as
interest rates, consumer demand and regulatory restrictions. The lack of
uniformity of the terms and provisions of such ARM programs have made it
impractical to compile meaningful comparative data on prepayment rates of ARMs
and accordingly, there can be no certainty as to the rate of prepayments on ARMs
in either stable or changing interest rate environments. The ARMs comprising a
Pool or underlying the Mortgage Certificates comprising a Pool may experience a
rate of principal prepayments which is different from the principal prepayment
rate for ARMs included in any other Pool for other adjustable rate mortgages
having different or similar characteristics and for fixed-rate mortgages. In
addition, there can be no assurance that any Pool will conform to past
prepayment experience or any published prepayment forecast.
As described under 'The Pools--The Mortgage Loans--Description of ARMs,' if
interest rates rise without a simultaneous increase in the related Monthly
Payments, Deferred Interest and negative amortization may result in the case of
Negatively Amortizing ARMs. However, borrowers may pay amounts in addition to
their Monthly Payments in order to avoid such negative amortization and increase
tax deductible interest payments. To the extent that any of the Mortgage Loans
or any mortgage loans underlying any Mortgage Certificate negatively amortize
over their respective terms, future interest accruals are computed on the higher
outstanding Principal Balance and a smaller portion of the Monthly Payment is
applied to principal than is necessary to amortize the unpaid principal over its
remaining term. Accordingly, the weighted average life of such mortgage loans
will be increased beyond that which would otherwise be the case. During a period
of declining interest rates, the portion of each Monthly Payment in excess of
scheduled interest and principal will be applied to reduce the outstanding
Principal Balance on the related Negatively Amortizing ARM, thereby resulting in
accelerated amortization of such mortgage loan. Any such increase in
amortization of the Principal Balances of any Negatively Amortizing ARMs
comprising a Pool or underlying Mortgage Certificate comprising a Pool will
shorten the weighted average life of such Negatively Amortizing ARMs over that
which would be the case in the absence of such accelerated amortization. The
application of partial prepayments to reduce the principal amount of a
Negatively Amortizing ARM will tend to reduce the weighted average life of the
mortgage loan and will adversely affect the yield to (i) holders of Certificates
which purchased their Certificates at a premium, if any, (ii) holders of classes
with lower proportionate shares of the principal amount in the underlying
Mortgage Assets, if any, and (iii) holders of IO Certificates.
31
<PAGE>
The pooling of Negatively Amortizing ARMs having Monthly Payment adjustment
dates in different months, together with different Initial Mortgage Rates,
Maximum Rates, Minimum Rates and stated maturity dates, could result in some
Negatively Amortizing ARMs experiencing negative amortization while the
amortization of other Negatively Amortizing ARMs is accelerated. The weighted
average life of Certificates of a Series will reflect a composite of the
repayment and prepayment characteristics of the Mortgage Assets in the related
Pool.
The number of foreclosures and the principal amount of the Mortgage Loans
and mortgage loans underlying Mortgage Certificates foreclosed in relation to
such mortgage loans which are repaid in accordance with their terms will affect
the weighted average life of the Mortgage Assets in the Pool and that of the
related Series of Certificates. Servicing decisions made with respect to the
Mortgage Loans and mortgage loans underlying Mortgage Certificates, including
the use of payment plans prior to demand for acceleration and the restructuring
of mortgage loans in bankruptcy proceedings, as well as the Master Servicer's
servicing policy generally not to accept payment from the Mortgagor of less than
the total of the scheduled monthly payments due on the Mortgage Loans, may also
have an impact upon the payment behavior of particular Pools. See 'Description
of the Certificates--Collection and Other Servicing Procedures.' In particular,
the return to holders of Certificates which purchased their Certificates at a
premium, if any, the return on classes with lower proportionate shares of the
principal amount of the interest in the underlying mortgage loans, if any, and
the return on interest only classes, if any, may be adversely affected by
servicing policies and decisions resulting in foreclosures.
As may be described in the Prospectus Supplement relating to any Series,
the related Agreement may provide that all or a portion of the principal
collected on or with respect to the related Mortgage Loans may be applied by the
related Trustee to the acquisition of additional Mortgage Loans during a
specified period (rather than used to fund payments of principal to
Certificateholders during such period) with the result that the related
Certificates possess an interest-only period, also commonly referred to as a
revolving period, which will be followed by an amortization period. Any such
interest-only or revolving period may, upon the occurrence of certain events to
be described in the related Prospectus Supplement, terminate prior to the end of
the specified period and result in the earlier than expected amortization of the
related Certificates.
The Prospectus Supplement for a Series of Sequential Pay Certificates may
contain a table setting forth percentages of the initial Certificate Balance of
each class expected to be outstanding after each of the dates shown in such
table. Any such table will be based upon a number of assumptions stated in such
Prospectus Supplement, including assumptions that prepayments on the mortgage
loans underlying the related Mortgage Certificates or on the Mortgage Loans are
made at rates corresponding to various percentages of the prepayment model
specified in the related Prospectus Supplement. It is unlikely, however, that
the prepayment of the mortgage loans underlying the Mortgage Certificates, or of
the Mortgage Loans, underlying any Series will conform to any of the percentages
of the prepayment model described in the table set forth in such Prospectus
Supplement.
See 'Description of the Certificates--Termination' herein and 'Description
of the Certificates--Optional Termination' in the Prospectus Supplement for a
description of the Depositor's or Master Servicer's option to repurchase the
Mortgage Assets comprising part of a Trust Fund when the aggregate outstanding
Principal Balance of such Mortgage Assets is less than a specified percentage of
the aggregate outstanding Principal Balance of such Mortgage Assets as of the
related Cut-off Date. The Depositor or a Mortgage Asset Seller may also be
required to repurchase Mortgage Assets from any Pool because of breaches in its
representations and warranties to the Trustee. Any such repurchases will shorten
the weighted average lives of the Certificates.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate Agreement
(the 'Agreement') for such Series between the Depositor, the Master Servicer and
the Trustee. The Agreement for each Series of Certificates will contain similar
terms and conditions, except for provisions with respect to the Pass-Through
Rate or Rates for each Class of such Series, the Delivery Date for such Series,
the specific Mortgage Loans relating to such Series, whether such Series
includes Senior Certificates and Subordinate Certificates and/or whether such
Series is enhanced by insurance or other forms of credit enhancement, whether
the Trust Fund relating to a Series of Certificates will elect to be treated as
a REMIC, the order and amount of distributions of principal or interest or both
on the various Classes of Certificates included in such Series, and any other
variations described in the
32
<PAGE>
Prospectus Supplement for such Series. If so specified in the related Prospectus
Supplement, the Mortgage Assets may be divided into Asset Groups and the
Certificates of separate Classes will evidence ownership interests of a
corresponding Asset Group. The following summaries of certain provisions of each
Agreement do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, the provisions of the Agreement relating to each
Pool and the related Prospectus Supplement. Reference is made to the form of
Agreement filed as an exhibit to the Registration Statement of which this
Prospectus forms a part for a complete statement of the particular provisions
and terms used in the Agreement and referred to herein.
GENERAL
The Certificates of each Series will be issued in fully registered
certificated or book-entry form and will represent ownership interests in the
Trust Fund created pursuant to the Agreement for such Series. Except as
otherwise specified in the related Prospectus Supplement, the Trust Fund for a
Series of Certificates will consist of: (i) the Mortgage Loans as from time to
time are subject to the Agreement for such Series; (ii) Mortgage Certificates;
(iii) such assets as from time to time are required to be deposited in one or
more trust accounts established and maintained pursuant to such Agreement; (iv)
any property which initially secured a Mortgage Loan and which is acquired by
foreclosure or deed in lieu of foreclosure; and (iv) the interests of the
Holders of such Certificates in any insurance policies or other forms of credit
enhancement required to be maintained pursuant to such Agreement. See 'Credit
Enhancements' herein. To the extent set forth in the related Prospectus
Supplement, the beneficial interests in the Mortgage Loans relating to a Series
of Certificates may be in the form of participation interests therein which will
represent REMIC 'regular interests' in a Trust Fund which contains the Mortgage
Loans relating to such Series.
The Certificates of each Series in certificated form may be transferred or
exchanged at the Corporate Trust Office of the Trustee or other offices
specified in the related Prospectus Supplement without the payment of any
service charge, other than any tax or other governmental charge payable in
connection therewith. In the event a Series of Certificates is issued, in whole
or in part, in book-entry form through the facilities of DTC or a similar
institution (the 'Repository') transfers or exchanges may be similarly effected
through a participating member of the Repository, as described in the related
Prospectus Supplement. Prior to issuance there has been no market for any Series
of Certificates, and there can be no assurance that one will develop or if one
does develop that it will provide the Holders of Certificates of such Series
with liquidity or that it will remain for the life of the Certificates of such
Series.
Each Certificate of a Series will evidence the specified interest of the
Holder thereof in payments of principal or interest or both in respect of the
Pool comprising part of the Trust Fund for such Series of Certificates. Each
Class may bear a different Pass-Through Rate, based upon the specified interest
of such Class in payments of principal and interest. Certain Series or Classes
of Certificates, or certain of the Mortgage Loans or Mortgage Certificates
relating to a Series, may be enhanced by mortgage or hazard insurance or other
forms of credit enhancement, in each case as described in the related Prospectus
Supplement for such Series. The specific characteristics and percentage
interests of each Class of Certificates of a Series and the minimum or specified
denominations of such Certificates will be set forth in the Prospectus
Supplement for such Series. Any statements made herein relating to the Classes
of Certificates which are not offered for sale hereby are solely for the
information of the Holders of Certificates being offered hereby.
A Series of Certificates may contain one or more Classes of Senior
Certificates which are senior in right of distribution to one or more Classes of
Subordinated Certificates (one or more of which may be senior in right of
distribution to one or more other Classes of Subordinated Certificates) and may
also contain one or more Classes of: Certificates upon which interest will
accrue but will be added to the Certificate Balance, rather than distributed,
until the time specified in the related Prospectus Supplement and thereafter
will be distributed as so specified ('Compounding Certificates'); Certificates
entitled to principal distributions (with disproportionate, nominal or no
interest distributions) or to interest distributions (with nominal or no
principal distributions) ('Stripped Certificates'); Certificates entitled to
minimum distributions of principal in accordance with a specified schedule based
on the assumed rate of prepayment on the Mortgage Loans ('Prepayment
Certificates'); Certificates with principal distribution on the classes of such
Series made in the sequence specified in the related Prospectus Supplement
('Sequential Pay Certificates'); Certificates entitled to distributions of
principal in accordance with a specified schedule that is intended to slow the
amortization rate of
33
<PAGE>
such Certificates relative to the related Mortgage Loans ('Non-Accelerated
Certificates'); other types of Certificates; or a combination thereof, all as
set forth in the related Prospectus Supplement. The relative interests of the
Senior Certificates and the Subordinated Certificates of a Series of certain
certificates ('Shifting Interest Certificates') in the Pool will be subject to
adjustment from time to time if funds available for distribution on Senior
Certificates of such Series are insufficient to cover the amounts of principal
otherwise payable to the holders of such Senior Certificates on a Distribution
Date as specified in the related Prospectus Supplement.
As used herein, the term 'Fractional Undivided Interest' shall mean the
percentage of the principal portion of a Trust Fund evidenced by a Certificate
and the term 'Percentage Interest' shall mean the percentage of the aggregate
distributions allocable to a Class of Certificates evidenced by a Certificate of
such Class. The term 'Principal Balance' means the principal balance of a
Mortgage Loan remaining to be paid at the close of business on the Cut-off Date
(after deduction of all principal payments due on or before the Cut-off Date
whether or not paid) and reduced by all amounts distributed to Certificate
holders and allocable to principal of such Mortgage Loan and, in the case of
Negatively Amortizing ARMs, increased by Deferred Interest added to principal of
such ARMs. The term 'Residual Holder' shall mean a Certificateholder entitled to
receive the 'residual interest' in the REMIC as defined in Section 860G(a)(2) of
the Code. The terms defined in this paragraph may be assigned different meanings
in the Prospectus Supplement relating to a particular Series of Certificates.
Except as otherwise specified in the related Prospectus Supplement for a
Series of Certificates, the Mortgage Loans will have Installment Due Dates on
the first day of the month ('First of the Month Mortgage Loans'). Except as
otherwise specified in the related Prospectus Supplement, distributions of
principal and interest received in respect of the Mortgage Loans relating to
such Series of Certificates will be made by the Trustee or other paying agent
(the 'Paying Agent') on the 25th day of each month or if such 25th day is not a
Business Day (as defined in the related Agreement) on the next succeeding
Business Day (each, a 'Distribution Date') and will be paid to the persons in
whose names such Certificates are registered at the close of business on the
last Business Day of the prior month (or in the event the last day of the month
is not a Business Day, on the Business Day immediately preceding such last day)
(the 'Record Date'). Unless otherwise specified in the related Prospectus
Supplement, such distributions will begin with the month succeeding the month in
which the Cut-off Date occurs. The aggregate principal balances of the
Certificates on the Cut-off Date will be the sum of the aggregate principal
balances of the Mortgage Loans and the Mortgage Certificates as of the first day
of the month in which the Cut-off Date occurs, after deducting payments of
principal and interest due on or before such date. In the event a Series of
Certificates represents interests in a Pool consisting of Mortgage Loans other
than First of the Month Mortgage Loans, the related Prospectus Supplement will
more fully describe any resulting effect on the holders of Certificates of such
Series.
In addition, the related Prospectus Supplement will specify whether the
related Agreement will provide that all or a portion of principal collected on
the Mortgage Loans may be retained by the Trustee (and held in certain temporary
investments, including Mortgage Loans) for a specified period prior to being
used to distribute payments of principal to certain Certificateholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related
Certificates relative to the amortization rate of the related Mortgage Loans, or
to attempt to match the amortization rate of the related Certificates to an
amortization schedule established at the time such Certificates are issued. Any
such feature applicable to any Certificates may terminate, resulting in the
current funding of principal payments to the related Certificateholders and an
acceleration of the amortization of such Certificates upon the occurrence of
certain events as set forth in the related Prospectus Supplement.
Such distributions with respect to certificated Certificates will be made
by check mailed to the address of each Holder as it appears on the Certificate
Register for such Series or, if provided by the Agreement for such Series, in
the case of any Holder of a Certificate of such Series with an initial
Certificate Balance or Notional Amount equal to or in excess of the amount
specified in the Agreement and described in the related Prospectus Supplement
and who has so notified the Trustee or any applicable Paying Agent, by wire
transfer in immediately available funds to the account of such Holder at a bank
or other depository institution having appropriate wire transfer facilities;
except that the final distribution in retirement of a certificated Certificate
will be made only upon presentation and surrender of such Certificate at the
office or agency of the Trustee specified in the final distribution notice to
such Certificateholder. In the event a Series of Certificates is issued, in
whole or in part, in
34
<PAGE>
book-entry form, distributions on such Certificates, including the final
distribution in retirement of such Certificates, will be made through the
facilities of the Repository in accordance with its usual procedures in the
manner described in the Prospectus Supplement for such Series.
ASSIGNMENT OF MORTGAGE LOANS
General
At the time of issuance of each Series of Certificates, the Depositor will
cause the Mortgage Loans, including loans underlying Mortgage Certificates,
comprising the Pool relating to such Series to be assigned to the Trustee for
such Series, together with all principal and interest due on or with respect to
such Mortgage Loans subsequent to the Cut-off Date. The Trustee will, in
exchange for the Trust Fund for such Series of Certificates and concurrently
with such assignment, execute and deliver the Certificates to a certificate
registrar appointed pursuant to the Agreement for such Series (the 'Certificate
Registrar') for authentication and delivery to the Depositor or its designee.
Each Mortgage Loan relating to such Series will be identified in a schedule
appearing as an exhibit to the Agreement for such Series which will include
information about each such Mortgage Loan including, among other things, its
Principal Balance as of the close of business on the Cut-off Date, its current
Mortgage Interest Rate and Mortgage Pass-Through Rate, its current scheduled
monthly payment of principal and interest, its stated maturity, its
Administration Fee, its Loan-to-Value Ratio, and, if such Mortgage Loan is an
ARM, its applicable Index, its Gross Margin, its lifetime Minimum Rate (if any),
its lifetime Maximum Rate, its periodic Maximum Adjustment, the frequency of its
interest rate adjustment and its First Monthly Payment Adjustment Date.
The Trustee for a Series of Certificates will be authorized to appoint one
or more custodians, which may include affiliates of the Depositor or the Trustee
(together, the 'Custodians'), under a custodial agreement to maintain possession
of and review the documents with respect to the Mortgage Loans relating to such
Series, as the agent of such Trustee. Any such custodial agreement will be on
such terms as the Depositor, the Trustee and each Custodian shall agree.
In addition, the Depositor will, as to each Mortgage Loan, deliver to the
Trustee the Mortgage Note endorsed without recourse in blank or to the order of
the Trustee, the original Mortgage with evidence of recording indicated thereon,
an Officer's Certificate to the effect that a title insurance policy was issued
and remains in full force and effect, and an assignment of the Mortgage in
recordable form unless otherwise described in the related Prospectus Supplement.
The Agreement will generally require that the assignment of each Mortgage be
properly recorded and delivered to the Trustee within one year following the
issuance of the Certificates; provided that assignments of Mortgages need not be
recorded in any state for which the Depositor delivers to the Trustee an opinion
of counsel to the effect that recordation of such assignments is not necessary
to secure or perfect the interest in such Mortgaged Properties in the name of
the Trustee. (Section 2.1. of the Agreement).
Unless otherwise specified in the related Prospectus Supplement, the
Trustee will review and hold such documents in trust for the benefit of the
Certificateholders. If any such document is found by the Trustee (within 45 days
or within a longer specified period with respect to assignments which must be
recorded) to be defective in any material respect and the Depositor does not
cure such defect within 60 days after notice by the Trustee given to the
Depositor within the relevant period, the Depositor will, after the Trustee's
notice to the Depositor of the defect, either (i) within the three month period
commencing on the closing date of the sale of the related Series of Certificates
repurchase the related Mortgage Loan at a price, unless otherwise specified in
the related Prospectus Supplement, equal to the principal balance of such
Mortgage Loan, plus accrued interest on such principal balance at the Mortgage
Interest Rate to the next scheduled Installment Due Date of such Mortgage Loan,
or (ii) within the three month period commencing on the closing date of the sale
of the related Series of Certificates (or within the two year period commencing
on such closing date if the related Mortgage Loan is a 'defective obligation'
within the meaning of the Code) unless otherwise provided in the related
Prospectus Supplement, substitute a different mortgage loan upon satisfaction of
the conditions set forth in the Agreement. Except as otherwise specified in the
related Prospectus Supplement, this repurchase or substitution obligation
constitutes the sole remedy available to the Certificateholders or the Trustee
for a material defect in a constituent document. (Section 2.2.) The related
Prospectus Supplement will specify any restrictions with respect to repurchases,
substitutions and any alternative arrangements.
35
<PAGE>
Because assignments by the Depositor to the Trustee of the Mortgage Loans
secured by Mortgaged Properties located in certain states may not be recorded,
it might be possible for the Depositor to transfer such Mortgage Loans to bona
fide purchasers for value without notice, notwithstanding the Trustee's rights.
However, in most instances the Depositor would not be able to deliver the
original documents evidencing the Mortgage Notes or the mortgages because under
the terms of the Agreement and any Custodial Agreement, such documents are to be
retained in the possession of the Trustee or the specified Custodian, except
when released to the Depositor in connection with its servicing activities.
Moreover, under the law of California and certain other states, a subsequent
transferee who failed to obtain delivery of the original evidence of
indebtedness would not, in the absence of special facts, be able to defeat the
Trustee's interest in a Mortgage Loan so long as such evidence of indebtedness
remained in the possession of the Trustee.
Pursuant to the Agreement, the Master Servicer will service and administer
the Mortgage Loans assigned to the Trustee as more fully set forth below.
REPRESENTATIONS AND WARRANTIES
Unless otherwise specified in the related Prospectus Supplement, in the
Agreement, the Depositor will represent and warrant to the Trustee (or will
assign to the Trustee representations and warranties of the Mortgage Asset
Seller) with respect to the Mortgage Loans comprising the Mortgage Assets in a
Trust Fund, upon delivery of the Mortgage Loans to the Trustee hereunder, among
other things: (i) that the information set forth in the schedule of Mortgage
Loans appearing as an exhibit to the Agreement is correct in all material
respects at the date or dates respecting which such information is furnished as
specified therein; (ii) that as of the date of the transfer of the Mortgage
Loans to the Trustee, the Depositor is the sole owner and holder of each
Mortgage Loan free and clear of all liens, pledges, charges or security
interests of any nature and has full right and authority, subject to no interest
or participation of, or agreement with, any other party, to sell and assign the
same; (iii) that as of the date of initial issuance of the Certificates, no
payment of principal of or interest on or in respect of any Mortgage Loan is
more than 89 days past due; (iv) that to the best of the Depositor's knowledge,
as of the date of the transfer of the Mortgage Loans to the Trustee there is no
valid offset, defense or counterclaim to any Mortgage Note or Mortgage; (v) that
as of the date of the initial issuance of the Certificates, there is, to the
best of the Depositor's knowledge, no proceeding pending or threatened for the
total or partial condemnation of any of the Mortgaged Property and the Mortgaged
Property is free of material damage and in good repair and neither the Mortgaged
Property nor any improvement located on or being part of the Mortgaged Property
is in violation of any applicable zoning law or regulation; (vi) that each
Mortgage Loan complies in all material respects with applicable state or federal
laws, regulations and other requirements, pertaining to usury, equal credit
opportunity and disclosure laws and each Mortgage Loan was not usurious at the
time of origination; (vii) that to the best of the Depositor's knowledge, as of
the date of the initial issuance of the Certificates, all taxes, government
assessments and insurance premiums in respect to the Mortgaged Properties
previously due and owing have been paid; (viii) that each Mortgage Note and the
related Mortgage are genuine and each is the legal, valid and binding obligation
of the maker thereof, enforceable in accordance with its terms except as such
enforcement may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditor's rights generally and by
general equity principles (regardless of whether such enforcement is considered
in a proceeding in equity or at law); all parties to the Mortgage Note and the
Mortgage had legal capacity to execute the Mortgage Note and the Mortgage and
each Mortgage Note and Mortgage have been duly and properly executed by the
Mortgagor; (ix) that each Mortgage is a valid and enforceable first lien on the
property securing the related Mortgage Note, which may arise thereunder and that
each Mortgage Loan is covered by an ALTA mortgagee title insurance policy or
other form of policy or insurance generally acceptable to FNMA or FHLMC, issued
by, and is a valid and binding obligation of, a title insurer acceptable to FNMA
or FHLMC insuring the originator, its successors and assigns, as to the lien of
the Mortgage in the original principal amount of the Mortgage Loan subject only
to (a) the lien of current real property taxes and assessments not yet due and
payable, (b) covenants, conditions and restrictions, rights of way, easements
and other matters of public record as of the date of recording of such Mortgage
acceptable to mortgage lending institutions in the area in which the Mortgaged
Property is located or specifically referred to in the appraisal performed in
connection with the origination of the related Mortgage Loan and (c) such other
matters to which like properties are commonly subject which do not individually,
or in the aggregate, materially interfere with the benefits of the security
intended to be provided by the Mortgage; (x) that as of the initial issuance of
the Certificates, neither the
36
<PAGE>
Depositor nor any prior holder of any Mortgage has, except as the Mortgage File
may reflect, modified the Mortgage in any material respect; satisfied, cancelled
or subordinated such Mortgage in whole or in part; released such Mortgaged
Property in whole or in part from the lien of the Mortgage; or executed any
instrument of release, cancellation, modification or satisfaction; (xi) that
each Mortgaged Property consists of a fee simple estate, a leasehold estate, or
condominium form of ownership in real property, or a share interest in a
cooperative corporation in the case of a Co-op Loan; (xii) the condominium
projects that include the condominiums that are the subject of any Co-op Loan
are generally acceptable to FNMA and FHLMC; (xiii) no foreclosure action is
threatened or has been commenced (except for the filing of any notice of
default) with respect to any Mortgage Loan; and except for payment delinquencies
not in excess of 91 days, to the best of the Depositor's knowledge, there is no
default, breach, violation or event of acceleration existing under any Mortgage
or the related Mortgage Note and no event which, with the passage of time or
with notice and the expiration of any grace or cure period, would constitute a
default, breach, violation or event of acceleration; and the Depositor has not
waived any default, breach, violation or event of acceleration; (xiv) that no
Mortgage Loan had a Loan-to-Value Ratio at origination in excess of 100%; (xv)
the Mortgage Loans were not selected in a manner to adversely affect the
interests of the Certificateholders and the Depositor knows of no conditions
which reasonably would cause it to expect any Mortgage Loan to become delinquent
or otherwise lose value and (xvi) the ratio of the aggregate outstanding
principal balance of Mortgage Loans with any payment delinquency in excess of 30
days over the aggregate outstanding principal balance of the Mortgage Loans as
of the Cut-off Date does not equal or exceed 20%.
Unless otherwise specified in the related Prospectus Statement, within 90
days of the discovery by the Depositor or the applicable Mortgage Asset Seller
of a breach of any representation or warranty which materially and adversely
affects the interests of the Certificateholders in a Mortgage Loan, or the
Depositor's or such Mortgage Asset Seller's receipt of notice thereof from the
Trustee or a Custodian, and without regard to any limitation set forth in such
representation or warranty concerning the knowledge of the Depositor as to facts
stated therein, the Depositor or the applicable Mortgage Asset Seller will cure
the breach or either (i) repurchase the Mortgage Loan at a price equal to the
principal balance of such Mortgage Loan plus accrued interest on such principal
balance at the Mortgage Interest Rate to the next scheduled Installment Due Date
of such Mortgage Loan or (ii) within the three month period commencing on the
closing date of the sale of the related Series of Certificates (or within the
two year period commencing on such closing date if the related Mortgage Loan is
a 'defective obligation' within the meaning of the Code) unless otherwise
provided in the related Prospectus Supplement, substitute a different Mortgage
Loan upon satisfaction of the conditions set forth in the Agreement. Except as
otherwise specified in the related Prospectus Supplement, this repurchase and
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for any such breach. (Section 2.3.) The
related Prospectus Supplement will specify any restrictions with respect to
repurchases, substitution and any alternative arrangements.
FORWARD COMMITMENTS: PRE-FUNDING ACCOUNT
If specified in the Prospectus Supplement relating to any Series, the
Trustee or the Master Servicer may, on behalf of the related Trust Fund, enter
into an agreement (each, a 'Forward Purchase Agreement') with the Depositor
whereby the Depositor will agree to transfer additional Mortgage Loans to such
Trust Fund following the date on which such Trust Fund is established and the
related Certificates are issued. The Trust Fund may enter into Forward Purchase
Agreements to permit the acquisition of additional Mortgage Loans that could not
be delivered by the Depositor or have not formally completed the origination
process, in each case prior to the date on which the Certificates are delivered
to the Certificateholders (the 'Closing Date'). Any Forward Purchase Agreement
will require that any Mortgage Loans so transferred to a Trust Fund conform to
the requirements specified in such Forward Purchase Agreement. If a Forward
Purchase Agreement is to be utilized, and unless otherwise specified in the
related Prospectus Supplement, the Trustee will be required to deposit in a
segregated account (each, a 'Pre-Funding Account') all or a portion of the
proceeds received by the Trustee in connection with the sale of one or more
classes of Certificates of the related Series; the additional Mortgage Loans
will be transferred to the related Trust Fund in exchange for money released to
the Depositor from the related Pre-Funding Account. Each Forward Purchase
Agreement will set a specified period during which any such transfers must
occur. The Forward Purchase Agreement or the related Agreement will require
that, if all moneys originally deposited to such Pre-Funding Account are not so
used by the end of such specified period, then any remaining
37
<PAGE>
moneys will be applied as a mandatory prepayment of the related class or classes
of Certificates as specified in the related Prospectus Supplement. The
reinvestment risk associated with any such prepayment will be borne by the
holders of the Certificates issued by the applicable Trust Fund. Unless
otherwise specified in the related Prospectus Supplement, the specified period
for the acquisition by a Trust Fund of additional Mortgage Loans will not exceed
three months from the date such Trust Fund is established. The amount that may
be initially deposited into a Pre-Funding Account may be up to 25% of the
principal amount of the Certificates issued by the related Trust Fund. The
amounts on deposit in any Pre-Funding Account may be invested only in certain
permitted investments deemed acceptable by the Rating Agencies as consistent
with the applicable ratings on the Certificates. The underwriting standards for
additional Mortgage Loans that will be acquired with amounts from the
Pre-Funding Account will be in accordance with the standards set forth under
'The Pools--Underwriting Policies' herein. In addition, following the transfer
of additional Mortgage Loans to the applicable Trust Fund, the characteristics
of the entire pool of Mortgage Loans included in such Trust Fund may vary
significantly from those of the initial Mortgage Loans transferred to such Trust
Fund. Accordingly, it is possible that the credit quality of the Pool, as a
whole, may differ due to the transfer of additional Mortgage Loans to the Trust
Fund but in no event will any such Mortgage Loans be transferred to the Trust
Fund if such transfer would cause a downgrade of the ratings of the related
Certificates. The transfer of additional Mortgage Loans to the Trust Fund may
also result in an accelerated rate of payment to the applicable
Certificateholders caused by an increased level of defaults on such Mortgage
Loans. Certificateholders will bear all reinvestment risk associated with a
higher than expected rate of payment of the Certificates. In addition, if such
Certificates were purchased at a premium, a higher than expected rate of payment
would result in a reduction in the yield to maturity of any class of
Certificates to which such payments are distributed.
PAYMENTS ON MORTGAGE LOANS
The Certificate Account which the Master Servicer will establish and
maintain in trust will be a separate account which must be maintained with a
depository institution (which may be an affiliate of the Master Servicer)
acceptable to the Rating Agency rating the Certificates of a Series. The Master
Servicer will credit to the Certificate Account on a daily basis the following
payments and collections received or made by it subsequent to the Cut-off Date
(including scheduled payments of principal and interest due after the Cut-off
Date but received by the Master Servicer on or before the Cut-off Date):
(i) all Mortgagor payments on account of principal, including
principal prepayments by Mortgagors, on the Mortgage Loans;
(ii) all Mortgagor payments on account of interest on the Mortgage
Loans, which may be net of that portion thereof which the Master Servicer
is entitled to retain as Administration Fees pursuant to the Agreement (as
adjusted);
(iii) all proceeds from Liquidation Proceeds net of unpaid
Administration Fees;
(iv) all proceeds received by the Master Servicer under any title,
hazard or other insurance policy covering any Mortgage Loan or the related
Mortgaged Property, other than proceeds to be applied to the restoration or
repair of the property subject to the related Mortgage or released to the
Mortgagor in accordance with the Master Servicer's normal servicing
procedures;
(v) all amounts required to be transferred to the Certificate Account
from the Reserve Fund, if any, pursuant to the Agreement;
(vi) any Advances made as described under 'Description of the
Certificates--Advances and Limitations Thereon';
(vii) all Repurchase Proceeds of Mortgage Loans; and
(viii) all other amounts required to be deposited in the Certificate
Account pursuant to the Agreement;
provided, however, that with respect to any payment of interest received by the
Master Servicer relating to a Mortgage Loan (whether paid by the Mortgagor or
received as Liquidation Proceeds, insurance proceeds or otherwise, but not as a
result of any Deferred Interest) which is less than the full amount of interest
then due with respect to such Mortgage Loan, the Master Servicer shall retain
only its pro rata share of such interest payment. (Section 3.2.)
38
<PAGE>
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will provide that amounts deposited in the Certificate Account may be
invested in Eligible Investments, as defined below, maturing in general not
later than the Business Day preceding the next Distribution Date. If a REMIC
election (see 'Certain Federal Income Tax Consequences') is made with respect to
a Series of Certificates, then (i) earnings on such Eligible Investments shall
belong to the Depositor unless otherwise specified in the related Prospectus
Supplement and (ii) investments will be restricted in such a manner as to
constitute 'permitted investments' (as defined in Section 860G(a)(5) of the
Code) and dispositions thereof will not be made if the result thereof would be
to cause any part of the proceeds to be subject to the 100 Percent Tax on
Prohibited Transactions imposed by Section 860F(a)(1) of the Code or would be to
cause a loss of REMIC status. If a REMIC election is not made, all income and
gain realized on any such investment will be for the account of the Master
Servicer. The amount of any loss incurred in connection with any such investment
must be deposited in the Certificate Account by the Master Servicer out of its
own funds immediately as realized.
The Master Servicer is authorized to make withdrawals from the Certificate
Account for various purposes set forth in the Agreement.
Unless otherwise specified in the related Prospectus Supplement, 'Eligible
Investments' shall include any one or more of the following obligations or
securities: (a) direct obligations of, or guaranteed as to full and timely
payment of principal and interest by, the United States or any agency or
instrumentality thereof; (b) direct obligations of, or guaranteed as to timely
payment of principal and interest by, FHLMC, FNMA or the Federal Farm Credit
System, qualified by a Rating Agency as investment grade; (c) demand and time
deposits in or certificates of deposit of, or bankers' acceptances issued by, a
qualified bank or trust company, savings and loan association or savings bank;
(d) general obligations of or obligations guaranteed by any state of the United
States or the District of Columbia with an investment grade rating; (e)
investment grade commercial or finance company paper; (f) certain guaranteed
reinvestment agreements issued by any bank, insurance company or other
corporation rated in one of the two highest rating levels available to such
issuers by each Rating Agency at the time of such investment; and (g) such other
obligations as are acceptable as Eligible Investments to each Rating Agency as
provided in the related Agreement.
DISTRIBUTIONS ON THE CERTIFICATES
Unless otherwise specified in the Prospectus Supplement for a Series of
Certificates, on each applicable Distribution Date the Pool Distribution will be
distributed to Certificateholders, in most cases, through DTC and DTC
Participants as described in 'Registration of Certificates' below. The 'Pool
Distribution' will consist of all previously undistributed payments or other
receipts on account of principal and interest due after the Cut-off Date and
received before the 20th day (or if such 20th day is not a Business Day, the
Business Day immediately preceding such 20th day) of the month of distribution
(each, a 'Determination Date') except:
(i) amounts received on Mortgage Loans as late payments or other
recoveries of principal or interest (including Liquidation Proceeds and
insurance proceeds) which represent recoveries of unreimbursed Advances;
(ii) amounts representing reimbursement for Nonrecoverable Advances
and amounts representing reimbursement for certain losses and expenses
incurred by the Master Servicer and described in the Agreement;
(iii) that portion of each Mortgagor payment of interest on a
particular Mortgage Loan in excess of interest at the Mortgage Pass-Through
Rate (less Deferred Interest, if any) on the Principal Balance of such
Mortgage Loan outstanding during the period for which such payment was
received, as adjusted;
(iv) all amounts representing scheduled payments of principal and
interest due after the immediately preceding Installment Due Date;
(v) all Principal Prepayments and Repurchase Proceeds with respect to
Mortgage Loans received after the related Prepayment Period (as defined
below) and all related payments of interest representing interest for any
period of time after the immediately preceding Installment Due Date for
such Mortgage Loans;
(vi) where permitted by the Agreement, that portion of Liquidation
Proceeds which represents unpaid Administration Fees to which the Master
Servicer is entitled; and
39
<PAGE>
(vii) any other amount not included in the Pool Distribution in
accordance with the Agreement.
Unless otherwise provided in the applicable Prospectus Supplement, the term
'Prepayment Period' shall refer to the month preceding the month in which such
distribution occurs.
Distributions of interest on Certificates which received interest will be
made periodically at the intervals and at the Pass-Through Rate specified or
determined in the manner described in the related Prospectus Supplement.
Interest on the Certificates will be calculated on the basis of a 360-day year
consisting of twelve 30-day months unless otherwise specified in the related
Prospectus Supplement.
If funds in the Certificate Account (together with any amounts transferred
from any reserve fund or applicable credit enhancement) are insufficient to make
the full distribution to Certificateholders described above on any Distribution
Date, the funds available for distribution to the Certificateholders of each
Class will be distributed in accordance with their respective interests therein,
except that Subordinate Certificateholders, if any, will not, subject to the
limitations described in the related Prospectus Supplement, receive any amount
of distributions until Senior Certificateholders receive the amount of present
distributions due them and the amount of distributions owed them which were not
timely distributed thereon and to which they are entitled (in each case
calculated as described in the related Prospectus Supplement). If specified in
the related Prospectus Supplement, the difference between the amount which
Certificateholders would have received if there had been sufficient eligible
funds available for distribution and the amount actually distributed will be
included in the calculation of the amount which the Certificateholders are
entitled to receive on the next Distribution Date.
Distributions on the Certificates on each Distribution Date will generally
be allocated to each Certificate entitled thereto on the basis of the undivided
percentage interest (the 'Percentage Interest') evidenced by such Certificate in
the Trust Fund or on the basis of their outstanding principal amounts or
notional amounts (subject to any subordination of the rights of any classes of
Subordinate Certificates to receive current distributions as specified in the
related Prospectus Supplement). If the Mortgage Assets for a Series have
adjustable or variable interest or pass-through rates, then the Pass-Through
Rate of the Certificates of such Series may also vary, due to changes in such
rates and due to prepayments with respect to Mortgage Loans comprising or
underlying the related Mortgage Assets. If the Mortgage Assets for a Series have
fixed interest or pass-through rates, then the Pass-Through Rate on Certificates
of the related Series may be fixed, or may vary, to the extent prepayments cause
changes in the weighted average interest rate or pass-through rate of the
Mortgage Assets. If the Mortgage Assets have lifetime or periodic adjustment
caps on their respective pass-through rates, then the Pass-Through Rate on the
Certificates of the related Series may also reflect such caps.
Interest. Each Class of Certificates of a Series will accrue interest from
the date and at the fixed or adjustable Pass-Through Rate set forth (or
determined as set forth) in the related Prospectus Supplement, except for any
Class of PO Certificates, which will not accrue interest. The 'Accrual Period'
with respect to any Distribution Date shall be the period from (and including)
the first day of the month preceding the month in which such Distribution Date
falls (or, in the case of the first Distribution Date, from the Closing Date)
through the last day of such preceding month, or such other period as may be
specified in the related Prospectus Supplement. Accrued interest will be
distributed (to the extent of available funds and subject to negative
amortization, if any, on the underlying Mortgage Loans) at the times and in the
manner specified in such Prospectus Supplement. Distributions of interest on any
Class of Compounding Certificates will commence at the time specified in such
Prospectus Supplement; until then, interest on the Compounding Certificates will
be added to the Certificate Balance thereof and will thereafter accrue interest.
Unless otherwise specified in the related Prospectus Supplement, interest on the
Certificates of each Class will accrue at the applicable Pass-Through Rate from
the date specified in the related Prospectus Supplement (calculated on the basis
of a 360-day year consisting of twelve 30-day months) through the last day of
the Accrual Period for the Distribution Date on which the Certificate Balance of
the Certificates of such Class is fully amortized.
Principal. The 'Certificate Balance' of a Certificate of a Series at any
time is equal to the initial Certificate Balance of such Certificate (plus, in
the case of Compounding Certificates, interest added to the Certificate Balance
thereof) less all distributions of principal thereon through the preceding
Distribution Date and adjustments, if any, in respect of losses and represents
the amount in respect of principal which the holder thereof
40
<PAGE>
is then entitled to receive from the cash flow on the assets included in the
related Pool. The aggregate initial Certificate Balance of a Series and each
Class thereof will be the amount set forth as such on the cover of the related
Prospectus Supplement.
Each Class of Certificates of a Series (except for IO Certificates) will
(to the extent of available funds) receive distributions of principal in the
amounts, at the times and in the manner specified in the related Prospectus
Supplement until its initial aggregate Certificate Balance has been fully
amortized. The aggregate amount distributed as principal for a Series will
generally be equal to (or determined pursuant to a formula based on) the amount
of principal received on the related Pool during the period specified in the
Prospectus Supplement. Allocations of distributions of principal will be made to
the Certificates of each Class in the proportions, during the periods and in the
order specified in the related Prospectus Supplement. The Certificate Balance of
a Class or Classes of Certificates may increase in accordance with any negative
amortization experienced by Mortgage Assets in the related Pool. Distributions
will be made pro rata among the Certificates of each Class then entitled to
receive such distributions.
The 'Scheduled Amortization Date' for a Class of Certificates is the latest
date as of which the aggregate Certificate Balance of the Certificates of such
Class is expected to be fully amortized, either based on the assumptions that
all scheduled payments (with no prepayments) on the Mortgage Loans and/or
Mortgage Certificates in the related Pool are timely received and, if
applicable, that all such scheduled payments are reinvested on receipt at the
rate or rates specified in the related Prospectus Supplement at which amounts in
the Certificate Account are assumed to earn interest (the 'Assumed Reinvestment
Rate') or, if a minimum prepayment agreement is entered into with respect to
such Series that payments on the related Mortgage Loans and/or Mortgage
Certificates are received, in accordance with a minimum prepayment rate or
schedule as set forth in the related Supplement. (If an Assumed Reinvestment
Rate is specified for a Series of Certificates, reinvestment earnings on funds
in the Certificate Account will not belong to the Master Servicer as additional
servicing compensation. Such amounts will be part of the Pool and will be
available to make distributions on the related Certificates.)
Senior and Subordinated Certificates. A Series of Certificates may consist
of one or more Classes of Senior Certificates and one or more Classes of
Subordinated Certificates, one or more of which may be further subordinated to
one or more other classes of Subordinated Certificates. Any such subordination
may be limited to the Subordinated Amount specified in the related Supplement
or, in the case of Shifting Interest Certificates, to the proportionate interest
of the Subordinated Certificates in distributions and will be effected by a
subordination of the right to receive current distributions, to the extent and
under the circumstances set forth in the related Prospectus Supplement. In
addition, a Reserve Fund may be established, which may be funded in part by an
initial deposit therein and in part by the deposit therein of amounts otherwise
distributable to holders of Subordinated Certificates. The terms of any
subordination arrangement will be described in the Prospectus Supplement. See
'Credit Enhancements--Subordination.'
Compounding Certificates. Compounding Certificates of a Series will not be
entitled to distributions of principal or interest until the date specified in
the related Prospectus Supplement. On each Distribution Date prior to the first
Distribution Date on which interest is distributed on a Class of Compounding
Certificates, the amount of interest accrued during the prior Distribution
Period or Accrual Period will be added to the Certificate Balance of such Class
and will accrue interest at the applicable Pass-Through Rate from the time it is
added to the Certificate Balance or from such other date as may be specified in
the related Prospectus Supplement.
Stripped Certificates. Stripped Certificates may consist of PO
Certificates, IO Certificates or Certificates entitled to distributions of
principal on Mortgage Loans and/or Mortgage Certificates with disproportionate
or nominal interests distributions or of interest on Mortgage Loans and/or
Mortgage Certificates with nominal principal distributions.
41
<PAGE>
PO Certificates are entitled to receive distributions of principal on
Mortgage Loans and/or Mortgage Certificates but not to receive distributions of
interest thereon.
IO Certificates are entitled to receive distributions of interest on
Mortgage Loans and/or Mortgage Certificates, but not distributions of principal
thereon and will be denominated in Notional Balances. With respect to any IO
Certificate and any Distribution Date, the 'Notional Balance' is the amount
specified as such on such Certificate, reduced by distributions allocable to
principal on the corresponding Class or Classes of Certificates entitled to
distributions of principal, all as set forth in the related Prospectus
Supplement. The initial aggregate Notional Balance for a Class of IO
Certificates will be specified in the related Supplement. The Notional Balance
of each IO Certificate will be used to calculate the amount of interest to be
distributed on all IO Certificates of such Series and each holder's pro rata
share of the interest distributions on the Mortgage Loans and/or Mortgage
Certificates allocated to that Class and for the determination of certain other
rights of holders of such Class of IO Certificates and will not represent an
interest in, or entitle any such holder to any distribution with respect to, any
principal distributions on the Mortgage Loans and/or Mortgage Certificates. Each
such Certificate's pro rata share of the interest distributions on the Mortgage
Loans and/or Mortgage Certificates on each Distribution Date will be calculated
by multiplying the interest distributions on the Mortgage Loans and/or Mortgage
Certificates allocated to its Class by a fraction, the numerator of which is the
Notional Balance of such IO Certificate and the denominator of which is the
aggregate Notional Amount of the IO Certificates of its Class.
Sequential Pay Certificates. Distributions of principal will be made on
the classes of a Series of Sequential Pay Certificates or on certain Classes of
such Series in order of the latest date as of which the aggregate Certificate
Balance of the Certificates of such Class is expected to be fully amortized (the
'Scheduled Amortization Date') or in another order, such that no Class will
receive a principal distribution until classes having earlier Scheduled
Amortization Date or prior designations have been fully amortized.
Prepayment Certificates. Prepayment Certificates are entitled to minimum
distributions of principal based on the assumption that the Mortgage Loans or
mortgage loans underlying Mortgage Certificates in the related Pool prepay at a
rate specified in the related Prospectus Supplement. Such distributions of
principal will commence on the Payment Date specified in the related Prospectus
Supplement.
Residual Certificates. A Series of REMIC Certificates will include a Class
of Residual Certificates representing the right to receive, in addition to any
other distributions to which they are entitled in accordance with their terms,
distributions of all of the Surplus (if any) with respect to each Distribution
Date. The 'Surplus' for a Series of REMIC Certificates as of any Distribution
Date equals the amount, if any, by which the sum of distributions, payments and
other amounts received exceeds the sum of (i) the amount required to be
distributed to Certificateholders on such Distribution Date and (ii) certain
expenses, all as more specifically described in the related Prospectus
Supplement. In addition, after the aggregate Certificate Balance of all Classes
of Regular Certificates has been fully amortized, the holders of the Residual
Certificates will be the sole owners of the related Pool and will have sole
rights with respect to the Mortgage Loans and/or Mortgage Certificates and other
assets remaining in such Pool. Some or all of the Residual Certificates of a
Series may be offered by this Prospectus and the related Prospectus Supplement;
if so, the terms of such Residual Certificates will be described herein and
therein. Any qualifications on direct or indirect ownership of Residual
Certificates offered hereby and by the related Prospectus Supplement, as well as
restrictions on the transfer of such Residual Certificates, will be set forth in
the related Prospectus Supplement. If such Residual Certificates are not so
offered, the Depositor may (but need not) sell some or all of such Residual
Certificates on or after the date of original issuance of such Series in
transactions exempt from registration under the Securities Act and otherwise
under circumstances that will not adversely affect the REMIC status of the Pool.
If Residual Certificates offered hereby and by the related Prospectus Supplement
have a Certificate Balance or a Pass-Through Rate, references herein with
respect to distributions on Certificates and Regular Certificates and related
matters should be deemed to include Residual Certificates, as appropriate.
42
<PAGE>
Non-Accelerated Certificates. Non-Accelerated Certificates are entitled to
distributions of principal according to an amortization schedule established at
the time such Certificates are issued. The scheduled amortization rate of such
Certificates is intended to be slower than the amortization rate of the related
Mortgage Loans.
ADVANCES AND LIMITATIONS THEREON
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will make an Advance each month for distribution to the
Certificateholders equal to the sum of the amount of delinquent Monthly Payments
due on the applicable Installment Due Date immediately preceding each such
Distribution Date, adjusted to the applicable Mortgage Pass-Through Rate less an
amount that the Master Servicer determines would not be recoverable from
Liquidation Proceeds or otherwise. Additionally, if otherwise specified in the
related Prospectus Supplement, the Trustee, on behalf of the Master Servicer,
may make such Advances. In making Advances, the Master Servicer is endeavoring
to maintain a regular flow of scheduled interest and principal payments to the
Certificateholders, rather than to guarantee or insure against losses.
Accordingly, any funds of the Master Servicer so advanced are recoverable
without interest by it out of amounts which represent late recoveries of
principal and/or interest respecting which any such Advance was made, or out of
related Liquidation Proceeds. If related Liquidation Proceeds are insufficient,
unreimbursed Advances ('Nonrecoverable Advances') may be recovered out of any
funds in the Certificate Account. In addition, Advances may be made by
withdrawals from funds on deposit in the Certificate Account. The Master
Servicer will make Advances whenever it determines that funds will ultimately be
available to reimburse it. If the Master Servicer makes an Advance on any
Distribution Date, it will be included with the distribution to the
Certificateholders on such Distribution Date. In the event the Trustee purchases
any foreclosed property and such property becomes part of the Trust Fund, the
Master Servicer will continue to make Advances on such property as if the
Mortgage Loan were still outstanding in the manner described above. At the time
the Trustee sells such property, the Master Servicer shall be reimbursed for all
such Advances in an amount not to exceed the sale price. (Section 4.3.)
ADJUSTMENT TO MASTER SERVICING FEES IN CONNECTION WITH PREPAYMENT INTEREST
SHORTFALL
When a Mortgagor prepays the entire Mortgage Loan between Installment Due
Dates for such Mortgage Loan, the Mortgagor pays interest on the amount prepaid
only to the date of prepayment. In addition, a partial prepayment may be applied
by the Master Servicer to reduce the principal balance of the related Mortgage
Loan as of a date prior to the receipt of such payment. Unless otherwise
specified in the related Prospectus Supplement, in order that Certificateholders
will not be adversely affected by a Prepayment Interest Shortfall, the Master
Servicer may forego all or a portion of the Master Servicing Fees so that the
distributions made to such Certificateholders on the Distribution Date in the
following month will include an amount equal to up to a full month's interest
payment, at the applicable Mortgage Pass-Through Rate, that would otherwise have
been included in such distribution with respect to any such Mortgage Loan
prepaid in full or in part. Any such payments by the Master Servicer of a
Prepayment Interest Shortfall may be covered only from and to the extent of the
aggregate Master Servicing Fees attributable to payments being distributed on
the related Distribution Date. Any such prepayments together with the full
month's interest thereon at the applicable Mortgage Pass-Through Rate will be
paid to the Certificateholders on the Distribution Date in the month following
the month in which the last day of the related Prepayment Period occurred.
Except with respect to a First of the Month Mortgage Loan, in the event a
Mortgage Loan is prepaid in full in a given month on a date after the scheduled
due date of such Mortgage Loan in such month, the Master Servicer will retain as
an increase in the Master Servicing Fee the amount of the Mortgagor's payments
attributable to interest at the applicable Mortgage Pass-Through Rate paid on
the Mortgage Loan from the scheduled due date of such Mortgage Loan to the date
of prepayment. (Section 4.6.) See 'Prepayment and Yield Considerations' herein.
43
<PAGE>
EXAMPLE OF DISTRIBUTION
The following chart sets forth an example of the application of the
foregoing provisions to the first two months of the related Trust Fund's
existence, assuming the Certificates are issued in March 1998, relate to a Pool
consisting of Mortgage Loans and are paid on a monthly basis:
<TABLE>
<S> <C>
March 1 (A) Cut-off Date.
March 2-March 31 (B) The Master Servicer receives any Principal Prepayments and interest thereon
to date of prepayment.
March 31 (C) Record Date.
April 1-April 20 (D) The Master Servicer receives scheduled payments of principal and interest
due on April 1.
April 20 (E) Determination Date.
April 25 (F) Distribution Date.
</TABLE>
Succeeding monthly periods follow the pattern of (B) through (F).
- ------------------
(A) The initial unpaid principal balance of the Mortgage Loans in the Pool would
be the aggregate unpaid principal balances of the Mortgage Loans at the
close of business on March 1, after deducting principal payments due on or
before such dates. Those principal payments due on or before such dates, and
the related interest payments, would not be part of the Trust Fund and would
be turned over to the Depositor when received.
(B) Principal prepayments received during this period would be credited to the
Certificate Account for distribution to Certificateholders on the April 25
Distribution Date. When a Mortgage Loan is prepaid in full or liquidated,
interest on the amount prepaid or liquidated is collected only from the
last scheduled Installment Due Date through which interest has been paid to
the date of prepayment or liquidation. Unless otherwise specified in the
related Prospectus Supplement, to the extent funds are available from the
current Master Servicing Fees, and in order to minimize the resulting
Prepayment Interest Shortfall, the Master Servicer would make an additional
payment to Certificateholders with respect to any Mortgage Loan that
prepaid by March 31 equal to the amount of the Prepayment Interest
Shortfall for such Mortgage Loan necessary to assure that on the related
Distribution Date the Pool Distribution would include with respect to each
such Mortgage Loan an amount equal to one month's interest at the Mortgage
Pass-Through Rate for such Mortgage Loan.
(C) Distributions in the month of April will be made to Certificateholders of
record at the close of business on this date.
(D) Scheduled monthly payments on the Mortgage Loans due on April 1 will be
deposited in the Certificate Account as received by the Master Servicer.
(E) As of the close of business on April 20 the Master Servicer will determine
the amounts of Advances, if any, and the amounts of principal and interest
which will be passed through to the Certificateholders. The Master Servicer
will be obligated to distribute those scheduled payments due on April 1
which have been received on or before April 20, as well as all principal
prepayments received on Mortgage Loans between March 2 and March 31 (with
interest adjusted to the applicable Mortgage Pass-Through Rate). To the
extent funds are available from the Administration Fees from payments
received during the period described in (D) above to cover any shortfalls
of interest with respect to principal prepayments in full, unless otherwise
specified in the related Prospectus Supplement, they will be included in
the distribution.
(F) Unless otherwise so specified in the related Prospectus Supplement, the
Master Servicer will make distributions to Certificateholders on the 25th
day of each month, or if such 25th day is not a Business Day, on the
succeeding Business Day.
44
<PAGE>
REGISTRATION OF CERTIFICATES
Certificateholders may hold their Certificates through DTC (in the United
States) or CEDEL or Euroclear (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
The Certificates will initially be registered in the name of CEDE & Co.,
the nominee of DTC, CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary for Euroclear (in such capacities, individually the
'Depositary' and collectively the 'Depositaries').
Transfers between DTC Participants (as defined below) will occur in
accordance with DTC rules. Transfers between CEDEL Participants and Euroclear
Participants will occur in accordance with their respective rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the Business Day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such Business Day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
or Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant CEDEL or Euroclear
cash account only as of the Business Day following settlement in DTC. For
information with respect to tax documentation procedures relating to the
Certificates, see 'Certain Federal Income Tax Consequences--Qualification as a
REMIC--Reporting and Other Administrative Matters', '--Foreign Investors' and
'--Investment in Certificates Not Representing Interests in a REMIC--Reporting'
and '--Foreign Investors' and 'Global Clearance, Settlement and Tax
Documentation Procedures' in Annex I hereto.
Certificateholders who are not DTC Participants but desire to purchase,
sell or otherwise transfer ownership of Certificates may do so only through DTC
Participants or indirect participants (unless and until Replacement
Certificates, as defined below, are issued). In addition, Certificateholders
will receive all distributions of principal of, and interest on, the
Certificates from the Trustee through DTC and DTC Participants.
Certificateholders will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below.
Unless and until Replacement Certificates are issued, it is anticipated
that the only 'Certificateholder' of the Certificates will be CEDE & Co., as
nominee of DTC. Certificateholders will not be Certificateholders as that term
is used in the Agreement. Certificate Owners are only permitted to exercise the
rights of Certificateholders indirectly through DTC Participants and DTC.
While the Certificates are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the 'Rules'), DTC is required to make
book-entry transfers among DTC Participants on whose behalf it acts with respect
to the Certificates and is required to receive and transmit distributions of
principal of, and interest on, the Certificates. DTC Participants and indirect
participants with whom Certificate Owners have accounts with respect to
Certificates are similarly
45
<PAGE>
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interests.
Unless and until Replacement Certificates are issued, Certificate Owners
who are not DTC Participants may transfer ownership of Certificates only through
DTC Participants and indirect participants by instructing such DTC Participants
and indirect participants to transfer Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Certificates, which
account is maintained with their respective DTC Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Certificates will be executed through DTC and the accounts of the respective DTC
Participants at DTC will be debited and credited. Similarly, the DTC
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Certificate
Owners.
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 the provisions of Section 17A of the
Exchange Act. DTC accepts securities for deposit from its participating
organizations ('DTC Participants') and facilitates the clearance and settlement
of securities transactions between DTC Participants in such securities through
electronic book-entry changes in accounts of DTC Participants, thereby
eliminating the need for physical movement of certificates. DTC Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to the
DTC system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly ('indirect participants').
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ('CEDEL
Participants') and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ('Euroclear Participants') and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the 'Euroclear Operator'), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
'Cooperative'). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
46
<PAGE>
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See 'Certain Income Tax Consequences'. CEDEL or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a
Certificateholder on behalf of a CEDEL Participant or Euroclear Participant only
in accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as 'Replacement Certificates'), only if (i) DTC or the Depositor advises the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Certificates
and the Depositor or the Trustee is unable to locate a qualified successor, or
(ii) the Depositor, at its sole option and with the consent of the Trustee,
elects to terminate the book-entry system through DTC. Upon issuance of
Replacement Certificates to Certificate Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and registered
Certificateholders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Depositor and the Trustee that, unless and until
Replacement Certificates are issued, DTC will take any action permitted to be
taken by a Certificateholder only at the direction of one or more DTC
Participants to whose DTC accounts the Certificates are credited. DTC may take
actions, at the direction of the related DTC Participants, with respect to some
Certificates which conflict with actions taken with respect to other
Certificates.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of indirect participants and certain banks, the ability of holders of
beneficial interests in the Certificates to pledge such Certificates to persons
or entities that do not participate in the DTC system, or otherwise take actions
in respect of such Certificates, may be limited due to the lack of a definitive
certificate for such Certificates.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, globally offered Certificates (the
'Global Securities') will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of DTC, CEDEL or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and United States domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to United States corporate debt obligations.
47
<PAGE>
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as Participants.
Non-United States holders (as described below) of Global Securities will be
subject to United States withholding taxes unless such holders meet certain
requirements and deliver appropriate United States tax documents to the
securities clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf or their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to United States corporate debt obligations.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to United States
corporate debt obligations issued in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one Business Day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of (i) the actual number of days in
such accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any
48
<PAGE>
settlement occurring within CEDEL or Euroclear. Under this approach, they may
take on credit exposure to CEDEL or Euroclear until the Global Securities are
credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one Business Day prior to settlement. In these cases, CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of (i) the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be backed-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the United States from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their CEDEL or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
49
<PAGE>
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the United
States) will be subject to the 30% United States withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by United States persons, unless (i) each clearing
system, bank or other financial institution that holds customers' securities in
the ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the United States entity required to withhold
tax complies with applicable certification requirements and (ii) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-United States Persons (Form W-8). Beneficial owners of
Global Securities that are non-United States persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for non-United States Persons with effectively connected income
(Form 4224). A non-United States person, including a non-United States
corporation or bank with a United States branch, for which the interest income
is effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-United States Persons resident in treaty
countries (Form 1001). Non-United States persons that are Certificate Owners
residing in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Certificate
Owners or their agent.
Exemption for United States Persons (Form W-9). United States persons can
obtain a complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
United States Federal Income Tax Reporting Procedure. The Certificate
Owners of a Global Security or, in the case of a Form 1001 or a Form 4224 filer,
his agent, file by submitting the appropriate form to the person through whom it
holds (the clearing agent, in the case of persons holding directly on the books
of the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
This summary does not deal with all aspects of United States Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will cause the Trustee to forward with each distribution to each
Certificateholder of record a statement setting forth the following information
as to each Class of Certificates to the extent applicable:
(a) the amount, if any, of such distribution allocable to principal on
the Mortgage Loans and Mortgage Certificates, separately identifying the
aggregate amount of any Principal Prepayments included therein;
(b) the amount of such distribution allocable to interest on the
Mortgage Loans and Mortgage Certificates;
(c) the amount of Deferred Interest, if any, added to the aggregate
Principal Balance of the Mortgage Loans and Mortgage Certificates during
such month;
(d) the aggregate amount, by Class, of any Advances included in the
amounts actually distributed;
50
<PAGE>
(e) the aggregate Principal Balance of the Mortgage Loans as of the
close of business on the last day of the Prepayment Period prior to the
immediately preceding Installment Due Date, after giving effect to payments
allocated to principal reported under clause (a) above and to amounts of
Deferred Interest, if any, added to principal under clause (c) above;
(f) the related amount of Administration Fees, as adjusted, pursuant
to the Agreement, retained or withdrawn from the Certificate Account by the
Master Servicer and the amount of additional servicing compensation
received by the Master Servicer attributable to penalties, fees, excess
Liquidation Proceeds and other items;
(g) the number and aggregate Principal Balances of Mortgage Loans
delinquent with respect to (a) one Monthly Payment, and (b) two or more
Monthly Payments, as of the close of business on the day prior to the
immediately preceding Installment Due Date;
(h) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure in respect of any Mortgage Loan as
of the close of business on the day prior to the immediately preceding
Installment Due Date;
(i) the amount remaining in the Reserve Fund, if any, on the
Distribution Date after any withdrawal reported under clause (f) above;
(j) the weighted average Mortgage Pass-Through Rate as of the first
day of the month immediately preceding the month of the Distribution Date;
and
(k) all Advances recovered during the related Prepayment Period.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer will cause the Trustee to furnish a report to
each Certificateholder of record at any time during such calendar year (a) as to
the aggregate of amounts reported pursuant to clauses (a) through (k) above for
such calendar year or, in the event such person was a Certificateholder of
record during a portion of such calendar year, for the applicable portion of
such year and (b) such other customary information as the Master Servicer deems
necessary or desirable for Certificateholders to prepare their tax returns.
(Section 4.4.) Information in the monthly and annual reports provided to the
Certificateholders will not have been examined and reported upon by an
independent public accountant. However, the Master Servicer will provide to the
Trustee annually a report by independent public accountants with respect to the
Master Servicer's servicing of the Mortgage Loans. (Section 3.12.) See '--
Evidence as to Compliance' below.
REPORTS TO THE TRUSTEE
No later than 25 days after each Distribution Date, the Master Servicer
will provide the Trustee with a report, certified by a Servicing Officer,
setting forth the status of the Certificate Account as of the close of business
on such Distribution Date, stating that all distributions required to be made by
the Master Servicer under the Agreement have been made (or if any required
distribution has not been made by the Master Servicer specifying the nature and
status thereof and showing, for the period covered by such statement, the
aggregate of deposits into and withdrawals from the Certificate Account for each
category of deposits and withdrawals specified in the Agreement). Such statement
shall also include information as to the aggregate unpaid Principal Balances of
all the Mortgage Loans and Mortgage Certificates as of the day prior to the
immediately preceding applicable Installment Due Date. Copies of such reports
may be obtained by Certificateholders upon request in writing from the Trustee
or from the Master Servicer that is identified in the related Prospectus
Supplement.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and any applicable credit enhancement
applicable thereto and will, consistent with the Agreement, follow such
collection procedures as it follows with respect to its own conventional
one-to-four-unit residential first mortgage loans. Consistent with the above,
the Master Servicer may, in its discretion, (i) waive any assumption fee, late
payment charge or other charge in connection with a Mortgage Loan; and (ii)
arrange a schedule, running for no more than 180 days after the Installment Due
Date for payment of any installment on any
51
<PAGE>
Mortgage Note, for the liquidation of delinquent items. (Section 3.2.) In
servicing ARMs, the Master Servicer will on occasion accommodate borrower
inquiries regarding the notice of interest rate adjustments by deferring the
effective date of the adjustment and requesting the borrower to agree to reduce
the notice period provided in the related mortgage note. The result of any
deferrals of the effective date of rate adjustments to Mortgage Loans included
in a Pool, during periods of rising interest rates, may be to reduce the yield
to investors in Certificates evidencing interests in such Pool.
In connection with any assumption or substitution, the Mortgage Interest
Rate will not be changed, but the Maximum Rate and Minimum Rate may be revised
as described above under 'Yield Considerations and Risks' if so specified in the
related Prospectus Supplement. (Section 3.6.)
Certain of the Mortgage Loans may provide for payment by the Mortgagor to
the Master Servicer of amounts to be used for payment of taxes, assessments,
hazard insurance premiums or comparable items for the account of the Mortgagor.
Such amounts, if any, will not become part of the Trust Fund and
Certificateholders will possess no interest therein. The Master Servicer may
deal with these amounts in accordance with its normal servicing procedures.
(Section 3.2.)
Pursuant to each Agreement, the Master Servicer will be responsible for
servicing and administering the Mortgage Loans, but will be permitted to enter
into a Servicing Agreement with a Qualified Lender or another eligible
institution (the other party to such Servicing Agreement hereafter referred to
as a 'Servicer'), to perform all or part of such functions under its supervision
that it would otherwise be required to perform as described below.
The Master Servicer, or the Servicer, subject to general supervision of the
Master Servicer, will diligently perform all services and duties specified in
each Agreement, or Servicing Agreement, in the same manner as prudent mortgage
lending institutions would perform with respect to mortgages of the same type as
the Mortgage Loans in those jurisdictions where the related Mortgaged Properties
are located. The Master Servicer will monitor the performance of the Servicer
and will have the right to remove such Servicer at any time if it considers such
removal to be in the best interest of the related Certificateholders. The duties
to be performed by the Master Servicer, directly or through the Servicer, will
include collection and remittance of principal and interest payments, collection
of insurance claims and, if necessary, foreclosure. In the event a Servicing
Agreement shall be terminated by the Master Servicer the servicing function of
the Servicer thereunder shall be either transferred to a substitute servicer or
performed by the Master Servicer. The Master Servicer shall be entitled to
retain the portion of the Administration Fee paid to the Servicer under a
terminated Servicing Agreement in the event the Master Servicer shall elect to
perform such servicing functions itself.
The Master Servicer will be paid an Administration Fee for the performance
of its services and duties under each Agreement as specified in the related
Prospectus Supplement. Additionally, the Master Servicer or the Servicer may be
entitled to retain late charges, assumption fees and similar charges to the
extent collected from Mortgagors.
HAZARD INSURANCE
The Depositor and/or the Master Servicer will obtain for each Mortgage Loan
a hazard insurance policy providing for no less than the coverage of the
standard form of fire insurance policy with extended coverage in the applicable
state. The Master Servicer will cause to be maintained for each Mortgage Loan
such hazard insurance policy. Such coverage will be in an amount equal to the
lesser of the principal balance of the Mortgage Loan and the replacement cost of
the improvements securing such Mortgage Loan. As set forth above, all amounts
collected by the Master Servicer under any hazard policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released to
the Mortgagor in accordance with the Master Servicer's normal servicing
procedures) will be credited to the Certificate Account. In the event that the
Master Servicer maintains a blanket policy insuring against hazard losses on all
the Mortgage Loans, it shall conclusively be deemed to have satisfied its
obligation relating to the maintenance of hazard insurance. Such blanket policy
may contain a deductible clause, in which case the Master Servicer will be
required to credit to the Certificate Account the amounts which would have been
credited thereto but for such clause. (Section 3.5.)
52
<PAGE>
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,
lighting, 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 and therefore do not contain identical terms
and conditions, the basic terms thereof are dictated by applicable law and most
such policies typically do not cover any physical damages resulting from the
following: war, revolution, governmental actions, flood and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, hurricanes, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. If any Mortgaged Property was located in a federally designated
special flood hazard area at the time of origination, the Master Servicer will
cause to be maintained a flood insurance policy on such Mortgaged Property up to
the maximum amount available or to the full amount of the related Mortgage Loan.
The hazard insurance policies covering Mortgaged Properties typically will
contain a clause which in effect requires the insured at all times to carry
insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage then the insurer's liability in the event of partial loss
shall not exceed the greater of (i) the actual cash value (generally defined as
replacement cost at the time and place of loss, less physical depreciation) of
the improvements damaged or destroyed or (ii) such proportion of the loss as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since residential properties have
appreciated in value over time, from time to time, in the past, the effect of
this requirement in the event of partial loss may be that hazard insurance
proceeds will be insufficient to restore fully the damaged property. However,
until the Subordinated Amount is reduced to zero (and provided any applicable
special loss limitation described in the related Prospectus Supplement has not
been exceeded), Senior Certificateholders will not realize a loss by reason of
uninsured hazard losses or application of the requirement if there are
sufficient funds otherwise due the Subordinate Certificateholders or held in the
Reserve Fund, if any, to pay Senior Certificateholders the amount which they are
entitled to receive.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will be obligated under the Agreement to follow such
practices and procedures as it deems necessary or advisable and as are normal
and usual in its general mortgage servicing activities to realize upon defaulted
Mortgage Loans. However, in the case of damage to a Mortgaged Property, the
Master Servicer is not required to expend its own funds in connection with
foreclosure or to restore any damaged property unless it reasonably determines
(i) that such foreclosure and/or restoration will increase the Liquidation
Proceeds to Certificateholders after reimbursement to the Master Servicer for
its expenses and (ii) that such expenses will be recoverable to it through
Liquidation Proceeds of the sale of the Mortgaged Property. In the event that
the Master Servicer has expended its own funds to restore damaged property, it
will be entitled to charge the Certificate Account, out of related Liquidation
Proceeds, an amount equal to expenses incurred by it. (Section 3.7.)
The Master Servicer may sell property securing a defaulted Mortgage Loan at
a trustee's sale or, in the event a deficiency judgment is available against the
Mortgagor or other person (see 'Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders' herein for
a description of the limited availability of deficiency judgments), foreclose
against such property and proceed for the deficiency against the appropriate
person. It is anticipated that in most cases the Master Servicer will not seek
deficiency judgments against defaulting Mortgagors. The Depositor and/or the
Master Servicer will be entitled to elect to purchase defaulted Mortgage Loans
or Mortgage Loans as to which the related Mortgagor has tendered a deed in lieu
of foreclosure from the Trust Fund for a purchase price equal to the Principal
Balance plus accrued and unpaid interest thereon. In the event the Master
Servicer purchases such a Mortgage Loan, any gain realized in a liquidation
proceeding on such Mortgage Loan will not be paid to the Trust Fund. If the
Master Servicer does not purchase such a Mortgage Loan, any gain realized in a
liquidation proceeding on such Mortgage Loan will be paid to the Trust Fund for
distribution to the Certificateholders, less reasonable reimbursement to the
Master Servicer for its expenses. If the Trust Fund elects to be treated as a
REMIC, such gain would become an asset of the REMIC Residual Holders to the
extent such gain is not necessary to make payments due to the holders of regular
interests. Often, the holder of property acquired through foreclosure maximizes
recovery by providing
53
<PAGE>
financing to a new purchaser. The Trustee will not be empowered to provide such
financing and the Master Servicer may, but will not be obligated to, do so. This
may result in a Pool experiencing greater losses with respect to defaulted
Mortgage Loans than might otherwise be the case.
Until the Subordinated Amount is reduced to zero (and provided any
applicable special loss limitation has not been exceeded), if Liquidation
Proceeds are less than the sum of the Principal Balance of the defaulted
Mortgage Loan and the Master Servicer's expenses, Senior Certificateholders will
not realize a loss.
Except as otherwise specified in the related Prospectus Supplement, with
respect to any payment of interest received by the Master Servicer in respect to
a Mortgage Loan (whether paid by the Mortgagor or received as Liquidation
Proceeds, insurance proceeds or otherwise) which is less than the full amount of
interest then due with respect to the related Mortgage Loan, the Master Servicer
shall retain only its pro rata share of such interest payment. (Section 3.2.)
With respect to a Series of Certificates for which a REMIC election (see
'Certain Federal Income Tax Consequences' herein) is made, if the Trustee
acquires ownership of any Mortgaged Property as a result of a default or
imminent default of any Mortgage Loan secured by such Mortgaged Property, the
Trustee will be required to dispose of such property within two years after the
date on which ownership of such property is acquired.
ADMINISTRATION FEES, COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer is entitled to receive a Master Servicing Fee with respect to each
Mortgage Loan, which may be variable, as described in the Agreement. The Master
Servicer's aggregate Master Servicing Fee for any month may be subject to
adjustment as described above under 'Adjustment to Master Servicing Fees in
Connection with Prepayment Interest Shortfall.' The Master Servicer may either
retain the Master Servicing Fees to which it is entitled before making required
deposits to the Certificate Account or may withdraw them from the Certificate
Account.
Since the Master Servicing Fees are percentages of the then outstanding
Principal Balance of each Mortgage Loan each month, the Master Servicer's
aggregate compensation will decrease as the Mortgage Loans amortize. In addition
to such compensation, the Master Servicer will retain all assumption fees, late
payment charges and other charges, to the extent collected from Mortgagors.
The Master Servicer will pay certain expenses incurred in connection with
its servicing of the Mortgage Loans, including, without limitation, payment of
the fees and disbursements of the Trustee and independent accountants, and
payment of expenses incurred in connection with distributions and reports to
Certificateholders. (Section 3.9.)
The Master Servicer is entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Mortgage Loans,
including under certain circumstances reimbursement of expenditures incurred by
it in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Liquidation Proceeds. The Master Servicer is also entitled to
reimbursement from the Certificate Account for Advances. (Sections 3.3 and 3.7.)
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that on or before April 30 of each year,
beginning, with respect to a Series of Certificates, with the April 30 of the
year which begins not less than six months after the initial issuance of such
Series of Certificates, a firm of independent public accountants will furnish a
statement to the Trustee to the effect that such firm has examined certain
documents and records relating to the servicing of the Mortgage Loans of each
Series and that, either (a) on the basis of such examination conducted
substantially in compliance with the audit program for mortgages serviced for
FHLMC, such firm is of the opinion that such servicing has been conducted in
compliance with the manner of servicing set forth in the Agreement except for
(i) such exceptions as such firm believes to be immaterial and (ii) such other
exceptions as are set forth in such statement or (b) that their examination
conducted substantially in compliance with the uniform single audit program for
mortgage bankers disclosed no exceptions or errors in the records relating to
mortgage loans serviced for others that in their opinion are material and that
such program requires them to report. (Section 3.12.) The Agreement will also
54
<PAGE>
provide for delivery to the Trustee of an annual statement signed by an officer
of each Master Servicer to the effect that such Master Servicer has fulfilled
its obligations under the Agreement throughout the preceding calendar year.
(Section 3.11.)
CERTAIN MATTERS REGARDING THE MASTER SERVICER
Unless otherwise specified in the applicable Prospectus Supplement, a
Master Servicer may not resign from its obligations and duties as Master
Servicer under the Agreement, except upon determination that its duties
thereunder are no longer permissible under applicable law or are in material
conflict by reason of applicable law with any other activities of a type and
nature presently carried on by it. No such resignation will become effective
until the Trustee or a successor Master Servicer has assumed such Master
Servicer's obligations and duties under the Agreement. (Section 6.4.) If a
Master Servicer resigns for any of the foregoing reasons, it is possible that
the Trustee would be unable or unwilling to assume responsibility for servicing
the Mortgage Loans under the Agreement and would therefore seek to appoint
another institution as mortgage servicer as described under 'Rights Upon
Default' below. Such Master Servicer may, however, arrange for its duties under
the Agreement to be performed by a subservicer, or the other Master Servicer, if
any, so long as the Master Servicer remains responsible for the performance of
such duties.
The Agreement will also provide that neither the Master Servicer nor any
director, officer, employee or agent of the Master Servicer will be under any
liability to the Trust Fund or the Certificateholders for any action taken or
for refraining from the taking of any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicer nor any such person will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder. The Agreement further provides that the
Master Servicer and any director, officer, employee or agent of any Master
Servicer 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 Agreement or the Certificates, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
Agreement provides that the Master Servicer is not under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. Any Master Servicer may, however, in its
discretion, subject to the terms and conditions of the Agreement, undertake any
such action which it may deem necessary or desirable in respect of the Agreement
and the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund and such Master Servicer and the other Master
Servicer, if any, will be entitled to be reimbursed therefor and charge the
Certificate Account for such reimbursement, such right of reimbursement being
prior to the rights of Certificateholders to receive any amounts in the
Certificate Account. (Section 6.3.)
Any person into which a Master Servicer may be merged or consolidated, or
any person resulting from any merger, conversion or consolidation to which such
Master Servicer is a party, or any person succeeding to the business of such
Master Servicer will be such Master Servicer's successor under the Agreement.
(Section 6.2.)
[BACK-UP MASTER SERVICER
Pursuant to the Agreement relating to any Series, ABN AMRO Bank N.V. or
another successor back-up master servicer appointed pursuant to such Agreement
will serve as back-up master servicer (the 'Back-Up Master Servicer') and assume
the duties of the Master Servicer after a notice of termination of the Master
Servicer or if the Master Servicer fails to perform certain duties. The Back-Up
Master Servicer shall have no liability for any act of the Master Servicer prior
to such assumption.]
55
<PAGE>
SPECIAL SERVICING AGREEMENTS
The Pooling and Servicing Agreement may permit the Master Servicer to enter
into a special servicing agreement with an unaffiliated holder of subordinated
mortgage pass-through certificates. Pursuant to such an agreement, such holder
may instruct the Master Servicer and if applicable, any sub-Servicer, to
commence or delay foreclosure proceedings with respect to delinquent Mortgage
Loans. Such commencement or delay at such holder's direction will be taken by
the Master Servicer only after such holder deposits a specified amount of cash
with the Master Servicer. Such cash will be available for distribution to the
Certificateholders if proceeds resulting from a liquidation or foreclosure are
less than they otherwise may have been had the Master Servicer acted pursuant to
their normal servicing procedures.
EVENTS OF DEFAULT
Events of Default under the Agreement consist of (i) any failure by the
Master Servicer to distribute or cause to be distributed to Certificateholders
any required payment which continues unremedied for five 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 Certificateholders holding Certificates
evidencing Fractional Undivided Interests aggregating not less than 25% of the
Trust Fund or 51% of the Percentage Interest of any Class of Certificates; (ii)
any failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the 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 Certificateholders holding Certificates evidencing Fractional
Undivided Interests aggregating not less than 25% of the Trust Fund or 51% of
the Percentage Interest of any Class of Certificates; and (iii) certain decrees
or orders in any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by the Master Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
(Section 7.1.)
RIGHTS UPON DEFAULT
So long as an Event of Default remains unremedied, the Trustee or
Certificateholders holding Certificates evidencing Fractional Undivided
Interests aggregating not less than 25% of the Trust Fund or 51% of the
Percentage Interest of any Class of Certificates may terminate all of the rights
and obligations of the Master Servicer under the Agreement, whereupon the
Trustee will succeed to all of the Master Servicer's responsibilities, duties
and liabilities under the Agreement and will be entitled to monthly servicing
compensation not to exceed the Administration Fees. In the event that the
Trustee is unwilling or unable to so act, it may select, pursuant to the public
bid or such other procedure described in the Agreement, or petition a court of
competent jurisdiction to appoint, a housing and home finance institution, bank
or mortgage servicing institution with a net worth of at least $15,000,000 to
act as successor to the Master Servicer under the Agreement. In the event such
public bid procedure is used, the successor Master Servicer would be entitled to
servicing compensation in such amounts, up to the servicing compensation
provided by Section 3.9 of the Agreement, as may be agreed by the Trustee, and
the Depositor, or if the Trust Fund elects REMIC status, the Residual
Certificateholder, would be entitled to receive the net profits, if any,
realized from the sale of such servicing rights and obligations under the
Agreement. (Sections 7.1 and 7.5.)
During the continuance of any Event of Default, the Trustee will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Certificateholders. Certificateholders
holding Certificates evidencing Fractional Undivided Interests, aggregating not
less than 25% of the Trust Fund or 51% of the Percentage Interest of each Class
of Certificates, may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon the Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Certificateholders have offered the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred by
the Trustee therein or thereby. Also, the Trustee may decline to follow any such
direction if the Trustee determines that the action or proceeding so directed
may not lawfully be taken or would involve it in personal liability or be
unjustly prejudicial to the non-assenting Certificateholders. (Sections 7.2 and
7.3.)
56
<PAGE>
No Certificateholder, solely by virtue of its status as a
Certificateholder, will have any right under the Agreement to institute any
proceeding with respect to the Agreement, unless such Certificateholder
previously has given to the Trustee written notice of default and unless
Certificateholders holding Certificates evidencing Percentage Interests
aggregating not less than 25% of each Class of Certificates have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days thereafter has neglected or refused to institute any such
proceeding. (Section 10.3.)
AMENDMENT
The Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Certificateholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein; (iii) to permit the trust to be
subject to the REMIC Provisions under the Code; or (iv) to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions of the Agreement, provided that
such action will not adversely affect in any material respect the interests of
any Certificateholder. The Agreement may also be amended by the Depositor, the
Master Servicer and the Trustee with the consent of Certificateholders holding
Certificates evidencing Percentage Interests aggregating not less than 50% of
the Trust Fund for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Agreement or of modifying in
any manner the rights of Certificateholders; provided, however, that no such
amendment may (a) reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Loans which are required to be distributed on any
Certificate without the consent of such Certificateholders; (b) adversely affect
in any material respect the interest of Certificateholders holding Senior
Certificates in a manner other than as described in clause (a) above without the
consent of Certificateholders holding Senior Certificates aggregating not less
than 66-2/3% of the aggregate Percentage Interest evidenced by all Senior
Certificates; (c) adversely affect in any material respect the interest of
Certificateholders holding Subordinate Certificates in a manner other than as
described in clause (a) above without the consent of Certificateholders holding
Subordinate Certificates aggregating not less than 66-2/3% of the aggregate
Percentage Interest evidenced by all Subordinate Certificates; or (d) reduce the
aforesaid percentages of Certificates the Certificateholders of which are
required to consent to any such amendment without the consent of all the
Certificateholders of the Class or Classes affected then outstanding. (Section
10.1.) For purposes of giving any such consent (other than a consent to an
action which would adversely affect in any material respect the interests of the
Subordinate Certificateholders while the Depositor or the Master Servicer or any
affiliate is a Subordinate Certificateholder holding Certificates aggregating
not less than 66-2/3% of the Fractional Undivided Interests evidenced by all of
the Subordinate Certificateholders), any Certificates registered in the name of
the Master Servicer or any of its affiliates shall be deemed not to be
outstanding. (Article I.)
TERMINATION
The obligations created by the Agreement will terminate upon the payment to
Certificateholders of all amounts held by the Master Servicer and required to be
paid to them pursuant to the Agreement after the earlier of (i) the final
payment or other liquidation (or any Advance made with respect thereto) of the
last Mortgage Asset subject thereto and the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any Mortgage Asset, or (ii)
if the applicable Prospectus Supplement so provides, the repurchase by the
Depositor, the Master Servicer or the Residual Holder, if any, from the Trustee
of all Mortgage Assets at the time subject to the Agreement and all property
acquired in respect of any Mortgage Asset. Unless otherwise specified in the
applicable Prospectus Supplement any repurchase pursuant to clause (ii) above
will be at a price equal to the sum of (a) the principal balance of each
Mortgage Loan or Mortgage Certificate plus accrued interest thereon at the
Mortgage Pass-Through Rate or Mortgage Certificate interest rate, as applicable,
to the next Installment Due Date, less any unreimbursed Advances made with
respect to any such Mortgage Asset and (b) the fair market value of all acquired
property in respect of any Mortgage Assets, less any unreimbursed Advances made
with respect to any such Mortgage Loans. The exercise of such repurchase right
will effect early retirement of the Certificates, but the Depositor's, the
Master Servicer's or the Residual Holder's right to so purchase will be subject
to the aggregate principal balance of the Mortgage Assets at the time of
repurchase being less than the percentage of the aggregate principal balance of
the Mortgage Assets as of the Cut-off Date as will be specified
57
<PAGE>
in the applicable Prospectus Supplement. In no event, however, will the trust
created by the Agreement continue beyond the expiration of 60 years from the
date of execution and delivery of the Agreement. The Master Servicer will give
written notice of termination of the Agreement to each Certificateholder, and
the final distribution will be made only upon surrender and cancellation of non
book-entry Certificates at an office or agency of the Master Servicer specified
in the notice of termination. (Section 9.1.)
CREDIT ENHANCEMENTS
GENERAL
For any Series, credit enhancement may be provided with respect to one or
more Classes thereof or the related Mortgage Assets. Credit enhancement may be
in the form of the establishment of one or more reserve funds, subordination of
one or more Classes of the Certificates of such Series, letters of credit, use
of a bankruptcy bond, repurchase bond or special hazard insurance policy,
certificate guarantee insurance policy, the use of cross-support features or
another method of credit enhancement described in the related Prospectus
Supplement, or combination of the foregoing, in any case, in such amounts and
having such terms and conditions as are acceptable to each Rating Agency which
assigns a rating to the Certificates of the Related Series.
To the extent any of the forms of credit enhancement described above and
further described below or other forms of credit enhancement are obtained for a
Series of Certificates, or deposits made in lieu thereof, a description of such
credit enhancement will be more fully set forth in the related Prospectus
Supplement.
SUBORDINATION
Unless otherwise specified in the related Prospectus Supplement, each
Series of Certificates will include Subordinate Certificates. The rights of the
Subordinate Certificateholders to receive distributions with respect to the
Mortgage Loans are subordinate to such rights of the Senior Certificateholders
to the extent of the then Subordinated Amount, as described below, or as
otherwise described in the applicable Prospectus Supplement. The Subordinated
Amount (before giving effect to Aggregate Losses described below) will be
determined in accordance with a schedule described in the applicable Prospectus
Supplement. The Subordinated Amount, as so determined at any time, will be
reduced by an amount equal to Aggregate Losses. Aggregate Losses will be defined
in the Agreement as generally including the aggregate amount of delinquencies,
losses and other deficiencies (other than any deficiency consisting of interest
on any unpaid amounts due the Senior Certificateholders) in the amounts due the
Senior Certificateholders previously borne by the Subordinated
Certificateholders, whether by way of withdrawal from the Reserve Fund, if any,
described below, reduction in amounts otherwise available to the Subordinate
Certificateholders or otherwise (as adjusted for the aggregate amounts of such
delinquencies, losses and other deficiencies previously recovered on the
Mortgage Loans).
SHIFTING INTEREST CREDIT ENHANCEMENT
The protection afforded to the Senior Certificateholders of a Series of
Certificates by the subordination feature described above under 'Subordination'
will be effected by the preferential right of the Senior Certificateholders to
receive current distributions from the Pool and, if so specified in the related
Prospectus Supplement, such subordination feature will be enhanced by
distributing to one or more Classes of Senior Certificates on certain
Distribution Dates, as payments of principal, certain Principal Prepayments in
the related Pool under the circumstances and for the period of time set forth
therein ('Shifting Interest Credit Enhancement'). Shifting Interest Credit
Enhancement will have the effect of accelerating the amortization of the Senior
Certificates while increasing the respective interest evidenced by the
Subordinated Certificates in the related Trust Fund. Increasing the respective
interest of the Subordinate Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinate Certificates.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, interest collections
on the Mortgage Loans may exceed interest payments on the Certificates for the
related Payment Date. Such amounts may be deposited into the Reserve Fund or
applied as a payment of principal on the Certificates. To the extent such
amounts are applied as
58
<PAGE>
principal payments on the Certificates, the effect will be to reduce the
principal balance of the Certificates relative to the outstanding balance of the
Mortgage Loans, thereby creating 'Overcollateralization' and additional
protection to the Certificateholders, as specified in the related Prospectus
Supplement.
RESERVE FUND
In addition to the preferential right of the Senior Certificateholders to
receive current distributions from the Pool (to the extent of the then
Subordinated Amount), to the extent described in the related Prospectus
Supplement the Master Servicer may establish and maintain with the Trustee a
reserve fund (the 'Reserve Fund'). The related Prospectus Supplement will state
whether or not the Reserve Fund, if any, will be part of the Trust Fund. Unless
otherwise specified in the related Prospectus Supplement, the Depositor will
make an initial cash deposit (the 'Initial Deposit') to the Reserve Fund, if
any, equal to the amount specified in the related Prospectus Supplement and
following the initial issuance of the Certificates and until the balance of such
Reserve Fund equals the sum of (i) the Initial Deposit, if any, and (ii) an
amount specified in the applicable Prospectus Supplement (the 'Specified Reserve
Fund Balance'), the Trustee or the applicable Paying Agent will withhold
distributions of principal and interest otherwise available to the Subordinate
Certificateholders and deposit such amounts in such Reserve Fund, unless
otherwise described in the Prospectus Supplement. After the Specified Reserve
Fund Balance is attained, the Trustee or the applicable Paying Agent will
withhold distributions of principal only from the Subordinate Certificateholders
and deposit such amounts in the Reserve Fund, if any, as necessary to maintain
the Specified Reserve Fund Balance applicable at the time, unless otherwise
described in the Prospectus Supplement. Amounts in the Reserve Fund, if any,
will be transferred to the Certificate Account for distribution to Senior
Certificateholders to the extent required to make full distributions to such
holders on a particular Distribution Date. The related Prospectus Supplement
will set forth when and to what extent the Specified Reserve Fund Balance may be
reduced. Unless otherwise specified in the Prospectus Supplement, if the
Subordinated Amount is reduced to zero, under certain circumstances, an amount
equal to the sum of (i) the Initial Deposit and (ii) the funds remaining in any
Reserve Fund at the time the Subordinated Amount is reduced to zero will be
distributed to the Holders of the Subordinate Certificates.
LETTER OF CREDIT
Credit enhancement with respect to a Series of Certificates may be provided
by the issuance of a letter of credit by a bank or financial institution
specified in the related Prospectus Supplement (the 'L/C Bank'). The maximum
obligation of the L/C Bank under the letter of credit will be to honor requests
for payment thereunder in an aggregate fixed dollar amount, net of unreimbursed
payments thereunder, equal to the percentage set forth in the related Prospectus
Supplement of the aggregate principal balance on the related Cut-off Date of the
Mortgage Loans evidenced by each Series. The duration of coverage and the amount
and frequency of any reduction in coverage provided by the letter of credit with
respect to a Series of Certificates will be in compliance with the requirements
established by the Rating Agency rating such Series, and will be set forth in
the Prospectus Supplement relating to such Series of Certificates.
SURETY BOND
If so specified in the related Prospectus Supplement with respect to a
Series of Certificates, credit enhancement may be provided in the form of a
surety bond issued by an insurer named therein.
SPECIAL HAZARD INSURANCE POLICY
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, the Depositor or the Master Servicer will obtain a special hazard
insurance policy (the 'Special Hazard Insurance Policy') for such Series, issued
by the insurer specified in such Prospectus Supplement (the 'Special Hazard
Insurer') and covering any special hazard amount ('Special Hazard Amount'). The
Master Servicer will in that event exercise its best reasonable efforts to keep
or cause to be kept a Special Hazard Insurance Policy in full force and effect,
unless coverage thereunder has been exhausted through payment of claims. The
Master Servicer will pay the premiums on each Special Hazard Insurance Policy on
a timely basis. Claims under such Special Hazard Insurance Policy will generally
be limited to a percentage set forth in the Prospectus Supplement (expected to
be not greater than 1%) of the aggregate principal balance as of the Cut-off
Date of the Mortgage Loans comprising
59
<PAGE>
the related Pool. The terms of any Special Hazard Insurance Policy will be more
fully described in the applicable Prospectus Supplement.
BANKRUPTCY BOND
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, the Depositor or the Master Servicer will obtain a bankruptcy bond
(the 'Bankruptcy Bond') for such Series. The obligor on, and the amount of the
coverage of, any such Bankruptcy Bond will be set forth in the applicable
Prospectus Supplement. The Master Servicer will exercise its best reasonable
efforts to maintain and keep or cause to be maintained and kept the Bankruptcy
Bond in full force and effect, unless coverage thereunder has been exhausted
through payment of claims. The Master Servicer will pay or cause to be paid the
premiums for each Bankruptcy Bond on a timely basis. Each Bankruptcy Bond will
cover certain losses resulting from an extension of the maturity of a Mortgage
Loan, or a reduction by the bankruptcy court of the principal balance of or the
Mortgage Rate on a Mortgage Loan, and the unpaid interest on the amount of a
principal reduction during the pendency of a proceeding under the federal
Bankruptcy Code. See 'Certain Legal Aspects of the Mortgage Loans.'
CROSS-SUPPORT FEATURES
If the Mortgage Assets for a Series are divided into separate Asset Groups,
the beneficial ownership of which is evidenced by a separate Class or Classes of
a Series, credit enhancement may be provided by a cross-support feature which
requires that distributions be made on Senior Certificates evidencing the
beneficial ownership of one Asset Group prior to distributions to Subordinate
Certificates evidencing beneficial ownership in another Asset Group within the
Trust Fund. The related Prospectus Supplement for a Series which includes a
cross-support feature will describe the manner and conditions for applying such
cross-support feature.
OTHER ARRANGEMENTS FOR CREDIT ENHANCEMENTS
Certain other arrangements for credit enhancement (including but not
limited to a letter of credit, limited guaranty, surety bond, insurance contract
or reserve fund) may be applicable to a Series of Certificates, to the Mortgage
Loans and/or Mortgage Certificates included in the related Pool and/or to the
mortgage loans underlying such Mortgage Certificates, as described in the
related Prospectus Supplement. In addition, unless otherwise provided in the
related Prospectus Supplement for a Series, at any time a surety bond, letter of
credit or other form of credit enhancement may be substituted for the credit
support arrangement in effect initially for such Series (or any substitute
therefor) to the extent permitted by the rating agencies rating such Series of
Certificates, without resulting in a downgrading of the current rating of the
Certificates of such Series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of legal aspects of mortgage
loans which are general in nature. Because such legal aspects are governed by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans or
the mortgage loans underlying the Mortgage Certificates is situated. The
summaries are qualified in their entirety by reference to the applicable federal
and state laws governing the Mortgage Loans and the mortgage loans underlying
the Mortgage Certificates.
GENERAL
The Mortgage Loans and the mortgage loans underlying the Mortgage
Certificates (other than Co-op Loans) will be secured by either deeds of trust
or mortgages, depending upon the prevailing practice in the state in which the
underlying property is located. A mortgage creates a lien upon the real property
described in the mortgage. 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 loan. The trustee's authority
under a deed of trust and the mortgagee's authority under a mortgage are
governed by the express provisions of the deed of trust or mortgage, applicable
law, and, in some cases, with respect to the deed of trust, the directions of
the beneficiary. There are two parties to a mortgage: the mortgagor, who is the
borrower and homeowner; and the mortgagee, who is the lender. In a mortgage
state instrument, the mortgagor delivers to the mortgagee a note or bond
evidencing the
60
<PAGE>
loan and the mortgage. Although a deed of trust is similar to a mortgage, a deed
of trust has three parties; the borrower-homeowner called the trustor (similar
to a mortgagor), a lender called the beneficiary (similar to a mortgagee), and a
third-party grantee called the trustee. The lien created by the mortgage or deed
of trust is not prior to the lien for real estate taxes and assessments and
other charges imposed under governmental police powers. Priority between
mortgages or deeds of trust depends on their terms or the terms of separate
subordination or inter-creditor agreements, the knowledge of the parties in some
cases and generally on the order of recordation of the mortgage in the
appropriate recording office.
FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that 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 certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to 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 of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, 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 property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
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. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
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 of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. 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 a judicial foreclosure proceeding, the
court may issue a judgment of foreclosure and appoint a receiver or other
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.
In case of foreclosure under either a deed of trust or a mortgage, 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 the 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. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
maintaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of mortgage
insurance proceeds. Courts have applied equitable principles to a lender's
utilization of the foreclosure process in order to avert a mortgagor's loss of
his residence for technical or trivial defaults. Some courts have been faced
with the issue of whether the particular foreclosure statutes in their states
meet federal or state constitutional requirements for fair and adequate notice.
In most instances, such courts have upheld such notice provisions as being
reasonable or as not involving sufficient state action to invoke such
constitutional provisions.
61
<PAGE>
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to diminish 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 judicial 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 AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit 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 is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state 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.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided in
certain instances where the value of the lender's security has been impaired by
acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 case under the federal Bankruptcy Code, if a court determines that the value
of a debtor's principal residence is less than the principal balance of the
loan, the court may, as part of the rehabilitation plan, unless the home is the
sole collateral for the mortgage loan, reduce the amount of the secured
indebtedness to the value of the home as it exists at the time of the case,
leaving the lender as a general unsecured creditor for the difference between
that value and the amount of outstanding indebtedness. A bankruptcy court may
grant the debtor a reasonable time to cure a payment default, and in the case of
a mortgage loan not secured by the debtor's principal residence, also may reduce
the monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. Regardless of whether a mortgage
loan is secured by the debtor's principal residence, the rehabilitation plan may
provide for the reinstatement of any payment defaults over a period of up to 5
years. In addition, the federal Soldiers' and Sailors' Civil Relief Act of 1940
may reduce the rate of interest payable on any mortgage loan as to which the
mortgagor is a military reservist called to active duty, and may interfere with
the lender's right to foreclose upon the related mortgage or deed of trust. In a
Chapter 7, Chapter 11 or Chapter 13 case under the federal Bankruptcy Code, the
lender is precluded from foreclosing without authorization from the bankruptcy
court. If the debtor's principal residence is not the only security for the
mortgage loan, the lender's lien may be transferred to other collateral and/or
be
62
<PAGE>
limited in amount to the value of the lender's interest in the collateral as of
the date of the bankruptcy. The loan term may be extended, the interest rate may
be adjusted to market rates in confirmed Chapter 11 and Chapter 13 plans and the
priority of the loan may be subordinated to bankruptcy court-approved financing.
The bankruptcy court can, in effect, invalidate due-on-sale clauses through
confirmed Chapter 11 and Chapter 13 plans of reorganization. The laws of some
states provide priority to certain tax liens over the lien of the mortgage or
deed of trust.
Numerous federal and some state consumer protection laws and environmental
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. The consumer
protection laws include the federal Truth in Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act, and related statutes and regulations. These federal laws
and state laws impose specified statutory liability upon lenders who originate
or service mortgage loans and who fail to comply with the provisions of the law.
In some cases, this liability may affect assignees of the mortgage loans.
JUNIOR LIENS; RIGHTS OF SENIOR LIENHOLDERS
The rights of the Trust Fund (and therefore the Certificateholders) as
beneficiary under a junior deed of trust or as mortgagee under a junior mortgage
are subordinate to those of the mortgagee or beneficiary under the senior
mortgage or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the junior mortgage loan to be sold upon default of the
mortgagor or trustor, thereby extinguishing the junior mortgagee's or junior
beneficiary's lien unless the holders thereof assert their subordinate interest
in a property in foreclosure litigation or satisfy the defaulted senior loan. As
discussed more fully below, in many states a junior mortgagee or beneficiary may
satisfy a defaulted senior loan in full, or may cure such default and bring the
senior loan current, in either event adding the amounts expended to the balance
due on the junior loan.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust will have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust.
Proceeds in excess of the amount of first mortgage indebtedness will, in most
cases, be applied to the indebtedness of a junior mortgage or trust deed.
The form of mortgage or deed of trust used by most institutional lenders
typically contains a 'future advance' clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an 'obligatory' or 'optional' advance. If the mortgagee or beneficiary is
obligated to advance the additional amounts, the advance is entitled to receive
the same priority as amounts initially made under the mortgage or deed of trust,
notwithstanding that there may be intervening junior mortgages or deeds of trust
and other liens between the date of recording of the mortgage or deed of trust
and the date of the future advance, and notwithstanding that the mortgagee or
beneficiary had actual knowledge of such intervening junior mortgages or deeds
of trust and other liens at the time of the advance. Where the mortgagee or
beneficiary is not obligated to advance the additional amounts and has actual
knowledge of the intervening junior mortgages or deeds of trust and other liens,
the advance will be subordinate to such intervening junior mortgages or deeds of
trust and other liens. Priority of advances under the clause rests, in many
other states, on state statutes giving priority to all advances made under the
loan agreement to a 'credit limit' amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property
63
<PAGE>
and, when due, all encumbrances, charges and liens on the property which appear
prior to the mortgage or deed of trust, to provide and maintain fire insurance
on the property, to maintain and repair the property and not to commit or permit
any waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee or beneficiary
under the mortgage or deed of trust. Upon a failure of the mortgagor or trustor
to perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary become part
of the indebtedness secured by the mortgage or deed of trust.
'DUE-ON-SALE' CLAUSES
The Agreement will provide that, when any mortgaged property underlying a
Mortgage Loan is about to be conveyed by the mortgagor, the Master Servicer
will, to the extent it has knowledge of such prospective conveyance, exercise
its rights to accelerate the maturity of such Mortgage Loan under the
'due-on-sale' clause applicable thereto, if any, unless it is not exercisable
under applicable law or if such exercise would result in loss of insurance
coverage with respect to such Mortgage Loan or would, in the Master Servicer's
judgment, be reasonably likely to result in litigation by the mortgagor. In
either case, the Master Servicer is authorized to take or enter into an
assumption and modification agreement from or with the person to whom such
Mortgaged Property has been or is about to be conveyed, pursuant to which such
person becomes liable under the Mortgage Note and, unless prohibited by
applicable state law, the mortgagor remains liable thereon, provided that the
Mortgage Loan will continue to be covered by any related primary mortgage
insurance policy and the Mortgage Interest Rate with respect to such Mortgage
Loan and the payment terms shall remain unchanged. The Master Servicer will also
be authorized, with the prior approval of any primary mortgage insurer (unless
such approval is precluded by the terms of the Mortgage Loan) to enter into, on
behalf of the Trustee, a substitution of liability agreement with such person,
pursuant to which the original mortgagor is released from liability and such
person is substituted as mortgagor and becomes liable under the Mortgage Note.
By virtue of the Garn-St Germain Depository Institutions Act of 1982 (the
'Act'), a Servicer or the Master Servicer may generally be permitted to
accelerate any Mortgage Loan which contains a 'due-on-sale' clause upon transfer
of an interest in the property subject to the deed of trust or mortgage. With
respect to any Mortgage Loan secured by a residence occupied or to be occupied
by the borrower, this ability to accelerate will not apply to certain types of
transfers, including (i) the granting of a leasehold interest which has a term
of three years or less and which does not contain an option to purchase, (ii) a
transfer to a relative resulting from the death of a borrower, or a transfer
where the spouse or child(ren) becomes an owner of the property in each case
where the transferee(s) will occupy the property, (iii) a transfer resulting
from a decree of dissolution of marriage, legal separation agreement or from an
incidental property settlement agreement by which the spouse becomes an owner of
the property, (iv) the creation of a lien or other encumbrance subordinate to
the lender's security instrument which does not relate to a transfer of rights
of occupancy in the property (provided that such lien or encumbrance is not
created pursuant to a contract for deed), (v) a transfer by devise, descent or
operation of law on the death of a joint tenant or tenant by the entirety, and
(vi) other transfers as set forth in the Act and the regulations thereunder. As
a result, a lesser number of Mortgage Loans which contain 'due-on-sale' clauses
may extend to full maturity than recent experience would indicate with respect
to single-family mortgage loans. The extent of the effect of the Act on the
average lives and delinquency rates of the Mortgage Loans, however, cannot be
predicted. See 'Maturity Considerations--Prepayment Considerations.'
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ('CERCLA') and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale or operates a mortgaged property may become
liable in certain circumstances for the costs of remedial action ('Cleanup
Costs') if hazardous wastes or hazardous substances have been released or
disposed of on the property. Such Cleanup Costs may be substantial. For any
particular Series of Certificates, it is possible that such Cleanup Costs could
become a liability of the related Trust Fund and reduce the amounts otherwise
distributable to the related Certificateholders if such Cleanup Costs
64
<PAGE>
are incurred in connection with a Mortgaged Property held by such Trust Fund.
Moreover, certain states by statute impose a lien for any Cleanup Costs incurred
by such state on the property that is the subject of such Cleanup Costs (a
'Superlien'). All subsequent liens on such property are subordinated to such
Superlien and, in some states, even prior recorded liens are subordinated to
such Superliens. In the latter states, the security interest of the Trustee in a
property that is subject to such a Superlien could be adversely affected.
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 or the mortgage loan
or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly,
unless otherwise specified in the Prospectus Supplement, the Qualified Lenders
will not have made such evaluation prior to the origination of the Mortgage
Loans nor will the Mortgage Asset Seller or the Depositor have required that
such evaluation be made by the originators who have sold the Mortgage Loans to
them. Neither the applicable Servicer nor the Master Servicer will be required
to undertake any such evaluations prior to foreclosure or accepting a deed-in-
lieu of foreclosure. Neither the Depositor, the Trustee nor the Master Servicer
makes any representations or warranties or assumes any liability with respect to
the absence or effect of hazardous wastes or hazardous substances on any
Mortgaged Property or any casualty resulting from the presence or effect of
hazardous wastes or hazardous substances. See 'Description of the
Certificates--Realization Upon Defaulted Mortgage Loans.'
SUBORDINATE FINANCING
Certain of the Mortgage Loans may not restrict the ability of the borrower
to use the Mortgaged Property as security for one or more additional loans.
Where a borrower encumbers a mortgage property with one or more junior liens,
the senior lender is subjected to additional risk. First, the borrower may have
difficulty servicing and repaying multiple loans. Moreover, if the subordinate
financing permits recourse to the borrower (as is frequently the case) and the
senior loan does not, a borrower may have more incentive to repay sums due on
the subordinate loan. Second, acts of the senior lender that prejudice the
junior lender or impair the junior lender's security may create a superior
equity in favor of the junior lender. For example, if the borrower and the
senior lender agree to an increase in the principal amount of or the interest
rate payable on the senior loan, the senior lender may lose its priority to the
extent any existing junior lender is harmed or the borrower is additionally
burdened. Third, if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken by junior lenders
can impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 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 is authorized 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. Fifteen states have
adopted laws reimposing or reserving the right to reimpose interest rate limits.
In addition, even where Title V is not so rejected, any state is authorized to
adopt a provision limiting certain other loan charges.
The Depositor will represent and warrant for the benefit of
Certificateholders that the Mortgage Loans were originated in full compliance
with applicable state laws, including usury laws.
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, deed of trust and mortgage generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Agreement, late charges and prepayment fees (to the extent
permitted by law and not waived by the Master
65
<PAGE>
Servicer or the Servicers) will be retained by the Master Servicer or the
Servicers as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue of whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
the deeds of trust receive notices in addition to the statutorily-prescribed
minimum requirements. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protections to the borrower.
CO-OP LOANS
To the extent set forth in the Prospectus Supplement, certain of the
Mortgage Loans may have been made in connection with a purchase or refinance of
cooperative apartments. Such Co-op Loans are not secured by liens on real
estate. The 'owner' of a cooperative apartment does not own the real estate
constituting the apartment but owns shares of stock in a corporation which holds
title to the building in which the apartment is located, and by virtue of owning
such stock is entitled to a proprietary lease to occupy the specific apartment
(the 'Lease'). Thus, a Co-op Loan is a personal loan secured by a lien on the
shares and an assignment of the Lease. If the borrower defaults on a Co-op Loan,
the lender's remedies are similar to the remedies which apply to a foreclosure
of a mortgage or deed of trust, in that the lender can foreclose the loan and
assume 'ownership' of the apartment.
There are certain risks which arise as a result of the cooperative form of
ownership which differentiate Co-op Loans from other types of mortgage loans.
For example, the power of the board of directors of most cooperative
corporations to reject a proposed purchaser of a unit owner's shares (and
prevent the sale of an apartment) for any reason (other than reasons based upon
unlawful discrimination) or for no reason, significantly reduces the universe of
potential purchasers in the event of a foreclosure. Moreover, cooperative
apartment owners run a special risk in buildings where the 'sponsor' (i.e., the
owner of the unsold shares in the corporation) holds a significant number of
unsold apartments if the sponsor were to go into default on a loan which is
secured by a mortgage on the building. In such event the unit owners would be
forced by special assessment to make the payments on the delinquent loan or risk
losing their apartments in a foreclosure proceeding brought by the holder of the
mortgage on the building. Not only would the value attributable to the right to
occupy a particular apartment be adversely affected by the special assessment,
but the foreclosure of a mortgage on the building in which the apartment is
located could result in a total loss of the shareholder's equity in the building
(and a corresponding loss of the lender's security for its Co-op Loan).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Federal income tax consequences of an investment in a Certificate of a
Series or a Class thereof will vary depending on the characteristics of such
Certificate. The following is a general discussion of the anticipated material
Federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereunder. The discussion is based upon the Internal
Revenue Code of 1986, as amended (the 'Code'), its legislative history, existing
and proposed regulations thereunder, including regulations (the 'REMIC
Regulations' and 'OID Regulations') promulgated under the real estate mortgage
investment conduit and original issue discount provisions of the Code, published
rulings and court decisions, all as in effect and existing
66
<PAGE>
on the date hereof and all of which are subject to change at any time, possibly
on a retroactive basis, and to differing interpretations. The OID Regulations do
not provide guidance on the computation of the accrual of original issue
discount under section 1272(a)(6) of the Code with respect to regular interests
in a REMIC.
The following discussion applies only to those persons who are the original
holders of the Certificates and who hold Certificates as capital assets, and
does not address the tax consequences to taxpayers who are subject to special
rules (such as foreign persons, tax-exempt organizations and insurance
companies) or aspects of Federal income taxation that may be relevant to a
prospective investor based upon such investor's particular tax situation. This
discussion generally does not address the state, local or foreign tax
consequences of the purchase, ownership and disposition of such Certificates.
Investors should consult their tax advisors in determining the Federal, state,
local, foreign or other tax consequences to them of the purchase, ownership and
disposition of the Certificates offered hereunder. The following discussion
addresses securities of two general types: (i) certificates representing
interests in a Trust Fund, or a portion thereof, which the Master Servicer will
covenant to elect to have treated as a REMIC under Code Sections 860A through
860G and (ii) certificates representing certain interests in a Trust Fund for
which an election to be treated as a REMIC will not be made. The Prospectus
Supplement for each Series of Certificates will indicate whether a REMIC
election will be made for the related Trust Fund and, if such an election is
made for the Trust Fund, will designate the related series of Certificates as
either 'regular interests' or 'residual interests' in the REMIC. For purposes of
this tax discussion, references to a 'Certificateholder' are references to the
beneficial owner of a Certificate.
REMIC
Classification of REMICs
An election to be treated as a REMIC for federal income tax purposes may be
made for a Trust Fund relating to a Series of Certificates. Such an election
will generally be made if the related Trust Fund would not qualify as a grantor
trust under subpart E, Part I of Subchapter J of the Code. Upon issuance of each
Series of Certificates for which an election to be treated as a REMIC is made,
Mayer, Brown & Platt, counsel to the Depositor, is of the opinion that, assuming
(i) ongoing compliance with all provisions of the Agreement which include
requirements, among other things, that a REMIC election be made timely in the
required form, certain representations set forth in the Agreement be true, and
there be continued compliance with the applicable provisions of the Code, as it
may be amended from time to time, and the applicable Treasury Regulations issued
thereunder, and (ii) the accuracy of information contained in certain other
documents, the Trust Fund issuing a Series of Certificates, under current
Federal income tax law, will qualify as a REMIC (and will not be treated as an
association or publicly traded partnership taxable as a corporation) for Federal
income tax purposes, and the Certificates offered thereby will be considered to
be 'regular interests' ('Regular Certificates') or 'residual interests'
('Residual Certificates') in a REMIC. Such opinion will be filed prior to
issuance of such Series of Certificates as an exhibit to a post-effective
amendment or in a Current Report on Form 8-K.
QUALIFICATION AS A REMIC
In order for the Trust Fund to qualify as a REMIC, there must be ongoing
compliance on the part of the Trust Fund with certain requirements set forth in
the Code. First, the Trust Fund must fulfill an asset test, which requires that
no more than a de minimis amount of the assets of the Trust Fund, 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 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 is met at any time when the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the Trust Fund'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 qualified mortgage is any obligation (including any participation or
certificate of beneficial ownership therein) that is principally secured by an
interest in real property and, generally, that is (i) transferred to the Trust
Fund on the Startup Day, (ii) purchased by the Trust Fund within a three-month
period thereafter pursuant to a fixed price contract in effect on the Startup
Day or (iii) received by the REMIC within such three-month period in replacement
of an obligation transferred to the REMIC on the Startup Day. Qualified
mortgages also include a
67
<PAGE>
regular interest in another REMIC if the interest is transferred to the Trust
Fund on the start-up day in exchange for regular or residual interests in the
Trust Fund. An obligation is 'principally secured by an interest in real
property' if (i) the fair market value of the real property security is at least
80% of the principal amount of the related Mortgage Loan either at origination
or as of the Startup Day (an original loan-to-value ratio of not more than 125%
with respect to the real property security) or (ii) substantially all the
proceeds of the Mortgage Loan were used to acquire, improve or protect an
interest in real property that, at the origination date, was the only security
for the Mortgage Loan. In rendering its opinion with respect to classification
of the Trust Fund as a REMIC, Mayer, Brown & Platt will rely on certain
representations in the Agreement and other documents regarding qualification of
the Mortgage Loans as 'qualified mortgages.'
Permitted investments include cash flow investments, qualified reserve
assets and foreclosure property. A cash flow investment is generally an
investment of amounts received on or with respect to qualified mortgages for a
temporary period, not exceeding thirteen months, which investment must earn a
return in the nature of interest. A qualified reserve asset is any intangible
property held for investment that is part of any reserve reasonably required to
be maintained to provide for payments of expenses or to provide security for
payments due on regular or residual interests that otherwise may be delayed or
defaulted upon because of default (including delinquencies) on the qualified
mortgages or lower than expected reinvestment returns. Foreclosure property is
real property acquired in connection with the default or imminent default of a
qualified mortgage and generally held for not more than two years, plus
extensions permitted by the Code.
In addition to the foregoing requirements, the various interests in the
Trust Fund also must meet certain requirements. A REMIC meets the interests test
if all of the interests in the REMIC are either regular interests or residual
interests, and there is one (and only one) class of residual interests (and all
distributions with respect to the residual interests are made pro rata). A
regular interest is an interest in a REMIC that is issued on the Startup Day
with fixed terms, is designated as a regular interest, 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. The REMIC Regulations provide that an interest in a REMIC
may be treated as a regular interest even if payments with respect to such
interest are subordinated to payments on other interests in the REMIC, and are
dependent on the absence of defaults or delinquencies on qualified mortgages or
permitted investments, lower than reasonably expected returns on permitted
investments, or expenses incurred by the REMIC. A residual interest is an
interest in a REMIC other than a regular interest that is issued on the Startup
Day and that is designated as a residual interest. The Trust Fund must also
adopt reasonable arrangements designed to ensure that 'disqualified
organizations' do not hold residual interests and that tax information is
furnished if this restriction is violated.
The following discussion assumes that all requirements for REMIC
qualification will be satisfied by the Trust Fund while there are any Regular
Certificates outstanding. If a Trust Fund with respect to which a REMIC election
is made fails to comply with one or more of the ongoing requirements of the Code
for REMIC status during any taxable year, the Code provides that the Trust Fund
will not be treated as a REMIC for such year and thereafter. In that event, the
Trust Fund may be taxable as a separate corporation, and the related
Certificates would not be accorded the status or given the tax treatment
described below. The Code provides that if (i) an entity ceases to be a REMIC,
(ii) the Secretary of the Treasury determines that such cessation was
inadvertent, (iii) no later than a reasonable time after the discovery of the
event resulting in such cessation, steps are taken so that such entity is once
more a REMIC, and (iv) such entity, and each person holding an interest in such
entity at any time during a period specified, agrees to make such adjustments as
may be required by the Secretary of the Treasury with respect to such period,
then, notwithstanding such terminating event, the entity will be treated as
continuing to be a REMIC or such cessation will be disregarded, whichever the
Secretary of the Treasury determines to be appropriate. While the Code
authorizes the Treasury Department to issue Treasury Regulations providing
relief in the event of an inadvertent termination of the status as a REMIC, no
such Treasury Regulations have been issued. Any such relief, moreover, may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC's income for the period in which the requirements for such
status are not satisfied.
68
<PAGE>
Characterization of Investments in Certificates
In general, (i) subject to the satisfaction of either the applicable
holding period or the bona fide business purpose requirement of Code Section
593(d)(1)(D), Certificates owned by a 'domestic building and loan association,'
a 'mutual savings bank,' or 'any cooperative bank without capital stock
organized and operated for mutual purposes and without profit' within the
meaning of Code Section 593(a) will be treated as 'qualifying real property
loans' within the meaning of Code Section 593(d), in the same proportion that
the assets of the Pool underlying such Certificates ('Assets') would be so
treated; (ii) Certificates held by a domestic building and loan association
will, under Code Section 7701(a)(19)(C)(xi), count toward satisfying the 60%
asset test applicable to those institutions under 7701(a)(19)(C) in the same
proportion that the Assets would be treated as falling within one of the classes
enumerated in 7701(a)(19)(C)(i) - (x) (including without limitation 'loans
secured by an interest in real property' within the meaning of Section
7701(a)(19)(C)(v)); and (iii) Certificates held by a real estate investment
trust will constitute 'real estate assets' within the meaning of Code Section
856(c)(5)(B), and interest on the REMIC 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 the Assets would be so treated. Moreover, if 95% or more of the
Assets qualify for any of the foregoing treatments at all times during the
calendar year, the Certificates will qualify for the corresponding status in
their entirety for that calendar year. Certificates held by certain financial
institutions will constitute an 'evidence of indebtedness' within the meaning of
Code Section 582(c)(1).
Certificateholders should be aware that (i) Certificates held by a real
estate investment trust will not constitute 'Government securities' within the
meaning of Code Section 856(c)(5)(A) and (ii) Certificates held by a regulated
investment company will not constitute 'Government securities' within the
meaning of Code Section 851(b)(4)(A)(i).
Taxation of Owners of Regular Certificates
For Federal income tax purposes, a Regular Certificate will be treated as a
debt instrument issued by the REMIC and not as an ownership interest in the
REMIC or the assets of the REMIC. The amounts includible in the income of a
Regular Certificateholder will be determined under the accrual method.
Original Issue Discount. The Regular Certificates may be issued with
'original issue discount' within the meaning of Code Section 1273(a). Holders of
any Class of Regular Certificates issued with original issue discount will be
required to include such original issue discount in gross income for Federal
income tax purposes as it is deemed to accrue, in advance of the receipt of the
cash attributable to such income.
Rules governing original issue discount are set forth generally in Code
Sections 1272, 1273 and 1275, and the OID Regulations. Code Section 1272(a)(6)
provides special original issue discount rules applicable to regular interests
in a REMIC, such as Regular Certificates. However, as discussed above, no
Treasury Regulations have as yet been proposed or adopted regarding the
computation of the accrual of original issue discount under Code Section
1272(a)(6). Further, the application of the OID Regulations to the Regular
Certificates remains unclear in other respects because the OID Regulations
either do not address, or are subject to varying interpretations with regard to,
several relevant issues.
Under the Code, 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.' Except as discussed in the following
paragraph, in general, the issue price of a Regular Certificate offered
hereunder will be determined with reference to the first price at which a
substantial amount of the Certificates is sold for money (other than to bond
houses or brokers). The stated redemption price at maturity of a Regular
Certificate will be the sum of all payments to be made on such Regular
Certificate other than 'qualified stated interest payments.' Qualified stated
interest is stated interest that is unconditionally payable at least annually at
a single fixed rate that appropriately takes into account the length of the
interval between payments. Qualified stated interest also includes certain
stated interest on 'variable rate debt instruments' if the interest is
unconditionally payable at least annually. The requirements for qualification of
a debt instrument bearing a rate of interest other than a fixed rate as a
'variable rate debt instrument' and for qualification of stated interest on a
variable rate debt instrument as 'qualified stated interest' are complex, and no
assurance can be given that all stated interest on Regular Certificates will
constitute qualified stated interest. For a general discussion of the treatment
of variable rate
69
<PAGE>
interest, see 'Investment in Certificates Not Representing Interests in a
REMIC--Taxation of Owners of P&I Certificates--Variable Rate Certificates,'
below. Generally, the stated redemption price at maturity of a Regular
Certificate will be its initial Certificate Balance. Under the OID Regulations,
if any portion of the initial purchase price of a Regular Certificate is
allocable to interest that has accrued prior to the issue date of such Regular
Certificate, and if such pre-issuance accrued interest will be paid on the first
payment date within one year of the issue date, the issue price of the Regular
Certificate may be computed by subtracting from the issue price (as otherwise
determined) such pre-issuance accrued interest. If the issue price is so
computed, the actual payment of such pre-issuance accrued interest will be
treated as a return of the excluded pre-issuance accrued interest, rather than
as an amount payable on the debt instrument.
Under a de minimis rule in the Code, as interpreted in the OID Regulations,
original issue discount on a Regular Certificate will be considered to be zero,
and all stated interest will be treated as qualified stated interest includible
under the accrual method of accounting, 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 life of the Regular Certificate. However,
under the OID Regulations, the holder of a Regular Certificate that has de
minimis OID would be required to include such de minimis OID in income as
principal payments are made in proportion to the ratio that each such principal
payment bears to the stated principal amount of such Regular Certificate. For
this purpose, the weighted average life of the Regular Certificate is computed
as the sum of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) until each payment included in the
stated redemption price at maturity is expected to be made by (ii) a fraction,
the numerator of which is the amount of such payment and the denominator of
which is the total amount of payments included in the stated redemption price at
maturity of such Regular Certificate. The Internal Revenue Service may take the
position that this rule should be applied taking into account the Prepayment
Assumption (described below) and the effect of any anticipated investment
income.
For purposes of computing the accrual of original issue discount on the
Regular Certificates issued by a REMIC, Code Section 1272(a)(6) requires that a
reasonable assumed prepayment rate (the 'Prepayment Assumption') be used with
respect to mortgage loans held by a REMIC, and that adjustments be made in the
amount and rate of accrual of such discount to reflect differences between the
actual prepayment rate and the Prepayment Assumption. Code Section 1272(a)(6)
provides that the Prepayment Assumption is to be determined in the manner
prescribed in Treasury Regulations. As noted above, those Treasury Regulations
have not been issued. The Conference Committee Report discussing Code Section
1272(a)(6) (the 'Committee Report') indicates that the Treasury Regulations will
provide that the Prepayment Assumption used in determining the amount and rate
of accrual of discount with respect to a Regular Certificate must be the same as
that used in pricing the initial offering of such Regular Certificate. The
Prepayment Assumption used by the Master Servicer in reporting original issue
discount for each series will be consistent with this standard and will be
disclosed in the related Prospectus Supplement. However, neither the Master
Servicer nor the Trustee will make any representation that the Mortgage Loans
will in fact prepay at a rate conforming to the Prepayment Assumption or at any
other rate. Each investor must make its own decision as to the appropriate
Prepayment Assumption to be used in deciding whether or not to purchase any of
the Regular Certificates.
Original issue discount is accrued by a Regular Certificateholder by
including in its gross income the sum of the 'daily portions' of original issue
discount, if any, on its Regular Certificate for each day during its taxable
year on which it held such Regular Certificate. In general, in the case of an
original holder of a Regular Certificate, the daily portions of original issue
discount will be determined based on the excess, if any, of (i) the sum of (A)
the present value, as of the end of the accrual period, of all of the
distributions remaining to be made on the Regular Certificate in future periods
and (B) the distributions made on such Regular Certificate during the accrual
period of amounts included in the stated redemption price at maturity, over (ii)
the adjusted issue price of such Regular Certificate at the beginning of the
accrual period. The excess will then be allocated ratably to each day during the
period to determine the daily portion of original issue discount for that day.
Although the OID Regulations allow Certificateholders to use interest accrual
periods of any length as long as each distribution date falls on either the
first day or final day of an accrual period, a Trust Fund with respect to which
a REMIC election is made will report original issue discount to
Certificateholders based on the assumption that each accrual period ends on a
date that corresponds to a Distribution Date and begins on the first day
following the immediately preceding accrual period (or in the case of the first
such period, begins on the Closing Date). The present value of
70
<PAGE>
the remaining distributions will be calculated (i) assuming that distributions
on the Regular Certificate will be received in future periods based on the
Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption, (ii)
using a discount rate equal to the original yield to maturity of the Regular
Certificate and (iii) taking into account events (including actual prepayments)
that have occurred before the close of the accrual period. The original yield to
maturity of the Regular Certificate will be calculated based on its issue price
and the assumption that distributions on the Regular Certificate will be made in
all periods as if the Mortgage Loans prepaid at a rate equal to the Prepayment
Assumption. The adjusted issue price of a Regular Certificate at the beginning
of any accrual period will equal the issue price of such Certificate, increased
by the aggregate amount of the daily portions with respect to such Regular
Certificate that accrued in prior accrual periods, and reduced by the amount of
any distributions made on such Regular Certificate in prior accrual periods of
amounts included in the stated redemption price at maturity.
A subsequent purchaser of a Regular Certificate that purchases the Regular
Certificate at a cost less than its remaining stated redemption price at
maturity will also be required to include in gross income the daily portions of
any original issue discount with respect to the Regular Certificate. However, if
the cost of the Regular Certificate to such subsequent purchaser is in excess of
its 'adjusted issue price,' each such daily portion will be reduced in
proportion to the ratio such excess bears to the aggregate original issue
discount remaining to be accrued on the Regular Certificate. The adjusted issue
price of a Regular Certificate on any given day equals the issue price,
increased by the amount of original issue discount previously includible in the
gross income of any holder, and decreased by the amount of any payment
previously made other than a payment of qualified stated interest.
Variable Rate Certificates. A Regular Certificate may provide for payments
of interest based on a variable interest rate formula, and may provide for
minimum or maximum rates or other adjustments. For a general discussion of the
treatment of variable rate interest, see 'Investment in Certificates Not
Representing Interests in a REMIC--Taxation of Owners of P&I
Certificates--Variable Rate Certificates.'
Market Discount. A Certificateholder that purchases a Regular Certificate
at a market discount, that is, at a purchase price less than its remaining
stated principal amount, or in the case of a Regular Certificate issued with
original issue discount, less than its 'revised issued price' (which generally
has the same meaning as 'adjusted issue price,' as defined above) will recognize
market discount income upon receipt of each principal distribution. See
'Investment in Certificates Not Representing Interests in a REMIC--Taxation of
Owners of P&I Certificates--If Stripped Bond Rules Do Not Apply and--Premium and
Market Discount' below, for a general discussion of market discount. Treasury
regulations implementing the market discount rules have not yet been issued.
Investors should consult their own tax advisors regarding the application of the
market discount rules and the advisability of making any of the elections
provided by the Code relating to the timing of recognition of market discount.
The market discount rules will not be applicable to a Regular Certificate so
long as it is held by its initial purchaser.
Premium. A Regular Certificateholder that purchased its Regular
Certificate at a premium may elect under Code Section 171 to amortize such
premium under a constant yield method over the life of the Certificate as an
offset to interest income, rather than as a separate deduction item. It is not
clear whether the Prepayment Assumption would be taken into account in
determining the life of the Regular Certificate for this purpose. However, the
Committee Report states that the same rules that apply to accrual of market
discount (which rules will require use of a Prepayment Assumption in accruing
market discount with respect to Regular Certificates without regard to whether
such Certificates have original issue discount) will also apply in amortizing
bond premium under Code Section 171. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. See 'Constant Yield Election' below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
Constant Yield Election
The OID Regulations permit Certificateholders to elect to include all
interest that accrues on a debt instrument by using a constant yield method. For
this purpose, 'interest' includes stated interest, acquisition discount, OID, de
minimis OID, market discount, de minimis market discount, and unstated interest,
as adjusted by any amortizable bond premium or acquisition premium. This
election would, in some cases, simplify the
71
<PAGE>
calculation of interest income for Certificateholders to whom it is available.
However, if the holder makes such an election with respect to a debt instrument
with amortizable bond premium or 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
debt instruments acquired by the holder in the same taxable year or thereafter.
The election is irrevocable except with approval of the Internal Revenue
Service. Investors should consult their own tax advisors regarding the
advisability of making such an election.
Effects of Defaults and Delinquencies
Certain Series of Certificates may contain one or more Classes of
Subordinate Certificates, and in the event there are defaults or delinquencies
on the Mortgage Loans, amounts that would otherwise be distributed on the
Subordinate Certificates may instead be distributed on the Senior Certificates.
Holders of Subordinate Certificates nevertheless will be required to report
income with respect to such Certificates under an accrual method without giving
effect to delays and reductions in distributions on such Subordinate
Certificates attributable to defaults and delinquencies on the Mortgage Loans,
except to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income reported by a holder of a
Subordinate Certificate in any period could significantly exceed the amount of
cash distributed to such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Subordinate Certificate
is reduced as a result of defaults and delinquencies on the Mortgage Loans.
However, the timing and character of such losses or reductions in income are
uncertain, and, accordingly, holders of Subordinate Certificates should consult
their own tax advisors on this point.
Taxation of Owners of Residual Certificates
Daily Portions. A Residual Certificateholder generally will be required to
report its daily portion of the taxable income or, subject to the limitation
described in '-- Basis Rules and Distributions' below, the net loss of the REMIC
for each day during a calendar quarter that the Residual Certificateholder owned
such Residual Certificate. For this purpose, the daily portion will be
determined by allocating to each day in the calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for such quarter and then by
allocating the amount so allocated among the Residual Certificateholders in
accordance with their percentage of ownership interests on such day. Any amount
included in the gross income of or allowed as a loss to any Residual
Certificateholder by virtue of the rules described in this paragraph will be
treated as ordinary income or loss. Each Residual Certificateholder should be
aware that taxable income with respect to its Residual Certificate may exceed
cash distributions with respect thereto in any taxable year.
Taxable Income of the REMIC. The taxable income of the REMIC will reflect
a netting of (i) the income from the Mortgage Loans and other assets of the
REMIC and (ii) the deductions allowed to the REMIC for interest (including
original issue discount) on the Regular Certificates (and any other class of
Certificates constituting 'regular interests' in the REMIC not offered hereby)
and, except as described below, for servicing, administrative and other
expenses. The limitation on miscellaneous itemized deductions imposed on
individuals by Code Section 67 will not be applied at the Pool level to such
expenses. See '--Pass-Through of Miscellaneous Itemized Deductions' below.
As a general rule, the taxable income of the REMIC will be determined in
the same manner as if the REMIC were an individual using the accrual method of
accounting, with certain modifications. The first modification is that a
deduction will be allowed for accruals of interest (including original issue
discount) on the 'regular interests' in the REMIC. If a Regular Certificate is
issued at a price in excess of its aggregate principal amount, the net amount of
interest deductions that are allowed the REMIC in each taxable year with respect
to the Regular Certificate will be reduced by an amount equal to the portion of
the excess that is considered to be amortized or prepaid in that year. Although
the matter is not entirely certain, it is likely that any such excess would be
amortized under a constant yield method in a manner analogous to the method for
accruing original issue discount described under 'Taxation of Owners of Regular
Certificates--Original Issue Discount' above.
The second modification relates to the accrual of income on a Mortgage Loan
deemed to have been acquired with market discount or premium. Any such market
discount will be includible in the income of the REMIC as it
72
<PAGE>
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the Regular Certificates. If the REMIC elects under Code Section 171
to amortize any premium on the Mortgage Loans, the premium may be amortized
under a constant yield method. See '--Taxation of Owners of Regular
Certificates--Market Discount' and '--Premium' above.
The third modification is that no item of income, gain, loss or deduction
allocable to a prohibited transaction (see '--Prohibited Transactions and other
REMIC-Level Taxes,' below) will be taken into account.
The fourth modification is that the REMIC generally may not deduct any item
that would be disallowed in calculating the taxable income of a partnership by
virtue of Code Section 703(a)(2).
The fifth modification is that the amount of the net income from
'foreclosure property' (if any) must be reduced by the amount of tax imposed
under Code Section 860G(c) with respect to such 'foreclosure property.'
The REMIC will have an initial aggregate basis in its assets equal to the
aggregate issue price of the 'regular interests' and 'residual interests' in the
REMIC. Such aggregate basis will be allocated among the individual Mortgage
Loans and other assets of the REMIC in proportion to their respective fair
market values. Accordingly, the Master Servicer will be required to estimate the
fair market value of such interests in order to determine the basis of the REMIC
in the Mortgage Loans and other property held by the REMIC. Generally with
respect to any Certificate offered hereby, its fair market value will be its
issue price as determined in the manner described above under 'Taxation of
Owners of Regular Certificates--Original Issue Discount' above.
Basis Rules and Distributions. Any distribution by a REMIC to a Residual
Certificateholder will not be included in the gross income of such Residual
Certificateholder to the extent it does not exceed the adjusted basis of such
Residual Certificateholder's interest in a Residual Certificate. Such
distribution will reduce the adjusted basis of such interest, but not below
zero. To the extent a distribution exceeds the adjusted basis of the Residual
Certificate, it will be treated as gain from the sale of the Residual
Certificate. See '--Sales of Certificates,' below. The adjusted basis of a
Residual Certificate is equal to the amount paid for such Residual Certificate,
increased by amounts included in the income of the Residual Certificateholder
(see '--Taxation of Owners of Residual Certificates--Daily Portions,' above) and
decreased by distributions and by net losses taken into account with respect to
such interest.
A Residual Certificateholder is not allowed to take into account any net
loss for any calendar quarter to the extent such net loss exceeds such Residual
Certificateholder's adjusted basis in its Residual Certificate as of the close
of such calendar quarter (determined without regard to such net loss). Any loss
allowed will reduce the adjusted basis of such interest, but not below zero. Any
loss disallowed by reason of this limitation may be carried forward indefinitely
to future calendar quarters and, subject to the same limitation, may be used
only to offset income from the Residual Certificate. The effect of these basis
and distribution rules is that a Residual Certificateholder may not amortize its
basis in a Residual Certificate, but may only recover its basis through
distributions, and through the deduction of any net losses of the REMIC or upon
the sale of its Residual Certificate. See '--Sales of Certificates' below.
Excess Inclusions. Any 'excess inclusion' with respect to a Residual
Certificate is subject to certain special tax rules. With respect to a Residual
Certificateholder, the excess inclusion for any calendar quarter is defined as
the excess (if any) of the daily portions of taxable income over the sum of the
'daily accruals' for each day during such quarter that such Residual Certificate
was held by such Residual Certificateholder. The daily accruals are determined
by allocating to each day during a calendar quarter its ratable portion of the
product of the 'adjusted issue price' of the Residual Certificate at the
beginning of the calendar quarter and 120 percent of the long-term 'applicable
Federal rate' (generally, an average of current yields on Treasury securities of
comparable maturity) in effect at the time of issuance of the Residual
Certificate. For this purpose, the adjusted issue price of a Residual
Certificate offered hereby, if any, as of the beginning of any calendar quarter
is the issue price of the Residual Certificate, (see '--Taxable Income of the
REMIC' above) increased by the amount of daily portions of income for all prior
quarters and decreased (but not below zero) by any distributions made with
respect to such Residual Certificate and any net losses taken into account with
respect to such Residual Certificates before the beginning of such quarter.
73
<PAGE>
As an exception to the general rules described above, the Treasury
Department has authority to issue regulations that would treat the entire amount
of income accruing on a Residual Certificate as an excess inclusion if the
aggregate Residual Certificates in the REMIC did not have 'significant value.'
The REMIC Regulations do not provide for such an exception.
For Residual Certificateholders, other than thrift institutions described
in Code Section 593, an excess inclusion cannot be offset by losses from other
sources. For Residual Certificateholders that are subject to tax on unrelated
business taxable income (as defined in Code Section 511), an excess inclusion is
treated as unrelated business taxable income. With respect to Residual
Certificateholders that are nonresident alien individuals or foreign
corporations generally subject to United States 30% withholding tax, an excess
inclusion will be subject to such tax and no tax treaty rate reduction or
exemption may be claimed with respect thereto. See '--Foreign Investors' below.
If a thrift institution described in Code Section 593 holds a Residual
Certificate that has 'significant value,' the thrift institution may offset its
losses against its excess inclusion income. In general, a Residual Certificate
has significant value if (i) the aggregate of the issue prices of the Residual
Certificates in the REMIC is at least equal to 2 percent of the aggregate of the
issue prices of all Regular Certificates and Residual Certificates in the REMIC,
and (ii) the anticipated weighted average life of the Residual Certificates is
at least 20 percent of the anticipated weighted average life of the REMIC.
However, a net operating loss of any other member of an affiliated group of
which the thrift institution is a member may not be used to offset an excess
inclusion attributable to the thrift institution. In addition, a thrift
institution may not offset its losses against an excess inclusion attributable
to a Residual Certificate held by any other member of an affiliated group of
which the thrift institution is a member.
In the case of any Residual Certificate held by a real estate investment
trust, the aggregate excess inclusions with respect to such Residual
Certificate, reduced (but not below zero) by the real estate investment trust's
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to
the Residual Certificate as if held directly by such shareholders.
Pass-Through of Miscellaneous Itemized Deductions
Under temporary Treasury regulations, if the REMIC is considered to be a
'single-class REMIC,' a portion of the REMIC's servicing, administrative and
other non-interest expenses will be allocated as a separate item to those
Regular Certificateholders that are 'pass-through interest holders.' Generally,
a single class REMIC is defined as (i) a REMIC that is substantially similar to
an investment trust under Treasury regulations but for its qualification as a
REMIC, or (ii) a REMIC that is substantially similar to an investment trust but
is structured with the principal purpose of avoiding this allocation requirement
imposed by the temporary regulations. Such a pass-through interest holder would
be required to add its allocable share, if any, of such expenses to its gross
income and to treat the same amount as an item of investment expense. An
individual generally would be allowed a deduction for such expenses only as a
miscellaneous itemized deduction subject to the limitations under Code Section
67, which allows such deductions only to the extent that in the aggregate such
expenses exceed two percent of the holder's adjusted gross income. In addition,
Code Section 68 provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a certain amount
(the 'Applicable Amount') will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over the Applicable Amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for the taxable year.
The amount of additional taxable income recognized by Regular Certificateholders
who are subject to the limitations of either Code Section 67 or Code Section 68
may be substantial. The REMIC is required to report to each pass-through
interest holder and to the IRS such holder's allocable share, if any, of the
REMIC's non-interest expenses. The term 'pass-through interest holder' generally
refers to individuals, entities taxed as individuals and certain pass-through
entities including regulated investment companies, but does not include real
estate investment trusts. Certificateholders that are 'pass-through interest
holders' should consult their own tax advisors about the impact of these rules
on an investment in the Regular Certificates.
74
<PAGE>
In addition, in a REMIC that is not considered to be a 'single-class REMIC'
as well as a REMIC that is considered to be a 'single-class REMIC,' all or a
portion of the REMIC's servicing, administrative and other non-interest expenses
will be allocated as a separate item to Residual Certificateholders that are
'pass-through interest holders.' Such a holder would be required to add its
allocable share, if any, of such expenses to its gross income and to treat the
same amount as an item of investment expense and an individual Residual
Certificateholder would be subject to the same limitations and adjustments as
described above for Regular Certificateholders.
Sales of Certificates
If a Certificate is sold, the selling Certificateholder will recognize gain
or loss equal to the difference between the amount realized on the sale and its
adjusted basis in the Certificate. The adjusted basis of a Regular Certificate
generally will equal the cost of such Regular Certificate to such
Certificateholder, increased by income reported by such Certificateholder with
respect to such Regular Certificate and reduced (but not below zero) by
distributions on such Regular Certificate received by such Certificateholder and
by any amortized premium. The adjusted basis of a Residual Certificate will be
determined as described under 'Taxation of Owners of Residual
Certificates--Basis Rules and Distributions,' above. Except as provided in the
following two paragraphs, any such gain or loss will be capital gain or loss,
provided such Certificate is held as a capital asset (generally, property held
for investment) within the meaning of Code Section 1221. The Federal income tax
rates applicable to capital gains for taxpayers other than individuals, estates,
and trusts are currently the same as those applicable to ordinary income.
However, the maximum ordinary income tax rate for individuals, estates, and
trusts is generally 39.6%, whereas the maximum long-term capital gains rate for
such taxpayers is 20% for capital assets held for more than 18 months, and 28%
for capital assets held for more than 12 months and not more than 18 months.
Capital losses generally may be used by a corporate taxpayer only to offset
capital gains, and by an individual taxpayer only to the extent of capital gains
plus $3,000 of other income.
Gain from the sale of a Regular Certificate that might otherwise be capital
gain will be treated as ordinary income to the extent such gain does not exceed
the excess, if any, of (i) the amount that would have been includible in the
seller's income with respect to such Regular Certificate assuming that income
had accrued thereon at a rate equal to 110% of the applicable Federal rate
determined as of the date of purchase of such Regular Certificate, over (ii) the
amount of ordinary income actually includible in the seller's income prior to
such sale.
Certificates will be 'evidences of indebtedness' within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a Certificate by a bank or thrift institution to which such section applies will
be ordinary income or loss.
Except as provided in Treasury regulations, if the seller of a Residual
Certificate reacquires a Residual Certificate, any other residual interest in a
REMIC or any similar interest in a 'taxable mortgage pool' (as defined in Code
Section 7701(i)) during the period beginning six months before, and ending six
months after, the date of such sale, such sale will be subject to the 'wash
sale' rules of Code Section 1091. In that event, any loss realized by the
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such Residual Certificateholder's adjusted basis in the
newly-acquired asset.
Prohibited Transactions and Other REMIC-Level Taxes
A REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from 'prohibited transactions.' In general, a prohibited
transaction means (i) the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, (ii) the receipt of investment income from a
source other than a Mortgage Loan or certain other permitted investments, (iii)
the receipt of compensation for services, or (iv) gain from the disposition of
an asset purchased with the payments on the Mortgage Loans for temporary
investment pending distribution on the Certificates. It is not anticipated that
a Trust Fund that makes an election to be taxed as a REMIC will engage in any
prohibited transactions. In addition, under the Code, a REMIC generally will be
taxed at a 100% rate on any contribution made to the REMIC after the Start-Up
Date unless such contribution is a cash contribution that (i) takes place within
the three-month period beginning on the closing date, (ii) is made to facilitate
a clean-up call or a qualified liquidation, (iii) is a payment in the nature of
a guarantee, or
75
<PAGE>
(iv) constitutes a contribution by the holder of the Residual Certificates in
the REMIC to a qualified reserve fund. The structure and operation of a Trust
Fund that makes an election to be taxed as a REMIC will be designed to avoid the
imposition of the 100% tax on contributions.
To the extent that a REMIC derives certain types of income from foreclosure
property (generally, income relating to dealer activities of the REMIC), it will
be taxed on such income at the highest corporate income tax rate. It is not
anticipated that a Trust Fund that makes an election to be taxed as a REMIC will
receive significant amounts of such income.
Tax on Transfers of Residual Certificates to Certain Organizations
If a Residual Certificate is transferred to a 'disqualified organization'
(as defined below), a tax would be imposed in an amount, determined under the
REMIC Regulations, generally equal to the product of (i) the present value of
the total anticipated excess inclusions with respect to such Residual
Certificate for periods after the transfer (determined by discounting the
anticipated excess inclusions from the end of each remaining calendar quarter in
which those excess inclusions are expected to accrue at the applicable Federal
rate based on the date on which the transfer occurs to the date the disqualified
organization acquires the residual interest) and (ii) the highest marginal
federal income tax rate applicable to corporations. Such a tax would generally
be imposed on the transferor of the Residual Certificate, except that where such
transfer is through an agent for a disqualified organization, the tax would
instead be imposed on such agent. However, a transferor of a Residual
Certificate would in no event be liable for such tax with respect to a transfer
if the transferee furnished to the transferor an affidavit stating the
transferee's social security number and 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. An entity will not
qualify as a REMIC unless there are reasonable arrangements designed to ensure
that residual interests in such entity are not held by disqualified
organizations and that information needed for the application of the tax
described herein will be made available. Restrictions on the transfer of the
Residual Certificate and certain other provisions that are intended to meet
these requirements are contained in the Agreement. Certificateholders should
consult their advisors regarding the potential impact on them of such
restrictions.
For these purposes, a 'disqualified organization' means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Code Section
168(h)(2)(D)), (ii) any organization (other than a cooperative described in Code
Section 521) which is exempt from tax unless such organization is subject to the
tax imposed by Code Section 511 or (iii) any organization described in Code
Section 1381(a)(2)(C).
In addition, if a 'pass-through entity' (as defined below) includes in
income excess inclusions with respect to a Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such pass-through entity equal to the product of
(i) the amount of excess inclusions on the Residual Certificate that are
allocable to the interest in the pass-through entity held by such disqualified
organization and (ii) the highest marginal federal income tax rate imposed on
corporations. A pass-through entity will not be subject to this tax for any
period, however, if the record holder of such interest furnishes to such pass-
through entity an affidavit that such record holder is not a disqualified
organization and, during such period, the pass-through entity does not have
actual knowledge that such affidavit is false. For these purposes, a 'pass-
through entity' means any regulated investment company, real estate investment
trust, trust, partnership or certain other entities described in Code Section
860E(e)(6).
Disregard of Certain Transfers
The REMIC Regulations provide that the transfer of a 'non-economic residual
interest' to a United States person will be disregarded for tax purposes if a
significant purpose of the transfer was to impede the assessment or collection
of tax. A Residual Certificate will constitute a non-economic residual interest
unless, at the time the interest is transferred, (i) the present value of the
expected future distributions with respect to the Residual Certificate equals or
exceeds the product of the present value of the anticipated excess inclusion
income and the highest corporate tax rate for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC in amounts sufficient to satisfy the taxes
on excess
76
<PAGE>
inclusion income as they accrue. A significant purpose to impede the assessment
or collection of tax exists if the transferor, at the time of the transfer,
either knew or should have known that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor is presumed not to have knowledge if (i) the transferor conducted, at
the time of the transfer, a reasonable investigation of the financial condition
of the transferee and, as a result of the investigation, the transferor found
that the transferee had historically paid its debts as they came due and found
no significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the noneconomic
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.
A transfer of a Residual Certificate to a foreign person will be
disregarded if the Residual Certificate has tax avoidance potential. A Residual
Certificate will have tax avoidance potential unless, at the time of the
transfer, the transferor reasonably expects that, for each excess inclusion, the
REMIC will distribute to the transferee Residual Certificateholder an amount
that will equal at least 30 percent of the excess inclusion, and that each such
amount will be distributed at or after the time at which the excess inclusion
accrues and not later than the close of the calendar year following the calendar
year of accrual. Under the REMIC Regulations a safe harbor is provided under
which a transferor is treated as having a reasonable expectation if the 30
percent test would be satisfied were the mortgages held by a REMIC to prepay at
each rate within a range of rates from 50 percent to 200 percent of the rate
assumed under Code Section 1272(a)(6) with respect to the qualified mortgages
(or the rate that would have been assumed had the mortgages been issued with
original issue discount). If a transfer of a residual interest is disregarded,
the transferor would be liable for any Federal income tax imposed upon taxable
income that otherwise would be derived by the transferee from the REMIC.
Termination
A REMIC will terminate shortly following receipt by the REMIC of the final
payment in respect of the Mortgage Loans or upon a sale of the REMIC's assets
following the adoption by the REMIC of a plan of complete liquidation. The last
distribution on a Regular Certificate will be treated as a payment in retirement
of a debt instrument. In the case of a Residual Certificate, if the last
distribution on such Residual Certificate is less than the Residual
Certificateholder's adjusted basis in such Residual Certificate, such Residual
Certificateholder should be allowed a loss equal to the amount of such
difference.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and Residual Certificateholders will be treated
as partners. Unless otherwise stated in the related Prospectus Supplement, the
Master Servicer, which will hold at least a nominal amount of Residual
Certificates, will file REMIC federal income tax returns on behalf of the
related REMIC, and will be designated as and will act as the 'tax matters
person' with respect to the REMIC in all respects.
As the tax matters person, the Master Servicer will, subject to certain
notice requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the Residual Certificateholders in
connection with the administrative and judicial review of items of income,
deduction, gain or loss of the REMIC, as well as the REMIC's classification.
Residual Certificateholders will generally be required to report such REMIC
items consistent with their treatment on the REMIC's tax return and may in some
circumstances be bound by a settlement agreement between the Master Servicer, as
tax matters person, and the Internal Revenue Service concerning any such REMIC
item. Any person that holds a Residual Certificate as a nominee for another
person may be required to furnish the REMIC, in a manner to be provided in
Treasury Regulations, with the name and address of such person and other
information.
Reporting of interest income, including any original issue discount, with
respect to Regular Certificates is required annually, and may be required more
frequently under Treasury Regulations. This requirement extends to certain
holders of Regular Certificates who are generally exempt from information
reporting on debt instruments. The REMIC also must comply with rules requiring a
Regular Certificate issued with original issue discount to
77
<PAGE>
disclose on its face the amount of original issue discount and the issue date
and requiring such information to be reported to the Internal Revenue Service.
Because the particular applications of the general method for computing
accrued income are varied and complex and involve factual as well as legal
uncertainties, the extent to which income will be recognized in advance of the
receipt of cash under the original issue discount rules is uncertain. Additional
guidance is required from the Internal Revenue Service or other legal authority
before it is possible to determine definitely the proper methods for accruing
income on the Certificates. In the absence of additional guidance from the
Internal Revenue Service or other legal authority, the Master Servicer intends
to compute and report accrued income on the Certificates for tax purposes in a
manner that it believes to be consistent with the principles of the Code and the
OID Regulations described above. Because of the uncertainties discussed above,
there can be no assurance that the method adopted by the Master Servicer for
reporting to holders of Certificates will coincide with that ultimately adopted
in final Treasury Regulations. Accordingly, holders of Certificates should
consult their tax advisors regarding the method for reporting the amounts
received or accrued with respect to the Certificates. As long as the only
'Certificateholder' of record is CEDE & Co., as nominee for DTC,
Certificateholders and the IRS will receive tax and other information from DTC
Participants and indirect participants of DTC rather than from the Master
Servicer. (The Master Servicer, however, will respond to requests for necessary
information to enable DTC Participants, indirect participants and certain other
persons to complete their reports.)
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
Certificateholder's purchase price which the REMIC may not have, it appears that
only information pertaining to the appropriate proportionate method of accruing
market discount should be required to be reported.
Backup Withholding
Payments of interest and principal, as well as payments of proceeds from
the sale of Certificates, may be subject to 'backup withholding' under Code
Section 3406 at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such withholding. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's Federal income tax. Furthermore, certain
penalties may be imposed by the Internal Revenue Service on a recipient of
payments that is required to supply information to the payor but that does not
do so in the proper manner.
Foreign Investors
A Regular Certificateholder that is not a 'United States person' (as
defined below) and is not subject to Federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a Regular Certificate may be eligible for an exception to United States
Federal income or withholding tax in respect of a distribution on a Regular
Certificate, provided that the Certificateholder complies to the extent
necessary with certain identification requirements (including delivery of a
statement, signed by the Certificateholder under penalties of perjury,
certifying that such Certificateholder is not a United States person and
providing the name and address of such Certificateholder) and provided that the
Certificateholder is not (i) a '10 percent shareholder' within the meaning of
Code Section 871(h)(3)(B) or a controlled foreign corporation described in Code
Section 881(c)(3)(C). The application of these requirements in the REMIC context
is not entirely clear, and foreign investors seeking to qualify for this
exemption should consult their own tax advisors. While the matter is not free
from doubt, the foregoing tax exemption may not apply with respect to a Regular
Certificate held by a Residual Certificateholder, or by a Certificateholder that
owns directly or indirectly a 10% or greater interest in, or is a 'controlled
foreign corporation' as defined under the Code related to, a Residual
Certificateholder. If the Certificateholder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such Certificateholder may be subject to a tax rate
of 30%, subject to reduction under any applicable tax treaty. For these
purposes, 'United States person' means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under
78
<PAGE>
the laws of the United States or any political subdivision thereof, or an estate
or trust whose income is subject to United States Federal income taxation
regardless of its source.
Unless otherwise stated in the related Prospectus Supplement, Residual
Certificateholders that are not United States persons should assume that
distributions of income on their Residual Certificates will be subject to a 30%
withholding tax (or such lesser rate as may be provided under any applicable tax
treaty). In the case of any income on a Residual Certificate that is an excess
inclusion, however, the rate of withholding will not be subject to reduction
under any applicable tax treaties. (See '--Taxation of Owners of Residual
Certificates--Excess Inclusions' above.)
Purchase of Both Regular and Residual Certificates
Any Certificateholder holding a 'regular interest' in the REMIC and persons
related to such Certificateholders should not acquire any interest identified as
a 'residual interest' in the REMIC and any Certificateholders holding a
'residual interest' in the REMIC and persons related to such Certificateholders
should not acquire any interest identified as a 'regular interest' in the REMIC,
without consulting their tax advisors as to any possible adverse tax
consequences.
INVESTMENT IN CERTIFICATES NOT REPRESENTING INTERESTS IN A REMIC
Classification of Trust Fund and Characterization of Investment in
Certificates
For purposes of the following discussion, Certificates of a Series
evidencing undivided ownership interests in a notional amount of principal of
each Mortgage Loan in a related Trust Fund together with interest thereon are
referred to as 'P&I Certificates,' and Certificates of a Series evidencing an
undivided ownership interest in a portion of the interest payable on a Notional
Amount of the Mortgage Loans in the related Trust Fund are referred to as 'IO
Certificates.'
Upon issuance of each Series of Certificates, unless a REMIC election is
made with respect to such Series, Mayer, Brown & Platt, counsel to the
Depositor, is of the opinion that the related 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. Such opinion will be filed prior to
issuance of such Series of Certificates as an exhibit to a post-effective
amendment or in a Current Report on Form 8-K. Moreover, each Certificateholder
of a Series will be treated as the owner of the undivided interest specified in
its Certificate in each of the Mortgage Loans in the related Trust Fund for each
Series. Accordingly, in the case of P&I Certificates, counsel to the Depositor
will deliver its opinion that, to the extent that the Trust Fund holds assets
described in the Code sections set forth below, (i) subject to the satisfaction
of either the applicable holding period or the bona fide business requirement of
Code Section 593(d)(1)(D), P&I Certificates owned by a 'domestic building and
loan association,' a 'mutual savings bank,' or 'any cooperative bank without
capital stock organized and operated for mutual purposes and without profit'
within the meaning of Code Section 593(a) will represent an interest in
'qualifying real property loans' within the meaning of Code Section 593(d); (ii)
P&I Certificates owned by a 'domestic building and loan association' will
represent 'loans . . . secured by an interest in real property' within the
meaning of Code Section 7701(a)(19)(C)(v); (iii) P&I Certificates owned by a
real estate investment trust will represent 'real estate assets' within the
meaning of Code Sections 856(c)(5)(A) and 856(c)(6)(B) and interest in respect
of P&I Certificates will represent '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); and (iv) P&I Certificates owned by a REMIC will represent
an interest in 'obligation[s] (including any participation or certificate of
beneficial ownership therein) which [are] principally secured by an interest in
real property' within the meaning of Code Section 860G(a)(3). It is unclear,
however, to what extent, if any, an IO Certificate will be considered to
represent such interests. Prospective purchasers should consult their tax
advisors regarding whether an IO Certificate will be characterized as
representing such assets and whether the income therefrom will be characterized
as derived from such assets.
79
<PAGE>
Taxation of Owners of P&I Certificates
Treatment as Stripped Bonds. The rate at which a Certificateholder will be
required to recognize income on its Certificate may be affected by a separation
of the right to receive a portion of the interest on each Mortgage Loan in the
Trust Fund from the right to receive a portion of the principal. Such a
separation will occur with respect to each Mortgage Loan having a Trust Fund
issuing IO Certificates. Such a separation also will occur if the amount of the
Administration Fee exceeds reasonable compensation such that the Master Servicer
is treated as the owner of a portion of the interest payments on the Mortgage
Loans. There are no authoritative guidelines for Federal income tax purposes
regarding the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions. However, the Service
has issued guidance establishing an elective 'safe harbor' for determining the
extent to which amounts that a taxpayer is entitled to receive under certain
mortgage servicing contracts represent reasonable compensation. If the safe
harbor is potentially applicable in a particular situation, the Mortgage
Servicer will disclose in the Prospectus Supplement relating to each Series of
Certificates whether it will elect to limit its compensation to an amount that
will qualify as reasonable compensation under such safe harbor. Such a
separation also may occur upon the issuance of a Certificate that represents an
interest in principal payments to be made on Mortgage Loans together with
interest payable thereon at a rate in excess of the rate at which interest is
payable on such Mortgage Loans. Such Certificateholders may be treated as having
purchased two separate instruments: first, a P&I Certificate representing their
undivided interests in payments of principal on such Mortgage Loans together
with interest payments at a rate at or below the rate at which interest is
payable on such Mortgage Loans; and, second, an IO Certificate representing
their undivided interests in the remainder of the payments of interest to be
made on such Mortgage Loans to which their Certificate entitles them.
Each Certificateholder in such a Trust Fund will be subject to the
'stripped debt' rules of Code Section 1286. As a result, the market discount
rules generally would not be applicable to the initial Certificateholders.
However, the Service has recently provided guidance under which certain mortgage
loans that are stripped bonds may be treated as market discount bonds governed
by Code Section 1278. This treatment is available only if the amount of the
original issue discount with respect to the stripped bond is determined to be de
minimis (see '--Qualification as a REMIC--Taxation of Owners of Regular
Certificates--Original Issue Discount') or the annual stated rate of interest
payable on the stripped bond is no more than 100 basis points lower than the
annual stated rate of interest payable on the original bond from which it (and
any other stripped bonds or coupons) were stripped. If these requirements are
met, and if the stripped bond has market discount (see '--Qualification as a
REMIC--Taxation of Owners of Regular Certificates--Market Discount'), the
Certificateholder may include such market discount as principal is repaid or
upon disposition of the Certificate at a gain or may elect to include such
income currently on the basis of either ratable accrual or a constant instant
rate method. If the market discount rules do not apply, each Certificateholder
in such a Trust Fund (whether a cash or accrual method taxpayer) will be
required to report the income (including interest that is added to principal as
Deferred Interest resulting from negative amortization) that is deemed to accrue
for each day with respect to the Certificate under a constant yield to maturity
method, in accordance with the original issue discount rules of the Code.
In general, the amount of such income that accrues for each day would equal
(i) the product of such Certificateholder's adjusted issue price of such P&I
Certificate at the beginning of an accrual period and the yield of such P&I
Certificate to such holder (ii) allocated ratably to each day in the accrual
period. See '--Qualification as a REMIC--Taxation of Owners of Regular
Certificates--Original Issue Discount' above. Such yield would be computed as
the rate (assuming monthly compounding) that, if used to discount the
Certificateholder's share of future payments on the Mortgage Loans, would cause
the present value of those future payments to equal the price at which the
Certificateholder purchased such Certificate. In computing accrued income under
the stripped debt rules, a Certificateholder's share of future payments on the
Mortgage Loans will not include any payments made in respect of any ownership
interest in the Mortgage Loans retained by the Depositor or its affiliates, but
will include such Certificateholder's share of any reasonable servicing fees and
other expenses.
There is considerable uncertainty, however, concerning the application of
Code Section 1272(a)(6) and the OID Regulations to instruments such as the P&I
Certificates. Among other things, it is unclear whether provisions of the 1986
Act requiring use of a prepayment assumption in accruing original issue discount
would
80
<PAGE>
be applicable to the P&I Certificates in the absence of Treasury Regulations or
whether use of a prepayment assumption may be permitted without reliance on
these rules. It also is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments. Certificateholders are advised to consult their tax
advisors concerning whether a prepayment assumption should be used in reporting
original issue discount with respect to P&I Certificates.
In the case of a P&I Certificate acquired at a price approximately equal to
the principal amount of the Mortgage Loans allocable to such Certificate, the
use or non-use of a reasonable prepayment assumption would not cause the income
required to be reported under the stripped debt rules to differ materially from
the income such Certificateholder would be required to report under an accrual
method of accounting if the stripped debt rules did not apply. In the case,
however, of a P&I Certificate acquired at a discount from, or premium over, such
principal amount, the use of a reasonable prepayment assumption would increase
or decrease the yield used in calculating accruals of income, and thus
accelerate or decelerate, respectively, the reporting of income.
If no prepayment assumption is used, then when a Mortgage Loan prepays in
full, the holder of a P&I Certificate acquired at a discount generally will
recognize ordinary income equal to the difference between the portion of the
prepaid principal amount of the Mortgage Loan that is allocable to such
Certificate and the portion of the adjusted basis of such Certificate that is
allocable to such Certificateholder's interests in the Mortgage Loan. If a
prepayment assumption is used, it appears that no income or loss should be
recognized upon a prepayment unless prepayments have occurred at a rate
different than the assumed prepayment rate.
Variable Rate Certificates. Although the OID Regulations are subject to a
different interpretation, in the absence of substantial legal authority to the
contrary the Master Servicer intends to treat Mortgage Loans subject to the
stripped debt rules and bearing a variable rate of interest as subject to the
provisions of the OID Regulations governing variable rate debt instruments. In
computing the accrual or original issue discount, the Master Servicer may be
required to use the methods described in Code Section 1272(a)(6). With respect
to the application of Code Section 1272(a)(6) to the accrual of original issue
discount, see generally '--Qualification as a REMIC--Taxation of Owners of
Regular Certificates--Original Issue Discount' above. Under the OID Regulations,
interest payments on a variable rate debt instrument may be characterized as
qualified stated interest includible in income when accrued, original issue
discount includible in income when accrued under the original issue discount
rules, or contingent interest payments generally includible in income in the
taxable year in which the payments become fixed. Although the OID Regulations
generally permit a variety of interest rate adjustment mechanisms to produce
'qualified stated interest' (e.g., one or more 'qualified floating rates,'
'qualified inverse floating rates,' or 'objective rates') where each qualified
floating rate or objective rate in effect during an accrual period is set at a
current value of that rate, the use of these formulas may in some cases produce
accelerated or deferred interest which must be accrued under a constant yield
method (which could require accrual in advance of the receipt of a corresponding
payment of cash). Moreover, prospective purchasers of P&I Certificates bearing a
variable rate of interest should be aware that the provisions in the OID
Regulations applicable to variable rate instruments may not apply to the
particular rate adjustment mechanisms for the Mortgage Loans or Mortgage
Certificates. If variable rate P&I Certificates are not governed by the
provisions applicable to variable rate debt instruments, the OID Regulations
provide that such Certificates would be subject to the provisions applicable to
instruments having contingent payments. See '--Taxation of Owners of IO
Certificates--Possible Application of Proposed Contingent Payment Rules' below.
The application of those provisions to instruments such as the P&I Certificates
is subject to differing interpretations. Prospective purchasers of variable rate
P&I Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
If Stripped Bond Rules Do Not Apply. If the stripped bond rules do not
apply to a P&I Certificate, the Certificateholder will be required to report its
pro rata share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. However, if the rules
relating to market discount, original issue discount, or premium are applicable,
the amount includible in income on account of a P&I Certificate may differ
significantly from the amount payable thereon from payments of interest on the
Mortgage Loans.
The original issue discount rules will apply to a P&I Certificate to the
extent it evidences an interest in Mortgage Loans or Mortgage Certificates
issued with original issue discount. Under the OID Regulations a
81
<PAGE>
Mortgage Loan would have original issue discount if the points charged at
origination (or other loan discount) exceeded a specified de minimis amount
(generally, the greater of one-sixth of one percent times the number of full
years to final maturity or one-fourth of one percent times the weighted average
maturity). The OID Regulations also treat certain variable rate mortgage loans
as having original issue discount if the loan has an initial rate of interest
that differs from that determined by the formula for setting the interest rate
during the remainder of the loan or if the loan uses an index that does not vary
in a manner approved in the OID Regulations. For a general discussion of the
treatment of variable rate interest, see '--Taxation of Owners of P&I
Certificates--Variable Rate Certificates' above. Generally, original issue
discount would be accrued on the basis of a constant yield to maturity. However,
the application of the original issue discount rules to the Mortgage Loans is
unclear in certain respects. See '--Treatment as Stripped Bonds,' above.
Premium and Market Discount. Determination of adjustments to a
Certificateholder's income based on premium or market discount with respect to a
Certificate requires that the purchase price of the Certificate be allocated
among the Mortgage Loans constituting the Trust Fund. Generally, such allocation
will provide a tax basis for the Certificateholder's undivided interest in each
Mortgage Loan and will be made on the basis of the relative fair market values
of the Certificateholder's undivided interest in the Mortgage Loans.
A Certificateholder that acquires an interest in a Mortgage Loan at a
premium may elect under Code Section 171 to amortize such premium under a
constant yield to maturity method over the life of the Mortgage Loan.
Certificateholders should consult their tax advisors concerning whether a
prepayment assumption should be used in calculating yield and concerning
possible alternative methods for amortizing premium.
An investor also should be aware that the Internal Revenue Service may take
the position that the method described below for accruing income under the
current proposed Treasury Regulations applicable to debt instruments providing
for contingent payments applies to a P&I Certificate purchased at such a premium
because all or a portion of its issue price (the 'Contingent Principal') may not
be recovered if the related Mortgage Loans were prepaid. See '--Taxation of
Owners of IO Certificates--Possible Application of Proposed Contingent Payment
Rules' below. The method of accruing income under the contingent payment rules
may be more likely to be applied if the difference between the issue price of
the Certificate and the amount of Contingent Principal is substantial.
If the portion of a P&I Certificate's purchase price allocable to a
Mortgage Loan in the Trust Fund is less than the Certificateholder's undivided
interest in the Mortgage Loan's 'revised issue price' (the sum of the issue
price and the previously accrued original issue discount reduced by the sum of
all prior payments of the stated redemption price at maturity), such excess is
'market discount.' A Certificateholder that acquires an interest in a Mortgage
Loan with market discount generally will be required under Code Section 1276 to
include accrued and previously unrecognized market discount in income as
ordinary income to the extent of payments of the stated redemption price at
maturity received on the Mortgage Loan at the time that each such payment is
received. In addition, on a sale or other disposition of the P&I Certificate, a
Certificateholder will be required to include as ordinary income any gain to the
extent of accrued and previously unrecognized market discount. Pending the
issuance of Treasury Regulations, market discount may be treated as accruing
either (i) under a constant yield to maturity method, (ii) in proportion to the
original issue discount accruing on a Mortgage Loan, or (iii) in proportion to
the stated interest in the absence of original issue discount. Alternatively, a
Certificateholder may elect to include accrued market discount in income
currently on all market discount obligations acquired by such Certificateholder
during the taxable year in which such election is made and thereafter. A
Certificateholder should be aware that Code Section 1277 may limit the
deductibility of interest paid or accrued to purchase or carry a Mortgage Loan
that is acquired at a market discount unless the election is made to include
accrued market discount in income currently. Certificateholders should consult
their tax advisors as to the application of this rule and the advisability of
making any elections under the market discount rules in their particular
circumstances.
Taxation of Owners of IO Certificates
Because the 'stripped debt' rules of Code Section 1286 will apply to the IO
Certificates, income on the IO Certificates must be accrued under the original
issue discount provisions of the Code. The regulations that have been issued to
date under Code Section 1286 do not address the treatment of stripped coupons,
and it is uncertain how the section will be applied to securities such as the IO
Certificates. The OID Regulations do not include
82
<PAGE>
rules relating specifically to 'stripped coupons,' although they provide
guidance as to how the original issue discount sections of the Code will
generally be applied. The discussion below assumes that an IO Certificateholder
will not own any P&I Certificates. IO Certificateholders should consult their
tax advisors concerning the method to be used in reporting income or loss with
respect to the IO Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued for each day on the IO Certificates based on a
constant yield to maturity method. See '--Taxation of Owners of P&I
Certificates--Treatment as Stripped Bonds,' above. It is unclear in the absence
of Treasury Regulations whether a reasonable prepayment assumption is required
or permitted to be applied to calculate such yield to maturity under a provision
of the Tax Reform Act of 1986 (the '1986 Act'). The accrual of income on the IO
Certificates will be significantly slower if a reasonable prepayment assumption
is permitted to be made than if yield is computed assuming no prepayments.
Possible Application of Contingent Payment Rules. Under the OID
Regulations, debt instruments providing for contingent payments are subject to
different rules than debt instruments providing for non-contingent payments. To
the extent that all or a portion of the issue price ('Contingent Principal') of
the IO Certificates would not be recovered if the related Mortgage Loans were
prepaid, the IO Certificates could be considered to be debt instruments
providing for contingent payments within the meaning of the current Treasury
Regulations dealing with debt instruments that provide for contingent payments.
Treasury Regulations concerning the treatment of debt instruments providing
for one or more contingent payments became effective on June 14, 1996 (the
'Contingent Payment Regulations') for debt instruments issued on or after August
13, 1996. Although the Assets may include debt instruments issued before August
13, 1996 (and thus not technically subject to the Contingent Payment
Regulations), the issuer expects to treat any contingent payments on both sets
of instruments in accordance with the Contingent Payment Regulations.
The Contingent Payment Regulations establish a 'noncontingent bond method'
for the treatment of debt instruments providing for contingent payments that are
issued for money or other publicly traded property. Under this method, the
holder of a contingent payment debt instrument will generally be required to
accrue interest on the debt instrument on the basis of a projected schedule of
the contingent and noncontingent payments to be made on the debt instrument
prepared by the issuer. Such interest accruals will be required to be calculated
on an economic accrual basis applying rules similar to those applicable to
noncontingent debt instruments issued with original issue discount treating none
of the payments on the debt instrument as 'qualified stated interest.' In
formulating the projected payment schedule, the issuer will be required to take
into account the noncontingent payments provided by the debt instrument, any
readily available forward price quotes for property rights that are
substantially similar to the right to any contingent payments on the debt
instrument and any readily available spot price quotes for an option or
combination of options that are substantially similar to the right to any
contingent payments on the debt instrument. If the debt instrument contains
contingent payments for which such forward or spot quotes are not readily
available, the payment schedule will be required to result in a reasonable yield
for the debt instrument that reflects any quotable contingent payments and the
relative expected values of any nonquotable contingent payments.
In the event that the amount of a contingent payment varied from its
projected amount, the holder will generally be required to include such variance
as a positive or negative adjustment to income in the year in which the payment
is made. Positive adjustments will be treated as ordinary interest income while
negative adjustments will result in ordinary loss. The amount of such ordinary
loss allowable for the year will be limited to the excess of the total interest
accrued to date on the debt instrument over the total amount of any negative
adjustments included as ordinary loss in previous years.
The Contingent Payment Regulations generally treat any gain on sale of a
contingent payment debt instrument as ordinary interest income. Loss realized on
sale of a contingent payment debt instrument is treated as ordinary loss to the
extent of the excess of the total interest accrued on the debt instrument to the
date of sale over the total amount of any negative adjustments previously
included in income. Any remaining loss is treated as capital loss.
Under such provisions, each holder of an IO Certificate which has
Contingent Principal will generally be required to accrue interest under the
'noncontingent bond method.' Although the issuer intends to provide to
83
<PAGE>
holders a projected schedule under the 'noncontingent bond method,' holders
should consult their own tax advisers regarding the application of the
Contingent Payment Regulations.
Administration Fee, Voluntary Advances and Subordinated Amount
The income received with respect to a Certificate generally includes
amounts not paid to the Certificateholder because they are used to pay the
Administration Fee. Subject to certain limitations on the deductibility by
individual Certificateholders of certain categories of expenses under Code
Section 67 and the reduction of certain deductible expenses for individual
Certificateholders under Code Section 68 (see '--Qualification as a
REMIC--Pass-Through of Miscellaneous Itemized Deductions' above), each
Certificateholder may deduct its allocable share of the Administration Fee paid
to or retained by the Master Servicer (to the extent such fee constitutes
reasonable compensation for the services rendered by the Master Servicer) at
such times and in such manner as it would have been deducted under such
Certificateholder's tax accounting method had it actually received such amounts
and paid them to the Master Servicer. Payments of Voluntary Advances and
payments in respect of the Subordinated Amount, if any, to Certificateholders
should be treated as having the same character as the payments they replace.
Sales of Certificates
Except as provided above with respect to accrued market discount (under
'--Taxation of Owners of P&I Certificates--If Stripped Bond Rules Do Not Apply,'
above, and, in the case of banks and other financial institutions, except as
provided under Code Section 582(c)), any gain or loss, equal to the difference
between the amount realized on the sale and the adjusted basis of such
Certificate, recognized on the sale or exchange of a Certificate by an investor
who holds such Certificate as a capital asset, will be capital gain or loss. The
Federal income tax rates applicable to capital gains for taxpayers other than
individuals, estates, and trusts are currently the same as those applicable to
ordinary income. However, the maximum ordinary income tax rate for individuals,
estates, and trusts is generally 39.6%, whereas the maximum long-term capital
gains rate for such taxpayers is 20% for capital assets held for more than 18
months, and 28% for capital assets held for more than 12 months and not more
than 18 months. Capital losses generally may be used by a corporate taxpayer
only to offset capital gains, and by an individual taxpayer only to the extent
of capital gains plus $3,000 of other income.
The adjusted basis of a Certificate will generally equal its cost,
increased by any income reported by the seller and reduced (but not below zero)
by any previously reported losses and by any distributions with respect to such
Certificate.
Purchasers of Certificates should be aware that, if income must be accrued
with respect to such a Certificate as if it were a separate instrument, it may
not be possible to determine whether the adjusted tax basis of the Certificate
will be recovered in full until all of the Mortgage Loans in the related Trust
Fund have been paid or otherwise discharged. Conversely, if income must be
accrued with respect to each such Certificateholder's undivided interest in each
Mortgage Loan in the related Trust Fund, it is likely that a portion of such
Certificateholder's adjusted tax basis will have to be allocated to each such
undivided interest. It then should be possible to determine whether the adjusted
tax basis allocable to an undivided interest in a Mortgage Loan in the related
Trust Fund has been recovered at the time the Mortgage Loan is paid or
discharged. Such an approach may result in the earlier recognition of any losses
attributable to such a Certificateholder's unrecovered adjusted tax basis than
if the Certificate were treated as a separate instrument. However, because of
the uncertainties involved and in the absence of substantial legal authority to
the contrary, the Master Servicer does not intend to allocate the adjusted tax
basis of such a Certificateholder in its Certificate to the undivided interest
in each Mortgage Loan represented by the Certificate nor to determine and report
whether any such allocable adjusted tax basis has been recovered at the time a
Mortgage Loan in the related Trust Fund is paid or discharged. Due to the
existence of the Subordinated Amount, the effect of such treatment by the Master
Servicer is not expected to be significant with respect to a P&I
Certificateholder.
84
<PAGE>
Reporting
The Master Servicer will furnish to each holder of a P&I Certificate with
each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Mortgage Loans and to interest thereon
at the related Pass-Through Rate. In addition, the Master Servicer will furnish,
within a reasonable time after the end of each calendar year, to each holder of
a Certificate who was such a holder at any time during such year, information
regarding the amount of servicing compensation received by the Master Servicer
and sub-servicers (if any) and such other customary factual information as the
Master Servicer deems necessary or is required by law to enable holders of
Certificates to prepare their tax returns. However, as long as the only
'Certificateholder' of record is CEDE & Co., as nominee for DTC,
Certificateholders and the IRS will receive tax and other information from DTC
Participants and indirect participants rather than the Master Servicer. (The
Master Servicer, however, will respond to requests for necessary information to
enable DTC Participants, indirect participants and certain other persons to
complete their reports.)
Because the particular applications of the general method for computing
accrued income are varied and complex and involve factual as well as legal
uncertainties, the extent to which income will be recognized in advance of the
receipt of cash under the original issue discount rules is uncertain. Additional
guidance is required from the Internal Revenue Service or other legal authority
before it is possible to determine definitely the proper methods for accruing
income on the Certificates. In the absence of additional guidance from the
Internal Revenue Service or other legal authority, the Master Servicer intends
to compute and report accrued income on the Certificates for tax purposes in a
manner that it believes to be consistent with the principles of the Code and the
OID Regulations described above. Because of the uncertainties discussed above,
there can be no assurance that the method adopted by the Master Servicer for
reporting to holders of Certificates will coincide with that ultimately adopted
in final Treasury Regulations. Accordingly, holders of Certificates should
consult their tax advisors regarding the method for reporting the amounts
received or accrued with respect to the Certificates. The Trustee intends in
reporting information relating to original issue discount to Certificateholders
of record (which, in the case of Certificates registered to CEDE & Co., as
nominee of DTC, shall be distributed to Certificate Owners by DTC Participants
and indirect participants of DTC) to provide such information on an aggregate
pool-wide basis. Although there are provisions in the OID Regulations that
suggest that the computation of original issue discount on such a basis is
either appropriate or required, it is possible that investors may be required to
compute original issue discount on a Mortgage Loan by Mortgage Loan basis taking
account of an allocation of their basis in the Certificates among the interests
in the various Mortgage Loans represented by such Certificates according to
their respective fair market values. Investors should be aware that it may not
be possible to reconstruct after the fact sufficient Mortgage Loan by Mortgage
Loan information should the Internal Revenue Service require computation on that
basis. See '--Sales of Certificates' above.
Backup Withholding
In general, the rules described in '--Qualification as a REMIC--Backup
Withholding' above, will also apply to Certificates.
Foreign Investors
In general, the discussion with respect to Regular Certificates in
'--Qualification as a REMIC--Foreign Investors' above, applies to Certificates.
STATE TAX CONSIDERATIONS
In addition to the Federal income tax consequences described in 'Certain
Federal Income Tax Considerations' above, potential investors should consider
the state income tax consequences of the acquisition, ownership, and disposition
of the Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Certificates.
85
<PAGE>
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA')
imposes requirements on employee benefit plans (and on certain other retirement
plans and arrangements, including individual retirement accounts and annuities,
Keogh plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested) (collectively 'Plans') subject to
ERISA and on persons who are fiduciaries with respect to such Plans. Generally,
ERISA applies to investments made by Plans. Among other things, ERISA requires
that the assets of Plans be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority and discretion to manage and
control the assets of such Plans. ERISA also imposes certain duties on persons
who are fiduciaries of Plans. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of such Plan (subject to certain exceptions
not here relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Certificates without regard to the ERISA considerations described
herein, subject to the provisions of applicable state law. Any such plan which
is qualified and exempt from taxation under Code Sections 401(a) and 501(a),
however, is subject to the prohibited transaction rules set forth in Code
Section 503.
On November 13, 1986, the United States Department of Labor (the 'DOL')
issued a final regulation concerning the definition of what constitutes the
assets of a Plan. (29 C.F.R. Section 2510.3-101.) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an 'equity' investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of an entity in
which a Plan invests will not be deemed for purposes of ERISA to be assets of
such Plan if the equity interest acquired by the investing Plan is a
publicly-offered security. A publicly-offered security, as defined in the
regulation, is a security that is widely held, freely transferable and
registered under the Exchange Act. The related Prospectus Supplement will
indicate whether the Certificates constitute publicly-offered securities for the
purpose of this exception.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ('Parties in Interest') having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. For example, an
investment in the Certificates by a Plan to which the Depositor, the Master
Servicer or Trustee is a Party in Interest would constitute a prohibited
transaction unless an exemption is available. In addition, because the Mortgage
Loans may be deemed Plan assets of each Plan that purchases Certificates, an
investment in the Certificates by a Plan might be a prohibited transaction if
any of the mortgagors is a Party in Interest to the Plan unless an exemption
applies.
In Prohibited Transaction Exemption 83-1 ('PTE 83-1'), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of 'mortgage
pool pass-through certificates' (as defined below) in the initial issuance of
such certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on 'single-family residential property' (as defined
below), and the acquisition and holding of certain mortgage pool pass-through
certificates representing an interest in such mortgage pools by Plans. If the
general conditions (discussed below) of PTE 83-1 are satisfied, investments by a
Plan in Certificates will be exempt from the prohibitions of ERISA Sections
406(a) and 407 (relating generally to transactions with Parties in Interest who
are not fiduciaries) if the Plan purchases the Certificates at no more than fair
market value, and will be exempt from the prohibitions of ERISA Sections
406(b)(1) and (2) (relating generally to transactions with fiduciaries) if, in
addition, the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool sponsor, the Plan does not purchase more than 25%
of all Certificates, and at least 50% of the Certificates are purchased by
persons independent of the pool sponsor or pool trustee.
A 'mortgage pool pass-through certificate' for the purpose of PTE 83-1 is
defined as a certificate representing a beneficial undivided fractional interest
in a mortgage pool and entitling the holder of such
86
<PAGE>
certificate to pass-through payments of principal and interest from the pooled
mortgage loans, less any fees retained by the pool sponsor. Certain Classes of
Certificates may, if specified in the related Prospectus Supplement, not qualify
as mortgage pool pass-through certificates as so defined, and therefore PTE 83-1
may not be applicable with respect to such Classes of Certificates, including:
(i) Classes of Certificates, such as Subordinated Certificates, entitled to
receive payments of interest and principal on the Mortgage Loans only after
payments to other Classes or after the occurrence of certain specified events;
(ii) Classes of Certificates that evidence the beneficial ownership in a Trust
Fund divided into Mortgage Loan Groups; (iii) Classes of Certificates that
evidence beneficial ownership of a specified percentage of interest payments
only or principal payments only, or a notional amount of either principal or
interest payments; and (iv) Classes of Certificates that evidence an interest in
a Pool organized as a REMIC. In addition, PTE 83-1 applies only where the
mortgage pool is limited to single-family residential property. PTE 83-1 defines
'single-family residential property' as non-farm property comprising one to four
dwelling units, and condominiums. Therefore, PTE 83-1 may not be available for
Classes of Certificates representing a beneficial interest in a mortgage pool
which includes: (i) multifamily mortgage loans; or (ii) loans secured by shares
issued by a cooperative housing association.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Pool. Certain Series or Classes of Certificates may be protected though a
subordination of other Classes of Certificates, a subordination by shifting of
interests, a reserve fund or other form of credit enhancement described in the
related Prospectus Supplement. In the absence of a ruling that the system of
insurance or other protection with respect to a Series or Class of Certificates
satisfies the first general condition referred to above, there can be no
assurance that these features will be so viewed by the DOL. In addition, such
subordination or other form of credit enhancement maintained with respect to a
Series or Class of Certificates will not satisfy the first general condition
referred to above unless it is maintained in an amount not less than the greater
of one percent of the aggregate principal balance of the Mortgage Loans or the
principal balance of the largest Mortgage Loan. With respect to the second
general condition referred to above, the Trustee will not be affiliated with the
Depositor. There can be no assurance that the third general condition will be
satisfied with respect to the Certificates.
One or more exemptions may be available, however, with respect to certain
transactions to which PTE 83-1 is not applicable, depending in part upon the
type of Plan fiduciary making the decision to acquire a Certificate and the
circumstances under which such decision is made, including but not limited to:
Prohibited Transaction Exemption 90-1, regarding investments by insurance
company pooled separate accounts; Prohibited Transaction Exemption 91-38,
regarding investments by bank collective investment funds; Prohibited
Transaction Exemption 84-14, regarding transactions effected by a 'qualified
professional asset manager,' or Prohibited Transaction Exemption 95-60,
regarding investments by insurance company general account. However, even if the
conditions specified in one or more of these exemptions are met, the scope of
the relief provided by these exemptions might not cover all of the transactions
involved.
The DOL has issued individual exemptions to a number of firms that may
serve as underwriter for a particular Series of Certificates (collectively
referred to as the 'Underwriter Exemption') which apply to certain sales and
servicing of 'certificates' that are obligations of a 'trust' with respect to
which such firm is the placement agent or underwriter, manager or co-manager of
an underwriting syndicate. The Underwriter Exemption provides relief which is
generally similar to that provided by PTE 83-1, but is broader in several
respects. The related Prospectus Supplement will indicate whether the particular
underwriter has been granted an Underwriter Exemption.
The Underwriter Exemption contains several requirements, some which differ
from those in PTE 83-1. The Underwriter Exemption contains an expanded
definition of 'certificate' which includes an interest which entitles the holder
to pass-through payments of principal, interest and/or other payments and a
certificate
87
<PAGE>
denominated as debt that represents an interest in a REMIC. The Underwriter
Exemption contains an expanded definition of 'trust', which may include
obligations secured by shares issued by a cooperative housing association and
loans secured by multi-family residential and commercial real property, as well
as loans secured by single-family residential real property. In addition, the
Underwriter Exemption does not require the loans, the property securing the
loans or the Certificateholders to be covered by a system of Insurance. The
definition of 'trust,' however, does not include any investment pool unless,
inter alia, (i) the Investment pool consists only of assets of the type which
have been included in other investment pools, (ii) certificates evidencing
interests in such other investment pools have been purchased by investors other
than Plans for at least one year prior to the Plan's acquisition of certificates
pursuant to the Underwriter Exemption, and (iii) certificates in such other
investment pools have been rated in one of the three highest generic rating
categories of the four credit rating agencies noted below. The general
conditions applicable to the Underwriter Exemption include: (i) the acquisition
of the certificates by a Plan must be on terms (including the price for the
certificates) that are at least as favorable to the Plan as they would be in an
arm's length transaction with an unrelated party; (ii) the rights and interests
evidenced by the certificates must not be 'subordinated' to the rights and
interests evidenced by other certificates of the same trust; (iii) certificates
acquired by a Plan must have received a rating at the time of their acquisition
that it is in one of the three highest generic rating categories of Standard &
Poor's Corporation, Moody's Investors Service, Inc., Duff & Phelps Inc. or Fitch
Investors Service, Inc.; (iv) the pool trustee must not be an affiliate of the
pool sponsor, nor an affiliate of the underwriter, the pool servicer, any
obligor with respect to mortgage loans included in the trust constituting more
than five percent of the aggregate unamortized principal balance of the assets
in the trust, or any affiliate of such entities; and (v) any Plan investing in
the certificates must be an 'accredited investor' as defined in Rule 501(a)(1)
of Regulation D of the Securities and Exchange Commission under the Securities
Act.
It is not clear whether the exemptions referenced above apply to
participant directed plans as described in Section 404(c) of ERISA or plans that
are subject to Section 4975 of the Code but that are not subject to Title I of
ERISA, such as certain Keogh plans and certain individual retirement accounts.
Any Plan fiduciary which proposes to cause a Plan to purchase Certificates
should consult with its counsel concerning the impact of ERISA and the Code, the
applicability of an exemption, and the potential consequences in the specific
circumstances, prior to making such investment. Moreover, each Plan fiduciary
should determine whether under the general fiduciary standards of investment
procedure and diversification an investment in the Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates in any of three ways: (i) through
underwriters or dealers; (ii) directly to a limited number of purchasers or to a
single purchaser, or (iii) through agents. The Prospectus Supplement relating to
a Series of Certificates will set forth the terms of the offering of such Series
of Certificates including the name or names of any underwriters, dealers or
agents, the purchase price of such Certificates and the proceeds to the
Depositor from such sale, any underwriting discounts and other items
constituting underwriters' compensation and any discounts and commissions
allowed or paid to dealers. Any initial public offering prices and any discounts
or concessions allowed or reallowed or paid to dealers may be changed from time
to time.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor or any affiliate thereof may purchase or retain some
or all of one or more Classes of Certificates of such Series. Such purchaser may
thereafter from time to time offer and sell, pursuant to this Prospectus, some
or all of such Certificates so purchased directly, through one or more
underwriters to be designated at the time of the offering of such Certificates
or through broker-dealers acting as agent and/or principal. Such offering may be
restricted in the manner specified in the related Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale, at
negotiated prices or at fixed prices. In addition, the Depositor or an affiliate
of the Depositor may pledge Certificates retained or purchased by the Depositor
in connection with borrowings or use them in repurchase transactions.
If any Certificates of any Series are sold through underwriters, the
Prospectus Supplement relating thereto will describe the nature of the
obligation of the underwriters to purchase such Certificates. The Certificates
may be offered to the public either through underwriting syndicates represented
by one or more managing
88
<PAGE>
underwriters or directly by one or more underwriting firms acting alone. The
underwriter or underwriters with respect to a particular underwritten offering
of Certificates will be named in the Prospectus Supplement relating to such
offering, and, if an underwriting syndicate is used, the managing underwriter or
underwriters will be set forth on the cover of the related Prospectus
Supplement. Unless otherwise set forth in a Prospectus Supplement, the
obligation of the underwriters to purchase any Certificates of the related
Series will be subject to certain conditions precedent, and the underwriters
will be obligated to purchase all of such Certificates if any are purchased.
Underwriters and agents who participate in the distribution of a Series of
Certificates may be entitled under agreements which may be entered into by the
Depositor to indemnification by the Depositor against certain liabilities,
including liabilities under the Securities Act, as amended, or to contribution
with respect to payments which the underwriters or agents may be required to
make in respect thereof.
The Prospectus Supplement with respect to any Series of Certificates
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and dealers for the Certificates of such Series.
Certain affiliates of the Depositor, including ABN AMRO Incorporated
('AAI'), may act as agents or underwriters in connection with the sale of a
Series of Certificates. AAI is a separately incorporated, wholly-owned indirect
non-bank subsidiary of ABN AMRO Bank N.V. ('ABN AMRO'). AAI is not a bank.
Securities sold, offered or recommended by AAI are not deposits, are not insured
by the Federal Deposit Insurance Corporation, are not guaranteed by, and are not
otherwise obligations of, any bank or thrift affiliate of AAI and involve
investment risks, including the possible loss of principal.
Any affiliate of the Depositor acting as agent or underwriter in connection
with the sale of a Series of Certificates will be named, and its affiliation
with the Depositor described, in the Prospectus Supplement with respect to such
Series. With respect to underwritten offerings, any such affiliates not named in
the Prospectus Supplement will not be parties to the related underwriting
agreement, will not be purchasing the related Certificates from the Depositor
and will have no direct or indirect participation in the underwriting of such
Certificates, although such affiliates may participate in the distribution of
such Certificates under circumstances entitling it to a dealer's commission. An
affiliate of the Depositor may act as a placement agent with respect to
Certificates not offered through underwriters. If an affiliate does act as
placement agent on behalf of the Depositor in the sale of Certificates, it will
receive a selling commission which will be disclosed in the related Prospectus
Supplement. To the extent permitted by law, certain affiliates of the Depositor,
including AAI, may purchase Certificates acting as principal.
The Depositor anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
'underwriters' within the meaning of the Securities Act in connection with
re-offers and sales by them of Certificates. Certificateholders should consult
with their legal advisors in this regard prior to any such re-offer or sale.
There is currently no secondary market for the Certificates. The Depositor
does not intend to make a secondary market for the Certificates. There can be no
assurance that a secondary market for the Certificates will develop or, if it
does develop, that it will continue. The Certificates will not be listed on any
securities exchange.
LEGAL INVESTMENT
Unless otherwise specified in the Prospectus Supplement for a Series, the
Certificates rated in one of the two highest rating categories by one or more
Rating Agencies will constitute 'mortgage-related securities' for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA') and, as such,
will be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, life 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 as, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
such entities. Under SMMEA, if a
state enacted legislation prior to October 4, 1991 specifically limiting the
legal investment authority of any such entities with respect to
'mortgage-related securities' the Certificates will constitute legal investments
for entities
89
<PAGE>
subject to such legislation only to the extent provided therein. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
Certificates, or require the sale or other disposition of Certificates, so long
as such contractual commitment was made or such Certificates acquired prior to
the enactment of such legislation. Pursuant to SMMEA, a number of states enacted
legislation, on or before the October 3, 1991 cut-off for such enactments,
limiting to varying extents the ability of certain entities to invest in
'mortgage-related securities,' in most cases by requiring the affected investors
to rely solely upon existing state law, and not SMMEA. Accordingly, the
investors affected by such legislation will be authorized to invest in the
Securities only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitation as to the percentage of their assets represented thereby;
federal credit unions may invest in the Certificates; and national banks may
purchase Certificates for their own account without regard to the limitations
generally applicable to investment securities set forth in 12 U.S.C. Section 24
(Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should review any applicable or proposed rules,
regulations and guidelines and consult their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
Securities that do not constitute 'mortgage-related securities' under SMMEA
will require registration, qualification or an exemption under applicable state
securities laws to meet requirements for legal investments.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain Federal
income tax consequences with respect thereto, will be passed upon for the
Depositor by Mayer, Brown & Platt, Chicago, Illinois and, as to certain matters
relating to corporate law, Kirk P. Flores, Esq., in-house counsel to the
Depositor and the Master Servicer.
RATING
It is a condition to the issuance of the Certificates offered by means of
this Prospectus and the related Prospectus Supplement that they shall have
received a rating of not less than Investment Grade by the Rating Agency or
Agencies identified in such Prospectus Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions of payments required pursuant
to the Agreement pursuant to which the certificates are issued on the underlying
mortgage loans. These ratings address the structural, legal and issuer
tax-related aspects associated with such certificates, the nature of the
underlying mortgage loans and the credit quality of the guarantor, if any.
Ratings on mortgage pass-through certificates do not represent any assessment of
the likelihood of principal prepayments by mortgagors or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning Rating Agency.
Each rating should be evaluated independently of similar ratings on different
securities.
90
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
Set forth below is a list of certain of the more significant terms used in
this Prospectus and the pages on which the definitions of such terms may be
found herein.
<TABLE>
<CAPTION>
PAGE
--------------------
<S> <C>
10 percent shareholder..................................................................... 92
1986 Act................................................................................... 97
AACC....................................................................................... 104
ABN AMRO................................................................................... 104
Accelerated amortization................................................................... 22, 68
Accredited investor........................................................................ 103
Accrual Period............................................................................. 48, 75
Act........................................................................................ 75, 105
Adjusted issue price....................................................................... 83, 84
Administration Fee......................................................................... 11
Advances................................................................................... 8, 14
Agreement.................................................................................. 1, 8, 20, 38, 64, 65
Anti-deficiency............................................................................ 26
Applicable Amount.......................................................................... 88
Applicable Federal rate.................................................................... 87
Appraised value............................................................................ 25
ARMs....................................................................................... 7, 21
Asset Group................................................................................ 6
Assets..................................................................................... 81
Assumed Reinvestment Rate.................................................................. 48
Back-Up Master Servicer.................................................................... 6, 65
Backup Withholding......................................................................... 92
Balloon Payment............................................................................ 24
Bankruptcy Bond............................................................................ 70
BIF........................................................................................ 24
Business Day............................................................................... 40
Buydown Fund............................................................................... 21
Buydown Loans.............................................................................. 21
Cash Flow Agreement........................................................................ 40
CEDEL...................................................................................... 10
CEDEL Participants......................................................................... 54
CERCLA..................................................................................... 75
Certificate................................................................................ 103
Certificate Account........................................................................ 9
Certificate Balance........................................................................ 48
Certificate Owners......................................................................... 3
Certificate Registrar...................................................................... 41
Certificateholder.......................................................................... 53, 79, 92, 99
Certificates............................................................................... 1, 9, 103
Citibank................................................................................... 10
Classes.................................................................................... 1
Cleanup Costs.............................................................................. 75
Clearing agency............................................................................ 54
Clearing corporation....................................................................... 8, 26
Closing Date............................................................................... 44
Co-op Loans................................................................................ 21
Code....................................................................................... 15, 79
Commission................................................................................. 3
Committee Report........................................................................... 83
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------------------
<S> <C>
Compounding Certificates................................................................... 11, 39
Contingent Payment Regulations............................................................. 97
Contingent Principal....................................................................... 96, 97
Controlled foreign corporation............................................................. 92
Cooperative................................................................................ 54
Custodians................................................................................. 41
Cut-off Date............................................................................... 15
Daily accruals............................................................................. 87
Daily Portions............................................................................. 83, 85
Debt Service Coverage Ratio................................................................ 24
Defective obligation....................................................................... 42, 44
Deferred Interest.......................................................................... 11, 22
Depositaries............................................................................... 10, 52
Depositor.................................................................................. 1, 6
Determination Date......................................................................... 46
Disqualified organization.................................................................. 90
Distribution Date.......................................................................... 40
DOL........................................................................................ 101
Domestic building and loan association..................................................... 81, 93
DTC........................................................................................ 3
DTC Participants........................................................................... 54
Due-on-Sale................................................................................ 23, 36, 75
Eligible Investments....................................................................... 46
Equity..................................................................................... 101
ERISA...................................................................................... 16, 100
Euroclear.................................................................................. 10
Euroclear Operator......................................................................... 54
Euroclear Participants..................................................................... 54
Event of Default........................................................................... 66
Evidence of indebtedness................................................................... 81, 89
Excess inclusion........................................................................... 18, 87
Exchange Act............................................................................... 3
FDIC....................................................................................... 24
FHA........................................................................................ 27
FHA Loans.................................................................................. 27
FHLMC...................................................................................... 24, 28
FHLMC Act.................................................................................. 28
FHLMC Certificates......................................................................... 28
First of the Month Mortgage Loans.......................................................... 40
Fixed-Rate Mortgage Loans.................................................................. 23
FNMA....................................................................................... 24, 29
FNMA Certificates.......................................................................... 29
Foreclosure property....................................................................... 80, 86
Forward Purchase Agreement................................................................. 9, 44
Fractional Undivided Interest.............................................................. 40
Global Clearance........................................................................... 53
Global Securities.......................................................................... 55
GNMA....................................................................................... 27
GNMA Certificates.......................................................................... 27
GNMA I Certificates........................................................................ 27
GNMA II Certificates....................................................................... 27
Government securities...................................................................... 81
Guide...................................................................................... 24
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------------------
<S> <C>
Hazard Insurance........................................................................... 61
Housing Act................................................................................ 27
HUD........................................................................................ 24
Index...................................................................................... 21
Indirect participants...................................................................... 54
Initial Deposit............................................................................ 13, 69
Initial Mortgage Interest Rates............................................................ 21
Installment Due Date....................................................................... 21
Interest Remittance Amount................................................................. 34
Investment Grade........................................................................... 10
IO Certificates............................................................................ 12, 93
Issue price................................................................................ 82
L/C Bank................................................................................... 69
Lease...................................................................................... 77
Legal investments.......................................................................... 16
Limited Mortgage Documentation Program..................................................... 25
Loan-to-Value Ratio........................................................................ 25
Lock-in.................................................................................... 36
Market Discount............................................................................ 84
Master Servicer............................................................................ 1, 6
Maximum Adjustment......................................................................... 22
Maximum Rate............................................................................... 23
Minimum Rate............................................................................... 23
Monthly Payments........................................................................... 7, 21
Morgan..................................................................................... 10
Mortgage Asset Seller...................................................................... 1
Mortgage Assets............................................................................ 1, 6
Mortgage Certificates...................................................................... 1, 7
Mortgage Interest Rates.................................................................... 7, 22
Mortgage Loans............................................................................. 1, 7
Mortgage Note.............................................................................. 41
Mortgage Pass-Through Rate................................................................. 32
Mortgage pool pass-through certificate..................................................... 101
Mortgage related securities................................................................ 16, 105, 106
Mortgagor.................................................................................. 11
Mutual savings bank........................................................................ 81, 93
Negatively Amortizing ARMs................................................................. 22
Net operating income....................................................................... 24
Non United States Persons.................................................................. 58
Non-Accelerated Certificates............................................................... 39
Non-economic residual interest............................................................. 90
Noncontingent bond method.................................................................. 98
Nonrecoverable Advances.................................................................... 50
Notional Balance........................................................................... 49
OID Regulations............................................................................ 79
Original issue discount.................................................................... 15, 82
P&I Certificates........................................................................... 93
Parties in Interest........................................................................ 101
Pass-through entity........................................................................ 90
Pass-through interest holder............................................................... 88
Pass-through interest holders.............................................................. 88
Pass-Through Rate.......................................................................... 1, 11
Paying Agent............................................................................... 40
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------------------
<S> <C>
Payment Caps............................................................................... 22
Percentage Interest........................................................................ 40, 47
Permitted investments...................................................................... 46
Plan....................................................................................... 100
PO Certificates............................................................................ 11, 49
Pool....................................................................................... 1, 20
Pool Distribution.......................................................................... 46
Pre-Funding Account........................................................................ 9, 44
Prepayment Assumption...................................................................... 83
Prepayment Certificates.................................................................... 39, 49
Prepayment Interest Shortfall.............................................................. 11
Prepayment Period.......................................................................... 47
Prepayment Premium......................................................................... 24
Principal Balance.......................................................................... 40
Private Certificates....................................................................... 30
Prohibited transactions.................................................................... 89
Prospectus Supplement...................................................................... 1
PTE 83-1................................................................................... 101
PUDs....................................................................................... 21
Qualified Lender........................................................................... 1
Qualified mortgage......................................................................... 80
Qualified stated interest.................................................................. 82
Qualifying real property loans............................................................. 81
Rating Agency.............................................................................. 10, 106
Real estate assets......................................................................... 81, 93
Realized Losses............................................................................ 14
Record Date................................................................................ 40
Registration Statement..................................................................... 4
Regular Certificates....................................................................... 15, 79
Regular interest........................................................................... 80, 93
REMIC...................................................................................... 2, 15
REMIC Regulations.......................................................................... 79
Replacement Certificates................................................................... 55
Repository................................................................................. 39
Reserve Fund............................................................................... 13, 69
Residual Certificates...................................................................... 50, 79
Residual Holder............................................................................ 40
Residual interest.......................................................................... 40, 81, 93
Rules...................................................................................... 53
SAIF....................................................................................... 24
Scheduled Amortization Date................................................................ 48, 49
Securities Act............................................................................. 4
Senior Certificates........................................................................ 1, 9
Sequential Pay Certificates................................................................ 39, 49
Series..................................................................................... 1
Servicers.................................................................................. 61
Servicing Agreement........................................................................ 21
Shifting Interest Certificates............................................................. 39
Shifting Interest Credit Enhancement....................................................... 13, 68
Shortfall.................................................................................. 14
Significant value.......................................................................... 87
Single Family Mortgage Loans............................................................... 1
Single-class REMIC......................................................................... 87, 88
</TABLE>
94
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------------------
<S> <C>
Single-family residential property......................................................... 102
SMMEA...................................................................................... 16, 105
Special Hazard Amount...................................................................... 70
Special Hazard Insurance Policy............................................................ 70
Special Hazard Insurer..................................................................... 70
Specified Reserve Fund Balance............................................................. 13, 69
Sponsor.................................................................................... 77
Startup Day................................................................................ 80
Stripped Bonds............................................................................. 94
Stripped Certificates...................................................................... 39, 49
Stripped debt.............................................................................. 94
Subordinate Certificates................................................................... 1, 9
Subordinated Amount........................................................................ 13
Subsequent Documents....................................................................... 3
Superlien.................................................................................. 76
Surplus.................................................................................... 50
Tax matters person......................................................................... 91
Taxable mortgage pool...................................................................... 89
Terms and Conditions....................................................................... 55
Title V.................................................................................... 76
Trust...................................................................................... 103
Trust Fund................................................................................. 1, 9
Trustee.................................................................................... 6, 20
Underwriter Exemption...................................................................... 102
Underwriters............................................................................... 105
United States person....................................................................... 92
USA........................................................................................ 7
VA......................................................................................... 27
Variable rate debt instrument.............................................................. 82
</TABLE>
95
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT...................................................................................... 3
REPORTS TO CERTIFICATEHOLDERS.............................................................................. 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................................... 3
ADDITIONAL INFORMATION..................................................................................... 3
SUMMARY.................................................................................................... 5
RISK FACTORS............................................................................................... 15
THE POOLS.................................................................................................. 17
General.................................................................................................. 17
The Mortgage Loans....................................................................................... 18
General............................................................................................... 18
General Characteristics of the Mortgage Loans......................................................... 18
Description of ARMs................................................................................... 19
Description of the Fixed-Rate Mortgage Loans.......................................................... 20
Assumption............................................................................................ 20
Description of Qualified Lenders...................................................................... 20
Payment Provisions of the Mortgage Loans.............................................................. 21
Underwriting Policies................................................................................. 21
Mortgage Certificates.................................................................................... 23
General............................................................................................... 23
GNMA, FHLMC and FNMA Certificates..................................................................... 23
Private Certificates.................................................................................. 26
THE DEPOSITOR.............................................................................................. 26
USE OF PROCEEDS............................................................................................ 27
PREPAYMENT AND YIELD CONSIDERATIONS........................................................................ 27
General.................................................................................................. 27
Determination of Mortgage Pass-Through Rates.......................................................... 27
Determination of Certificate Pass-Through Rate........................................................ 27
Yield.................................................................................................... 28
Price................................................................................................. 28
Effective Pass-Through Rate........................................................................... 28
Other Yield Considerations............................................................................ 29
Maximum and Minimum Rates, Maximum Adjustment, Payment Caps and Deferred Interest........................ 29
Distribution Shortfalls.................................................................................. 29
Classes of Certificates.................................................................................. 30
MATURITY CONSIDERATIONS.................................................................................... 30
General.................................................................................................. 30
Maturity................................................................................................. 30
Prepayment Considerations................................................................................ 30
DESCRIPTION OF THE CERTIFICATES............................................................................ 32
General.................................................................................................. 33
Assignment of Mortgage Loans............................................................................. 35
General.................................................................................................. 35
Representations and Warranties........................................................................... 36
Forward Commitments: Pre-Funding Account................................................................. 37
Payments on Mortgage Loans............................................................................... 38
Distributions on the Certificates........................................................................ 39
Advances and Limitations Thereon......................................................................... 43
Adjustment to Master Servicing Fees in Connection with Prepayment Interest Shortfall..................... 43
Example of Distribution.................................................................................. 44
Registration of Certificates............................................................................. 45
Global Clearance, Settlement and Tax Documentation Procedures............................................ 47
Initial Settlement....................................................................................... 48
</TABLE>
96
<PAGE>
<TABLE>
<S> <C>
Secondary Market Trading................................................................................. 48
Certain U.S. Federal Income Tax Documentation Requirements............................................... 50
Reports to Certificateholders............................................................................ 50
Reports to the Trustee................................................................................... 51
Collection and Other Servicing Procedures................................................................ 51
Hazard Insurance......................................................................................... 52
Realization Upon Defaulted Mortgage Loans................................................................ 53
Administration Fees, Compensation and Payment of Expenses................................................ 54
Evidence as to Compliance................................................................................ 54
Certain Matters Regarding the Master Servicer............................................................ 55
Back-Up Master Servicer.................................................................................. 55
Special Servicing Agreements............................................................................... 56
Events of Default........................................................................................ 56
Rights Upon Default...................................................................................... 56
Amendment................................................................................................ 57
Termination.............................................................................................. 57
CREDIT ENHANCEMENTS........................................................................................ 58
General.................................................................................................. 58
Subordination............................................................................................ 58
Shifting Interest Credit Enhancement..................................................................... 58
Overcollateralization.................................................................................... 58
Reserve Fund............................................................................................. 59
Letter of Credit......................................................................................... 59
Surety Bond.............................................................................................. 59
Special Hazard Insurance Policy.......................................................................... 59
Bankruptcy Bond.......................................................................................... 60
Cross-Support Features................................................................................... 60
Other Arrangements for Credit Enhancements............................................................... 60
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS................................................................ 60
General.................................................................................................. 60
Foreclosure.............................................................................................. 61
Rights of Redemption..................................................................................... 62
Anti-Deficiency Legislation and Other Limitations on Lenders............................................. 62
Junior Liens; Rights of Senior Lienholders............................................................... 63
'Due-on-Sale' Clauses.................................................................................... 64
Environmental Legislation................................................................................ 64
Subordinate Financing.................................................................................... 65
Applicability of Usury Laws.............................................................................. 65
Enforceability of Certain Provisions..................................................................... 65
Co-op Loans.............................................................................................. 66
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................................... 66
General.................................................................................................. 66
REMIC.................................................................................................... 67
Qualification as a REMIC................................................................................. 67
Investment in Certificates Not Representing Interests in a REMIC......................................... 79
STATE TAX CONSIDERATIONS................................................................................... 85
ERISA CONSIDERATIONS....................................................................................... 86
PLAN OF DISTRIBUTION....................................................................................... 88
LEGAL INVESTMENT........................................................................................... 89
LEGAL MATTERS.............................................................................................. 90
RATING..................................................................................................... 90
INDEX OF SIGNIFICANT DEFINITIONS........................................................................... 91
</TABLE>
97
<PAGE>
[This page intentionally left blank]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER
OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
OFFERED CERTIFICATES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANCE IN THE AFFAIRS OF
THE SELLER SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary Information................................ S-8
Risk Factors....................................... S-33
The Trust.......................................... S-38
Description of the Mortgage Pool................... S-38
Group I Mortgage Loans............................. S-46
Group II Mortgage Loans............................ S-51
Description of the Certificates.................... S-58
Servicing.......................................... S-81
Yield and Prepayment Considerations................ S-89
Credit Enhancements................................ S-91
Certain Legal Aspects of Mortgage Loans under
California Law.................................... S-92
Certain Federal Income Tax Consequences............ S-92
Certain Legal Investment Aspects................... S-95
Erisa Considerations............................... S-96
Method Of Distribution............................. S-98
Legal Matters...................................... S-98
Certificate Ratings................................ S-98
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ABN AMRO MORTGAGE
CORPORATION
Depositor
$204,471,645
MULTI-CLASS MORTGAGE
PASS-THROUGH CERTIFICATES,
SERIES 1998-1
[LOGO]
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ABN AMRO INCORPORATED
MARCH 27, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
