<PAGE>
As filed with the Securities and Exchange Commission on October 8, 1999
Registration No. 333-85443
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM S-3
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
----------------
ABN AMRO MORTGAGE CORPORATION
(Exact name of registrant as specified in governing instruments)
----------------
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Delaware 181 West Madison Street 363886007
(State or other jurisdiction of Chicago, Illinois 60602 (I.R.S. Employer Identification
incorporation or organization) (Address of principal executive offices) Number)
----------------
Joseph Krul, President
ABN AMRO Mortgage Corporation
181 West Madison Street
Chicago, Illinois 60602
(248) 637-2530
(Name and address of agent for service)
----------------
Copies to:
Diane Citron, Esq.
Mayer, Brown & Platt
1675 Broadway
New York, New York 10019-5820
(212) 506-2500
----------------
</TABLE>
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Securities Amount to be Offering Price Aggregate Offering Amount of
being Registered Registered Per Unit* Price* Registration Fee
<S> <C> <C> <C> <C>
Mortgage Pass-Through $3,500,000,000 100% $3,500,000,000 $973,000
Certificates(1)
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</TABLE>
* Estimated solely for the purpose of calculating the registration fee.
(1) Also registered hereby are secondary market sales in Mortgage Pass-Through
Certificates to be effected by ABN AMRO Incorporated, the volume of which
cannot be determined.
(2) $278 was previously paid.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a base prospectus and (ii) an
illustrative form of prospectus supplement for use in the offering of each
series of Mortgage Pass-Through Certificates. Appropriate modifications will be
made to the form of prospectus supplement to disclose the specific terms of any
particular series of certificates, the specific classes of certificates to be
offered thereby, and the terms of the related offering. Each base prospectus
used (in either preliminary or final form) will be accompanied by a prospectus
supplement. Because an affiliate of the Registrant intends to make a market in
the certificates of one or more series for which its acts as an underwriter,
immediately following the form of the prospectus and prospectus supplement there
follow (a) alternate pages of the prospectus and (b) alternate pages of the form
of prospectus supplement. All other pages of the prospectus and prospectus
supplement are also to be used in the market-making prospectus and prospectus
supplement.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
ABN AMRO Mortgage Corporation, Depositor
Mortgage Pass-Through Certificates
Issuable in series by separate trusts
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EACH SERIES OF CERTIFICATES: EACH TRUST:
will consist of one or more classes of will own a pool of mortgage assets sold to
mortgage pass-through certificates the trust by ABN AMRO Mortgage
representing interests in the assets of a Corporation that may include:
trust; -- mortgage loans;
-- certificates backed by mortgage
will receive principal and interest only loans;
from payments collected on the assets of -- principal and interest payments
the related trust; and due on these mortgage assets
will not be insured or guaranteed by any will include mortgage loans secured by
government agency or instrumentality first liens on:
and will not be obligations of ABN -- one- to four-family residential
AMRO Mortgage Corporation or any properties; and
related companies. -- rights to own and occupy
apartments in cooperative
buildings.
</TABLE>
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is _______ __, 1999.
<PAGE>
TABLE OF CONTENTS
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Page
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Description of the Certificates.................................................................................-1-
Source of Funds for Payment................................................................................-1-
Form of Certificates.......................................................................................-2-
Classes of Certificates....................................................................................-3-
Distributions of Principal and Interest....................................................................-6-
General.................................................................................................-6-
Distributions of Interest...............................................................................-8-
Distributions of Principal..............................................................................-8-
Example of Distributions...................................................................................-9-
Optional Termination of a Trust or Underlying Trust.......................................................-11-
The Trusts.....................................................................................................-12-
General...................................................................................................-12-
The Loans.................................................................................................-14-
Description of the Loans...............................................................................-14-
Payment Provisions of the Loans........................................................................-15-
Loan Underwriting Policies.............................................................................-17-
Mortgage Certificates.....................................................................................-19-
Description of the Mortgage Certificates...............................................................-19-
Substitution of Mortgage Certificates..................................................................-25-
The Depositor..................................................................................................-25-
Generally.................................................................................................-25-
Year 2000 Project.........................................................................................-26-
State of Readiness.....................................................................................-26-
Risks..................................................................................................-26-
Use of Proceeds................................................................................................-27-
Credit Enhancement.............................................................................................-27-
Types of Enhancements.....................................................................................-27-
Subordination.............................................................................................-28-
Shifting Interest Credit Enhancement...................................................................-29-
Cross-Support.............................................................................................-29-
Pool Insurance............................................................................................-30-
Special Hazard Insurance..................................................................................-31-
Bankruptcy Bond...........................................................................................-31-
Reserve Fund..............................................................................................-32-
Overcollateralization.....................................................................................-32-
Letter of Credit..........................................................................................-32-
Surety Bond...............................................................................................-33-
Other Insurance, Guarantees and Similar
Instruments or Agreements..............................................................................-33-
Prepayment, Yield and Maturity
Considerations................................................................................................-33-
General...................................................................................................-33-
Determination of Pass-Through Rates....................................................................-33-
Determination of Remittance Rate.......................................................................-34-
Yield.....................................................................................................-34-
Price..................................................................................................-35-
Effective Pass-Through Rate............................................................................-35-
Other Yield Considerations.............................................................................-36-
Prepayment Considerations.................................................................................-37-
General................................................................................................-37-
Substitutions..........................................................................................-39-
Loan Assumptions.......................................................................................-39-
ARMs ..................................................................................................-39-
Foreclosures...........................................................................................-40-
Pre-Funding............................................................................................-41-
Prepayment Assumptions.................................................................................-41-
Optional Termination...................................................................................-41-
Distributions on the Certificates..............................................................................-42-
Servicing of the Loans.........................................................................................-44-
Collection and Other Servicing Procedures.................................................................-44-
Primary Mortgage Insurance................................................................................-47-
Hazard Insurance..........................................................................................-47-
Unanticipated Recoveries of Losses on the Loans...........................................................-49-
Advances..................................................................................................-49-
Payments on Mortgage Assets...............................................................................-50-
Administration Fees, Compensation and Payment of Expenses.................................................-51-
Resignation of the Master Servicer; Scope of Indemnities..................................................-51-
Back-Up Master Servicer...................................................................................-52-
Special Servicing Agreements..............................................................................-53-
Servicing of the Underlying Loans.........................................................................-53-
The Pooling and Servicing Agreement............................................................................-53-
Assignment of Loans.......................................................................................-53-
Representations and Warranties............................................................................-55-
</TABLE>
<PAGE>
TABLE OF CONTENTS
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Repurchase or Substitution................................................................................-57-
Forward Commitments: Pre-Funding Account..................................................................-58-
Adjustment to Administration Fees in
Connection with Prepayment Interest Shortfall..........................................................-59-
Book-Entry Registration...................................................................................-59-
Global Clearance, Settlement and Tax Documentation Procedures.............................................-63-
Initial Settlement................................................................................-63-
Secondary Market Trading..........................................................................-64-
U.S. Federal Income Tax Documentation Requirements................................................-66-
Definitive Certificates...................................................................................-67-
Evidence as to Compliance.................................................................................-68-
Reports to Certificateholders.............................................................................-68-
Reports to the Trustee....................................................................................-69-
Events of Default.........................................................................................-70-
Rights Upon Event of Default..............................................................................-70-
Amendment.................................................................................................-71-
Termination...............................................................................................-72-
Governing Law.............................................................................................-72-
Legal Aspects of the Loans.....................................................................................-73-
General...................................................................................................-73-
Foreclosure...............................................................................................-73-
Rights of Redemption......................................................................................-74-
Anti-Deficiency Legislation and Other Limitations on Lenders..............................................-75-
Junior Liens; Rights of Senior
Lienholders..............................................................................................-76-
"Due-on-Sale" Clauses.....................................................................................-78-
Environmental Legislation.................................................................................-79-
Subordinate Financing.....................................................................................-79-
Applicability of Usury Laws...............................................................................-80-
Enforceability of Some Provisions.........................................................................-80-
Legal Aspects of the Loans Under California Law...........................................................-81-
Co-op Loans...............................................................................................-81-
Legal Investment Matters.......................................................................................-82-
ERISA Considerations...........................................................................................-84-
Federal Income Tax Consequences................................................................................-88-
General...................................................................................................-88-
REMIC.....................................................................................................-89-
Classification of REMICs...............................................................................-89-
Qualification as a REMIC..................................................................................-90-
Characterization of Investments in Certificates........................................................-91-
Taxation of Owners of Regular Certificates.............................................................-92-
Constant Yield Election................................................................................-95-
Effects of Defaults and Delinquencies..................................................................-96-
Taxation of Owners of Residual Certificates............................................................-96-
Pass-Through of Miscellaneous Itemized Deductions......................................................-99-
Sales of Certificates.................................................................................-100-
Prohibited Transactions and Other REMIC-Level Taxes...................................................-101-
Tax on Transfers of Residual Certificates to Certain Organizations....................................-101-
Disregard of Some Types of Transfers..................................................................-102-
Termination...........................................................................................-103-
Reporting and Other Administrative
Matters..............................................................................................-103-
Backup Withholding....................................................................................-104-
Foreign Investors.....................................................................................-105-
Purchase of Both Regular and Residual Certificates....................................................-105-
Investment in certificates Not Representing
Interests in a REMIC..................................................................................-106-
Classification of Trust and Characterization of Investment in Certificates............................-106-
Taxation of Owners of P&I Certificates................................................................-106-
Taxation of Owners of IO Certificates.................................................................-110-
Administration Fee, Voluntary Advances and Subordinated Amount........................................-112-
Sales of Certificates.................................................................................-112-
Reporting.............................................................................................-113-
Backup Withholding....................................................................................-114-
Foreign Investors.....................................................................................-114-
State Tax Considerations......................................................................................-114-
Plan of Distribution..........................................................................................-115-
Legal Matters.................................................................................................-116-
Rating........................................................................................................-117-
</TABLE>
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Where You Can Find More Information...........................................................................-117-
ABN AMRO Mortgage Corporation............................................................................-117-
Additional Information Relating to the Mortgage Certificates.............................................-118-
</TABLE>
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We describe the offered certificates in two separate documents that
progressively provide more detail: (1) this prospectus, which provides general
information, some of which may not apply to all series of certificates; and (2)
the prospectus supplement for a series of certificates, which describes the
specific terms of that series of securities and may be different from the
information in the prospectus. Neither this prospectus nor any prospectus
supplement will contain all the information included in the registration
statement. The registration statement also includes copies of the various
contracts and documents referred to in this prospectus and any prospectus
supplement. You may obtain copies of these documents for review. See "Where You
Can Find More Information."
IF THE DESCRIPTION OF THE TERMS OF THE CERTIFICATES VARIES BETWEEN THE
PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN
THE PROSPECTUS SUPPLEMENT.
We include cross-references in each prospectus supplement and in this
prospectus to captions in these materials where you can find further related
discussions. The Table of Contents which appears before this page and the Table
of Contents included in each prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Significant Definitions" in
this prospectus and in the prospectus supplement for each series.
-------------------------------------
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The certificates comprising each series will represent the entire
beneficial ownership interest in a distinct trust (the "TRUST") that will issue
those certificates. The Trust will be comprised primarily of mortgage assets
(the "MORTGAGE ASSETS") consisting of:
mortgage loans (the "LOANS") secured by first liens on one- to
four-family residential properties and rights to own and occupy
apartments in cooperative buildings,
mortgage certificates (the "MORTGAGE CERTIFICATES") secured by
mortgage loans (the "UNDERLYING LOANS"), and
the principal and interest payments due on the Mortgage Assets.
One or more entities, which may include an affiliate of ABN AMRO
Mortgage Corporation (the "DEPOSITOR"), will be specified in the prospectus
supplement as the master servicer (the "MASTER SERVICER") for a series of
certificates. Each series of certificates will be issued under a separate
pooling and servicing agreement (the "POOLING AND SERVICING AGREEMENT") entered
into among ABN AMRO Mortgage Corporation, as Depositor, the Master Servicer, and
a commercial bank or trust company acting as trustee (the "TRUSTEE") for the
benefit of certificateholders of the related series.
The provisions of each Pooling and Servicing Agreement will vary
depending upon the nature of the certificates to be issued and the nature of the
related Trust. This prospectus summarizes the material provisions which may
appear in each Pooling and Servicing Agreement. The prospectus supplement for a
series of certificates will describe any other material provisions of the
Pooling and Servicing Agreement relating to that series. On written request, the
Depositor will provide certificateholders with a copy of the Pooling and
Servicing Agreement for any series without charge. You should send your request
to ABN AMRO Mortgage Corporation, 181 West Madison Street, Suite 3250, Chicago,
Illinois 60602-4510, Attention: Maria Fregosi - Director - ABN AMRO Mortgage
Operations. The Depositor will file the Pooling and Servicing Agreement relating
to a series of certificates with the SEC within 15 days after the date of
issuance of a series of certificates. See "The Trusts--General."
SOURCE OF FUNDS FOR PAYMENT
The certificates of a series will be entitled to payment only from the
proceeds from the Mortgage Assets included in the Trust issuing that series. You
will not be entitled to payments from the Mortgage Assets included in any other
Trust established by the Depositor. The certificates are not obligations of ABN
AMRO Mortgage Corporation or any of its affiliates. The certificates will not be
guaranteed by any governmental agency or any other entity.
-1-
<PAGE>
The Depositor and the Master Servicer of the Mortgage Assets for a
Trust will each have limited obligations to the Trust.
The Depositor's obligations will be limited to repurchasing
Mortgage Assets in the Trust or substituting different Mortgage
Assets into the Trust if the Depositor breaches its
representations and warranties concerning the Mortgage Assets.
The only obligations of the Master Servicer for the Trust will be
its contractual servicing and/or master servicing obligations.
This may include an obligation to make advances of delinquent
installments of principal, interest or both under limited
circumstances.
The prospectus supplement may describe additional obligations of the
Depositor and the Master Servicer to the Trust. You should refer to "The Pooling
and Servicing Agreement--Repurchase or Substitution" and "Servicing of the Loans
- --Advances" in this prospectus.
The Mortgage Assets in the Trust will not be insured or guaranteed by
any governmental agency or any other entity. You may experience delays in
distributions on your certificates or losses on your certificates if:
delinquent payments or losses on defaulted Loans are not advanced
by the Master Servicer or another person or paid from any credit
enhancement arrangement in your Trust;
payments on Mortgage Certificates are delayed or the Mortgage
Certificates experience losses.
FORM OF CERTIFICATES
The certificates of each series will be issued in fully registered
certificated or book-entry form only. The minimum original principal balance or
notional balance that may be represented by a certificate is referred to as its
denomination. Each prospectus supplement will specify the minimum denominations
for that series. The original principal balance of each certificate will equal
the aggregate distributions of principal to which that certificate is entitled.
Unless otherwise stated in the prospectus supplement, interest distributions on
each certificate that is not entitled to distributions of principal will be
calculated based on the notional balance of the certificate. The notional
balance will not evidence an interest in or entitlement to distributions of
principal. It will be used solely for convenience in determining the interest
payable on the certificate, the denomination of the certificate and the voting
rights of its holder. You will not receive payment of the notional balance of
your certificate.
When we refer to interests in the certificates, we sometimes reference
two different types of interests. The first is a "FRACTIONAL UNDIVIDED INTEREST"
which means the percentage of the principal portion of a Trust evidenced by a
certificate. The second term is "PERCENTAGE INTEREST" which means the percentage
that a certificate represents of a particular class of certificates. When we
refer to a "RESIDUAL
-2-
<PAGE>
HOLDER," we are referring to a certificateholder entitled to receive the
"residual interest" in the REMIC as defined in Section 860G(a)(2) of the
Internal Revenue Code of 1986, as amended (the "CODE").
Except for global certificates described in the next paragraph, you may
transfer and exchange your certificates on a certificate register to be
maintained at the corporate trust office of the Trustee or an office or agency
maintained by the Trustee for that purpose. Unless otherwise stated in the
prospectus supplement, the Trustee will not charge a fee for any registration of
transfer or exchange of certificates, but may require you to pay an amount
sufficient to cover any tax or other governmental charge. Before a certificate
is properly presented for transfer, the Master Servicer, the Trustee, the
certificate registrar and any of their agents may treat the person in whose name
a certificate is registered as the owner of the certificate for the purpose of
receiving distributions of principal and interest and for all other purposes
under the Pooling and Servicing Agreement.
For the classes of certificates specified in the applicable prospectus
supplement, investors will not have the right to receive physical certificates
evidencing their ownership except under limited circumstances. Instead, the
Trust will issue the certificates in the form of global certificates, which will
be held by The Depository Trust Company, known as DTC, or its nominee or a
similar institution. Financial institutions that are direct or indirect
participants in DTC will record beneficial ownership of a certificate by
individual investors in the authorized denominations.
CLASSES OF CERTIFICATES
Each series of certificates will be issued in one or more classes. Each
class of certificates may have multiple components and may be entitled to
receive all amounts payable on a specific group of assets in the related Trust.
The certificates of each class will be entitled to receive:
any distributions from the Mortgage Assets of the Trust that are
allocable to principal, in the aggregate amount of the original
principal balance, if any, of that class of certificates; and
any distributions from the Mortgage Assets of the Trust that are
allocable to interest on the principal balance or notional balance
of the certificates at the interest rate, if any, payable on that
class of certificates.
If stated in the prospectus supplement, the certificates will have an
aggregate original principal balance equal to the aggregate unpaid principal
balance of the Loans and Mortgage Certificates as of the close of business on
the first day of the month of creation of the Trust (the "CUT-OFF DATE") after
deducting payments of principal due on or before, and prepayments of principal
received before, the Cut-off Date. The principal balance of a Loan refers to the
scheduled principal balance remaining to be paid at the close of business on the
Cut-Off Date:
-3-
<PAGE>
reduced by all amounts collected by the Master Servicer and
allocable to principal of that Loan;
plus for any Loan which is not payable in self amortizing
payments, the shortfall, if any, in interest that is added to the
principal balance of the Loan.
The principal balance of a Mortgage Certificate refers to the principal
balance remaining to be paid at the close of business on the Cut-Off Date;
reduced by distributions of principal made after the Cut-Off Date
and any allocation of losses;
plus, any interest not distributed that may be added to the
principal balance of the Mortgage Certificate.
If a Trust or underlying trust includes Loans or Underlying Loans with payments
due on a day other than on the first day of each month, the prospectus
supplement will more fully describe any resulting effect on certificateholders.
Each class of certificates may bear interest at a different Remittance
Rate. The "REMITTANCE RATE" will equal the rate of interest payable on each
Mortgage Asset in the Trust minus the Master Servicer's administration fee, the
servicing fee of any third party servicer of the Loans and any other amounts
stated in the prospectus supplement. If stated in the prospectus supplement, the
original principal balance of the certificates and the interest rate on the
classes of certificates will be determined based on the cash flows on the
Mortgage Assets.
In addition, the related prospectus supplement will specify whether the
Pooling and Servicing Agreement will provide that all or a portion of principal
collected on the Mortgage Assets may be retained by the Trustee and held in
temporary investments, including mortgage loans, for a specified period prior to
being used to distribute payments of principal to certificateholders.
The result of any retention and temporary investment of principal by
the Trustee would be to slow the repayment rate of the related certificates
relative to the repayment rate of the related Mortgage Assets, or to attempt to
match the repayment rate of the related certificates to a repayment schedule
established at the time the certificates are issued. Any feature of this type
applicable to any certificates may terminate, resulting in the current funding
of principal payments to the related certificateholders and an acceleration of
the repayment of those certificates upon the occurrence of specified events
described in the related prospectus supplement.
Each series of certificates may include different classes of
certificates that have different rights to receive or not receive distributions
of principal and interest on each "DISTRIBUTION DATE" as specified in the
prospectus supplement. The prospectus supplement for each series will outline
these classes and their rights. A summary of some of the possible categories of
certificates and their rights are described below:
-4-
<PAGE>
Senior and Subordinated Certificates. The rights of a "SENIOR"
certificate to receive any or a specified portion of distributions will be
superior to the rights of a "SUBORDINATE" certificate up to an amount specified
in the related prospectus supplement (the "SUBORDINATED AMOUNT"). See "Credit
Enhancements--Subordination."
Accrual Certificates. Interest will accrue at the applicable Remittance
Rate on "ACCRUAL" certificates, but the Trustee will not distribute interest
until the termination of the accrual period specified in the prospectus
supplement. Instead, the amount of interest accrued during the accrual period
will be added to the principal balance of the certificate.
Accretion Directed Certificates. In addition to receiving distributions
of principal on the Mortgage Assets, "ACCRETION DIRECTED" certificates are
entitled to receive principal distributions from the interest accrued but not
paid to the Accrual certificates.
Principal Only Certificates. "PRINCIPAL ONLY" certificates are entitled
to receive distributions of principal on Mortgage Assets, but not to receive
distributions of interest.
Interest Only Certificates. "INTEREST ONLY" certificates are entitled
to receive distributions of interest on the Mortgage Assets, but not
distributions of principal. These certificates will be denominated in notional
balances. The notional balance is the amount specified on the certificate,
reduced by distributions allocable to principal on the corresponding class or
classes, all as described in the prospectus supplement. The Trustee will
calculate each Interest Only Certificate's pro rata share of the interest
distributions on the Mortgage Assets by multiplying the amount of interest by
the following fraction:
notional balance of the Interest Only certificate
-----------------------------------------------------------------
notional balance of all Interest Only certificates of its class
Stripped Certificates. "STRIPPED" certificates may consist of the
following:
Principal Only certificates;
Interest Only certificates;
certificates entitled to distributions of principal with
disproportionate or nominal interest distributions; or
certificates entitled to distributions of interest with
disproportionate or nominal principal distributions.
Sequential Pay Certificates. "SEQUENTIAL PAY" certificates receive
distributions of principal in order so that no class will receive a principal
distribution until classes having earlier scheduled maturity dates or prior
designations have been fully repaid.
-5-
<PAGE>
Prepayment Certificates. "PREPAYMENT" certificates are entitled to
minimum distributions of principal based on the assumption that the Loans in the
related Trust or the Underlying Loans related to the Mortgage Certificates in
the related Trust prepay at a rate specified in the prospectus supplement.
Distributions of principal to these certificates will commence on the
Distribution Date specified in the 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, for each Distribution Date.
The "SURPLUS" for a series of REMIC certificates as of any Distribution Date
equals the amount by which the sum of distributions, payments and other amounts
received exceeds the sum of (1) the amount required to be distributed to
certificateholders on that Distribution Date and (2) expenses described in the
prospectus supplement. In addition, after the aggregate principal balances of
all of the certificates other than the Residual certificates have been fully
repaid, the holders of the Residual certificates will be the sole owners of the
related Trust and will have sole rights to the Loans and/or Mortgage
Certificates and other assets remaining in the Trust. Some or all of the
Residual certificates of a series may be offered by the related prospectus
supplement; if so, the terms of the Residual certificates will be described in
the prospectus supplement. Any qualifications on direct or indirect ownership of
Residual certificates offered by a prospectus supplement, as well as
restrictions on the transfer of the Residual certificates, will be described in
the related prospectus supplement. If the Residual certificates are not so
offered, the Depositor may, but need not, sell some or all of the Residual
certificates on or after the date of original issuance of a series in
transactions exempt from registration under the Securities Act of 1933 and
otherwise under circumstances that will not adversely affect the REMIC status of
the Trust. If Residual certificates offered by this prospectus and the related
prospectus supplement have a certificate balance or a Remittance Rate,
references in this prospectus to distributions on certificates and related
matters should be interpreted to include Residual certificates, as appropriate.
Non-Accelerated Certificates. "NON-ACCELERATED" certificates are
entitled to distributions of principal according to a repayment schedule
established at the time the certificates are issued. The scheduled repayment
rate of the certificates is intended to be slower than the repayment rate of the
related Mortgage Assets.
Each class of certificates that is entitled to distributions allocable
to interest will bear interest at a fixed rate or a rate that may change from
time to time:
in accordance with a schedule;
in reference to a widely published interest rate index like the
London Interbank Offered Rate (LIBOR); or
as otherwise specified in the prospectus supplement.
-6-
<PAGE>
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
GENERAL
The Trustee will distribute principal and interest at the applicable
Remittance Rate, if any, on the certificates out of funds available on the
Distribution Dates specified in the prospectus supplement. Distribution Dates
may be monthly, quarterly, semiannually or at another interval specified in the
prospectus supplement. The Trustee will make distributions to the persons in
whose names the certificates are registered at the close of business on the last
business day of the month before the Distribution Date (each, a "RECORD DATE").
Unless otherwise specified in the prospectus supplement, distributions will
begin in the month after the month in which the Cut-off Date occurs. The Trustee
will distribute funds by check or money order mailed to the person entitled to
receive them at the address appearing in the certificate register. The
prospectus supplement may also specify that in the case of certificates that are
of a specified minimum denomination, upon written request by the
certificateholder, the Trustee will remit funds by wire transfer or by other
means agreed upon. The Trustee will make the final distribution in retirement of
the certificates only upon presentation and surrender of the certificates at the
office or agency of the Trustee specified in the final distribution notice to
certificateholders. The Trustee will make all distributions on global
certificates held by DTC to DTC, which will credit the accounts of its direct
participants. If you hold an interest in a global certificate, you will have to
rely on your financial intermediary to forward you payments. The Pooling and
Servicing Agreement may permit the Trustee to appoint a paying agent for
purposes of remitting distributions.
The Trustee will make distributions on the certificates out of, and
only to the extent of, funds in a separate account established and maintained
under the Pooling and Servicing Agreement for the benefit of holders of the
certificates of the related series (the "CERTIFICATE ACCOUNT"). The Trustee will
distribute principal, principal prepayments, scheduled payments of principal and
interest in the manner specified in the prospectus supplement. Unless otherwise
stated in the prospectus supplement, distributions to any class of certificates
will be made pro rata to all certificateholders of that class.
Unless otherwise specified in the related prospectus supplement, the
Pooling and Servicing Agreement will provide that amounts deposited in the
Certificate Account may be invested in the following "ELIGIBLE INVESTMENTS":
direct obligations of, or guaranteed as to full and timely payment
of principal and interest by, the United States or any United
States agency or instrumentality;
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;
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;
general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia with an investment
grade rating;
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investment grade commercial or finance company paper;
guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation rated in one of the two highest
rating levels available to the issuers by each rating agency at
the time of the investment; and
other obligations that are acceptable as Eligible Investments to
each of the rating agencies rating then rating the certificate
series as provided in the related Pooling and Servicing Agreement.
Eligible Investments made by the Trustee must mature no later than the business
day before the next Distribution Date. If a REMIC election (see "Federal Income
Tax Consequences") is made for a series of certificates, then:
earnings on those Eligible Investments will belong to the
Depositor unless otherwise specified in the related prospectus
supplement; and
investments will be so that they qualify as "permitted
investments" (as defined in Section 860G(a)(5) of the Code) and
the Trustee will not sell these investments if the sale would
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.
DISTRIBUTIONS OF INTEREST
Each class of certificates of a series will accrue interest from the
date and at the fixed or adjustable Remittance Rate described in the prospectus
supplement. For each Distribution Date, unless described differently in the
prospectus supplement, interest will accrue on each class of certificates
entitled to interest from the first day to the last day of the month before the
month in which the distribution occurs (each, an "ACCRUAL PERIOD"). Interest
will accrue on the aggregate principal balance of your certificate, or if your
certificate is an Interest Only class, interest will accrue on its notional
balance. To the extent funds are available, the Trustee will distribute interest
accrued during each Accrual Period on the Distribution Dates specified in the
prospectus supplement. The Trustee will distribute interest until the aggregate
principal balance of a class of certificates is reduced to zero or, in the case
of Interest Only classes, until the aggregate notional balance of the
certificates is reduced to zero. Distributions of interest on each class of
Accrual certificates will commence only after the occurrence of the events
specified in the prospectus supplement. Before any of the specified events
occur, the aggregate principal balance of any class of Accrual certificates will
increase on each Distribution Date by the amount of interest that would have
been distributed to that class. Any class of Accrual certificates will
thereafter accrue interest on its outstanding principal balance. Interest
accrued but not paid to the Accrual certificates may be distributed as principal
to some classes of Accretion Directed certificates. Each prospectus supplement
may provide for interest to accrue and/or to be distributed differently from the
description in this paragraph.
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DISTRIBUTIONS OF PRINCIPAL
Unless otherwise stated in the prospectus supplement, the outstanding
principal balance of any class of certificates at any point in time will be:
the original principal balance of that class of certificates;
minus
all distributions of principal made on those certificates; minus
all realized losses allocated to that class; plus
in the case of Accrual certificates, all interest accrued, but not
then paid less its allocable share of shortfalls.
The aggregate amount of principal distributable for a certificate
series will generally be equal to the amount of principal received on the
Mortgage Assets in the related Trust. The prospectus supplement will specify the
method by which the Master Servicer will calculate principal distributions and
the manner in which that amount will be allocated among the classes of
certificates entitled to distributions of principal. The Trustee will distribute
principal on a pro rata basis among certificates of the same class entitled to
receive distributions. The certificate balance of a class or classes of
certificates may increase in accordance with any negative amortization
experienced by the Mortgage Assets in the related Trust.
The "DUE DATE" related to each Distribution Date is the first day of
the month in which that Distribution Date occurs. The "DETERMINATION DATE" is a
day not later than the 10th day before the related Distribution Date in the
month in which the Distribution Date occurs.
If stated in the prospectus supplement, one or more classes of Senior
certificates may be entitled to receive all or a disproportionate percentage of
Principal Prepayments. "PRINCIPAL PREPAYMENTS" consist of the payments or other
recoveries of principal on a Loan that are received in advance of their
scheduled Due Dates and not accompanied by amounts of interest representing
scheduled interest due after the month in which the payment was received. The
allocation of Principal Prepayments to the Senior classes will accelerate the
reduction of the principal balance of the relevant Senior class while
simultaneously increasing the interests in the Trust held by the Subordinate
classes. Increasing the interests of the Subordinate certificates relative to
that of the Senior certificates is intended to preserve the benefits to the
Senior certificates of the subordination provided by the Subordinate
certificates. See "Credit Enhancement--Subordination."
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of hypothetical distributions
on a series of certificates. The chart assumes the certificates are issued in
October 1999, are paid monthly and relate to a Trust comprised of Mortgage
Assets. All references to the Trust, certificateholders, Mortgage Assets and
Certificate Account refer to those related to a series of certificates. We have
assumed that all dates are business days.
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<TABLE>
<S> <C>
October 1............... Cut-off Date. The Trust will include the aggregate unpaid principal
balance of the Mortgage Assets, after deducting principal payments due
and payable on or before October 1, and Principal Prepayments received
before October 1. These deducted principal payments, interest payments
and Principal Prepayments will not be included in the Trust or passed
through to certificateholders. They will be paid to the Depositor when
received.
October 1-31............ Principal Prepayments received by the Master Servicer during this period
would be credited to the Certificate Account for distribution to
certificateholders on the November 25 Distribution Date. When a Loan is
prepaid in full or liquidated, interest on the amount prepaid or liquidated is
collected only to the date of prepayment or liquidation. Unless otherwise
specified in the prospectus supplement, to the extent funds are available
from the current administration fees, and in order to minimize a shortfall in
interest payable to Certificateholders, the Master Servicer will make an
additional payment to certificateholders on any Loan that is prepaid or
liquidated by October 31. The payment may be in an amount up to the
amount necessary to assure that on the related Distribution Date the funds
available for distribution will include one month's interest at the Pass-
Through Rate for each prepaid or liquidated Loan. For example, assume a
mortgagor prepays a mortgage in full on October 10. The prepayment
includes interest from October 1 to October 10. The Master Servicer will
make an additional payment to certificateholders to minimize the interest
shortfall from October 11 to October 31.
October 31.............. Record Date. Distributions on November 25 will be made to
certificateholders of record at the close of business on the last business day
of October.
November 1-15........... The Master Servicer receives scheduled payments of principal and interest
due November 1, and deposits these amounts in a custodial account as they
are received. Under the terms of the related mortgage, the Master Servicer
may collect a late charge on payments received after their due date and any
applicable grace period. The Master Servicer, or servicer, will retain these
late charges as additional servicing compensation.
</TABLE>
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<TABLE>
<S> <C>
November 15............. Determination Date. On November 15, the Master Servicer determines the
aggregate amount of collections available for distribution to
certificateholders on the Distribution Date and provides the Trustee with a
report outlining these amounts and the Trustee will determine amounts
payable on the certificates. These amounts will include:
scheduled principal payments and principal prepayments that are
distributable on the November Distribution Date,
the amount of funds the Master Servicer is
required to advance for scheduled payments due
on November 1 but not received by the close of
business on the Determination Date, and
the portion of current administrative fees that it
will distribute in order to minimize prepayment
interest shortfalls on any Loan that is prepaid by
October 31.
November 24............. Withdrawal date. On the business day before the Distribution Date, the
Master Servicer transfers amounts to be distributed to certificateholders to
the Certificate Account.
November 25............. Distribution Date. The Trustee will distribute to certificateholders the
aggregate amounts described in the notice it received from the Master
Servicer, unless provided otherwise in the prospectus supplement.
</TABLE>
OPTIONAL TERMINATION OF A TRUST OR UNDERLYING TRUST
Unless otherwise specified in the prospectus supplement, the Depositor,
the Master Servicer or the Residual Holder may, at its option, effect early
termination of the Trust, by purchasing all of the Mortgage Assets in the Trust.
The Depositor or the Master Servicer may exercise this option on any
Distribution Date after the aggregate outstanding principal balance of the
Mortgage Assets is less than a specified percentage of the aggregate outstanding
principal balance of the Mortgage Assets as of the Cut-off Date as specified in
the prospectus supplement. The Trustee will apply the proceeds of this sale on
that Distribution Date to each certificate entitled to distributions. The
proceeds realized upon an early termination may be less than the total principal
balance of all outstanding certificates plus accrued and unpaid interest. In
this case, the resulting shortfall will be allocated among the certificates as
described in the prospectus supplement.
We anticipate that the Depositor or the Master Servicer will buy the
assets in the Trust for a price equal to the sum of the following:
the principal balance of each Mortgage Asset, plus accrued
interest thereon at the applicable Pass-Through Rate; plus
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the fair market value of all acquired property in respect of any
Mortgage Assets; minus
unreimbursed monthly advances of principal or interest by the
Master Servicer.
The Trust will sell the Mortgage Assets in connection with any early
termination without representation or warranty, except as to the Trust's title,
and without recourse. No holder of any class of certificates will be entitled to
any share of unanticipated recoveries received after the termination of the
Trust. See "Servicing of the Loans--Unanticipated Recoveries of Losses on the
Mortgage Assets" in this prospectus.
The Master Servicer of the Underlying Loans held in an underlying trust
which secures the Mortgage Certificates or another party may have the ability to
terminate the underlying trust on any Distribution Date after the aggregate
outstanding principal balance of the Underlying Loans is less than a specified
percentage of the aggregate outstanding principal balance of the Underlying
Loans as of a specified date. The proceeds realized upon an early termination of
the Underlying Loans may be less than the total principal balance of the
Mortgage Certificates secured by those loans plus accrued and unpaid interest.
THE TRUSTS
GENERAL
The Trust issuing a series of certificates may include the following
assets:
the Mortgage Assets consisting of Loans and Mortgage Certificates
backed by Underlying Loans;
amounts held from time to time in the Certificate Account and any
segregated account established by the Master Servicer in
connection with a particular form of credit enhancement for a
particular series (the "PRE-FUNDING ACCOUNT");
all payments, except for any exclusions identified in the
prospectus supplement, in respect of the Mortgage Assets, adjusted
for the applicable Pass-Through Rates;
all property acquired by foreclosure or deed in lieu of
foreclosure for any property that secured a Loan;
all rights of the Depositor under any primary mortgage insurance
policies and any other insurance policies required to be
maintained in respect of the Loans;
the Depositor's rights and remedies under any purchase agreement
by which it acquires the Mortgage Assets; and
rights under any form of credit enhancement specified in the
prospectus supplement.
The Depositor will purchase or acquire each Loan from a qualified lender or
mortgage asset seller pursuant to a mortgage loan purchase agreement. Qualified
lenders and mortgage asset sellers may be
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affiliates of the Depositor. Each Loan will have been originated or purchased by
a qualified lender. All qualified lenders will be or will have been at the time
of the origination of the Loans either:
(1) mortgagees approved by the Secretary of Housing and Urban
Development ("HUD"), the 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"); or
(2) originated or underwritten by an entity employing underwriting
standards consistent with the underwriting standards of an
institution described in subclause (1) above.
The Depositor has approved, or will approve, individual institutions as
eligible qualified lenders by applying specific criteria, including the
qualified lender's depth of mortgage origination experience, servicing
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 Loans for
inclusion in a Trust from lenders not meeting the generally applicable criteria
described above. In each of these cases, the Depositor must review the lender
and find it acceptable. In connection with these types of purchases by the
Depositor, the Depositor will reunderwrite the applicable Loans. See "--Loan
Underwriting Policies" below.
The prospectus supplement for each certificate series will include
information describing the Mortgage Assets. If definitive information respecting
the final pool of Mortgage Assets is not known at the time the related series of
certificates initially is offered, information of the nature described below for
the anticipated pool will be provided in the prospectus supplement. Definitive
information for the final pool will be described in a report on Form 8-K and
filed with the Securities and Exchange Commission within fifteen days after the
initial issuance of the certificates. The definitive description of the mortgage
asset pool will specify:
the range of the aggregate outstanding scheduled principal balance
of the Mortgage Assets at origination and as of the Cut-off Date;
any special payment features of the Mortgage Assets;
years of origination of the Loans;
insurance policies, letters of credit or other terms of credit
enhancement, if any, applicable to any Mortgage Asset;
the original maturities of the Loans and the last maturity date of
the latest maturing in the Trust;
mortgage interest rates borne by the Loans and for adjustable rate
Loans:
the initial and current mortgage interest rates;
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the index or formula used to calculate the adjustable
mortgage interest rate;
the weighted average minimum and maximum rates and maximum
adjustment; and
the frequency of interest rate adjustments;
original loan-to-value ratios;
distribution by number and aggregate unpaid principal balance of
the types of properties securing the Loans; and
geographical distribution of the Loans by state.
The definitive description of the pool of Mortgage Assets comprising a
Trust will also specify the original principal balance, or, in the case of
Interest Only certificates, the notional balance, of each class of certificates
on the date of issuance of the certificates, and information regarding the exact
amount of any forms of credit enhancement, if applicable.
THE LOANS
DESCRIPTION OF THE LOANS
The Loans will be evidenced by promissory notes secured by mortgages or
deeds of Trust. The mortgages create first liens on one- to four-unit
residential properties, condominium units, townhouses and units located within
planned unit developments ("PUDS") and that are secured by shares of cooperative
corporations ("CO-OP LOANS").
The Loans will be "conventional" Loans which means they will not be
insured or guaranteed by any governmental agency. The mortgaged properties
securing the Loans may be located in any jurisdiction within the United States
and many include investment properties and vacation and second homes. Unless
otherwise stated in the prospectus supplement, the Loans will have the following
characteristics:
initial principal balances at origination of not more than
$2,000,000;
monthly payments due on the first day of each month;
5- to 40-year term at origination;
adjustable or fixed rates of interest;
level or variable monthly payments over the term of the Loan; and
secured by a lien on the underlying mortgaged property or by a
leasehold interest in the property.
Unless otherwise stated in the prospectus supplement, the loan-to-value
ratio of any Loan will be determined by dividing (1) the original principal
balance of the Loan by (2) the original value of the related mortgaged property.
The principal balance of the Loan, for purposes of computation of the
loan-to-value ratio of any Loan, will include any part of an origination fee or
closing costs that have been financed. The original value of a mortgaged
property is:
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in the case of a purchase money Loan, the lesser of the appraised
value of the mortgaged property and the selling price; and
in the case of any non-purchase money Loan, the value of the
mortgaged property, based on the appraised value determined in an
appraisal obtained at the time of refinancing or origination of
the loan or the sales price, if the mortgaged property was
purchased within the previous twelve months.
PAYMENT PROVISIONS OF THE LOANS
Each Loan may be fully amortizing or may be a balloon loan. A "BALLOON
LOAN" is a Loan that requires the borrower to make a substantial payment on the
Loan's stated maturity date. The ability of a borrower to make a balloon payment
will frequently depend upon the borrower's ability to refinance the Loan. Each
Balloon Loan may require payment of a premium or a yield maintenance penalty in
connection with a prepayment. The prospectus supplement will describe any
balloon loans, any applicable prepayment premiums or yield maintenance penalties
and the allocation of any premiums or penalties.
A Trust may contain buydown loans. A "BUYDOWN LOAN" is a Loan that
includes a provision whereby the originator or a third party partially
subsidizes the monthly payments of the mortgagor during the early years of the
Loan. At the time of origination of the Loan, the originator or a third party
establishes a buydown fund from which the difference in the amount of principal
and interest due on the Loan and the payment due from the mortgagor will be
made. 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.
As a result, the mortgagor should be able to meet the full mortgage payments at
the end of the buydown period. To the extent that a mortgagor does not
experience an increase in income, the possibility of defaults on buydown loans
is increased. The prospectus supplement will contain information for 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.
The Loans in any Trust may include loans that bear simple interest at
fixed annual rates (the "FIXED-RATE LOANS") and have original terms up to 40
years. These 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 repay the principal amount of the note by
maturity.
The Loans may include fully or negatively amortizing adjustable rate
loans ("ARMS"). Unless otherwise specified in the related prospectus supplement,
ARMs eligible for inclusion in a Trust provide for a fixed initial mortgage
interest rate for an initial period of time ranging from 1 month to 120 months.
Thereafter, the mortgage interest rates are subject to periodic adjustment based
on changes in a formula or index (the "INDEX"). The Index applicable as of any
interest adjustment date will be the most recent index figure available during a
period specified in the prospectus supplement. A lender may set the initial
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mortgage interest rate independently of the Index otherwise applicable at the
time of origination. The initial mortgage interest rate is based on competitive
factors and on other various factors including the lender's:
lending policy at the time of origination;
availability of funds for lending purposes;
rate of return obtainable on other investments; and
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 rates are adjusted periodically 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"). Some ARMs can be converted
into Fixed-Rate Loans at the option of the mortgagor subject to any maximum
rate, minimum rate and maximum adjustment. The mortgagor's option to convert is
usually limited to a set period after origination and the fulfillment of
specific conditions described in the related mortgage note. To the extent
specified in the related prospectus supplement, any ARM converted to a
fixed-rate mortgage 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 the
mortgage interest rate may not be adjusted to a rate above a lifetime maximum
rate or below a lifetime minimum rate. In addition, some ARMs provide for
limitations on the maximum amount by which mortgage interest rates may adjust
for any single adjustment period. These 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 maximum rate, 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.
The mortgage interest rates on ARMs that do not provide for negative
amortization adjust at specified intervals which will be specified in the
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 repay the Loan over its remaining term at the
mortgage interest rate in effect as of the adjustment date. The Loans which
comprise any Trust may have been originated at different times, and therefore
the monthly payments on these Loans will adjust periodically in different
months.
Some ARMs are payable in self amortizing payments of principal and
interest. Other ARMs ("NEGATIVELY AMORTIZING ARMS") instead provide for
limitations on changes in the monthly payment on the ARMs ("PAYMENT CAPS").
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to repay the Loan by its maturity at the
mortgage interest rate in effect in any particular month. If a monthly payment
is not sufficient to pay the interest accruing on a Negatively Amortizing ARM,
the amount of the shortfall in interest ("DEFERRED INTEREST") is added to the
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principal balance of the Loans, causing negative amortization of the Loan, and
will be repaid through future monthly payments. If 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 repay the outstanding
principal balance over the remaining term of the loan, the excess reduces the
principal balance of the ARM. See "Prepayment, Yield and 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. 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. For any Trust that includes ARMs,
the related prospectus supplement will specify whether the Trust includes
Negatively Amortizing ARMs.
The Loans included in a Trust are by their terms assumable under
limited conditions. However, they also contain "due-on-sale" provisions under
which the Loans become due and payable, at the option of the mortgage holder,
upon the sale of the related mortgaged property. We expect that the Master
Servicer will enforce "due-on-sale" provisions on most Fixed-Rate Loans and some
ARMs. In instances where the Master Servicer does not enforce these provisions,
the prospective purchaser must meet the Master Servicer's creditworthiness
standards or the Master Servicer must reasonably believe that it may be
restricted by law from enforcing a due-on-sale clause. In addition, 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 assumption, the Master Servicer may enter into an assumption and
modification agreement with the person to whom the property has been or is about
to be conveyed, pursuant to which that person becomes liable under the
promissory note evidencing the Loan. If a REMIC election is made for the related
Trust, in connection with any assumption or substitution agreement, the Master
Servicer may not change the interest rate of the related mortgage note. The
person assuming the Loan will generally pay a fee based on a percentage of the
outstanding principal balance of the Loan. The Master Servicer will retain this
fee 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 Loans generally are not modified to current market
rates, unless the loan bears a higher interest rate than the prevailing market
rate. For a description of circumstances in which the Master Servicer may be
unable to enforce due-on-sale clauses, see "Legal Aspects of the Loans--'Due
on Sale' Clauses".
LOAN UNDERWRITING POLICIES
The Loans to be included in each Trust will be subject to the various
credit, appraisal and underwriting standards described in this section. The
Depositor's credit, appraisal and underwriting standards for the Loans will
generally conform to those published in the Depositor's selling guide. We refer
to the Depositor's selling guide, together with the Depositor's servicing guide,
as modified from time to time, as the "GUIDE". The credit, appraisal and
underwriting standards 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 Loans may
be underwritten by the Depositor or by designated third parties.
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In addition, the Depositor may purchase Loans which do not conform to
the underwriting standards described in the Guide. The Depositor may purchase
these Loans from qualified lenders and mortgage asset sellers who will represent
that the 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 these Loans for conformity with the applicable
credit, appraisal and underwriting standards. The Depositor may also purchase
Loans from qualified lenders and mortgage asset sellers who will represent that
the 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 the insurance company
as to a Loan's insurability in a mortgage pool as evidence that the Loan
conforms to applicable underwriting standards. The certificates will likely have
been issued before the purchase of the Loans by the Depositor. The Depositor
will perform only random quality assurance reviews on Loans delivered with this
certification.
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 described 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 Loans included in any Trust,
the prospectus supplement will not distinguish among the various credit,
appraisal and underwriting standards applicable to the Loans nor describe any
review for compliance with applicable credit, appraisal and underwriting
standards performed by the Depositor. Moreover, we cannot assure you that every
Loan was originated in conformity with the applicable credit, appraisal and
underwriting standards in all material respects, or that the quality or
performance of 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 about 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. In order to establish 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.
The Depositor may purchase Loans which were originated under a limited mortgage
documentation program. However, the mortgagors on these types of loans 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 under this type of program, only
Loans with specified loan-to-value ratios will qualify for purchase. If the Loan
qualifies, the Depositor waives some of its
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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 generally made of each property
considered for financing. The appraiser may be required to inspect the property
and verify that it is in good condition and that construction, if new, has been
completed. Alternatively, the appraisal may be conducted by comparing values of
similar properties in an automated system or electronic data base, inspecting
the exterior of the property or another method described in the Guide. 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. The Depositor expects that the underwriting standards will require
that the underwriters be satisfied that the value of the property being financed
supports, and will continue to support, the outstanding Loan balance, and
provides sufficient value to mitigate the effects of adverse shifts in real
estate values.
Some 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 "Legal Aspects of the Mortgage Loans--Anti-Deficiency
Legislation and Other Limitations on Lenders." The Depositor expects that the
underwriting standards applied to the Loans will require that the underwriters
be satisfied that the value of the property being financed, as indicated by the
appraisal, currently supports and is anticipated to support in the future the
outstanding loan balance, and provides sufficient value to mitigate the effects
of adverse shifts in real estate values. The 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.
We cannot assure you, 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 that the Loan was originated in accordance with the
underwriting guidelines described above or other policies that the Depositor may
require or approve from time to time. The qualified lender providing this
representation may or may not be the party that originated the Loan. The
Depositor will review, or cause to be reviewed, all or a representative sample
of the Loans, and perform other reviews that it deems appropriate to determine
compliance with these standards. The Depositor will have 90 days following
delivery of a certificate series to complete its review. If the Depositor finds
any Loan fails to comply with these standards, the mortgage asset seller must
repurchase the defective Loan or provide a substitute Loan. However, the
mortgage asset seller will not be obligated to make a repurchase or substitution
if it can demonstrate to the satisfaction of the Depositor that the defective
Loan is includible in the pool. See "The Pooling and Servicing
Agreement--Repurchase or Substitution."
The underwriting policies described in this section may be varied for
particular certificate series to the extent described in the prospectus
supplement.
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MORTGAGE CERTIFICATES
DESCRIPTION OF THE MORTGAGE CERTIFICATES
All of the Mortgage Certificates will be registered in the name of the
Trustee or its nominee or, in the case of Mortgage Certificates issued only in
book-entry form, a financial intermediary that is a member of the Federal
Reserve System or of a clearing corporation on the books of which the security
is held. In some cases the financial intermediary may be the Trustee. Each
Mortgage Certificate will evidence an interest in a Trust consisting of a pool
of Mortgage Assets and/or in principal distributions and interest distributions
thereon.
The descriptions of Government National Mortgage Association ("GNMA"),
FHLMC, FNMA and Private certificates in this section are descriptions of
certificates representing proportionate interests in a pool of mortgage loans
and in the payments of principal and interest thereon. These issuers may also
issue asset-backed securities that represent a right to receive distributions
of:
interest only; or
principal only; or
disproportionate distributions of principal or interest; or
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 these 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 Mortgage Certificates
to be included in a Trust and the Underlying Loans will be described in the
prospectus supplement. The descriptions that follow are subject to modification
in each prospectus supplement as appropriate to reflect the terms of the
Mortgage Certificates that are actually included in a Trust.
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. The pool will consist of:
loans insured by the United States Federal Housing Administration
(the "FHA") under the Housing Act or Title V of the Housing Act of
1949 ("FHA LOANS");
loans 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
other eligible loans.
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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 a 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 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 certificateholder 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 underlying mortgage loan over the GNMA certificate
pass-through rate.
In addition, each payment to a GNMA certificateholder will include
proportionate pass-through payments of any prepayments of principal on the
underlying loans, and the holder's proportionate interest in the remaining
principal balance in the event of a foreclosure or other disposition of any
underlying loan.
Unless otherwise specified in the related prospectus supplement, the
GNMA certificates included in a Trust may be issued under either or both of the
GNMA I program and the GNMA II program. All mortgages underlying a particular
GNMA I certificate must be of the same type. An example of type would be
"single-family level payment mortgage loans." The mortgages must also have the
same annual interest rate, except for pools of mortgage loans secured by mobile
homes. The annual interest rate on each GNMA I certificate is one-half
percentage point less than the annual interest rate on the mortgage loans
included in the pool of mortgages backing the GNMA I certificate. Mortgages
underlying a particular GNMA II certificate must also be of the same type, 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 the GNMA II certificate.
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GNMA will have approved the issuance of each of the GNMA certificates
in accordance with a guaranty agreement between GNMA and the Master Servicer of
the mortgage loans underlying the GNMA certificate. Pursuant to the guaranty
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 the servicer on the mortgage loans backing the GNMA certificate are
less than the amounts due on the GNMA certificate. If a servicer is unable to
make payments on a GNMA certificate as it becomes due, it must promptly notify
GNMA and request GNMA to make the payment. Upon notification and request, GNMA
will make the payments directly to the registered holder of the GNMA
certificate. If no payment is made by the servicer and it fails to notify and
request GNMA to make the payment, the registered holder of the GNMA certificate
has recourse only against GNMA to obtain the payment. The registered holder is
entitled to proceed directly against GNMA under the terms of each GNMA
certificate or the guaranty agreement or contract relating to the GNMA
certificate for any amounts that are not paid when due under the GNMA
certificate.
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 mortgage loans,
the purchase of participation interests in these types of loans, and
the resale of the purchased mortgage loans 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 in
conventional one-to-four-unit residential first mortgage loans which it deems to
be of the quality, type and class as to generally meet the purchase standards
imposed by private institutional mortgage investors.
FHLMC Certificates. FHLMC certificates represent an undivided interest
in a group of mortgage loans purchased by FHLMC. Mortgage loans underlying the
FHLMC certificates included in a Trust will consist principally of fixed or
adjustable-rate mortgage loans with original terms to maturity of approximately
5, 7, 15, 20 and 30 years. First liens on one- to four-family residential
properties secure these loans.
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
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against FHLMC or a Federal Reserve Bank may be exercised only through the
Federal Reserve Bank on whose book-entry system the 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 the FHLMC certificate on the registered holder's pro rata
share of the outstanding unpaid principal balance of the related mortgage loans,
whether or not received. FHLMC also guarantees to each registered holder
ultimate collection of all principal of the related mortgage loans, without any
offset or deduction, to the extent of the holder's pro rata share. It 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 the latest to occur of:
foreclosure sale,
payment of a claim by any mortgage insurer, or
the expiration of any right of redemption.
In any event, FHLMC shall remit the guaranteed amount 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 on 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 this type of agreement is entered into and
is applicable to all or any part of the FHLMC certificates included in a Trust,
its existence will be disclosed in the 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. In addition, it guarantees 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.
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.
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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 loans, whether or not received.
It also guarantees each holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not the full principal amount is actually recovered. If FNMA were unable to
perform its obligations, distributions on FNMA certificates would consist solely
of payments and other recoveries on the underlying mortgage loans. 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.
Private Certificates. Each "PRIVATE" certificate will evidence an
undivided interest in a pool of:
FNMA certificates,
FHLMC certificates,
GNMA certificates,
mortgage loans, or
any combination of FNMA, FHLMC and GNMA certificates and mortgage
loans.
We expect that Private certificates will be issued pursuant to participation or
agreements entered into from time to time between the related seller and the
related trustee or custodian for the certificates. In addition, an affiliate of
the seller or of the Depositor under the agreement may be a Master Servicer for
these certificates or for the mortgage loans in which the 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 Master Servicer. Each Private certificate will have been
acquired in a secondary transaction and not from the issuer or any affiliate of
the issuer of the Private certificate.
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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 Loans in this prospectus.
Each Private certificate included in any Trust that is not a FNMA, FHLMC or GNMA
certificate must either: (1) have been previously registered under the
Securities Act of 1933 or (2) if not registered, be eligible for sale under Rule
144(k) under the Securities Act of 1933.
We expect that all collections received by the servicers on the
mortgage loans securing the Private Certificates will be deposited with the
trustee for the Private certificates. However, the Master Servicer will be
entitled to retain servicing fees and other amounts specified in the related
Pooling and Servicing Agreement from collections. Monthly distributions of the
principal and interest components of the collections will be made to the Trustee
for the certificates of the related series for deposit into the Certificate
Account for that series.
More specific information concerning the Private certificates
underlying a particular series of certificates, the mortgage loans underlying
those Private certificates, and related servicing and insurance, subordination
or other credit support arrangements will be described in the prospectus
supplement.
SUBSTITUTION OF MORTGAGE CERTIFICATES
The Pooling and Servicing Agreement for a series that includes Mortgage
Certificates may permit substitution of Mortgage Certificates if the seller of
the Mortgage Certificates breaches a representation or warranty, or the
documentation related to any Mortgage Certificate is incomplete. The prospectus
supplement for each series will further describe the conditions under which a
substitution may occur.
THE DEPOSITOR
GENERALLY
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.
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We do not expect 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) 904-0800.
Unless otherwise specified in the related prospectus supplement,
neither the Depositor, its parents nor any of the Depositor's affiliates will
insure or guarantee distributions on the certificates of any series. As
described in this prospectus, the only obligations of the Depositor will be
pursuant to representations and warranties related to the Mortgage Assets. See
"Pooling and Servicing Agreement--Representations and Warranties." The Depositor
will have no ongoing servicing responsibilities or other responsibilities for
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. 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.
YEAR 2000 PROJECT
STATE OF READINESS
The Depositor is part of ABN AMRO Bank N.V.'s U.S. operations, which
are managed by ABN AMRO North America, Inc. ("AANA"). AANA began addressing the
year 2000 problem in 1996 by assembling a corporate project team to develop a
year 2000 readiness program for ABN AMRO entities within North America. The
project team is comprised of AANA business leaders and representatives from the
Information Technology Division and is assisted by outside consulting firms and
contract personnel who are experts in the area of year 2000 readiness.
The project team's efforts are generally divided into four phases:
awareness, assessment, renovation and validation. The project team has completed
the initial awareness phase. At present, all AANA staff are aware of the year
2000 problem and its potential impact to their business units and the
organization as a whole. The effort to improve management and staff
understanding of the problem will continue throughout the life of the project.
In addition, the project team has initiated efforts to continue to improve
awareness of the year 2000 problem among all of AANA's customers and business
partners by coordinating mass mailings and responding to customer requests for
information.
The assessment phase of the year 2000 project is complete. The project
team has surveyed and documented its year 2000 readiness requirements, and has
prepared a project plan that addresses remediation, renovation, replacement,
upgrade or obsolescence of current systems. At present, the project team has
estimated and scheduled all efforts of renovation, testing, certification and
implementation.
The renovation phase of the year 2000 project is substantially
complete. All internal "mission critical" systems and applications are in place
and fully tested.
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The project team has also launched the validation phase of the year
2000 project. It developed a comprehensive plan to validate the readiness of all
of the systems utilized by ABN AMRO entities in North America for the year 2000.
In addition, to address potential disruptions in business due to year
2000 issues, AANA has developed a general year 2000 business continuity planning
process for all ABN AMRO entities in North America. The project team will
complete specific business unit year 2000 contingency plans for all ABN AMRO
entities in North America by December 31, 1999.
RISKS
Although the project team for the ABN AMRO entities in North America
expects its year 2000 remediation efforts to be fully completed, validated and
implemented well before the year 2000, there can be no assurance that these
efforts will be completed on time, or that they will fully remediate all
problems associated with the year 2000. In addition, there can be no assurance
that the Trustee, or unaffiliated businesses and entities who provide services
to the Depositor, the Servicer or the Trustee, will adequately address year 2000
issues.
If the Servicer, the Trustee or any of their respective vendors or
third party service providers are not year 2000 ready, the ability of the
Servicer to service the Loans, and the ability of the Trustee to make timely
distributions and required reports to certificateholders, may be materially and
adversely affected.
Some of the statements made in this section regarding the likelihood of
the Depositor successfully addressing problems associated with the year 2000
constitute forward-looking statements as defined in Section 27A(i)(1) of the
Securities Act. Generally, all statements in this section that are not
statements of historical fact are forward-looking statements. Because forward-
looking statements involve risks and uncertainties, there are important factors
that could cause actual results to differ materially from those expressed or
implied by forward-looking statements. These factors include the ability of the
Depositor to successfully identify systems and components that may pose year
2000 issues, the nature and the amount of programming required to correct these
systems and components, the ability of third party consultants and service
providers to timely complete portions of the Depositor's year 2000 remediation
plans, and the ability of the business partners of the Trustee, the Depositor
and the Servicer to successfully address their year 2000 issues.
USE OF PROCEEDS
Unless otherwise stated in the prospectus supplement, the Depositor
will use substantially all of the net proceeds from sales of certificates to
purchase Mortgage Assets or to reimburse itself for previous purchases of
Mortgage Assets. Reimbursement amounts to the Depositor may include the
following:
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amounts sufficient to repay any loans made to the Depositor to
facilitate mortgage asset purchases;
the costs of carrying the Mortgage Assets until the sale of the
certificates; and
expenses connected with pooling the Mortgage Assets and issuing
the certificates.
Any remaining proceeds will be used by the Depositor for its general
corporate purposes which are related to the activities described above.
CREDIT ENHANCEMENT
TYPES OF ENHANCEMENTS
Credit enhancement may be provided for one or more classes of a series
of certificates or for the Mortgage Assets in the related Trust. Credit
enhancement may be in one or more of the following forms:
the subordination of one or more classes of the certificates of
the series;
the use of a cross-support feature;
a pool insurance policy;
a special hazard insurance policy;
a bankruptcy bond;
the establishment of one or more reserve funds;
shifting interest credit enhancement;
overcollateralization;
letters of credit;
surety bond; or
another method of credit enhancement described in the related
prospectus supplement.
Unless otherwise stated in the prospectus supplement, any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the certificates and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement,
certificateholders will bear their allocable share of deficiencies.
SUBORDINATION
If so stated in the prospectus supplement, distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination of these
items that otherwise would have been payable to one or more classes of
Subordinate certificates of a series will instead be payable to holders of one
or more classes of Senior certificates of that series under the circumstances
and to the extent specified in the prospectus supplement. If stated in the
prospectus supplement, delays in receipt of scheduled payments on the Loans and
losses on defaulted Loans will be borne first by the various classes of
Subordinate
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certificates and thereafter by the various classes of Senior
certificates, in each case under the circumstances and subject to the
limitations specified in the prospectus supplement. The prospectus supplement
may limit the subordination of payments to Subordinate certificateholders that
the Trustee will distribute to Senior certificateholders as follows:
limiting the aggregate distributions from delinquent payments on
the Loans over the lives of the certificates or at any time,
limiting the aggregate losses in respect of defaulted Loans which
must be borne by the Subordinate certificates by virtue of
subordination.
If aggregate distributions in respect of delinquent payments on the Loans or
aggregate losses in respect of these Loans were to exceed the total amounts
payable and available for distribution to holders of Subordinate certificates
or, if applicable, were to exceed the specified maximum amount, holders of
Senior certificates could experience losses on the certificates.
In addition to or in lieu of the foregoing, if so stated in the
prospectus supplement, the Trustee may deposit all or any portion of
distributions otherwise payable to holders of Subordinate certificates on any
Distribution Date into one or more reserve funds established by the Trustee. See
"--Reserve Fund."
The prospectus supplement may specify that one or more classes of
certificates will bear the risk of specified losses on defaulted Loans not
covered by other forms of credit enhancement prior to other classes of
certificates. This subordination might be effected by reducing the principal
balance of the Subordinate certificates on account of losses, thereby decreasing
the proportionate share of distributions allocable to the Subordinate
certificates, or by another means specified in the prospectus supplement.
If stated in the prospectus supplement, various classes of Senior
certificates and Subordinate certificates may themselves be subordinate in their
right to receive distributions to other classes of Senior and Subordinate
certificates, respectively, through a cross-support mechanism or otherwise.
Unless otherwise stated in the prospectus supplement, the Pooling and
Servicing Agreement may permit the Master Servicer, at its option, to grant to
the holders of some classes of Subordinate certificates particular rights in
connection with the foreclosure of defaulted Loans in the related Trust. See
"Servicing of the Loans--Collection and Other Servicing Procedures."
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 Trust. Also, if specified in the related
prospectus supplement, the subordination feature will be enhanced by
distributing to one or more classes of Senior certificates on specified
Distribution Dates, as payments of principal, specified Principal
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Prepayments in the pool of Mortgage Assets under the circumstances and for the
period of time set forth in the prospectus supplement ("SHIFTING INTEREST CREDIT
ENHANCEMENT"). Shifting Interest Credit Enhancement will have the effect of
accelerating the repayment of the Senior certificates while increasing the
respective interest evidenced by the Subordinate certificates in the related
Trust. 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.
CROSS-SUPPORT
If stated in the prospectus supplement, the Trustee may issue different
classes of certificates of the series that evidence a beneficial ownership in
separate groups of assets included in a Trust. In this case, credit enhancement
may be provided by a cross-support feature which may require the Trustee to make
distributions on certificates evidencing beneficial ownership of one or more
asset groups prior to distributions to certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust. The prospectus
supplement for a series which includes a cross-support feature will describe
the manner and conditions for applying the cross-support feature.
If stated in the prospectus supplement, the coverage provided by one or
more forms of credit enhancement may apply concurrently to two or more separate
Trusts. If applicable, the prospectus supplement will identify the Trusts to
which the credit enhancement relates and the manner of determining the amount of
the coverage provided and the application of coverage to the identified Trusts.
POOL INSURANCE
In order to decrease the likelihood that certificateholders will
experience losses in respect of the Mortgage Assets, if stated in the prospectus
supplement, the Depositor will obtain one or more pool insurance policies. The
pool insurance policy will, subject to the limitations described in the
prospectus supplement, cover loss by reason of default in payments on the Loans
up to the amounts specified in the prospectus supplement and for the periods
specified in the prospectus supplement. The Master Servicer will agree to use
its best reasonable efforts to maintain in effect any pool insurance policy and
to present claims thereunder to the pool insurer on behalf of itself, the
Trustee and the certificateholders. The pool insurance policy, however, is not a
blanket policy against loss. Claims under a pool insurance policy may only be
made respecting particular defaulted Loans and only upon satisfaction of
specific conditions precedent described below. The pool insurance policy, if
any, will not cover losses due to a failure to pay or denial of a claim under a
primary mortgage insurance policy, irrespective of the reason therefore.
Unless otherwise stated in the prospectus supplement, the original
amount of coverage under any pool insurance policy will be reduced over the life
of the related series of certificates by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the pool insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
expenses incurred by the Master Servicer on the foreclosed properties for the
following:
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hazard insurance premiums;
amounts paid for property taxes that have been approved by the
pool insurer;
the discharge of liens;
expenses required to preserve and repair the properties;
foreclosure costs; and
accrued interest on delinquent Loans to the date of payment of the
claim.
See "Legal Aspects of the Loans--Foreclosure." Accordingly, if aggregate net
claims paid under any pool insurance policy reach the original policy limit,
coverage under that pool insurance policy will be exhausted and any further
losses will be borne by one or more classes of certificateholders.
Since any mortgage pool insurance policy may require that the property
subject to a defaulted Loan be restored to its original condition prior to
claiming against the pool insurer, the policy may not provide coverage against
hazard losses. As described under "Servicing of the Loans--Hazard Insurance,"
the hazard policies concerning the Loans typically exclude from coverage
physical damage resulting from a number of causes. Even when the damage is
covered, the hazard policies may afford recoveries which are significantly less
than the full replacement cost of losses. Even if special hazard insurance is
applicable as specified in the prospectus supplement, no coverage in respect of
special hazard losses will cover all risks, and the amount of any coverage will
be limited. See "Special Hazard Insurance" below. As a result, some hazard risks
will not be insured against and will therefore be borne by certificateholders.
SPECIAL HAZARD INSURANCE
In order to decrease the likelihood that certificateholders will
experience losses in respect of the Loans, if specified in the prospectus
supplement, the Depositor will obtain one or more special hazard insurance
policies on the Loans. The special hazard insurance policy will, subject to
limitations described below and in the prospectus supplement, protect holders of
certificates from loss by reason of damage to mortgaged properties caused by
specified hazards (including earthquakes and, to a limited extent, tidal waves
and related water damage) not covered in the standard form of hazard insurance
policy for the respective states in which the mortgaged properties are located
or under flood insurance policies, if any, covering the mortgaged properties. It
also protects holders from loss from partial damage caused by reason of the
application of the co-insurance clause contained in hazard insurance policies.
Any special hazard insurance policy may not cover losses occasioned by war,
civil insurrection, specified governmental actions, errors in design, faulty
workmanship or materials (except under specific circumstances), nuclear
reaction, flood (if the mortgaged property is located in a federally designated
flood area), chemical contamination and other risks. Aggregate claims under each
special hazard insurance policy may be limited to a specified percentage of the
aggregate principal balance as of the Cut-off Date of the Loans. Any special
hazard insurance policy may also provide that no claim may be paid unless hazard
and, if applicable, flood insurance on the mortgaged property has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer. The terms of any special hazard insurance policy will be more
fully described in the prospectus supplement.
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BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the mortgaged property securing the related Loan at an
amount less than the then outstanding principal balance of the Loan secured by
the mortgaged property and could reduce the secured debt to that value. In this
case, the holder of the Loan would become an unsecured creditor to the extent of
the difference between the outstanding principal balance of the Loan and the
reduced secured debt. In addition, the bankruptcy court can make other
modifications of the terms of a Loan, including reducing the monthly payments
required to be made by the borrower. See "Legal Aspects of the
Loans--Enforceability of Some Provisions." If so stated in the related
prospectus supplement, the Depositor will obtain a bankruptcy bond or similar
insurance contract for proceedings of borrowers under the Bankruptcy Code. The
bankruptcy bond will cover specified losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a Loan or
a reduction by the court of the principal amount of a Loan. It will also cover
some amounts of unpaid interest on the amount of a principal reduction from the
date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related prospectus supplement. Payments made under the
bankruptcy bond will reduce the coverage amounts unless otherwise stated in the
related prospectus supplement, and will not be restored.
In lieu of a bankruptcy bond, the Depositor may obtain a limited
guarantee to cover bankruptcy-related losses.
RESERVE FUND
If in the related prospectus supplement the Master Servicer will
establish and maintain a reserve fund (the "RESERVE FUND") with the Trustee. The
prospectus supplement will state whether or not the Reserve Fund will be part of
the Trust assets. Unless otherwise specified in the related prospectus
supplement, the Depositor will make an initial cash deposit to the Reserve Fund
equal to the amount specified in the related prospectus supplement. Following
the initial issuance of the certificates and until the balance of the Reserve
Fund equals the amount specified in the 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 those amounts in the Reserve Fund. 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 those amounts in the Reserve Fund as necessary to
maintain the Specified Reserve Fund Balance applicable at the time. 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 them 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. The Prospectus Supplement will further specify how
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any funds remaining in the Reserve Fund will be distributed after termination of
the Trust or reduction of the Subordinated Amount to zero.
OVERCOLLATERALIZATION
Credit enhancement for a series of Certificates may be provided by
overcollateralization. Principal and/or interest collections on the Mortgage
Assets may exceed principal and/or interest payments on the certificates for the
related Distribution Date. These excess amounts may be deposited into the
Reserve Fund or applied as a payment of principal on the certificates. To the
extent these amounts are applied as 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 Assets.
LETTER OF CREDIT
Credit enhancement for a series of certificates may be provided by the
issuance of a letter of credit by a bank or financial institution specified in
the prospectus supplement. The maximum obligation of the issuer of the letter of
credit will be to honor requests for payment in an aggregate fixed dollar
amount, net of unreimbursed payments under the letter of credit, equal to the
percentage described in the prospectus supplement of the aggregate principal
balance on the related Cut-off Date of the Mortgage Assets evidenced by each
series. The duration of coverage and the amount and frequency and circumstances
of any reduction in coverage provided by the letter of credit for a series of
certificates will be in compliance with the requirements established by the
rating agency or agencies rating the series, and will be described in the
prospectus supplement.
SURETY BOND
If so specified in the related prospectus supplement for a series of
certificates, credit enhancement may be provided in the form of a surety bond
issued by an insurer named in the prospectus supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If stated in the prospectus supplement, the related Trust may also
include insurance, guarantees or similar arrangements for the purpose of:
maintaining timely payments or providing protection against losses
on the assets included in a Trust;
paying administrative expenses; or
establishing a minimum reinvestment rate on the payments made in
respect of the assets or principal payment rate on the assets.
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These arrangements may include agreements under which
certificateholders are entitled to receive amounts deposited in various accounts
held by the Trustee based on the terms specified in the prospectus supplement.
In addition, unless otherwise provided in the prospectus supplement, 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 the
series to the extent permitted by the rating agency or agencies rating the
certificate series, without resulting in a downgrading of the current rating of
the certificates of that series.
PREPAYMENT, YIELD AND MATURITY CONSIDERATIONS
GENERAL
DETERMINATION OF PASS-THROUGH RATES
Unless otherwise specified in the related prospectus supplement, the
"PASS-THROUGH RATE" for each Loan will equal the mortgage interest rate on the
Loan less the servicing fee due to the Master Servicer for that Loan (the
"ADMINISTRATION FEE") and for each Mortgage Certificate will equal the interest
rate on the Mortgage Certificate less the Administration Fee. The Administration
Fee will be specified in the Pooling and Servicing Agreement. It may be uniform
for all Loans in a pool or may vary on a loan-by-loan basis. For ARMs, the
Administration Fee, will generally vary on a loan-by-loan basis to produce a
uniform margin (the "NET MARGIN") by which the Pass-Through Rate for each Loan
in a Trust will exceed the applicable Index for the 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 Trust for
that class or series, an individual 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. Similarly, a Loan whose mortgage
interest rate is 175 basis points over the Index would be assigned an
Administration Fee totaling 50 basis points. The prospectus supplement will
specify whether the Administration Fee assigned to a Loan at the time of
formation of a Trust will be fixed throughout the term of the related Pooling
and Servicing Agreement or will vary. If the lifetime maximum rate or the
periodic maximum adjustment applicable to a 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 that loan, the Pass-Through Rate for the loan may
be less than the Index plus the Net Margin. Similarly, if the lifetime minimum
rate or, if applicable, the periodic maximum adjustment prevents the mortgage
interest rate from fully adjusting, the Pass-Through Rate for the loan may
exceed the Index plus the Net Margin.
DETERMINATION OF REMITTANCE RATE
Unless otherwise specified in the related prospectus supplement, the
Remittance Rate for each class of certificates of a series will, for Trusts
consisting of ARMs, and may, for Trusts consisting of Fixed-Rate Loans, be all,
or a portion specified in the related prospectus supplement, of the weighted
average of the Pass-Through Rates of the Loans included in the Trust. The
weighted average Pass-Through Rate for Trusts comprised of ARMs generally will
change with any changes in the adjustable mortgage interest rates
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borne by or accruing on the underlying ARMs and may change with principal
prepayments, negative amortization or accelerated repayment of the ARMs. The
weighted average Pass-Through Rate for a Trust consisting of Fixed-Rate Loans
with different Pass-Through Rates may change due to differing prepayment rates
and differing repayment rates of the Loans included in the Trust.
YIELD
The following discussions of 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.
The yield on any certificate will depend on, among other things, the
price paid by the certificateholder, the Remittance Rate of the certificate, the
weighted average life and the prepayment experience of the Mortgage Assets
represented by the certificate. The actual yield to maturity realized on the
certificates listed below may be dramatically affected by the prepayment
experience or repurchases of the Mortgage Assets comprising the related Trust:
certificates offered at a discount from or premium over its
original principal amount,
Interest Only certificates, or
certificates offered with a lower proportionate share of the
principal amount of the Mortgage Assets.
In extreme cases, holders of some certificates could fail to recoup their
investment.
PRICE
Prepayments of principal in whole or in part or accelerated repayment,
if any, on the Mortgage Assets comprising a Trust will:
increase the yield to maturity on a certificate purchased at a
price less than the aggregate principal balance of the Mortgage
Assets represented by that certificate, and
decrease the yield to maturity 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 that certificate. However, the
amount of interest payable in connection with prepayments as
described in the prospectus supplement may alter the effect on the
price of certificates.
Additionally, and as more fully described in the prospectus supplement,
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 the certificate will be extremely sensitive to
levels of
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prepayments of the Mortgage Assets represented by that certificate. In extreme
cases, holders of these certificates could fail to recoup their original
investment.
EFFECTIVE PASS-THROUGH RATE
Each monthly interest payment on a Loan is calculated as 1/12 of the
applicable mortgage interest rate times the outstanding principal balance of the
Loan on the first day of the month. The Pass-Through Rate for each Loan will be
similarly calculated on a loan-by-loan basis, after subtracting the
Administration Fee applicable to each Loan from the applicable mortgage interest
rate, unless otherwise specified in the related prospectus supplement. In the
case of a Trust with a range of Pass-Through Rates, disproportionate prepayments
of Loans with higher Pass-Through Rates will result in a lower effective
Remittance Rate to certificateholders.
Except as otherwise specified in the prospectus supplement, the
interest accrual period for your certificates will be from the first day of each
month through the end of the month, but the Trustee will not distribute that
interest until a later date which is the Distribution Date occurring in the
following month. As a result, the effective yield to maturity on certificates
entitled to interest distributions will be slightly lower than the yield
otherwise produced by the applicable Remittance Rate and the applicable purchase
prices of certificates.
When a mortgagor prepays the entire Loan prior to the next scheduled
Due Date, the mortgagor pays interest on the amount prepaid only to the date of
prepayment. In addition, a mortgagor may make a partial prepayment that reduces
the principal balance of the related Loan as of a date prior to the Due Date of
the payment. In this case, on the next Due Date, the mortgagor would not pay
interest on the amount of the partial prepayment. The difference between one
full month's interest at the applicable Pass-Through Rate and the amount of
interest actually paid by the mortgagor is referred to as "PREPAYMENT INTEREST
SHORTFALL". Unless otherwise specified in the related prospectus supplement, in
order to prevent certificateholders from being adversely affected by a
Prepayment Interest Shortfall, the Master Servicer may forego all or a portion
of the current Administration Fees as compensating interest, so that up to a
full month's interest payment will be passed through to the certificateholders.
To the extent sufficient current Administration Fees due to the Master Servicer
are not available to cover compensating interest, the yield to
certificateholders will be slightly less than it would be if the current
administration fees were adequate to cover compensating interest. See
"Description of the Certificates--Example of Distributions." The occurrence of
any of the following events may also reduce the amount of interest passed
through to certificateholders and any resulting shortfall will be borne by
certificateholders:
the payment of a claim under insurance policies or the purchase of
a defaulted Loan by a private mortgage insurer, or
a reduction in the interest rate of any Loan due to the
application of the Soldiers' and Sailors' Civil Relief Act of
1940.
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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 this type of Loan
on a given Due Date (the "INTEREST REMITTANCE AMOUNT") may not be equal to
interest at the applicable Pass-Through Rate on the Loan. During periods of
negative amortization, any Deferred Interest that is added to the principal
balance of a Loan bears interest at the applicable mortgage interest rate. The
distribution to certificateholders of the Interest Remittance Amount, rather
than interest calculated at the applicable 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 "--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
"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. In addition, because ARMs included in a Trust may have
different origination dates, the mortgage interest rates on the ARMs comprising
a Trust will not necessarily adjust on the same dates. Accordingly, the yield to
certificateholders on Trusts comprised of ARMs will be adjusted on a delayed
basis relative to movements in the applicable Index.
ARMs. In the case of a Trust containing ARMs, the readjustment
mechanics of the ARM 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 that 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 Loan in
full and obtain financing 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. The Trustee will use the following funds to
make distributions to certificateholders:
the aggregate amount of payments received from mortgagors on the
Loans;
any servicing advances;
funds otherwise payable to the Subordinate certificateholders; and
monies available in the Reserve Fund.
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If these amounts are insufficient 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 Remittance Rates, will be added to the amount the Senior
certificateholders are entitled to receive on the next Distribution Date. The
allocation of any shortfall and shortfall recoveries between the classes of
Senior certificates, and the effect of any shortfall on yield will be discussed
in the prospectus supplement relating to those certificates.
Classes of Certificates. The certificates of a series may consist of
one 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. If certificates are subdivided, the yield of any class evidencing
interest payments only will be adversely impacted by prepayments in full and
partial prepayments. If appropriate, the prospectus supplement for that series
will offer examples of cash flows on the certificates, based on specified
mortgage interest rates.
PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and weighted average lives of the certificates
will be affected primarily by the rate and timing of principal payments received
on or in respect of the Mortgage Assets included in the related Trust. The
yields to investors will be sensitive in varying degrees to the rate of
prepayments on the Mortgage Assets. The extent to which the yield to maturity of
a certificate is sensitive to prepayments will depend upon the degree to which
it is purchased at a discount or premium. In the case of certificates purchased
at a premium, faster than anticipated rates of principal payments on the
Mortgage Assets could result in actual yields to investors that are lower than
the anticipated yields. In the case of some classes of these certificates,
investors could fail to recover their investments. In the case of certificates
purchased at a discount, slower than anticipated rates of principal payments on
the Mortgage Assets could result in actual yields to investors that are lower
than the anticipated yields. This could result in an extension of the weighted
average lives of these certificates. Principal payments will include:
scheduled payments;
Principal Prepayments;
prepayments resulting from foreclosure, condemnation and other
dispositions of the mortgaged properties and include amounts paid
by insurers under insurance policies;
repurchases by the Depositor of any Loan as to which there has
been a material breach of warranty or defect in documentation or
deposit of additional amounts in respect of delivery of a
substitute loan; and
repurchases by the Depositor or the Master Servicer of all of the
certificates or all of the Mortgage Assets resulting from an
optional termination of a Trust.
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The yield to maturity and weighted average lives of the certificates
may also be affected by the amount and timing of delinquencies and losses on the
Mortgage Assets.
A number of social, economic, tax, geographic, demographic, legal and
other factors may influence prepayments, delinquencies and losses on the
Mortgage Assets. These factors may include:
the age of the Loans and/or Underlying Loans;
the geographic distribution of mortgaged properties;
the terms of the mortgages;
the characteristics of the mortgagors;
homeowner mobility;
economic conditions generally and in the geographic area in which
the mortgaged properties are located;
enforceability of due-on-sale clauses;
servicing decisions;
prevailing mortgage market interest rates in relation to the
interest rates on the Loans and/or the Underlying Loans;
the availability of mortgage funds;
the use of second or home equity loans by mortgagors;
the availability of refinancing opportunities; and
the use of the properties as second or vacation homes.
The rate of principal prepayments on pools of conventional housing
loans has fluctuated significantly in recent years. Generally, if prevailing
interest rates were to fall significantly below the interest rates on the Loans
and/or Underlying Loans, the Loans and/or Underlying Loans would be expected to
prepay at higher rates than if prevailing rates were to remain at or above the
interest rates on the Loans and/or Underlying Loans. During these periods, the
yields at which an investor in the certificates may be able to reinvest amounts
received as payments on the investor's certificates may be lower than the yield
on those certificates. Conversely, if interest rates were to rise above the
interest rates on the Loans and/or Underlying Loans, the Loans and/or Underlying
Loans would be expected to prepay at lower rates than if prevailing rates were
to remain at or below interest rates on the Loans and/or Underlying Loans.
During these periods, the amount of payments available to an investor for
reinvestment at these high rates may be relatively low. The Loans and/or
Underlying Loans will not prepay at any constant rate, nor will all of the Loans
and/or Underlying Loans prepay at the same rate at any one time. The timing of
changes in the rate of prepayments may significantly affect a
certificateholder's actual yield to maturity, even if the average rate of
principal payments is consistent with a certificateholder's expectation. In
general, the earlier a prepayment of principal the greater the effect on the
certificateholder's yield to maturity. As a result, the effect on a
certificateholder's yield of principal payments occurring at a rate higher or
lower than the rate anticipated by the investor during the period immediately
following the issuance of the related series of certificates will not be offset
by a subsequent like reduction or increase in the rate of principal payments.
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SUBSTITUTIONS
Substitutions of Loans by the Depositor under the conditions in the
Pooling and Servicing Agreement may also be treated as partial prepayments. If
the principal balance of the substituted loan is less than the principal balance
of the Loan replaced, the Depositor must pay the Trust the difference. The
Trustee will pass this amount through to the certificateholders as a prepayment.
LOAN ASSUMPTIONS
The Loans may allow the mortgagor to sell the mortgaged property and
have the purchaser assume the mortgagor's obligations under the mortgage.
Assumptions of the Loans will reduce the level of principal prepayments in the
related Trust that would otherwise occur if the 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 the Loan under any applicable "due-on-sale"
clause if credit or other factors warrant enforcement. However, the Loans
provide for assumption by qualifying buyers, and the Master Servicer may in some
cases encourage the assumption of Loans by persons meeting relevant underwriting
standards. In no event will the Master Servicer exercise any right of
acceleration if prohibited by law. If the Master Servicer determines not to
enforce a "due-on-sale" clause, it will enter into an assumption and
modification agreement with the person to whom the property has been conveyed or
is proposed to be conveyed, pursuant to which that person becomes liable under
the 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 "Servicing of
the Loans--Collection and Other Servicing Procedures."
ARMS
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 like
interest rates, consumer demand and regulatory restrictions. The lack of
uniformity of the terms and provisions of 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
Trust or underlying the Mortgage Certificates comprising a Trust may experience
a rate of principal prepayments which is different from the principal prepayment
rate for ARMs included in any other Trust for other adjustable rate mortgages
having different or similar characteristics and for fixed-rate mortgages. In
addition, we cannot assure you that any Trust will conform to past prepayment
experience or any published prepayment forecast.
As described under "The Trusts--The Loans--Payment Provisions of the
Loans" if interest rates rise without a simultaneous increase in the related
monthly payments, Deferred Interest and negative
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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 negative amortization. In the case of Negatively Amortizing ARMs,
borrowers may pay amounts in addition to their monthly payments in order to
avoid negative amortization or they may incur negative amortization. To the
extent that any of the Loans or any Underlying Loans negatively amortize, the
amount of the negative amortization is added to the outstanding principal
balance and 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 repay the unpaid principal over its remaining
term. Accordingly, the weighted average life of these 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 repayment of the Loan. This will shorten the weighted average life
of the Negatively Amortizing ARMs. 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 Loan and may adversely affect the yield to (1)
holders of certificates which purchased their certificates at a premium, (2)
holders of classes with lower proportionate shares of the principal amount in
the underlying Mortgage Assets, and (3) holders of Interest Only certificates.
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
Trust.
FORECLOSURES
The number of foreclosures and the principal amount of the Loans and
Underlying Loans foreclosed in relation to Loans and Underlying Loans which are
repaid in accordance with their terms will affect the weighted average life of
the Mortgage Assets in the Trust and that of the related series of certificates.
Servicing decisions made regarding the Loans and Underlying Loan, may also
have an impact upon the payment behavior of particular Trusts. See "Servicing of
the Loans-- Collection and Other Servicing Procedures" and "Servicing of the
Underlying Loans." These servicing decisions may include:
the use of payment plans prior to demand for acceleration,
the restructuring of Loans or Underlying Loans in bankruptcy
proceedings,
the Master Servicer's servicing policy to generally not accept
payment from the mortgagor of less than the total scheduled
monthly payment due on a Loan.
Servicing policies and decisions that result in foreclosures may
adversely affect the return:
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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 Loans, if any,
and
the return on Interest Only classes, if any.
PRE-FUNDING
As may be described in the prospectus supplement relating to any
series, the related Pooling and Servicing Agreement may provide for a
pre-funding period. During this period, all or a portion of the principal
collected on the Mortgage Assets may be applied by the Trustee to the
acquisition of additional Mortgage Assets during a specified period rather than
used to fund payments of principal to certificateholders during that period.
This will result in the related certificates possessing an interest-only period,
also commonly referred to as a revolving period, which will be followed by a
repayment period. Any interest-only or revolving period may, upon the occurrence
of specified 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 repayment of the related certificates.
PREPAYMENT ASSUMPTIONS
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 the
table. The table will be based upon a number of assumptions stated in the
prospectus supplement, including assumptions that prepayments on the Underlying
Loans or on the Loans are made at rates corresponding to various percentages of
the prepayment model specified in the prospectus supplement. It is unlikely,
however, that the prepayment of the Underlying Loans, or of the Loans underlying
any series will conform to any of the percentages of the prepayment model
described in the table.
OPTIONAL TERMINATION
The Depositor, Master Servicer, or another third party may have the
option to repurchase the Mortgage Assets comprising part of a Trust when the
aggregate outstanding principal balance of the Mortgage Assets is less than a
specified percentage of the aggregate outstanding principal balance
of the Mortgage Assets as of the related Cut-off Date. See "Description of the
Certificates-- Optional Termination of a Trust, --Optional Termination of an
Underlying Trust" in this prospectus and "Description of the
Certificates--Optional Termination" in the prospectus supplement. 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 repurchases will shorten the weighted average lives of the
certificates.
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The prospectus supplement relating to a series of certificates will
discuss in greater detail the effect of the rate and timing of principal
payments, prepayments, delinquencies and losses on the yield, weighted average
lives and maturities of the certificates.
DISTRIBUTIONS ON THE CERTIFICATES
Unless otherwise specified in the prospectus supplement, on each
applicable Distribution Date the Trustee will distribute the Available
Distribution Amount from the Certificate Account to certificateholders, in most
cases, through DTC and its participants.
The "AVAILABLE DISTRIBUTION AMOUNT" for any Distribution Date, as more
fully described in the Pooling and Servicing Agreement, will equal the sum of
the following amounts:
(1) the total amount of all cash received by or on behalf of the
Master Servicer for the Mortgage Assets by the Determination
Date and not previously distributed, including amounts
received in connection with the liquidation of defaulted Loans
whether through trustee's sale, foreclosure sale, proceeds of
insurance policies, condemnation proceeds or otherwise
("LIQUIDATION PROCEEDS") except:
all scheduled payments of principal and interest collected
but due on a date after the related Due Date;
all partial principal prepayments received after the
previous calendar month, together with any interest
payment received with the prepayments to the extent that
it represents the payment of interest accrued on the Loans
for the period after the previous calendar month;
all prepayments in full received after the applicable
calendar month immediately before the Determination Date,
together with any interest payment received with the
prepayments in full to the extent that it represents the
payment of interest accrued on the Loans for the period
after the previous calendar month;
Liquidation Proceeds received on the Loans after the
previous calendar month; on all amounts in the separate
account established and maintained by the Master Servicer
for collection purposes (the "CUSTODIAL ACCOUNT FOR P&I")
which are due and reimbursable to the Master Servicer
pursuant to the terms of the Pooling and Servicing
Agreement;
the Administration Fee for each Loan; and
the excess, if any, of the total amount received in
connection with the liquidation of defaulted Loans
received during the previous calendar month over the
amount that would have been received if prepayments in
full had been made on these Loans on the date that the
liquidation proceeds were received ("EXCESS LIQUIDATION
PROCEEDS");
(2) all advances made by the Master Servicer to the Trustee on that
Distribution Date;
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(3) any amounts payable as compensating interest by the Master
Servicer on that Distribution Date; and
(4) the total amount of any cash received by the Trustee or the
Master Servicer in respect of the obligation of the Depositor
or the seller to repurchase any Mortgage Assets.
Unless otherwise provided in the applicable prospectus supplement, the
term "PREPAYMENT PERIOD" shall refer to the calendar month before the
Distribution Date.
Distributions on the certificates on each Distribution Date will
generally be allocated to each certificate entitled to receive a distribution on
the basis of the Percentage Interest of the Trust which each certificate
represents or their outstanding principal amounts or notional amounts.
However, a prospectus supplement may alter these general distribution
methods by providing for the subordination of the rights of any classes of
Subordinate certificates to receive current distributions. If the Mortgage
Assets for a series have adjustable or variable interest rates, then the
Remittance Rate of the Certificates for that series will also vary, due to
changes in those rates and due to prepayments of Loans and/or Underlying Loans
comprising the related Mortgage Assets. If the Mortgage Assets for a series have
fixed interest rates, then the Remittance 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 of the Mortgage Assets. If the Mortgage Assets
have lifetime or periodic adjustment caps on their respective interest rates,
then the Remittance Rate on the Certificates of the related series may also
reflect these caps.
Distributions of interest on certificates which receive interest will
be made periodically at the intervals and at the Remittance 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.
Funds available in the Certificate Account together with any amounts
transferred from any Reserve Fund or applicable credit enhancement may not
always be sufficient to make the full distribution to certificateholders on any
Distribution Date. In this case, the Trustee will distribute available funds to
the certificateholders of each class in accordance with their respective
interests. The 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 and to which they are entitled. 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.
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SERVICING OF THE LOANS
One or more entities, which may include an affiliate of the Depositor,
will be named in the related prospectus supplement as the Master Servicer. The
Master Servicer will be responsible for the servicing and administration of the
Loans as described in the related prospectus supplement. Any Master Servicer or
any successor Master Servicer may contract with Master Servicers, who also may
be qualified lenders or mortgage asset sellers, to perform all or a portion of
the servicing functions on behalf of the Master Servicer.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer will make reasonable efforts to collect all
payments called for under the Loans and any applicable credit enhancement. It
will also follow collection procedures that are consistent with the Pooling and
Servicing Agreement and as it follows on its own conventional one- to-four-unit
residential first Loans. Consistent with the above, the Master Servicer may, in
its discretion, (1) waive any assumption fee, late payment charge or other
charge in connection with a Loan; and (2) arrange a schedule, running for no
more than 180 days after the Due Date for payment of any installment on any
mortgage note, for the liquidation of delinquent items.
Some of the 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. These
amounts, if any, will not become part of the Trust assets and certificateholders
will possess no interest in them. The Master Servicer may deal with these
amounts in accordance with its normal servicing procedures.
The Master Servicer will be responsible for servicing and administering
the Loans, but will be permitted to enter into a servicing agreement with a
qualified lender or another eligible institution to perform all or part of its
functions under its supervision that it would otherwise be required to perform.
The Master Servicer or the servicer will diligently perform all
services and duties specified in the Pooling and Servicing Agreement, or
servicing agreement, in the same manner as prudent mortgage lending institutions
would perform for mortgages of the same type as the 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 any
servicer at any time if it considers removal to be in the best interest of the
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. If the Master Servicer terminates a servicing agreement, it shall
either perform the servicing function itself or transfer it to a substitute
servicer. The Master Servicer will be entitled to retain the portion of the
servicing fee paid to the servicer under a terminated servicing agreement if the
Master Servicer elects to perform the servicing functions itself.
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The Master Servicer will be paid an Administration Fee for the
performance of its services and duties under the Pooling and Servicing 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.
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 Loans
included in a Trust, during periods of rising interest rates, may be to reduce
the yield to investors in certificates evidencing interests in that Trust.
The Master Servicer will be obligated to follow the 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 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 (1) that foreclosure and/or
restoration will increase the liquidation proceeds to certificateholders after
reimbursement to the Master Servicer for its expenses and (2) that the expenses
will be recoverable to it through liquidation proceeds of the sale of the
mortgaged property. If the Master Servicer has expended its own funds to restore
damaged property, it will be entitled to charge the Certificate Account, out of
the related liquidation proceeds, an amount equal to expenses incurred by it.
In realizing upon a defaulted Loan, the Master Servicer may:
directly or through a local assignee, sell the property at a
foreclosure or trustee's sale;
negotiate with the mortgagor for a deed in lieu of foreclosure; or
if a deficiency judgment is available against the mortgagor or
other person, foreclose against the property and proceed for the
deficiency against the appropriate person.
We anticipate that in most cases the Master Servicer will not seek deficiency
judgments against defaulting mortgagors. See "Legal Aspects of the
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders" for a
description of the limited availability of deficiency judgments.
The Depositor and/or the Master Servicer will be entitled to elect to
purchase defaulted Loans or Loans as to which the related mortgagor has tendered
a deed in lieu of foreclosure from the Trust for a purchase price equal to the
principal balance plus accrued and unpaid interest on the loan. If the Master
Servicer purchases a Loan, any gain realized in a liquidation proceeding on the
Loan will not be paid to the Trust. If the Master Servicer does not purchase the
Loan, any gain realized in a liquidation proceeding on the Loan will be paid to
the Trust for distribution to the certificate holders, less reasonable
reimbursement to the Master Servicer for its expenses. If the Trust elects to be
treated as a REMIC, the gain would become an asset of the REMIC Residual Holders
to the extent the gain is not necessary to make payments
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due to the holders of regular interests. Often, the holder of property acquired
through foreclosure maximizes recovery by providing financing to a new
purchaser. The Trustee will not be empowered to provide this financing and the
Master Servicer may, but will not be obligated to do so. This may result in a
Trust experiencing greater losses on defaulted Loans than might otherwise be the
case.
For a series of certificates for which a REMIC election is made, if the
Trustee acquires ownership of any mortgaged property as a result of a default or
imminent default of any Loan secured by that mortgaged property, the Trustee
will be required to dispose of the property within two years after the date on
which it acquired ownership of the property.
The Master Servicer will not be obligated to foreclose on any mortgaged
property which it believes may be contaminated with or affected by hazardous or
toxic wastes, materials or substances. See "Legal Aspects of the
Loans--Environmental Legislation." The Master Servicer will not be liable to the
certificateholders of a series if it fails to foreclose on a mortgaged property
securing a Loan in the related Trust which it believes may be contaminated or
affected, even if the mortgaged property is, in fact, not contaminated or
affected. If the Master Servicer does not foreclose on the mortgaged property in
this instance, the certificateholders of the related series may experience a
loss on the related Loan. In addition, the Master Servicer will not be liable to
the certificateholders if, based on its belief that no contamination or effect
exists, it forecloses on a mortgaged property and takes title to the mortgaged
property on behalf of the related Trustee, and thereafter the mortgaged property
is determined to be contaminated or affected.
Unless otherwise stated in the prospectus supplement relating to a
series of certificates, if the Master Servicer determines that all amounts which
it expects to recover from or on account of a Loan have been recovered, its
obligation, if any, to advance delinquent installments of principal, interest or
both on that Loan will cease. The principal balance of the Loan will then be
allocated in reduction of the principal balance of the certificates of the
related series in the manner in which losses are allocated as specified in the
prospectus supplement.
For a series of certificates that includes subordination as a form of
credit enhancement, until the Subordinated Amount is reduced to zero, and
provided any special loss limitation has not been exceeded, Senior
certificateholders will not realize a loss on a defaulted Loan if Liquidation
Proceeds are less than the sum of the principal balance of the defaulted Loan
and the Master Servicer's expenses.
The Master Servicer will maintain with one or more depository
institutions one or more accounts into which it will deposit all payments of
taxes, insurance premiums, assessments or comparable items received for the
account of the mortgagors. The Master Servicer may withdraw amounts from these
accounts only to effect the following:
payment of taxes, insurance premiums, assessments or comparable
items;
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reimbursement to itself, or the applicable Master Servicer, out of
related collections for any cost incurred in paying taxes,
insurance premiums and assessments or otherwise preserving or
protecting the value of the mortgages;
refunds to mortgagors for any amounts determined to be overages;
payment of interest to mortgagors on balances in these accounts to
the extent required by law;
withdraw interest or other income which may lawfully be retained by
the Trust for deposit into the Certificate Account; and
clear and terminate the accounts at termination of the Trust.
PRIMARY MORTGAGE INSURANCE
The Loans in a Trust will not have loan-to-value ratios in excess of
100% of the original value of the mortgaged property unless otherwise specified
in the prospectus supplement. Generally, Loans that the Depositor acquires do
not have loan-to-value ratios in excess of 95% of the original value of the
mortgaged property. The prospectus supplement for a series will describe the
extent to which a Trust includes Loans with loan-to-value ratios exceeding 95%.
Unless otherwise stated in the prospectus supplement, each Loan will have
primary mortgage insurance if the original principal amount of the loan exceeds
80% of the original value of the mortgaged property. The mortgagor is generally
required to continue this coverage until the outstanding principal amount of the
loan equals or is less than 80% of the greater of the original value of the
mortgaged property and, if permitted under any pool insurance policy obtained
for a series, the then current value of the property as evidenced by an
appraisal. A primary mortgage insurance policy may provide that, as an
alternative to paying a claim thereunder, the mortgage insurer will have the
right to purchase the Loan following the receipt of a notice of default. The
mortgage insurer may have a purchase right after the borrower has failed to make
three scheduled monthly payments, or one payment if it is the first payment due
on the Loan, or after any foreclosure or other proceeding affecting the Loan or
the mortgaged property has been commenced. The proceeds of any purchase will be
distributed to certificateholders on the applicable Distribution Date. A
mortgage insurer may be more likely to exercise its purchase option when
prevailing interest rates are low relative to the interest rate borne by the
defaulted Loan, in order to reduce the aggregate amount of accrued interest that
the insurer would be obligated to pay upon payment of a claim.
HAZARD INSURANCE
The Master Servicer will cause to be maintained for each 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
coverage will be in an amount equal to the lesser of (1) the principal balance
of the Loan; and (2) the replacement cost of the improvements securing the Loan.
All amounts collected by the Master Servicer under any hazard policy will be
credited to the Custodial Account for P&I 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. The Master
Servicer may satisfy its obligation relating to the maintenance of hazard
insurance by maintaining a blanket policy insuring against hazard losses on all
the Loans. The Master Servicer will pay the premium amount for any blanket
policy it maintains. The blanket policy may contain a deductible clause, in
which case the Master Servicer will
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be required to credit to the Custodial Account for P&I the amounts which would
have been payable by the insurer but for the deductible clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightening, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans will be underwritten by
different insurers and therefore do not contain identical terms and conditions,
the basic terms are dictated by applicable law. Most 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 some
cases, vandalism. The foregoing list is merely indicative of some 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 the mortgaged property up to the maximum amount available or
to the full amount of the related Loan. The Depositor may also purchase special
hazard insurance against some or all of the uninsured risks described in this
paragraph. See "Credit Enhancement--Special Hazard Insurance."
Most of the properties securing the Loans in a Trust will be covered by
homeowners' insurance policies, which, in addition to the standard form of fire
and extended coverage, provide coverage for other types of risks. These
homeowners' policies typically contain a coinsurance 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 will not exceed the greater of (1) 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 (2) a proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of the improvements.
Since the amount of hazard insurance the Master Servicer is required to
cause to be maintained on the improvements securing the Loans declines as the
principal balances owing on the Loans decrease, if the residential properties
securing the Loans appreciate in value over time, the effect of coinsurance in
the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damaged property. However, for a series of
certificates that includes subordination as a form of credit enhancement, Senior
certificates may not realize a loss resulting from uninsured hazard losses or
the application of coinsurance provisions. The Trustee will distribute the full
distribution amounts due on the Senior certificates until the Subordinated
Amount is reduced to zero, so long as the following conditions are met:
any applicable special loss limitation described in the related
prospectus supplement has not been exceeded, and
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there are sufficient funds otherwise due on the Subordinate
certificates or held in the Reserve Fund, if any, to pay the
distribution amount due to the Senior certificates.
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative apartment relating to any
Co-op Loan. Generally, the cooperative itself is responsible for maintenance of
hazard insurance for the property owned by the cooperative and the
tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a Co-op Loan do not maintain this insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's cooperative apartment or the
cooperative building could significantly reduce the value of the collateral
securing that Co-op Loan.
UNANTICIPATED RECOVERIES OF LOSSES ON THE LOANS
To the extent and in the manner specified in the prospectus supplement,
the principal balance of classes of certificates may be reduced by allocating
losses of principal to them that occur in connection with liquidation on the
Loans in the related Trust (a "REALIZED LOSS"). Unless otherwise stated in the
prospectus supplement, holders of certificates that had previously been
allocated a Realized Loss may receive distributions if the Master Servicer
subsequently recovers an amount (an "UNANTICIPATED RECOVERY") in respect of that
Loan. Unanticipated Recoveries may result from events like an unanticipated
insurance settlement, tax refund or mortgagor bankruptcy distribution. To the
extent a certificate has been transferred, the holder that receives an
Unanticipated Recovery may be different from the holder who was allocated a
Realized Loss. The Trustee will distribute to the holders of each outstanding
class to which the Realized Loss had previously been allocated, its share of the
Unanticipated Recovery up to the amount of the loss previously allocated to that
class. The Trustee will make this distribution on the Distribution Date in the
calendar month following receipt of the Unanticipated Recovery. Any
distributions of Unanticipated Recoveries will not reduce the principal balances
of the class of certificates receiving the recoveries. However, no
certificateholder will be entitled to receive any share of an Unanticipated
Recovery following the Distribution Date on which the principal balance of its
certificate has been reduced to zero, including following the termination of the
Trust. See "The Pooling and Servicing Agreement--Termination" in this
prospectus.
ADVANCES
Unless otherwise stated in the prospectus supplement, if any borrower
fails to make any payment of principal or interest required under the terms of a
Loan, the Master Servicer will be obligated to advance the entire amount of that
payment net of the applicable Administration Fee. This obligation to advance
will be limited to amounts which the Master Servicer reasonably believes will be
recoverable by it out of liquidation proceeds or otherwise in respect of the
Loan. In addition, the Master Servicer may make advances from funds on deposit
in the Certificate Account.
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The Master Servicer will make advances in order to maintain a regular
flow of scheduled interest and principal payments to holders of the relevant
classes of certificates. These advances do not represent an obligation of any
Master Servicer to guarantee or insure against losses.
The Master Servicer may recover advances without interest from amounts
which represent late recoveries of principal and/or interest on, or liquidation
proceeds or insurance proceeds from, the Loan as to which the advance was made.
If these amounts are insufficient to reimburse the Master Servicer, the amount
of the deficiency will be characterized as a non-recoverable advance. The Master
Servicer may reimburse itself for non-recoverable advances out of any funds in
the Custodial Account for P&I or the Certificate Account. If the Master Servicer
makes an advance on any Distribution Date, it will be included with the
distribution to the certificateholders on that Distribution Date. If the Trustee
purchases any foreclosed property and the property becomes part of the Trust,
the Master Servicer will continue to make advances on the property as if the
Loan were still outstanding in the manner described above. At the time the
Trustee sells the property, the Master Servicer may reimburse itself for these
advances in an amount not to exceed the sale price. Additionally, if specified
in the related prospectus supplement, the Trustee, on behalf of the Master
Servicer, may make advances.
Any obligation to make advances may be limited to amounts due holders
of Senior certificates of the related series or may be limited to specified
periods or otherwise as specified in the prospectus supplement.
PAYMENTS ON MORTGAGE ASSETS
The Pooling and Servicing Agreement for each Trust will require that
the Master Servicer establish and maintain a Custodial Account for P&I. The
Master Servicer will credit to the Custodial Account for P&I on a daily basis
the collections received by it after the Cut-off Date, as well as scheduled
payments of principal and interest due after the Cut-off Date, but received
before the Cut-off Date. These amounts include:
all mortgagor payments on account of principal, including principal
prepayments by mortgagors, on the Loans and payments on account of
principal on the Mortgage Certificates;
all mortgagor payments on account of interest on the Loans and
payments on account of interest on the Mortgage Certificates, which
may be net of administration fees the Master Servicer is entitled
to retain;
all liquidation proceeds net of unpaid administration fees;
all proceeds received by the Master Servicer under any title,
hazard or other insurance policy covering any 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;
all repurchase proceeds of Loans;
Unanticipated Recoveries; and
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all other amounts required to be deposited in the Custodial Account
for P&I pursuant to the Pooling and Servicing Agreement.
The Master Servicer is authorized to make withdrawals from the
Custodial Account for P&I for various purposes outlined in the Pooling and
Servicing Agreement. The Master Servicer may invest funds held in the Custodial
Account for P&I in Eligible Investments.
On the business day before each Distribution Date, the Master Servicer
will transfer amounts to be distributed to certificateholders from the Custodial
Account for P&I and any amounts required to be transferred from the Reserve Fund
to the Certificate Account.
ADMINISTRATION FEES, COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related prospectus supplement, the
Master Servicer is entitled to receive an Administration Fee for each Loan,
which may be variable, as described in the Pooling and Servicing Agreement. The
Master Servicer's aggregate Administration Fee for any month may be reduced to
cover a Prepayment Interest Shortfall. The Master Servicer may either retain the
Administration Fees to which it is entitled before making required deposits to
the Certificate Account or may withdraw them from the Certificate Account.
Since the Administration Fee is a percentage of the then outstanding
principal balance of each Loan each month, the Master Servicer's aggregate
compensation will decrease as the Loans are repaid. In addition to the
Administration Fees, 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 some of the expenses incurred in
connection with its servicing of the 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.
The Master Servicer is entitled to reimbursement for some types of
expenses incurred by it in connection with the liquidation of defaulted Loans,
including under some circumstances reimbursement of expenditures incurred by it
in connection with the restoration of mortgaged properties. The Master
Servicer's right of reimbursement for these amounts is senior to the rights of
certificateholders to receive any related amounts resulting from the liquidation
of a defaulted loan. The Master Servicer is also entitled to reimbursement from
the Certificate Account for advances.
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RESIGNATION OF THE MASTER SERVICER; SCOPE OF INDEMNITIES
Unless otherwise specified in the applicable prospectus supplement, a
Master Servicer may not resign from its duties unless performance of its duties
is no longer permissible under applicable law or is in material conflict by
reason of applicable law with any other activities of a type and nature
presently carried on by it. No resignation will become effective until the
Trustee or a successor Master Servicer has assumed the Master Servicer's duties
under the Pooling and Servicing Agreement. If a Master Servicer resigns for any
of these reasons, it is possible that the Trustee would be unable or unwilling
to assume responsibility for servicing the Loans under the Pooling and Servicing
Agreement and would seek to appoint another institution as servicer. The Master
Servicer may arrange for its duties under the Pooling and Servicing Agreement to
be performed by a sub-servicer, so long as the Master Servicer remains
responsible for the performance of its duties.
The Pooling and Servicing Agreement for each Trust 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 or the
certificateholders for any action taken or for refraining from the taking of any
action in good faith and without gross negligence or willful misconduct or for
errors in judgment. The Pooling and Servicing Agreement will further provide
that the Master Servicer and any director, officer, employee or agent of any
Master Servicer is entitled to indemnification by the related Trust and will be
held harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Pooling and Servicing Agreement or the
certificates, except for any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence of the Master Servicer in the
performance of its duties or by reason of reckless disregard of its duties. In
addition, the Pooling and Servicing 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 Pooling and Servicing Agreement, undertake any 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
this event, the legal expenses and costs of this action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust and the
Master Servicer and the other Master Servicer, if any, will be entitled to be
reimbursed therefor and charge the Certificate Account for the reimbursement,
the right of reimbursement being prior to the rights of certificateholders to
receive any amounts in the Certificate Account.
If the Master Servicer reorganizes, including as a result of a merger,
consolidation or transfer of its assets, any person succeeding to the business
of the Master Servicer will be the Master Servicer's successor under the Pooling
and Servicing Agreement.
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BACK-UP MASTER SERVICER
If so specified in the related prospectus supplement, pursuant to the
Pooling and Servicing Agreement relating to any series, the Trustee or another
successor Master Servicer appointed pursuant to the 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 its duties. The back-up Master Servicer
shall have no liability for any act of the Master Servicer prior to its
assumption of duties.
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 the agreement, the
holder may instruct the Master Servicer and if applicable, any sub-servicer, to
commence or delay foreclosure proceedings on delinquent Loans.
SERVICING OF THE UNDERLYING LOANS
The Mortgage Certificates will have been issued pursuant to a pooling
and servicing agreement, an indenture or similar agreement. Unless otherwise
specified in the related prospectus supplement, the seller/servicer of the
Underlying Loans will have entered into the agreement with a trustee and a
servicer. The servicer named in the agreement, along with any subservicers, as
applicable, will service the Underlying Loans in accordance with the terms of
the agreement.
THE POOLING AND SERVICING AGREEMENT
The following, together with the description of the Pooling and
Servicing Agreement in the prospectus supplement, describes the material
provisions of the Pooling and Servicing Agreement relating to a series of
certificates. The summaries do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the provisions of the Pooling
and Servicing Agreements. Where particular provisions or terms used in the
Pooling and Servicing Agreements are referred to, these provisions or terms are
as specified in the Pooling and Servicing Agreements.
ASSIGNMENT OF LOANS
At the time of issuance of each series of certificates, the Depositor
will cause the Loans, including loans underlying Mortgage Certificates,
comprising the Trust to be assigned to the Trustee for that series, together
with all principal and interest due on the Loans subsequent to the Cut-off Date.
The Trustee will, in exchange for the Trust and concurrently with the
assignment, execute and deliver the certificates to a certificate registrar
appointed pursuant to the Pooling and Servicing Agreement for authentication and
delivery to the Depositor or its designee. Each Loan will be identified in a
schedule appearing as an exhibit
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to the Pooling and Servicing Agreement. The schedule will include information
about each Loan including the following:
principal balance as of the Cut-off Date;
current mortgage interest rate and Pass-Through Rate;
current scheduled monthly payment of principal and interest;
stated maturity;
Administration Fee; original Loan-to-Value Ratio; and if the 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 for the Loans, as the agent of the
Trustee. Any custodial agreement will be on terms to which the Depositor, the
Trustee and each custodian shall agree.
In addition, the Depositor will deliver to the Trustee for each Loan
the following documents:
the mortgage note endorsed without recourse in blank or to the
order of the Trustee,
the original mortgage with evidence of recording,
an Officer's certificate to the effect that a title insurance
policy was issued and remains in full force and effect or the
original title insurance policy or in the event the original title
policy is not available, any one of an original title binder, an
original preliminary title report or an original title commitment
or a copy certified by the title company with the original policy
to follow within 180 days, and an assignment of the mortgage in
recordable form unless otherwise described in the related
prospectus supplement.
The Pooling and Servicing 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 the assignments is not necessary to secure or perfect the
interest in the mortgaged properties in the name of the Trustee.
Because assignments by the Depositor to the Trustee of the Loans
secured by mortgaged properties located in some states may not be recorded, it
might be possible for the Depositor to transfer the 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 mortgage loan purchase agreement and any custodial agreement,
these 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.
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Moreover, under the law of California and some 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 Loan so long as evidence of indebtedness remained in the
possession of the Trustee.
Unless otherwise specified in the related prospectus supplement, the
Trustee or specified Custodian will review and hold the documents relating to
the Loans in Trust for the benefit of the certificateholders. If any document is
found by the Trustee or specified Custodian (within 45 days or within a longer
specified period for assignments that must be recorded) to be defective in any
material respect and the Depositor does not cure the defect within 90 days after
notice by the Trustee has been given to the Depositor within the relevant
period, the Depositor will either:
within the three month period commencing on the closing date of the
sale of the related series of certificates repurchase the related
Loan at a price, unless otherwise specified in the related
prospectus supplement, equal to the principal balance of the Loan,
plus accrued interest on the principal balance at the mortgage
interest rate to the next scheduled Due Date, or
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 the closing date if the related Loan is a
"defective obligation" within the meaning of the Code) unless
otherwise provided in the related prospectus supplement, substitute
a different Loan upon satisfaction of the conditions described 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. The related prospectus supplement will specify any restrictions for
repurchases, substitutions and any alternative arrangements.
REPRESENTATIONS AND WARRANTIES
Unless otherwise specified in the related prospectus supplement, the
Depositor will represent and warrant to the Trustee in the Pooling and Servicing
Agreement, or will assign the representations and warranties of the mortgage
asset seller related to the Loans comprising the Mortgage Assets in a Trust,
upon delivery of the Loans to the Trustee hereunder, among other things:
that the information described in the schedule of Loans appearing
as an exhibit to the Pooling and Servicing Agreement is correct in
all material respects at the date or dates respecting which the
information is furnished;
that as of the date of the transfer of the Loans to the Trustee,
the Depositor is the sole owner and holder of each Loan free and
clear of all liens, pledges, charges or security interests of any
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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;
that as of the date of initial issuance of the certificates, no
payment of principal of or interest on or in respect of any Loan
is more than 89 days past due;
that to the best of the Depositor's knowledge, as of the date of
the transfer of the Loans to the Trustee there is no valid offset,
defense or counterclaim to any mortgage note or mortgage;
that as of the date of the initial issuance of the certificates,
there is no proceeding pending, or to the best of the Depositor's
knowledge, no proceeding 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;
that each 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 Loan was not usurious at the time of origination;
that to the best of the Depositor's knowledge, as of the date of
the initial issuance of the certificates, all insurance premiums
previously due and owing on the mortgaged properties have been
paid and all taxes and government assessments previously due and
owing, and which may become a lien against the mortgaged property
have been paid;
that each mortgage note and the related mortgage are genuine and
each is a legal, valid and binding obligation, enforceable in
accordance with its terms except as enforcement may be limited by
bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and by
general equity principles (regardless of whether enforcement is
considered in a proceeding in equity or at law);
all parties to the mortgage note and the mortgagor 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;
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 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
Loan subject only to:
the lien of current real property taxes and assessments not
yet due and payable;
covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of
recording of the 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 Loan; and
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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;
that as of the initial issuance of the certificates, neither the
Depositor nor any prior holder of any mortgage has, except as the
mortgage file may reflect, modified the mortgage in any material
respect; satisfied, canceled or subordinated the mortgage in whole
or in part; released the mortgaged property in whole or in part
from the lien of the mortgage; or executed any instrument of
release, cancellation, modification or satisfaction;
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;
the condominium projects that include the condominiums that are
the subject of any Co-op Loan are generally acceptable to FNMA
and FHLMC;
no foreclosure action is threatened or has been commenced (except
for the filing of any notice of default) on any 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;
that each Loan was originated on FNMA or FHLMC uniform instruments
for the state in which the mortgaged property is located;
that based upon a representation by each mortgagor at the time of
origination or assumption of the applicable Loan, the percentage
of the Loans measured by principal balance secured by
owner-occupied residences and by non-owner-occupied residences do
not exceed specified percentages;
that an appraisal of each mortgaged property was conducted at the
time of origination of the related Loan;
that no Loan had a loan-to-value ratio at origination in excess of
100%;
that the 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 Loan
to become delinquent or otherwise lose value;
each Loan was either (1) originated directly by or closed in the
name of either: (a) a savings and loan association, savings bank,
commercial bank, credit union, insurance company, or similar
institution which is supervised and examined by a federal or state
authority or (b) a mortgagee approved by the Secretary of Housing
and Urban Development pursuant to Sections 203 and 211 of the
National Housing Act or (2) originated or underwritten by an
entity employing underwriting standards consistent with the
underwriting standards of an institution as described in subclause
(1)(a) or (1)(b) above;
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each Loan is a "qualified mortgage" within the meaning of Section
860G of the Code without regard to 'SS' 1.860G-2(f) of the REMIC
Provisions or any similar rule; and
each Loan that has a Loan-to-Value Ratio in excess of 80% is
covered by a primary mortgage insurance policy.
REPURCHASE OR SUBSTITUTION
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, or the Depositor's or
the mortgage asset seller's receipt of a notice from the Trustee or a Custodian,
and without regard to any limitation contained in the representation or warranty
concerning the knowledge of the Depositor as to facts stated in the
representation or warranty, the Depositor or the applicable mortgage asset
seller will cure the breach or either (1) repurchase the Loan at a price equal
to the principal balance of the Loan plus accrued interest on the principal
balance at the mortgage interest rate to the next scheduled Due Date of or (2)
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 the
closing date if the related Loan is a "defective obligation" within the meaning
of the Code) unless otherwise provided in the related prospectus supplement,
substitute a different Loan upon satisfaction of the conditions described in the
Pooling and Servicing 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 this type
of breach. The related prospectus supplement will specify any restrictions for
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, enter into
an agreement (each, a "FORWARD PURCHASE AGREEMENT") with the Depositor whereby
the Depositor will agree to transfer additional Loans to the Trust following the
date on which the Trust is established and the related certificates are issued.
The Trust may enter into Forward Purchase Agreements to permit the acquisition
of additional 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 Loans transferred
to a Trust conform to the requirements specified in the 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 the 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 Loans will be transferred to the related Trust in
exchange for money released to the Depositor from the related Pre-Funding
Account. Each Forward Purchase Agreement will set a specified
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period during which any transfers must occur. The Forward Purchase Agreement or
the related Pooling and Servicing Agreement will require that, if all moneys
originally deposited to the Pre-Funding Account are not used by the end of the
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. The reinvestment risk associated with this type
of prepayment will be borne by the holders of the certificates issued by the
applicable Trust.
Unless otherwise specified in the related prospectus supplement, the
specified period for the acquisition by a Trust of additional Loans will not
exceed three months from the date the Trust 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. The amounts on
deposit in any Pre-Funding Account may be invested only in investments deemed
acceptable by the rating agencies as consistent with the applicable ratings on
the certificates. The underwriting standards for additional Loans that will be
acquired with amounts from the Pre-Funding Account will be in accordance with
the standards set forth under "The Trusts--Loan Underwriting Policies."
In addition, following the transfer of additional Loans to the
applicable Trust, the characteristics of the entire pool of Loans included in
the Trust may vary significantly from those of the initial Loans transferred to
the Trust. Accordingly, it is possible that the credit quality of the pool, as a
whole, may differ due to the transfer of additional Loans to the Trust. In no
event will any Loans be transferred to the Trust if the transfer would cause a
downgrade of the ratings of the related certificates. The transfer of additional
Loans to the Trust may also result in an accelerated rate of payment to the
applicable certificateholders caused by an increased level of defaults on the
Loans. Certificateholders will bear all reinvestment risk associated with a
higher than expected rate of payment of the certificates. In addition, if the
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 these payments are distributed.
ADJUSTMENT TO ADMINISTRATION FEES IN CONNECTION WITH PREPAYMENT INTEREST
SHORTFALL
Unless otherwise stated in the prospectus supplement, the Master
Servicer may forego all or a portion of its Administration Fee to minimize the
adverse effect of Prepayment Interest Shortfall to certificateholders. See
"Prepayment, Yield and Maturity Considerations-- Yield-- Effective Pass-Through
Rate."
BOOK-ENTRY REGISTRATION
Certificate owners may hold their interests in the offered certificates
through DTC, in the United States, or Cedel Bank or the Euroclear System, in
Europe, if they are participants in those systems, or indirectly through
organizations that are participants in those systems. Cede & Co., as nominee for
DTC, will hold the offered certificates. Cedel and Euroclear will hold omnibus
positions on behalf of their respective participants, through customers'
securities accounts in Cedel's and Euroclear's names on the
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books of their respective depositaries. The depositaries in turn will hold the
positions in customers' securities accounts in the depositaries' names on the
books of DTC.
DTC has advised us and the underwriters 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 under the provisions of Section
17A of the Securities Exchange Act of 1934.
DTC holds securities for its participants and facilitates the clearance and
settlement among its participants of securities transactions, including
transfers and pledges, in deposited securities through electronic book-entry
changes in its participants' accounts. This eliminates the need for physical
movement of securities certificates. DTC participants include securities brokers
and dealers, banks, trust companies, clearing corporations and other
organizations. Indirect access to the DTC system is also available to others
including securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a participant, either directly
or indirectly. The rules applicable to DTC and its participants are on file with
the SEC.
Transfers between participants on the DTC system will occur under DTC
rules. Transfers between participants on the Cedel system and participants on
the Euroclear system will occur under their 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 by DTC
under DTC rules on behalf of the relevant European international clearing system
by that system's depositary. However, these cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in that system under 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 under normal procedures for same-day funds
settlement applicable to DTC. Cedel participants and Euroclear participants may
not deliver instructions directly to their system's depositary.
Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date. The credits for any transactions in these
securities settled during this processing will be reported to the relevant Cedel
participant or Euroclear
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participant on that business day. Cash received in Cedel or Euroclear as a
result of sales of securities by or through a Cedel participant or a Euroclear
participant to a DTC participant will be received and available on the DTC
settlement date. However, it will not be available in the relevant Cedel or
Euroclear cash account until the business day following settlement in DTC.
Purchases of offered certificates under the DTC system must be made by
or through DTC participants, which will receive a credit for the offered
certificates on DTC's records. The ownership interest of each actual certificate
owner is in turn to be recorded on the DTC participants' and indirect
participants' records. certificate owners will not receive written confirmation
from DTC of their purchase. However, certificate owners are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC participant or indirect participant
through which the certificate owner entered into the transaction. Transfers of
ownership interests in the offered certificates are to be accomplished by
entries made on the books of DTC participants acting on behalf of certificate
owners. Certificate owners will not receive certificates representing their
ownership interest in offered certificates unless use of the book-entry system
for the offered certificates is discontinued.
To facilitate subsequent transfers, all securities deposited by DTC
participants with DTC are registered in the name of DTC's nominee, Cede & Co.
The deposit of securities with DTC and their registration in the name of Cede &
Co. does not change beneficial ownership. DTC has no knowledge of the actual
certificate owners of the offered certificates. DTC's records reflect only the
identity of the DTC participants to whose accounts the offered certificates are
credited, which may or may not be the actual beneficial owners of the
certificates. The DTC participants will remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC
participants, by DTC participants to indirect participants, and by DTC
participants and indirect participants to certificate owners will be governed by
arrangements among them and by any statutory or regulatory requirements in
effect from time to time.
Neither DTC nor Cede & Co. will consent or vote on behalf of the
offered certificates. Under its usual procedures, DTC mails an omnibus proxy to
the issuer as soon as possible after the record date, which assigns Cede & Co.'s
consenting or voting rights to those DTC participants to whose accounts the
offered certificates are credited on the record date, identified in a listing
attached to the proxy.
Principal and interest payments on the offered certificates will be
made to DTC. DTC's practice is to credit its participants' accounts on the
applicable Distribution Date according to their respective holdings shown on
DTC's records unless DTC has reason to believe that it will not receive payment
on that Distribution Date. Payments by DTC participants to certificate owners
will be governed by standing instructions, customary practices, and any
statutory or regulatory requirements as may be in effect from time to time.
These payments will be the responsibility of the DTC participant and not of DTC,
the Trustee or the Depositor. Payment of principal and interest to DTC is the
responsibility of the Trustee. DTC is
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responsible for disbursing payments made to it to DTC participants. Disbursement
of these payments to certificate owners is the responsibility of DTC
participants and indirect participants.
DTC may discontinue providing its services as securities Depository for
the offered certificates at any time by giving reasonable notice to the
Depositor or the Trustee. Under these circumstances, if a successor securities
Depository is not obtained, definitive certificates are required to be printed
and delivered.
DTC management is aware that some computer applications, systems, and
the like for processing data that are dependent upon calendar dates, including
dates before, on, and after January 1, 2000, may encounter Year 2000 problems.
DTC has informed its participants and other members of the financial community
that it has developed and is implementing a program so that its systems relating
to the timely payment of distributions to securityholders, book-entry
deliveries, and settlement of trades within DTC will continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's program includes a testing
phase, which it expects to complete within appropriate time frames.
DTC's ability to perform properly its services is also dependent upon
other parties. Third parties include issuers and their agents, DTC's direct and
indirect participants, vendors from whom DTC licenses software and hardware, and
vendors on whom DTC relies for information or services, including
telecommunication and electrical utility service providers. DTC has informed us
that it is contacting, and will continue to contact, third party vendors from
whom DTC acquires services to: (1) impress upon them the importance of these
services being Year 2000 compliant; and (2) determine the extent of their
efforts for Year 2000 remediation and testing of their services. Additionally,
DTC is in the process of developing contingency plans as it deems appropriate.
According to DTC, the foregoing information about DTC has been provided
to us for informational purposes only and is not a representation, warranty, or
contract modification of any kind.
Cedel is incorporated under the laws of Luxembourg as a professional
Depository. Cedel holds securities for its participating organizations 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 32 currencies,
including United States dollars.
Cedel participants are financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
and clearing corporations. Indirect access to Cedel is also available to others,
including banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Cedel participant, either directly or
indirectly.
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The Euroclear System was created in 1968 to hold securities for its
participants and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment. This
eliminates the need for physical movement of certificates. Transactions may be
settled in any of 32 currencies, including United States dollars.
The Euroclear System is operated by Morgan Guaranty Trust Company of
New York, Brussels, Belgium office, the Euroclear operator, under contract with
Euroclear Clearance System, Societe Cooperative, a Belgium cooperative
corporation, the Euroclear 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
Euroclear cooperative. The board of the Euroclear cooperative establishes policy
for the Euroclear System.
Euroclear participants include banks -- including central banks --
securities brokers and dealers and other professional financial intermediaries.
Indirect access to the Euroclear System is also available to other firms that
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
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. These terms and
conditions govern transfers of securities and cash within the Euroclear System,
withdrawal of securities and cash from the Euroclear System, and receipts of
payments for securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear operator acts under
these terms and conditions only on behalf of Euroclear participants and has no
record of or relationship with persons holding through Euroclear participants.
Distributions on the offered certificates held through Cedel or
Euroclear will be credited to the cash accounts of Cedel participants or
Euroclear participants according to the relevant system's rules and procedures,
to the extent received by its depositary. These distributions must be reported
for tax purposes under United States tax laws and regulations. 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 its participants only as permitted
by its rules and procedures, and only if its depositary is able to take these
actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to these procedures to
facilitate transfers of offered certificates among participants of DTC, Cedel
and Euroclear, they are not obligated to perform these procedures. Additionally,
these procedures may be discontinued at any time.
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GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
In most circumstances, the certificates offered by this prospectus will
be issued only as global certificates which are registered and held by a
depository. Certificate owners of the global certificates may hold their global
certificates through any of DTC, Cedel or Euroclear. The global certificates
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding global certificates
through Cedel and Euroclear will be conducted in the ordinary way under their
normal rules and operating procedures and under conventional eurobond practice,
which is seven calendar day settlement.
Secondary market trading between investors holding global certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
participants holding global certificates will be effected on a
delivery-against-payment basis through the respective depositaries of Cedel and
Euroclear and the DTC participants.
Non-U.S. holders of global certificates may have to pay U.S.
withholding taxes unless the holders meet the requirements for exemption from
the tax and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All global certificates will be held in book-entry form by DTC in the
name of Cede & Co., as nominee of DTC. Certificate owners' interests in the
global certificates 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 of their participants through their
respective depositaries, which in turn will hold their positions in accounts as
DTC participants.
Certificate owners electing to hold their global certificates through
DTC will follow the settlement practices applicable to U.S. corporate debt
obligations. Certificate owner securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Certificate owners electing to hold their global certificates 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 certificates will be credited to
the securities custody accounts on the settlement date against payment in same-
day funds.
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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 U.S. corporate
debt obligations 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 certificates 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 before settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the global certificates against payment. Payment will include interest
accrued on the global certificates from and including the last coupon payment
date to and excluding the settlement date. Payment will then be made by the
respective Depositary to the DTC participant's account against delivery of the
global certificates. After settlement has been completed, the global
certificates will be credited to the respective clearing system and by the
clearing system, under its usual procedures, to the Cedel participant's or
Euroclear participant's account. The global certificates credit will appear the
next day accounting to European time, and the cash debit will be back-valued to,
and interest on the global certificates will accrue from, the value date. The
value date would be the day before the day that settlement occurred in New York.
If the trade fails and settlement is not completed on the intended value date,
the Cedel or Euroclear cash debit will be valued instead on 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 pre-position
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
global certificates 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
pre-position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel participants or Euroclear participants
purchasing global certificates wold incur overdraft charges for one day,
assuming they cleared the overdraft when the global certificates were credited
to their accounts. However, interest on the global certificates would accrue
from the value date. Therefore, in many cases the investment income on the
global certificates earned during that
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one-day period may substantially reduce or offset the amount of the 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
certificates 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 certificates 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 before settlement. In these cases, Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to deliver
the bonds to the DTC participant's account against payment. Payment will include
interest accrued on the global certificates from and including the last coupon
payment date to and excluding the settlement date. 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 back-valued to the value date. The
value date would be the day before the day that 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 debit in anticipation of
receipt of the sale proceeds in its account, the back- valuation will extinguish
any overdraft charges incurred over that one-day period. If the trade fails and
settlement is not completed on the intended value date, receipt of the cash
proceeds in the Cedel participant's or Euroclear participant's account would
instead be valued on the actual settlement date. Finally, day traders that use
Cedel or Euroclear and that purchase global certificates 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, under the clearing system's customary procedures;
(b) borrowing the global certificates in the U.S. from a DTC
participant no later than one day prior to settlement, which would give the
global certificates 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 before the value date for the sale to the Cedel participant or Euroclear
participant.
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U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global certificates holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be required to pay the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. 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 that
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) that beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8 or new Form W-8BEN).
Beneficial owners of global certificates that are non-U.S. Persons can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status) or new Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8 changes (or new Form W-8BEN), a new Form W-8 (or
new Form W-8BEN) must be filed within 30 days of that change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224 or new Form W-8ECI). A non-U.S. Person, including a non-U.S. corporation or
bank with a U.S. 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) or New Form W-8ECI (Certificate of Foreign
Persons Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct or Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001 or new Form W-8BEN). Non-U.S. Persons that are beneficial
owners of global certificates 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) or new Form W-8BEN. 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 or new Form W-8BEN. Form 1001 may be filed by the certificate
owner or his agent whereas new Form W-8BEN must be filed by the beneficial
owner.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Certificate or in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, 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
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is effective for one calendar year, but Forms W-8, 1001 and 4224 will not be
effective after December 31, 2000.
A new Form W-8BEN, if furnished with a taxpayer identification number,
("TIN"), will remain in effect until the status of the beneficial owner changes,
or a change in circumstances makes any information on the form incorrect. A new
Form W-8BEN, if furnished without a TIN, and a new Form W-8ECI will remain in
effect for a period starting on the date the form is signed and ending on the
last day of the third succeeding calendar year, unless a change in circumstances
makes any information on the form incorrect.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision of the United States, (iii) an
estate, the income of which is includible in gross income for United States tax
purposes, regardless of its source, or (iv) a trust if a U.S. court is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust. This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the global certificates.
Certificate owners are advised to consult their own tax advisers for specific
tax advice concerning their holding and disposing of the global certificates.
In 1997, final Treasury regulations were issued that modify the filing
requirements with which non-U.S. persons must comply in order to be entitled to
an exemption from U.S. withholding tax or a reduction to the applicable U.S.
withholding tax rate. Those persons currently required to file Form W-8 or Form
1001 will be required to file new Form W-8BEN, while those persons currently
required to file Form 4224 will be required to file new Form W-8ECI. These new
withholding regulations generally are effective for payments of interest due
after December 31, 2000, but Forms W-8, 1001 and 4224 filed before that date
will continue to be effective until the earlier of December 31, 2000 or the
current expiration date of those forms. Prospective investors are urged to
consult their tax advisors about the effect of these new withholding
regulations.
DEFINITIVE CERTIFICATES
We refer to certificates issued in fully registered, certificated form
as "DEFINITIVE CERTIFICATES." The certificates for any series will be issued as
Definitive Certificates, rather than in book entry form to DTC or its nominees,
only under the circumstances described in the related prospectus supplement.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement will provide that a firm of
independent public accountants will furnish a statement to the Trustee on or
before April 30 of each year, beginning with April 30 in the year which begins
not less than six months after the date of the initial issue of certificates.
The statement
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will state that the firm has examined specific documents and records relating
to the servicing of the Loans of each series and that, either:
on the basis of its examination conducted substantially in
compliance with the audit program for mortgages serviced for
FHLMC, the firm is of the opinion that servicing has been
conducted in compliance with the manner of servicing described in
the Pooling and Servicing Agreement except for exceptions as the
firm believes to be immaterial and other exceptions as are
described in the statement; or
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 Loans serviced for
others that in their opinion are material and that the program
requires them to report.
The Pooling and Servicing Agreement will also require each Master Servicer to
provide the Trustee with an annual statement signed by an officer to the effect
that the Master Servicer has fulfilled its obligations under the Pooling and
Servicing Agreement throughout the preceding calendar year.
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:
1. the amount, if any, of the distribution allocable to principal
on the Loans and Mortgage Certificates, separately identifying
the aggregate amount of any Principal Prepayments included in
the distribution;
2. the amount of the distribution allocable to interest on the
Loans and Mortgage Certificates;
3. the amount of Deferred Interest, if any, added to the
aggregate principal balance of the Loans and Mortgage
Certificates during that month;
4. the aggregate amount, by class, of any advances included in
the amounts actually distributed;
5. the aggregate principal balance of the Loans as of the close
of business on the last day of the Prepayment Period prior to
the immediately preceding Due Date, after giving effect to
payments allocated to principal reported under clause (1)
above and to amounts of Deferred Interest, if any, added to
principal under clause (3) above;
6. the related amount of Administration Fees, as adjusted,
pursuant to the Pooling and Servicing 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;
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7. the number and aggregate principal balances of Loans
delinquent for (a) one monthly payment, and (b) two monthly
payments or (c) three or more monthly payments, as of the
close of business on the day prior to the immediately
preceding Due Date;
8. the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure in respect of any
Loan as of the close of business on the day prior to the
immediately preceding Due Date;
9. the amount remaining in the Reserve Fund, if any, on the
Distribution Date after any withdrawal reported under clause
(6) above;
10. the weighted average Pass-Through Rate as of the first day of
the month immediately preceding the month of the Distribution
Date; and
11. 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 customary
information as the Master Servicer deems necessary or desirable for
certificateholders to prepare their tax returns. 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 regarding the Master Servicer's servicing of the Loans. See
"--Evidence as to Compliance".
So long as the certificates remain outstanding in book-entry form
issued to DTC, the Trustee will provide to DTC, its nominee and its
participants, periodic and annual reports regarding any Trust. DTC, its nominee
and its participants, may provide these reports to the beneficial owners of the
certificates. The reports will be prepared in accordance with generally accepted
accounting principles, but will not be examined and reported on by an
independent public accountant.
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 officer of the Master
Servicer. The report will set forth the status of the Certificate Account as of
the close of business on that Distribution Date, and should state that all
distributions required to be made by the Master Servicer under the Pooling and
Servicing Agreement have been made. If any required distribution has not been
made, the Master Servicer will specify in the report the nature and status of
the distribution and showing, for the period covered by the statement, the
aggregate of deposits into and withdrawals from the Certificate Account for each
category of deposits and withdrawals specified in the Pooling and Servicing
Agreement. The report will include information as to the aggregate unpaid
principal balances of all the Loans and Mortgage Certificates as of the day
prior to the immediately preceding applicable Due Date. Copies of the 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.
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EVENTS OF DEFAULT
Events of default under the Pooling and Servicing Agreement will
consist of:
any failure by the Master Servicer to distribute or cause to be
distributed to certificate holders any required payment which
continues unremedied for five days after the giving of written
notice of the 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 or 51% of the Percentage Interest
of any class of certificates;
any failure by the Master Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in
the Pooling and Servicing Agreement which continues unremedied for
60 days after the giving of written notice of the 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 or 51% of the Percentage Interest of any class of
certificates; and
decrees or orders in any insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and
actions by the Master Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an event of default under the Pooling and Servicing
Agreement remains unremedied, the Trustee or certificateholders holding
certificates evidencing Fractional Undivided Interests aggregating not less than
25% of the Trust 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
Pooling and Servicing Agreement. In this case, the Trustee will succeed to all
of the Master Servicer's responsibilities, duties and liabilities under the
Pooling and Servicing Agreement and will be entitled to monthly servicing
compensation not to exceed the Administration Fees. If the Trustee is unwilling
or unable to so act, it may select, pursuant to the public bid or another
procedure described in the Pooling and Servicing 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 Pooling and Servicing
Agreement. If the public bid procedure is used, the successor Master Servicer
would be entitled to servicing compensation in amounts, up to the servicing
compensation provided in the Pooling and Servicing Agreement, as may be agreed
by the Trustee, and the Depositor, or if the Trust elects REMIC status, the
Residual certificateholder. The Trust would be entitled to receive the net
profits, if any, realized from the sale of the servicing rights and obligations
under the Pooling and Servicing Agreement.
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
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25% of the Trust 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 remedy or to exercise any of the trusts or powers
unless the certificateholders have offered the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred by
the Trustee. Also, the Trustee may decline to follow any 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.
No certificateholder, solely by virtue of its status as a
certificateholder, will have any right under the Pooling and Servicing Agreement
to institute any proceeding related to the Pooling and Servicing Agreement,
unless the 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 the 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 proceeding.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Depositor,
the Master Servicer and the Trustee, without the consent of any of the
certificateholders:
to cure any ambiguity;
to correct or supplement any provision in the Pooling and
Servicing Agreement which may be inconsistent with any other
provision of the agreement;
to permit the Trust to be subject to the REMIC Provisions under
the Code; and
to conform the terms of the Pooling and Servicing Agreement to the
terms described in the prospectus and the related prospectus
supplement.
The Pooling and Servicing 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 for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the Pooling and Servicing Agreement or
of modifying in any manner the rights of certificateholders; but no amendment
may:
reduce in any manner the amount of, or delay the timing of,
payments received on Loans which are required to be distributed on
any certificate without the consent of these certificateholders;
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adversely affect in any material respect the interest of
certificateholders holding Senior certificates in a manner other
than as described in clause (1) 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;
adversely affect in any material respect the interest of
certificateholders holding Subordinate certificates in a manner
other than as described in clause (1) 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;
adversely affect in any material respect the interest of
certificateholders holding Residual Certificates without the
consent of all holders of Residual Certificates; or
reduce the percentages of certificates the certificateholders of
which are required to consent to this amendment without the
consent of all the certificateholders of the class or classes
affected then outstanding.
For purposes of giving any 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.
TERMINATION
The obligations created by the Pooling and Servicing 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 Pooling and
Servicing Agreement after the earlier of:
1. 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
2. any optional termination of a trust as described in
"Description of the Certificates--Optional Termination of a
Trust or Underlying Trust."
In no event, however, will the Trust created by the Pooling and
Servicing Agreement continue beyond the expiration of 60 years from the date of
execution and delivery of the Pooling and Servicing Agreement. The Master
Servicer will give written notice of termination of the Pooling and Servicing
Agreement to each certificateholder, and the final distribution will be made
only upon surrender and cancellation of non book-entry certificates at an office
or agency of the Master Servicer specified in the notice of termination.
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GOVERNING LAW
The Pooling and Servicing Agreement provides that it shall be construed
in accordance with the laws of the State of New York, and the obligations,
rights and remedies of the parties to the Pooling and Servicing Agreement will
be determined in accordance with these laws.
LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of some of the legal
aspects of Loans which are general in nature. Because the legal aspects are
governed primarily by applicable state law, which may differ substantially from
state to state, the summaries do not purport to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Loans.
GENERAL
The Loans and the 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, for 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 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 some states,
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
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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. 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 necessary repairs at its own expense 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, these courts have upheld theses notice provisions as being reasonable
or as not involving sufficient state action to invoke constitutional provisions.
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RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and some foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
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
Some 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 other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the underlying
security; however, in some of these states, the lender, following judgment on
the personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies for 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 the
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 specific 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.
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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
the amount of outstanding indebtedness and the adjusted value of the home. 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 the 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 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 some types of 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 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 Loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the Loans.
JUNIOR LIENS; RIGHTS OF SENIOR LIENHOLDERS
The rights of the Trust (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
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mortgagee's or junior beneficiary's lien unless the lien holders 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 the 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 the proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in the
order as the mortgagee or beneficiary may determine. Thus, if improvements on
the property are damaged or destroyed by fire or other casualty, or if 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 this type of 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 these
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 any
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 when due all taxes and assessments on the property and 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 of the property, 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,
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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 Pooling and Servicing 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 a
prospective conveyance, exercise its rights to accelerate the maturity of the
mortgage loan under the "due-on-sale" clause applicable thereto, if any, unless
it is not exercisable under applicable law or if its exercise would result in
loss of insurance coverage on the 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
the mortgaged property has been or is about to be conveyed, pursuant to which
that 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 and the payment terms shall
remain unchanged. The Master Servicer will also be authorized, with the prior
approval of any primary mortgage insurer (unless approval is precluded by the
terms of the mortgage loan) to enter into, on behalf of the Trustee, a
substitution of liability agreement with that person, pursuant to which the
original mortgagor is released from liability and that 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. For any
mortgage loan secured by a residence occupied or to be occupied by the borrower,
this ability to accelerate will not apply to some types of transfers, including:
the granting of a leasehold interest which has a term of three
years or less and which does not contain an option to purchase,
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,
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,
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 the lien or
encumbrance is not created pursuant to a contract for deed),
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a transfer by devise, descent or operation of law on the death of
a joint tenant or tenant by the entirety, and
other transfers as described in the Act and the regulations
thereunder.
As a result, a lesser number of Loans which contain "due-on-sale"
clauses may extend to full maturity than recent experience on single-family
loans would indicate. The extent of the effect of the Act on the average lives
and delinquency rates of the Loans, however, cannot be predicted. See
"Prepayment, Yield and Maturity Considerations--Prepayment Considerations."
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA") and under state law in some 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 some circumstances for the cleanup costs of remedial action if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Cleanup costs may be substantial. For any particular series of
certificates, it is possible that cleanup costs could become a liability of the
related Trust and reduce the amounts otherwise distributable to the related
certificateholders if cleanup costs are incurred in connection with a mortgaged
property held by that Trust. Moreover, some states by statute impose a lien for
any cleanup costs incurred by the state on the property that is the subject of
cleanup costs (a "SUPERLIEN"). All subsequent liens on that property are
subordinated to the Superlien and, in some states, even prior recorded liens are
subordinated to Superliens. In the latter states, the security interest of the
Trustee in a property that is subject to this type of a Superlien could be
adversely affected.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present on any
mortgaged property prior to the origination of 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 this type of evaluation prior to the origination of the Loans nor will
the mortgage asset seller or the Depositor have required that this type of
evaluation be made by the originators who have sold the Loans to them. Neither
the applicable Servicer nor the Master Servicer will be required to undertake
any 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 "Servicing of the Loans--Collection and
Other Servicing Procedures."
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SUBORDINATE FINANCING
Some of the 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 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 some types of residential first loans originated by specific 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 other types of loan charges.
The Depositor will represent and warrant for the benefit of
certificateholders that the Loans were originated in full compliance with
applicable state laws, including usury laws.
ENFORCEABILITY OF SOME 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 some states, there are
or may be specific limitations upon late charges which a lender may collect from
a borrower for delinquent payments. Some states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling and Servicing Agreement, late charges and prepayment
fees (to the extent permitted by law and not waived by the Master Servicer or
the Servicers) will be retained by the Master Servicer or the Servicers as
additional servicing compensation.
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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, like 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.
LEGAL ASPECTS OF THE LOANS UNDER CALIFORNIA LAW
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. The
prospectus supplement for each series will specify the percentage of Loans by
initial principal balance that are secured by liens on mortgaged properties
located in California.
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CO-OP LOANS
To the extent described in the prospectus supplement, some of the Loans
may have been made in connection with a purchase or refinance of cooperative
apartments. These 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 the 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 some risks which arise as a result of the cooperative form of
ownership which differentiate Co-op Loans from other types of 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 this 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).
LEGAL INVESTMENT MATTERS
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"). As a result,
they 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
other state entities. Under SMMEA, if a state enacted legislation prior to
October 4, 1991 specifically limiting the legal investment authority of any of
these types of entities to invest in "mortgage-related securities" the
certificates will constitute legal investments for entities subject to the
legislation only to the extent provided therein. SMMEA provides, however, that
in no event will the enactment of this type
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of 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 the contractual commitment was made or the certificates
were acquired prior to the enactment of the legislation. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cut-off
for the enactments, limiting to varying extents the ability of some 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 this legislation will be authorized to invest in the
Securities only to the extent provided in this 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 described in 12 U.S.C. 'SS' 24 (Seventh),
subject in each case to those regulations as the applicable
federal authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination
Counsel issued a revised supervisory policy statement (the "1998 POLICY
STATEMENT") applicable to all Depository institutions, setting forth guidelines
for investments in "high-risk mortgage securities." The 1998 Policy Statement
has been adopted by the Federal Reserve Board, the Office of the Comptroller of
the Currency, the FDIC, the National Credit Union Administration (the "NCUA")
and the Office of Thrift Supervision (the "OTS") with an effective date of May
26, 1998. The 1998 Policy Statement rescinds a 1992 policy statement that had
required, prior to purchase, a Depository institution to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. The 1998 Policy Statement eliminates former constraints on
investing in some types of "high-risk" mortgage derivative products and
substitutes broader guidelines for evaluating and monitoring investment risk.
On January 1, 1999, OTS Thrift Bulletin 13a, entitled "Management of
Interest Rate Risk, Investment Securities, and Derivatives Activities" ("TB
13a"), which is applicable to thrift institutions regulated by the OTS became
effective. One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position, to (i) conduct a
pre-purchase portfolio sensitivity analysis for any "significant transaction"
involving securities or financial derivatives, and (ii) conduct a pre-purchase
price sensitivity analysis of any "complex security" or financial derivative.
For the purposes of TB 13a, a "complex security" includes among other things any
collateralized mortgage obligation or real estate mortgage investment conduit
security, other than any "plain vanilla" mortgage pass-through security (that
is, securities that are part of a single class of securities in the related pool
that are non-callable and do not have any special features). Accordingly, all
classes of the offered certificates would likely be viewed
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as "complex securities". The OTS recommends that while a thrift institution
should conduct its own in-house pre-acquisition analysis, it may rely on an
analysis conducted by an independent third-party so long as management
understands the analysis and its key assumptions. Further, TB 13a recommends
that the use of "complex securities with high price sensitivity" be limited to
transactions and strategies that lower a thrift institution's portfolio interest
rate risk. TB 13a warns that investment in complex securities by thrift
institutions that do not have adequate risk measurement, monitoring and control
systems may by viewed by OTS examiners as an unsafe and unsound practice.
In addition, the NCUA has issued regulations governing federal credit
union investments which prohibit investment in specified types of securities,
which may include some classes of 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 like the offered certificates, including
securities previously purchased. You should consult your own legal advisors in
determining whether and to what extent the offered certificates constitute legal
investments for you.
There may be other restrictions on the ability of some 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
these 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.
You should consult your own legal advisors in determining whether and
to what extent the certificates constitute legal investments for you.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") imposes requirements on employee benefit plans (and on some other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which plans, accounts or arrangements are invested) (collectively "PLANS")
subject to ERISA and on persons who are fiduciaries for these 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 these Plans. ERISA also imposes specific 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 the Plan (subject to specific exceptions
not relevant
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here). Some employee benefit plans, like 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 these plans may be invested in certificates
without regard to the ERISA considerations described in this prospectus, subject
to the provisions of applicable state law. Any plan which is qualified and
exempt from taxation under Code Sections 401(a) and 501(a), however, is subject
to the prohibited transaction rules contained 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. 'SS' 2510.3- 101.) Under this regulation, the
underlying assets and properties of corporations, partnerships and 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 some 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
the 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 Securities Exchange Act of 1934. 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
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries of the 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 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 specific 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
these certificates. PTE 83-1 permits, subject to specific conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest under those Plans related to the origination, maintenance and
termination of mortgage pools consisting of 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 mortgage pool pass-through
certificates representing an interest in 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)
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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 the certificate to
pass-through payments of principal and interest from the pooled loans, less any
fees retained by the pool sponsor. Some 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 to these classes of certificates, including:
classes of certificates entitled to receive payments of interest
and principal on the loans only after payments to other classes or
after the occurrence of specified events;
classes of certificates that evidence the beneficial ownership in
a Trust divided into mortgage loan groups;
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
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: (1) multifamily Loans; or (2) 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: (1) the maintenance of a
system of insurance or other protection for the pooled Loans and property
securing the 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 Loans or the principal balance of the largest
covered pooled mortgage loan; (2) the existence of a pool trustee who is not an
affiliate of the pool sponsor; and (3) 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 Loans plus reasonable
compensation for services provided by the pool sponsor to the pool. Some 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 for 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, subordination or another form of credit
enhancement maintained for 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
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the aggregate principal balance of the Loans or the principal balance of the
largest mortgage loan. For 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 for the certificates.
One or more exemptions may be available, however, for 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 the 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 some sales and
servicing of "certificates" that are obligations of a "trust" with respect to
which the 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 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, (1) the investment pool consists only of assets of the
type which have been included in other investment pools, (2) certificates
evidencing interests in other investment pools that 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 (3) certificates in
other investment pools that have been rated in one of the
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three highest generic rating categories of the four credit rating agencies noted
below. The general conditions applicable to the Underwriter Exemption include:
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;
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;
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, a division of the
McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Duff
& Phelps Credit Rating Co. or Fitch IBCA, Inc.;
the pool trustee must not be an affiliate of the pool sponsor, nor
an affiliate of the underwriter, the pool servicer, any obligor on
the Loans included in the trust constituting more than five
percent of the aggregate unpaid principal balance of the assets in
the trust, or any affiliate of any of these entities; and
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, like some Keogh plans and 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 an 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.
Any Plan proposing to invest in certificates should consult with its
counsel to confirm that the investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the
Code.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Federal income tax consequences of an investment in a certificate
of a series or a class of a series will vary depending on the characteristics of
the certificate. The following is a general discussion of
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the anticipated material Federal income tax consequences of the purchase,
ownership and disposition of the certificates offered under this prospectus. The
discussion is based upon the Code, its legislative history, existing and
proposed regulations thereunder, including regulations promulgated under the
real estate mortgage investment conduit ("REMIC") and original issue discount,
called "OID" provisions of the Code, called the "REMIC REGULATIONS" and the "OID
REGULATIONS," published rulings and court decisions, all as in effect and
existing on the date of this prospectus 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
OID under section 1272(a)(6) of the Code for 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 or aspects of Federal income taxation that may be relevant to a
prospective investor based upon the investor's particular tax situation. For
example, the discussion would not apply to:
banks,
insurance companies,
tax-exempt organizations,
electing large partnerships,
dealers in securities or currencies
mutual funds,
REITs,
RICs,
S corporations,
estates and trusts,
investors that hold the certificates as part of a hedge, straddle,
integrated or conversion transaction, or
holders whose "functional currency" is not the United States
dollar.
This discussion generally does not address the state, local or foreign tax
consequences of the purchase, ownership and disposition of the 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: (1) certificates representing
interests in a trust, or a portion of a trust, which the Master Servicer will
covenant to elect to have treated as a REMIC under Code Sections 860A through
860G and (2) certificates representing interests in a trust 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 and, if the election is made for the trust, 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.
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REMIC
CLASSIFICATION OF REMICs
An election to be treated as a REMIC for federal income tax purposes
may be made for a Trust relating to a series of certificates. An election will
generally be made if the related Trust 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
(1) ongoing compliance with all provisions of the Pooling and Servicing
Agreement which include requirements, among other things, that a REMIC election
be made timely in the required form, the representations described in the
Pooling and Servicing 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 under the Code, and (2) the
accuracy of information contained in other related documents, the Trust 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. This opinion will be filed prior to issuance of a 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 to qualify as a REMIC, there must be ongoing
compliance on the part of the Trust with requirements contained in the Code.
First, the Trust must fulfill an asset test, which requires that no more than a
de minimis amount of the assets of the Trust, as of the close of the third
calendar month beginning after the date of issuance of the certificates, called
the "STARTUP DAY," 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'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 in a qualified mortgage, that is principally
secured by an interest in real property and, generally, that is (1) transferred
to the Trust on the Startup Day, (2) purchased by the Trust within a three-month
period thereafter pursuant to a fixed price contract in effect on the Startup
Day or (3) received by the REMIC within the three-month period in replacement of
an obligation transferred to the REMIC on the Startup Day. Qualified mortgages
also include a regular interest in another REMIC if the interest is transferred
to the Trust on the start-up day in exchange for regular or residual interests
in the Trust. An obligation is "principally secured by an interest in real
property" if (1) the fair market value of the real property security is at least
80% of the principal amount of the related Loan either at origination or as of
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the Startup Day (an original loan-to-value ratio of not more than 125% of the
real property security) or (2) substantially all the proceeds of the Loan were
used to acquire, improve or protect an interest in real property that, at the
origination date, was the only security for the Loan. In rendering its opinion
on the classification of the Trust as a REMIC, Mayer, Brown & Platt will rely on
the representations in the Pooling and Servicing Agreement and other documents
regarding qualification of the 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 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 requirements discussed above, the various interests
in the Trust also must meet other 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 on 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 on the 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 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 while there are any Regular
Certificates outstanding. If a Trust for 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 will not be treated as
a REMIC for that year and thereafter. In that event, the Trust 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 (1)
an entity ceases to be a REMIC, (2) the Secretary of the Treasury determines
that the cessation was
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inadvertent, (3) no later than a reasonable time after the discovery of the
event resulting in the cessation, steps are taken so that the entity is once
more a REMIC, and (4) the entity, and each person holding an interest in the
entity at any time during a period specified, agrees to make those adjustments
as may be required by the Secretary of the Treasury for that period, then,
notwithstanding a terminating event, the entity will be treated as continuing to
be a REMIC or the 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 Treasury Regulations of
this type have been issued. Any relief, moreover, may be accompanied by
sanctions, like the imposition of a corporate tax on all or a portion of the
REMIC's income for the period in which the requirements for REMIC status are not
satisfied.
CHARACTERIZATION OF INVESTMENTS IN CERTIFICATES
In general, (1) 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 the certificates, called the "ASSETS" would be
so treated; (2) 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 Code Section 7701(a)(19)(C) in
the same proportion that the Assets would be treated as falling within one of
the classes enumerated in Code Section 7701(a)(19)(C)(i) - (x), including
without limitation "loans secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v); and (3) 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 some
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Code Section 582(c)(1).
Certificateholders should be aware that (1) certificates held by a real
estate investment trust will not constitute "government securities" within the
meaning of Code Section 856(c)(5)(A) and (2) certificates held by a regulated
investment company will not constitute "government securities" within the
meaning of Code Section 851(b)(4)(A)(i).
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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
holder of a Regular certificate (a "REGULAR CERTIFICATEHOLDER") will be
determined under the accrual method.
Original Issue Discount. The Regular Certificates may be issued with
OID within the meaning of Code Section 1273(a). Holders of any class of Regular
Certificates issued with OID will be required to include the OID in gross income
for Federal income tax purposes as it is deemed to accrue, in advance of the
receipt of the cash attributable to that income.
Rules governing OID are set forth generally in Code Sections 1272, 1273
and 1275, and the OID Regulations. Code Section 1272(a)(6) provides special OID
rules that apply to regular interests in a REMIC, like Regular Certificates.
However, as discussed above, no Treasury Regulations have as yet been proposed
or adopted regarding the computation of the accrual of OID 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 OID 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 by 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 the 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 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 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 the Regular Certificates, and if the 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, any pre-issuance
accrued interest. If the issue
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price is so computed, the actual payment of any 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, OID 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 the OID is less than 0.25% of the stated
redemption price at maturity of the Regular Certificates multiplied by the
weighted average life of the Regular Certificates. However, under the OID
Regulations, the holder of a Regular Certificate that has de minimis OID would
be required to include any de minimis OID in income as principal payments are
made in proportion to the ratio that each principal payment bears to the stated
principal amount of the Regular Certificates. For this purpose, the weighted
average life of the Regular Certificates is computed as the sum of the amounts
determined by multiplying (1) 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 (2) a fraction, the numerator of which is the
amount of the payment and the denominator of which is the total amount of
payments included in the stated redemption price at maturity of the Regular
Certificates. 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 OID on the Regular
Certificates issued by a REMIC, Code Section 1272(a)(6) requires that a
reasonable assumed prepayment rate, called the "PREPAYMENT ASSUMPTION", be used
for Loans held by a REMIC, and that adjustments be made in the amount and rate
of accrual of the 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), called 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 on a Regular Certificate must be the same as that used in pricing the
initial offering of the Regular Certificates. The Prepayment Assumption used by
the Master Servicer in reporting OID 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 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.
OID is accrued by a Regular Certificateholder by including in its gross
income the sum of the "daily portions" of OID, if any, on its Regular
Certificate for each day during its taxable year on which it held the Regular
Certificates. In general, in the case of an original holder of a Regular
Certificate, the daily portions of OID will be determined based on the excess,
if any, of (1) 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 the Regular
Certificate during the accrual period of amounts included in the stated
redemption price at maturity, over (2) the adjusted issue price of the Regular
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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 OID 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 for
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
period, begins on the Closing Date. The present value of the remaining
distributions will be calculated (1) assuming that distributions on the Regular
Certificate will be received in future periods based on the Loans being prepaid
at a rate equal to the Prepayment Assumption, (2) using a discount rate equal to
the original yield to maturity of the Regular Certificate and (3) 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
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 the certificate, increased by the aggregate amount of the
daily portions on the Regular Certificate that accrued in prior accrual periods,
and reduced by the amount of any distributions made on the 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 OID on the Regular Certificate. However, if the cost of the Regular
Certificate to the subsequent purchaser is in excess of its "adjusted issue
price," each daily portion will be reduced in proportion to the ratio the excess
bears to the aggregate OID 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 OID 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 OID, 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
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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 that
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 on Regular Certificates without regard to whether those
certificates have original issue discount, will also apply in amortizing bond
premium under Code Section 171. If made, the 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 calculation of interest income for
certificateholders to whom it is available. However, if the holder makes the
election for 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 this election.
EFFECTS OF DEFAULTS AND DELINQUENCIES
Some series of certificates may contain one or more classes of
Subordinate certificates, and if there are defaults or delinquencies on the
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 on these
certificates under an accrual method without giving effect to delays and
reductions in distributions on the Subordinate certificates attributable to
defaults and delinquencies on the Loans, except to the extent that it can be
established that those 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 the 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
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the aggregate amount of distributions on the Subordinate certificate is reduced
as a result of defaults and delinquencies on the Loans. However, the timing and
character of 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
the 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 that quarter and then by allocating
the amount so allocated among the Residual Certificateholders in accordance with
their percentage of ownership interests on that 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 on its
Residual Certificate may exceed cash distributions attributable to that income
in any taxable year.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC will
reflect a netting of (1) the income from the Loans and other assets of the REMIC
and (2) the deductions allowed to the REMIC for interest, including OID, on the
Regular Certificates, and any other class of certificates constituting "regular
interests" in the REMIC not offered by this prospectus, 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 these 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 some 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 for 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 excess would be amortized
under a constant yield method in a manner analogous to the method for accruing
OID described under "Taxation of Owners of Regular Certificates--Original Issue
Discount" above.
The second modification relates to the accrual of income on a Loan
deemed to have been acquired with market discount or premium. Any market
discount will be includible in the income of the REMIC as it accrues, in advance
of receipt of the cash attributable to that income, under a method similar to
the method described above for accruing OID on the Regular Certificates. If the
REMIC elects under Code
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Section 171 to amortize any premium on the 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) on "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. The aggregate basis will be allocated among the individual 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 these interests in order to determine the basis of the REMIC in the
Loans and other property held by the REMIC. Generally for any certificate
offered by this prospectus, 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."
BASIS RULES AND DISTRIBUTIONS. Any distribution by a REMIC to a
Residual Certificate holder will not be included in the gross income of the
Residual Certificateholder to the extent it does not exceed the adjusted basis
of the Residual Certificateholder's interest in a Residual Certificate. The
distribution will reduce the adjusted basis of the 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 that 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 for the
interest.
A Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent the net loss exceeds the
Residual Certificateholder's adjusted basis in its Residual Certificate as of
the close of the calendar quarter, determined without regard to any net loss.
Any loss allowed will reduce the adjusted basis of the interest, but not below
zero. Any loss disallowed because 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.
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EXCESS INCLUSIONS. Any "excess inclusion" for a Residual Certificate is
subject to special tax rules. For 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 the quarter that the Residual Certificate was held by the 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 by this prospectus,
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 on the Residual Certificate and any
net losses taken into account on the Residual Certificates before the beginning
of that quarter.
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 this type of 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. For 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 this tax and no tax treaty rate reduction or
exemption may be claimed for this tax. 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 (1) 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 (2) 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 for the 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
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allocated among the shareholders of the trust in proportion to the dividends
received by those shareholders from the trust, and any amount so allocated will
be treated as an excess inclusion for the Residual Certificate as if held
directly by those 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 (1) a REMIC that is substantially similar to
an investment trust under Treasury regulations but for its qualification as a
REMIC, or (2) 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. A pass-through interest holder would be
required to add its allocable share, if any, of the 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 the expenses only as a miscellaneous
itemized deduction subject to the limitations under Code Section 67, which
allows these deductions only to the extent that in the aggregate the 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 specified amount (the
"APPLICABLE AMOUNT") will be reduced by the lesser of (1) 3% of the excess of
the individual's adjusted gross income over the Applicable Amount or (2) 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 each 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 other 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.
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." This type of holder would be required
to add its allocable share, if any, of the 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.
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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 the Regular Certificate to the
certificateholder, increased by income reported by the certificateholder on the
Regular Certificate and reduced, but not below zero, by distributions on the
Regular Certificate received by the 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
gain or loss will be capital gain or loss, provided the 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 these taxpayers is 20% for capital
assets held for more than 12 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 the gain does not
exceed the excess, if any, of (1) the amount that would have been includible in
the seller's income on the 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 the Regular Certificate, over (2) the amount of ordinary
income actually includible in the seller's income prior to the 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 this 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 the sale, the 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 the 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 (1) the disposition of a Loan other than pursuant to specified
exceptions, (2) the receipt of investment income from a source other than a Loan
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or other permitted investments, (3) the receipt of compensation for services, or
(4) gain from the disposition of an asset purchased with the payments on the
Loans for temporary investment pending distribution on the certificates. It is
not anticipated that a Trust 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 the contribution is a cash contribution that (1)
takes place within the three-month period beginning on the closing date, (2) is
made to facilitate a clean-up call or a qualified liquidation, (3) is a payment
in the nature of a guarantee, or (4) 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 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 specific types of income from
foreclosure property (generally, income relating to dealer activities of the
REMIC), it will be taxed on that income at the highest corporate income tax
rate. It is not anticipated that a Trust that makes an election to be taxed as a
REMIC will receive significant amounts of this 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 (1) the present
value of the total anticipated excess inclusions for the 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 (2) the highest marginal federal income tax
rate applicable to corporations. This tax would generally be imposed on the
transferor of the Residual Certificate, except that where the transfer is
through an agent for a disqualified organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Certificate would in
no event be liable for the tax on 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 the affidavit is
false. An entity will not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that residual interests in the entity are not
held by disqualified organizations and that information needed for the
application of the tax described in this prospectus will be made available.
Restrictions on the transfer of the Residual Certificate and other provisions
that are intended to meet these requirements are contained in the Pooling and
Servicing Agreement. Certificateholders should consult their advisors regarding
the potential impact on them of these restrictions.
For these purposes, a "disqualified organization" means (1) the United
States, any State or political subdivision of the United States, 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), (2) any organization, other than a cooperative described in Code
Section 521, which is
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exempt from tax unless the organization is subject to the tax imposed by Code
Section 511 or (3) 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 on a Residual Certificate, and a disqualified
organization is the record holder of an interest in a pass-through entity, then
a tax will be imposed on the pass-through entity equal to the product of (1) the
amount of excess inclusions on the Residual Certificate that are allocable to
the interest in the pass-through entity held by the disqualified organization
and (2) 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 the interest furnishes to the pass-through entity an
affidavit that the record holder is not a disqualified organization and, during
that period, the pass-through entity does not have actual knowledge that the
affidavit is false. For these purposes, a "pass-through entity" means any
regulated investment company, real estate investment trust, trust, partnership
or other entities described in Code Section 860E(e)(6).
DISREGARD OF SOME TYPES OF 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, (1) the
present value of the expected future distributions on 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 (2) the transferor reasonably expects that the transferee
will receive distributions from the REMIC in amounts sufficient to satisfy the
taxes on excess 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 (1) 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 (2) 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 at or after the time
at which the excess inclusion accrues and not later than the close of the
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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)
on the qualified mortgages, or the rate that would have been assumed had the
mortgages been issued with OID. 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 on the 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
that certificate is less than the Residual Certificateholder's adjusted basis in
the Residual Certificate, the Residual Certificateholder should be allowed a
loss equal to the amount of the 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 Residual Certificateholders holding the greatest percentage
interst in the 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" on the REMIC.
As the tax matters person, the Master Servicer will, subject to
specific 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
the 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
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 that person and other
information.
Reporting of interest income, including any OID, on Regular
Certificates is required annually, and may be required more frequently under
Treasury Regulations. This requirement extends to some types of 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 OID to disclose on its
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face the amount of OID and the issue date and requiring this 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 OID 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
on 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 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 these payments fail to furnish to
the payor necessary information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from backup withholding.
Any amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against the recipient's Federal income tax. Furthermore,
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.
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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 on a distribution on a Regular Certificate,
provided that the certificateholder complies to the extent necessary with
identification requirements, including delivery of a statement, signed by the
certificateholder under penalties of perjury, certifying that the
certificateholder is not a United States Person and providing the name and
address of the certificateholder, and provided that the certificateholder is not
a "10 percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C). 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 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 of accrued OID, to the 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 the laws of the United States or any political subdivision of the United
States, 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 a 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 these 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 these
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.
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TRUSTS WITH NEGATIVELY AMORTIZING ARMS
In the event that a Trust contains Negatively Amortizing ARMs, the
discussion of the federal income tax implications of the Negatively Amortizing
ARMs to a holder of an interest in the Trust, including the treatment of
Deferred Interest, will be contained in the related prospectus supplement.
INVESTMENT IN CERTIFICATES NOT REPRESENTING INTERESTS IN A REMIC
CLASSIFICATION OF TRUST 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 Loan in a related Trust together with interest thereon are referred to as
"P&I CERTIFICATES." Certificates of a series evidencing an undivided ownership
interest in a portion of the interest payable on a Notional Amount of the Loans
in the related Trust are referred to as "IO CERTIFICATES."
Upon issuance of each series of certificates, unless a REMIC election
is made for that series, Mayer, Brown & Platt, counsel to the Depositor, is of
the opinion that the related Trust 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. The opinion will be filed prior to issuance of any series of
certificates to which a REMIC election is not made, 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 Loans in the related Trust
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 holds
assets described in the Code sections set forth below, (1) 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); (2) 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); (3) 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 (4) 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 these interests. Prospective purchasers should consult their tax
advisors regarding whether an IO Certificate will be characterized as
representing these assets and whether the income from the IO Certificate will be
characterized as derived from these assets.
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 Loan in the
Trust from the right to receive a portion of the principal. This type of
separation will occur
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on each Loan having a Trust issuing IO Certificates. It also will occur if the
amount of the Administration Fee exceeds reasonable compensation so that the
Master Servicer is treated as the owner of a portion of the interest payments on
the 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 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 the safe harbor. A separation also may occur
upon the issuance of a certificate that represents an interest in principal
payments to be made on Loans together with interest payable on the certificate
at a rate in excess of the rate at which interest is payable on the Loans. These
certificateholders may be treated as having purchased two separate instruments:
first, a P&I Certificate representing their undivided interests in payments of
principal on the Loans together with interest payments at a rate at or below the
rate at which interest is payable on the Loans; and, second, an IO Certificate
representing their undivided interests in the remainder of the payments of
interest to be made on the Loans to which their certificate entitles them.
Each certificateholder 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 some 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 OID on 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 the market discount as principal is repaid or upon
disposition of the certificate at a gain or may elect to include this 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
this type of Trust, 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 on the certificate under a constant yield to maturity method, in accordance
with the OID rules of the Code.
In general, the amount of this income that accrues for each day would
equal the product of the certificateholder's adjusted issue price of the P&I
Certificate at the beginning of an accrual period and the yield of the P&I
Certificate to that holder allocated ratably to each day in the accrual period.
See "--Qualification as a REMIC--Taxation of Owners of Regular
Certificates--Original Issue Discount" above. The yield would be computed as the
rate, assuming monthly compounding, that, if used to discount the
certificateholder's share of future payments on the Loans, would cause the
present value of those future
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payments to equal the price at which the certificateholder purchased that
certificate. In computing accrued income under the stripped debt rules, a
certificateholder's share of future payments on the Loans will not include any
payments made on any ownership interest in the Loans retained by the Depositor
or its affiliates, but will include the 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 like the P&I
Certificates. Among other things, it is unclear whether provisions of the Tax
Reform Act of 1986 (the "1986 ACT") requiring use of a prepayment assumption in
accruing OID would 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 OID on P&I Certificates.
In the case of a P&I Certificate acquired at a price approximately
equal to the principal amount of the Loans allocable to the 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 the 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, the
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 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 Loan that is allocable to that certificate and the
portion of the adjusted basis of that certificate that is allocable to the
certificateholder's interests in the 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 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 OID, the Master Servicer may be required to use the methods described
in Code Section 1272(a)(6). For the application of Code Section 1272(a)(6) to
the accrual of OID, 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,
OID includible in income when accrued under the OID rules, or contingent
interest payments generally includible in income in the taxable year in which
the payments
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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 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 the 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 like 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 these 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 Loans in accordance with the
certificateholder's normal method of accounting. However, if the rules relating
to market discount, OID, 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 Loans.
The OID rules will apply to a P&I Certificate to the extent it
evidences an interest in Loans or Mortgage Certificates issued with OID. Under
the OID Regulations a Loan would have OID 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 some types of variable rate Loans as having OID if
the loans have an initial rate of interest that differs from that determined by
the formula for setting the interest rate during the remainder of the loans or
if the loans use 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, OID would be accrued on the basis of a constant
yield to maturity. However, the application of the original issue discount rules
to the Loans is unclear in all cases. See "--Treatment as Stripped Bonds,"
above.
PREMIUM AND MARKET DISCOUNT. Determination of adjustments to a
certificateholder's income based on premium or market discount on a certificate
requires that the purchase price of the certificate be allocated among the Loans
constituting the Trust. Generally, this allocation will provide a tax basis for
the certificateholder's undivided interest in each Loan and will be made on the
basis of the relative fair market values of the certificateholder's undivided
interest in the Loans.
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A certificateholder that acquires an interest in a Loan at a premium
may elect under Code Section 171 to amortize the premium under a constant yield
to maturity method over the life of the 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 a premium
because all or a portion of its issue price, called the "CONTINGENT PRINCIPAL",
may not be recovered if the related 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
Loan in the Trust is less than the certificateholder's undivided interest in the
Loan's "revised issue price" (the sum of the issue price and the previously
accrued OID reduced by the sum of all prior payments of the stated redemption
price at maturity), the excess is "market discount." A certificateholder that
acquires an interest in a 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 Loan at the time that each 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 (1) under a constant yield to maturity method, (2) in proportion to the
OID accruing on a Loan, or (3) in proportion to the stated interest in the
absence of OID. Alternatively, a certificateholder may elect to include accrued
market discount in income currently on all market discount obligations acquired
by the certificateholder during the taxable year in which an 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 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 OID
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 like the IO
Certificates. The OID Regulations do not include rules relating specifically to
"stripped coupons," although they provide guidance as to how the OID sections of
the Code will generally be applied. The discussion below assumes that a holder
of an IO
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Certificate will not own any P&I Certificates. Holders of IO Certificates should
consult their tax advisors concerning the method to be used in reporting income
or loss on the IO Certificates.
Under the stripped coupon rules, it appears that OID 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 the yield to maturity under a provision of 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 PROPOSED 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, or the Contingent
Principal, of the IO Certificates would not be recovered if the related 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,
called 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. These 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 OID 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 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.
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If the amount of a contingent payment varies from its projected amount,
the holder will generally be required to include the 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 the 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 these 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 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 on a certificate generally includes amounts not
paid to the certificate holder because they are used to pay the Administration
Fee. Subject to limitations on the deductibility by individual
certificateholders of some categories of expenses under Code Section 67 and the
reduction of some 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 the fee constitutes reasonable compensation for the services rendered
by the Master Servicer, at the times and in the manner as it would have been
deducted under the certificateholder's tax accounting method had it actually
received those amounts and paid them to the Master Servicer. Payments of
voluntary servicing 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 for accrued market discount under "--Taxation
of Owners of P&I Certificates--If Stripped Bond Rules Do Not Apply," 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 the certificate, recognized on
the sale or exchange of a certificate by an investor who holds the 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
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income tax rate for individuals, estates, and trusts is generally 39.6%, whereas
the maximum long-term capital gains rate for these taxpayers is 20% for capital
assets held for more than 12 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 on the certificate.
Purchasers of certificates should be aware that, if income must be
accrued on 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 Loans in the related Trust have been paid or
otherwise discharged. Conversely, if income must be accrued on each certificate
holder's undivided interest in each Loan in the related Trust, it is likely that
a portion of each certificateholder's adjusted tax basis will have to be
allocated to each undivided interest. It then should be possible to determine
whether the adjusted tax basis allocable to an undivided interest in a Loan in
the related Trust has been recovered at the time the Loan is paid or discharged.
This approach may result in the earlier recognition of any losses attributable
to a certificate holder'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 a
certificateholder in its certificate to the undivided interest in each Loan
represented by the certificate nor to determine and report whether any allocable
adjusted tax basis has been recovered at the time a Loan in the related Trust is
paid or discharged. Due to the existence of the Subordinated Amount, the effect
of this treatment by the Master Servicer is not expected to be significant on a
P&I certificateholder.
REPORTING
On each Distribution Date, the Master Servicer will cause the Trustee
to furnish to each certificateholder a statement setting forth the amount of the
distribution allocable to principal on the Loans and to interest on the Loans 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 a holder at any time during that year, information
regarding the amount of servicing compensation received by the Master Servicer
and sub-servicers, if any, and 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 other persons to complete their reports.)
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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 OID 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
on the certificates. The Trustee intends in reporting information relating to
OID 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 this
information on an aggregate pool-wide basis. Although there are provisions in
the OID Regulations that suggest that the computation of OID on this basis is
either appropriate or required, it is possible that investors may be required to
compute OID on a Loan by Loan basis taking account of an allocation of their
basis in the certificates among the interests in the various Loans represented
by the certificates according to their respective fair market values. Investors
should be aware that it may not be possible to reconstruct after the fact
sufficient Loan by 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 on 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
"Federal Income Tax Consequences" 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 describe any aspect
of the income tax laws of any state. Therefore, potential investors should
consult their own tax advisors about the various tax consequences of investments
in the certificates.
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PLAN OF DISTRIBUTION
The Depositor may sell the certificates in any of three ways:
through underwriters or dealers;
directly to a limited number of purchasers or to a single
purchaser; or
through agents.
The prospectus supplement will set forth the terms of the offering of
each series of certificates including:
the name or names of any underwriters, dealers or agents;
the purchase price of the certificates and the proceeds to the
Depositor from the 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, the Depositor or any of
its affiliates may purchase or retain some or all of one or more classes of
certificates of the series. The purchaser may thereafter from time to time offer
and sell, pursuant to this prospectus, some or all of the certificates so
purchased directly, through one or more underwriters to be designated at the
time of the offering of the certificates or through broker-dealers acting as
agent and/or principal. The offering may be restricted in the manner specified
in the related prospectus supplement. The 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
related prospectus supplement will describe the nature of the obligation of the
underwriters to purchase the certificates. The certificates may be offered to
the public either through underwriting syndicates represented by one or more
managing underwriters or directly by one or more underwriting firms acting
alone. The underwriter or underwriters for a particular underwritten offering of
certificates will be named in the prospectus supplement relating to that
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 described in a prospectus supplement, the
obligation of the underwriters to purchase any certificates of the related
series will be subject to various conditions precedent, and the underwriters
will be obligated to purchase all of the certificates if any are purchased.
-118-
<PAGE>
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 specific liabilities,
including liabilities under the Securities Act, as amended, or to contribution
for payments which the underwriters or agents may be required to make under the
terms of the agreements.
The prospectus supplement for any series of certificates offered other
than through underwriters will contain information regarding the nature of the
offering and any agreements to be entered into between the Depositor and dealers
for the certificates of that series.
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. 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 related prospectus supplement.
For underwritten offerings, any of these 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 the certificates,
although the affiliates may participate in the distribution of the certificates
under circumstances entitling it to a dealer's commission. An affiliate of the
Depositor may act as a placement agent for 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, affiliates of the Depositor, including AAI, may purchase
certificates acting as principal.
The Depositor anticipates that the certificates will be sold to
institutional and retail investors. Purchasers of certificates, including
dealers, may, depending on the facts and circumstances of the purchases, be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with re-offers and sales by them of certificates. Certificateholders
should consult with their legal advisors in this regard prior to any 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. Unless otherwise stated in the
prospectus supplement, the certificates will not be listed on any securities
exchange.
-119-
<PAGE>
LEGAL MATTERS
The legality of the certificates of each series and the federal income
tax consequences will be passed upon for the Depositor by Mayer, Brown & Platt,
Chicago, Illinois. Matters relating to corporate law will be passed upon for the
Depositor by Kirk P. Flores, Esq., in-house counsel to the Depositor.
RATING
Any class of certificates of a series offered by this prospectus and
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 in one of the
rating agency's four highest rating categories which are referred
to as investment grade.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions of payments required pursuant
to the Pooling and Servicing Agreement pursuant to which the certificates are
issued on the Underlying Loans. These ratings address the structural, legal and
issuer tax-related aspects associated with the certificates, the nature of the
Underlying 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
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.
WHERE YOU CAN FIND MORE INFORMATION
ABN AMRO MORTGAGE CORPORATION
We will file reports and other information with the SEC about the Trust
issuing your certificates. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, New York, and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on their public reference rooms.
-120-
<PAGE>
The SEC allows us to incorporate by reference the information we file
with them about the Trust issuing your certificates. This means that we can
disclose important information to you by referring you to these documents. The
information incorporated by reference is an important part of this prospectus,
and information that we file later with the SEC about the Trust issuing your
certificates will automatically update and supersede this information. You may
request a copy of our filings at no cost by writing or telephoning at the
following address:
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
In addition, we will provide you with reports annually and monthly on
each Distribution Date containing information about the Trust and your
certificates.
ADDITIONAL INFORMATION RELATING TO THE MORTGAGE CERTIFICATES
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 of these documents, and has not conducted any independent
inquiry to verify the accuracy or completeness of the information described 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 these documents and has not conducted any independent
inquiry to verify the accuracy or completeness of the information contained in
FHLMC's Offering Circular, Information Statement or Information Statement
Supplement.
-121-
<PAGE>
Index to Prospectus Definitions
<TABLE>
<S> <C>
1986 Act ..................................................................................................108
1998 Policy Statement............................................................................................83
AAI ..................................................................................................116
AANA ...................................................................................................26
Accretion Directed................................................................................................5
Accrual ....................................................................................................5
Accrual Period....................................................................................................8
Act ...................................................................................................78
Administration Fee...............................................................................................33
Applicable Amount................................................................................................99
ARMs ...................................................................................................15
Assets ...................................................................................................92
Available Distribution Amount....................................................................................42
Back-Up Master Servicer..........................................................................................52
Balloon Loan ...................................................................................................15
BIF ...................................................................................................13
Buydown Loan ...................................................................................................15
CERCLA ...................................................................................................79
Certificate Account...............................................................................................7
Closing Date ...................................................................................................58
Co-op Loans ...................................................................................................14
Code ....................................................................................................3
Committee Report.................................................................................................94
Contingent Payment Regulations..................................................................................111
Contingent Principal............................................................................................110
Custodial Account for P&I........................................................................................42
Custodians ...................................................................................................54
Cut-off Date ....................................................................................................3
Deferred Interest................................................................................................16
Definitive Certificates..........................................................................................67
Depositor ....................................................................................................1
Determination Date................................................................................................9
Distribution Date.................................................................................................4
DOL ...................................................................................................84
Due Date ....................................................................................................9
Eligible Investments..............................................................................................7
ERISA ...................................................................................................84
Excess Liquidation Proceeds......................................................................................43
FDIC ...................................................................................................13
FHA ...................................................................................................20
FHA Loans ...................................................................................................20
FHLMC ...................................................................................................12
FHLMC Act ...................................................................................................22
Fixed-Rate Loans.................................................................................................15
FNMA ...................................................................................................13
Forward Purchase Agreement.......................................................................................58
Fractional Undivided Interest.....................................................................................2
GNMA ...................................................................................................20
Gross Margin ...................................................................................................16
Guide ...................................................................................................17
Housing Act ...................................................................................................20
HUD ...................................................................................................12
Index ...................................................................................................15
Interest Only ....................................................................................................5
Interest Remittance Amount.......................................................................................36
IO Certificates.................................................................................................106
Lease ...................................................................................................81
Loans ....................................................................................................1
Master Servicer...................................................................................................1
Mortgage Assets...................................................................................................1
Mortgage Certificates.............................................................................................1
NCUA ...................................................................................................83
Negatively Amortizing ARMs.......................................................................................16
Net Margin ...................................................................................................33
Non-Accelerated...................................................................................................6
OID ...................................................................................................88
OID Regulations..................................................................................................88
OTS .................................................................................................. 83
P&I Certificates................................................................................................106
Parties in Interest..............................................................................................85
Pass-Through Rate................................................................................................33
Payment Caps ...................................................................................................16
Percentage Interest...............................................................................................2
Plans ...................................................................................................84
Pooling and Servicing Agreement...................................................................................1
Pre-Funding Account..............................................................................................12
Prepayment ....................................................................................................5
Prepayment Assumption............................................................................................93
</TABLE>
-122-
<PAGE>
<TABLE>
<S> <C>
Prepayment Interest Shortfall....................................................................................36
Prepayment Period................................................................................................43
Principal Only....................................................................................................5
Principal Prepayments.............................................................................................9
Private ...................................................................................................24
PTE 83-1 ...................................................................................................85
PUDs ...................................................................................................14
Realized Loss ...................................................................................................49
Record Date ....................................................................................................7
Regular Certificateholder........................................................................................92
Regular Certificates.............................................................................................89
REMIC ...................................................................................................88
REMIC Regulations................................................................................................88
Remittance Rate...............................................................................................4, 34
Reserve Fund ...................................................................................................32
Residual ....................................................................................................6
Residual Certificates............................................................................................89
Residual Holder...................................................................................................2
SAIF ...................................................................................................13
Senior ....................................................................................................5
Sequential Pay....................................................................................................5
Shifting Interest Credit Enhancement.............................................................................29
SMMEA ...................................................................................................82
Specified Reserve Fund Balance...................................................................................32
Startup Day ...................................................................................................90
Stripped ....................................................................................................5
Subordinate ....................................................................................................5
Subordinated Amount...............................................................................................5
Superlien ...................................................................................................79
Surplus ....................................................................................................6
TB 13a ...................................................................................................83
Title V ...................................................................................................80
Trust ....................................................................................................1
Trustee ....................................................................................................1
Unanticipated Recovery...........................................................................................49
Underlying Loans..................................................................................................1
Underwriter Exemption............................................................................................87
United States person............................................................................................105
VA ...................................................................................................20
</TABLE>
-123-
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED ______ ___, ____
[LOGO]
Prospectus supplement dated [____ __, ____] (to prospectus dated [____ __, ___]
[$___________]
ABN AMRO MORTGAGE CORPORATION
DEPOSITOR
ABN AMRO MORTGAGE GROUP, INC.
SERVICER
MULTI-CLASS MORTGAGE PASS-THROUGH CERTIFICATES, SERIES [_____-__]
The Trust will hold [___] pool[s] of conventional, [fixed-rate] [adjustable]
first lien residential mortgage loans.
The Trust will issue these classes of certificates that are offered under this
prospectus supplement:
[__] classes of senior certificates
[__] classes of subordinated certificates
Credit enhancement for all of these certificates will be provided by additional
subordination.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT.
[______________ and] ABN AMRO Incorporated will offer [__] class of senior
certificates and [__] class of subordinated certificates to the public at
varying prices to be determined at the time of sale. From the sale of the
offered certificates, ABN AMRO Mortgage Corporation will receive [__]% of their
principal amount, plus accrued interest, less expenses.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE OFFERED
CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
----------------------------------------
ABN AMRO INCORPORATED [NAME OF OTHER UNDERWRITERS]
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary ....................................................................S-1
Offered Certificates......................................................S-1
Residual Class............................................................S-2
Book-Entry Registration...................................................S-2
The Mortgage Pool.........................................................S-2
[Subordination and Allocation of Losses]..................................S-3
Credit Enhancement........................................................S-3
Optional Termination......................................................S-3
Federal Income Tax Treatment..............................................S-3
Legal Investment..........................................................S-3
ERISA Considerations......................................................S-3
Available Distribution Amount.............................................S-3
Amounts Allocated to Interest.............................................S-4
[Interest Only Certificates]..............................................S-4
[Principal Only Certificates].............................................S-4
Allocation of Principal Cash Flows........................................S-4
[Charts describing the flow of payments]..................................S-4
Risk Factors.................................................................S-5
Prepayments on the mortgage loans may affect
the yield on your certificates...........................................S-5
Losses and delinquent payments on the mortgage
loans may affect the return on your certificate..........................S-6
[The Subordinate certificates are especially
sensitive to losses on the mortgage loans]...............................S-6
It may not be possible to find an investor to
purchase your certificates...............................................S-6
The concentration of mortgage loans with
certain characteristics may change over time, which
may affect the timing and amount of payments on
your certificates........................................................S-7
Payments from the mortgage loans are the sole
source of payments on your certificates..................................S-7
The return on your certificates may be particularly
sensitive to changes in the real estate markets in
certain geographical areas...............................................S-8
The Class R Certificate has tax implications that
are different from the other certificates................................S-8
Factors that reduce collections could cause early
repayment, delayed payment or reduced payment
on the certificates......................................................S-9
The FDIC has special powers under banking laws
to take actions during the insolvency of the Seller......................S-9
The bankruptcy of the Servicer could further delay
or reduce payments to you...............................................S-10
Attempted recharacterization of the transfer from
the Depositor to the Trust could delay or reduce
payments to you.........................................................S-10
The Trust...................................................................S-11
Description of the Mortgage Pool............................................S-11
General..................................................................S-11
Additional Information...................................................S-13
Description of the Certificates.............................................S-14
General..................................................................S-14
Book-Entry Registration..................................................S-14
[Definitive Certificates]................................................S-15
[Transfer Restrictions]..................................................S-16
Available Distribution Amount............................................S-16
Advances.................................................................S-17
[Definitions Relating to the Priority
of Distributions].......................................................S-17
Priority of Distributions................................................S-21
[Subordination and Allocation of Losses].................................S-21
The Class R Certificate..................................................S-22
Last Scheduled Distribution Date.........................................S-22
Optional Termination.....................................................S-22
Servicing...................................................................S-23
Servicing Compensation and Payment of Expenses...........................S-23
Special Servicing Agreements.............................................S-24
Prepayment and Yield Considerations.........................................S-24
General..................................................................S-24
Principal Prepayments and Compensating Interest..........................S-25
[The Subordinate Certificates]...........................................S-25
Rate of Payments.........................................................S-25
Special Sensitivities....................................................S-26
Prepayment Speed Assumption and Modeling
Assumptions.............................................................S-26
[Yield Considerations of the Interest Only and
Principal Only Certificates]............................................S-28
[Additional Yield Considerations Applicable Solely
to the Class R Certificate].............................................S-29
Additional Information...................................................S-29
[Legal Aspects of the Mortgage Loans under
California Law]....................................................S-30
[Federal Income Tax Consequences]...........................................S-30
[Year 2000 Project].........................................................S-30
[ERISA Considerations]......................................................S-30
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Method of Distribution......................................................S-30
Legal Matters...............................................................S-31
Certificate Ratings.........................................................S-31
Index of Significant Definitions............................................S-32
Appendix A - Declining Balance Tables........................................A-1
Appendix B - Loan Information................................................B-1
</TABLE>
------------------------
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We describe the offered certificates in two separate documents that
progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to this series of
certificates; and (2) this prospectus supplement, which describes the specific
terms of this series of securities and may be different from the information in
the prospectus.
IF THE DESCRIPTION OF THE TERMS OF THE CERTIFICATES VARIES BETWEEN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN
THIS PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The preceding Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in
this prospectus supplement are defined under the caption "Index of Significant
Definitions" in this prospectus supplement and in the accompanying prospectus.
------------------------
<PAGE>
THE SERIES [________-___] MULTI-CLASS MORTGAGE PASS-THROUGH CERTIFICATES
<TABLE>
<CAPTION>
ORIGINAL LAST
PRINCIPAL [RATING [RATING SCHEDULED
OR NOTIONAL PRINCIPAL INTEREST INTEREST AGENCY] AGENCY] DISTRIBUTION
CLASS AMOUNT(1) TYPE (2) RATE TYPE (2) RATING (3) RATING (3) DATE (4)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFERED CERTIFICATES:
- -------------------------------------------------------------------------------------------------------------------------
$
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Total
Offered: (5)
- -------------------------------------------------------------------------------------------------------------------------
NON-OFFERED CERTIFICATES: (6)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Total
Non-Offered: (5)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL: (5)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These amounts are approximate. They are subject to an upward or
downward adjustment of no more than 5%, depending on the total principal
amount of the mortgage loans delivered at closing. Amount is "notional" if
so indicated under principal type.
(2) See pages S-[__] and S-[__] in this prospectus supplement for a more
complete description of the principal types and interest types.
(3) See "Certificate Ratings" in this prospectus supplement.
(4) The actual final payment to any class of certificates could be
significantly earlier.
(5) Excludes notional balances.
(6) The information presented for the non-offered certificates is provided
solely to assist the reader's understanding of the offered certificates.
iii
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. To understand the terms of the certificates, carefully read
this entire document and the accompanying prospectus.
<TABLE>
<S> <C>
TITLE OF SERIES: Multi-Class Mortgage Pass-
Through Certificates Series
[_______-_______]
DEPOSITOR: ABN AMRO Mortgage
Corporation
181 West Madison Street
Chicago, Illinois 60602
(312) 904-0800
SELLER: [____________________]
[MASTER] [____________________]
SERVICER:
TRUSTEE: [____________________]
DISTRIBUTION The [_____] day of each month,
DATE: beginning in __________, ____.
If the 25th day is not a business day, then the
Distribution Date will be the next business day.
CUT-OFF DATE: [_______] 1, [______]
CLOSING DATE: On or about [_____ ___, ____]
UNDERWRITERS: ABN AMRO Incorporated
[____________________]
</TABLE>
OFFERED CERTIFICATES
The Trustee will issue the certificates under a Pooling and Servicing
Agreement dated as of the Cut-Off Date among ABN AMRO Mortgage Corporation, as
depositor, [_________________], as trustee, and [____________________], as
servicer.
The certificates will represent all of the beneficial ownership interest in
a trust. ABN AMRO Mortgage Corporation will deposit the mortgage loans composing
the pool of mortgage loans into the trust.
Sometimes we refer to the certificates by their principal or interest
types. Since some classes have the characteristics of more than one category,
they appear more than once in the categories presented in the chart at the
right.
- -------------------------------------------------------------------
CERTIFICATE TYPES
<TABLE>
<S> <C>
- -------------------------------------------------------------------
[Class A Certificates:]
- -------------------------------------------------------------------
[Subordinate
Certificates:]
- -------------------------------------------------------------------
[Senior Subordinate
Certificates:]
- -------------------------------------------------------------------
[Junior Subordinate
Certificates:]
- -------------------------------------------------------------------
[Residual Certificates:]
- -------------------------------------------------------------------
[Senior Certificates:]
- -------------------------------------------------------------------
[Book-Entry
Certificates:]
- -------------------------------------------------------------------
[Interest Only
Certificates:]
- -------------------------------------------------------------------
[Principal Only
Certificates:]
- -------------------------------------------------------------------
</TABLE>
S-1
<PAGE>
RESIDUAL CLASS
The Class R certificate, having a principal amount of $_____ and an
interest rate of [___]%, will consist of:
[Description of the components of the Class R
certificate.]
BOOK-ENTRY REGISTRATION
The offered certificates (other than the Class [___] certificate) will be
available only in book-entry form through the facilities of the Depository Trust
Company, except under limited circumstances. See "Description of the
Certificates--Book-Entry Registration".
THE MORTGAGE POOL
The mortgage pool will consist of conventional [fixed rate][adjustable]
residential mortgage loans secured by first liens on one- to four-family
residential properties and rights to own and occupy apartments in cooperative
buildings. ABN AMRO Mortgage Corporation expects the mortgage loans to have the
following characteristics:
SELECTED MORTGAGE POOL DATA AS OF [___________, _____]
<TABLE>
<CAPTION>
Weighted
Range or Total Average
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Number of Mortgage Loans --
- --------------------------------------------------------------------------------------------------------
Aggregate Unpaid Principal Balance $ --
- --------------------------------------------------------------------------------------------------------
Unpaid Principal Balances $ $ (1)
- --------------------------------------------------------------------------------------------------------
Interest Rates % %
- --------------------------------------------------------------------------------------------------------
Remaining Terms to Stated Maturity
- --------------------------------------------------------------------------------------------------------
Loan Age
- --------------------------------------------------------------------------------------------------------
Original Loan-to-Value Ratio % %
- --------------------------------------------------------------------------------------------------------
FICO Scores
- --------------------------------------------------------------------------------------------------------
Geographic Concentration of Mortgaged % CA --
Properties in Excess of 5% of the Aggregate % TX
Unpaid Principal Balance % IL
- --------------------------------------------------------------------------------------------------------
Maximum Five-Digit Zip Code Concentration % --
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average
Before the issuance of the offered certificates, we may remove mortgage
loans from the mortgage pool. We may also substitute new mortgage loans for
certain mortgage loans in the mortgage pool. This may result in changes in the
mortgage pool characteristics shown above and could affect the weighted average
lives and yields of the certificates.
S-2
<PAGE>
[SUBORDINATION AND ALLOCATION OF LOSSES]
[Description of subordination features, as applicable, and method of
allocation of losses on the mortgage loans among the certificates]
CREDIT ENHANCEMENT
[Description of any credit enhancement features, as applicable]
OPTIONAL TERMINATION
If the total outstanding principal balance of all the mortgage loans on any
Distribution Date is less than [___]% of their total principal balance as of the
Cut-Off Date, the Depositor may repurchase the mortgage loans, but is not
required to. If the Depositor does repurchase the mortgage loans, the
outstanding principal balance of the certificates will be paid in full together
with accrued interest.
FEDERAL INCOME TAX TREATMENT
[The offered certificates, other than the Class R certificate, will
represent ownership of REMIC regular interests. For federal income tax purposes,
these offered certificates will be treated as ownership of debt.
Certificateholders must include in income all interest and any original issue
discount on such offered certificates in accordance with the accrual method of
accounting, even if the certificateholder is otherwise a cash method taxpayer.
Certain classes of offered certificates will be treated as having been
issued with original issue discount; certain other classes of offered
certificates may be so treated. The prepayment assumptions that will be used in
determining the rate of accrual of original issue discount and market discount
or premium (if any) for federal income tax purposes is [_____]. No
representation is made that the mortgage loans will prepay at any given
percentage of [_____].
The Class R certificate will likely constitute "non-economic" residual
interests under the REMIC rules. The taxation of the Class R certificate is very
complex and may entail significant adverse tax consequences. Also, transfers of
the Class R certificate are restricted. See "Federal Income Tax Consequences" in
this prospectus supplement and the prospectus.]
LEGAL INVESTMENT
At the time of their issuance, the offered certificates (except the Class
[________] certificates) will constitute "mortgage-related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984. Investors
should consult their own legal advisors in determining the extent to which the
offered certificates constitute legal investments for them. See "Legal
Investment Matters".
ERISA CONSIDERATIONS
In general, the Class [_____] certificates will be eligible for purchase by
retirement plans subject to ERISA. Investors should consult with their counsel
with respect to the consequences under ERISA and the Internal Revenue Code of
the plan's acquisition and ownership of the certificates.
Sales of the Class [_______] certificates and the Class R certificate to
retirement plans subject to ERISA are prohibited, except as may be permitted
under an exemption available to insurance companies using general accounts. See
"ERISA Considerations". Any investor in the Class [________] certificates or
Class R certificate will be deemed to represent that it complies with these
restrictions.
AVAILABLE DISTRIBUTION AMOUNT
On any Distribution Date, interest and principal distributions will
generally be made only up to the "AVAILABLE DISTRIBUTION AMOUNT" calculated for
that Distribution Date which generally includes the following amounts net of
servicing fees:
amounts received on the mortgage loans for scheduled principal and interest
payments due on the [first] day of the month (including
S-3
<PAGE>
advances received from the [Master] Servicer)
full and partial prepayments received on the mortgage loans in the
preceding calendar month (including compensating interest received from the
[Master] Servicer)
any other unscheduled amounts received in respect of the mortgage loans,
including liquidation proceeds, in the preceding calendar month
AMOUNTS ALLOCATED TO INTEREST
On each Distribution Date, for each class of certificates, interest will
accrue in an amount determined by the following formula:
<TABLE>
<S> <C> <C> <C> <C>
1/12 of the the related the pro rata
applicable principal or share allocated
interest x notional - to such class of
rate for balance for any prepayment
each class each class interest
shortfalls not
covered by
compensating
interest and
certain losses
attributable to
interest
</TABLE>
Interest to be distributed on the certificates of each class will include
accrued but unpaid interest from prior Distribution Dates (together with
interest thereon at the applicable rate), but only up to the Available
Distribution Amount.
[Description of any subordination feature that entitles any class of
certificates to a priority in its right to receive interest payments.]
[INTEREST ONLY CERTIFICATES]
[The Class [____] certificates are "INTEREST ONLY" certificates. This means
that the Trustee will not distribute principal to investors in the Class [____]
certificates. The Trustee will distribute interest to investors in this class
based upon its notional amount.
[On each Distribution Date, the Class [____] notional amount will be equal
to the total principal balance of the mortgage loans having interest rates,
after deducting the servicer's fee of [____]% ("PASS-THROUGH RATES"), greater
than [____]% multiplied by the following fraction:
Weighted Average
Pass-Through Rate
for all such loans minus [___]%
-------------------------------
[____]%]
[PRINCIPAL ONLY CERTIFICATES]
[The Class [___] certificates are "PRINCIPAL ONLY" certificates. This means
that the Trustee will not distribute interest to investors in the Class [____]
certificates. The Trustee will distribute a fixed portion of the principal
payments received in respect of mortgage loans having Pass-Through Rates less
than [___]% to investors in this class. That portion is determined based on the
following fraction as to each such loan:
[____]% minus the
Pass-Through Rate on such loan
------------------------------
[____]%]
ALLOCATION OF PRINCIPAL CASH FLOWS
On each Distribution Date, the Trustee will distribute from the Available
Distribution Amount interest and principal to investors until the principal
balance of each certificate has been reduced to zero. Only certain classes are
due principal and/or interest on each Distribution Date as described in this
prospectus supplement. The calculation of the amount of interest and principal
that the Trustee will distribute is very complex. The following two charts
summarize the flow of payments.
[CHARTS DESCRIBING THE FLOW OF PAYMENTS]
S-4
<PAGE>
RISK FACTORS
- --------------------------------------------------------------------------------
The offered certificates are not suitable investments for all investors. In
particular, no investor should purchase certificates of any class unless the
investor understands and is able to bear the prepayment, credit, liquidity, and
market risks associated with that class.
The certificates are complex securities. Each investor should possess,
either alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
prospectus in the context of that investor's financial situation.
The yield of each class will depend upon the price you paid for your
certificates and the rate of principal payments on the mortgage loans (including
prepayments, defaults and liquidations) as well as the actual characteristics of
the mortgage loans. The mortgage loans may be prepaid at any time without
penalty. Mortgage prepayment rates are likely to fluctuate significantly from
time to time. Investors should consider the associated risks, including the
following:
<TABLE>
<S> <C>
PREPAYMENTS ON THE MORTGAGE If the mortgage loans are prepaid at a fast rate, this may reduce the
LOANS MAY AFFECT THE YIELD ON yields of any classes of certificates (other than the Class [__]
YOUR CERTIFICATES. certificates) purchased at a premium over their principal amounts.
[If the mortgage loans which have Pass-Through Rates higher than
[___]% are prepaid at a fast rate, this may reduce the yield of the
Class [___] certificates and investors in these certificates may not
fully recover their investments.]
If the mortgage loans are prepaid at a slow rate, it may reduce the
yields of any classes of certificates purchased at a discount to their
principal amounts.
[If the mortgage loans which have Pass-Through Rates lower than [ ]%
are prepaid at a slow rate, this may reduce the yield of the Class [ ]
certificates.]
[Under some prepayment scenarios, investors in the Interest Only
certificates could fail to fully recover their initial investments.]
Any time your principal is repaid to you at a time when you did not
expect to receive it, you may not be able to reinvest your funds at
the same or a higher rate of return than the interest rate on your
certificates.
If the actual characteristics and behavior of the mortgage loans
differ from what you assumed, it can have a significant effect on the
weighted average lives and yields of the related classes.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
The rate of principal payments on pools of mortgage loans varies
among pools and from time to time is influenced by a variety of
economic, demographic, geographic, social, tax, legal and other
factors, including prevailing mortgage market interest rates and
the particular terms of the mortgage loans. There is no guarantee
as to the actual rate of prepayment on the mortgage loans, or that
the rate of prepayment will conform to any model described in this
prospectus supplement or in the prospectus. See "Prepayment, Yield
and Maturity Considerations" in the prospectus and this prospectus
supplement.
LOSSES AND DELINQUENT In general, losses on the mortgage loans and the resulting
PAYMENTS ON THE MORTGAGE reduction in principal amount will mean that less interest will
LOANS MAY AFFECT THE RETURN ON accrue than would otherwise be the case. The earlier a loss and
YOUR CERTIFICATE. resulting reduction in principal amount occur, the greater the
effect on an investor's yield.
[Description of the impact of any subordination features and risks
associated with the allocation of losses.]
[THE SUBORDINATE CERTIFICATES [Investors who purchase Subordinate certificates will not receive
ARE ESPECIALLY SENSITIVE TO distributions of interest and principal on any given Distribution
LOSSES ON THE MORTGAGE Date until after the Senior certificates and classes of more senior
LOANS]. Subordinate certificates receive their distributions of interest and
principal. The Subordinate certificates will bear losses and
delinquencies [description of allocation of losses and
delinquencies]. Depending upon the timing of defaults and severity
of losses, investors may realize a lower expected return on their
investment than they originally anticipated. It may also take
longer for investors holding Subordinate certificates to realize
their expected return on their investment.]
IT MAY NOT BE POSSIBLE The Underwriters intend to make a market for the purchase and sale
TO FIND AN INVESTOR TO PURCHASE of the offered certificates after their initial issuance but have
YOUR CERTIFICATES. no obligation to do so. There is no assurance that such a
secondary market will develop or, if it develops, that it will
continue. Consequently, investors may not be able to sell their
certificates readily or at prices that will enable them to realize
their desired yield. The market values of the certificates are
likely to fluctuate. These fluctuations may be significant and
could result in significant losses to investors.
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
The secondary markets for mortgage-backed securities have
experienced periods of illiquidity and can be expected to do so in
the future. Illiquidity means you may not be able to find another
investor to buy your certificates, which can have a severely
adverse effect on the market value of your certificates. Although
the certificateholders will receive monthly statements containing
certain statistical information with respect to the Trust,
initially the Depositor does not intend to publish information
relating to the certificates of any series or any Trust. The
limited availability of any 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 the
certificates in the secondary trading market since investors may
be unwilling to purchase certificates for which they cannot obtain
physical certificates. Illiquidity is more likely for classes that
are especially sensitive to prepayment, credit, or interest rate
risk, or that have been structured to meet the investment
requirements of limited categories of investors. However, any
class of certificates may experience illiquidity.
THE CONCENTRATION OF The concentration of the mortgage loans with specific
MORTGAGE LOANS WITH CERTAIN characteristics relating to the types of properties, property
CHARACTERISTICS MAY CHANGE characteristics, and geographic location are likely to change over
OVER TIME, WHICH MAY AFFECT time. Principal payments may affect the concentration levels.
THE TIMING AND AMOUNT OF Principal payments could include voluntary prepayments and
PAYMENTS ON YOUR prepayments resulting from casualty or condemnation, defaults
CERTIFICATES. and liquidations and from repurchases and substitutions due to
breaches of representations and warranties. Because unscheduled
collections of principal on the mortgage loans are payable to the
respective classes of [_______] certificates in varying orders of
priority, such classes that have a later priority for principal
distributions are more likely to be exposed to any risks
associated with changes in concentrations of mortgage loan or
property characteristics.
PAYMENTS FROM THE MORTGAGE The certificates do not represent an interest in or obligation of the
LOANS ARE THE SOLE SOURCE OF Depositor, the [Master] Servicer, the Trustee, the Underwriters or
PAYMENTS ON YOUR any of their affiliates. However, the Depositor does have limited
CERTIFICATES. obligations with respect to certain breaches of its representations
and warranties. No governmental agency or instrumentality, the
Depositor, the [Master] Servicer, the Trustee, the Underwriters
nor any of their affiliates will guarantee or insure either the
certificates or the mortgage loans. Consequently, if payments on
the mortgage loans are insufficient or otherwise unavailable to
make all payments required on the certificates, you will have no
recourse to the Depositor, the [Master] Servicer, the Trustee, the
Underwriters or any of their affiliates.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
THE RETURN ON YOUR [As of the Cut-Off Date, mortgaged properties located in the
CERTIFICATES MAY BE State of California secure approximately [____]% of all mortgage
PARTICULARLY SENSITIVE TO loans. If the California residential real estate market should
CHANGES IN THE REAL ESTATE experience an overall decline in property values, the rates of
MARKETS IN CERTAIN delinquency, foreclosure, bankruptcy and loss on those mortgage
GEOGRAPHICAL AREAS. 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 [____]%, [____]%,
[____]% and [____]% of all the mortgage loans are located in
[____],[____],[____], and [____], respectively.
THE CLASS R CERTIFICATE HAS [Holders of the Class R certificates will be required to report on
TAX IMPLICATIONS THAT ARE their federal income tax returns as ordinary income their pro rata
DIFFERENT FROM THE OTHER share of taxable income of the REMIC regardless of the amount
CERTIFICATES. or timing of their receipt of cash payments. See "Federal Income
Tax Consequences--Qualification as a REMIC--Taxation of Owners of
Residual certificates" in the prospectus. Accordingly, under
certain circumstances, holders of Residual certificates might have
taxable income and tax liabilities arising from their investment
during a taxable year in excess of the cash received during that
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 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 the holder which:
except in the case of certain thrift institutions, will not be
subject to offset by losses from other activities,
for a tax-exempt Holder, will be treated as unrelated business
taxable income and
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
"Federal Income Tax Consequences" in the prospectus.]
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
FACTORS THAT REDUCE A decline in real estate values or changes in mortgage market
COLLECTIONS COULD CAUSE EARLY interest rates may affect the yield on your certificates. If the
REPAYMENT, DELAYED PAYMENT residential real estate market in the locale of properties securing
OR REDUCED PAYMENT ON THE the mortgage loans should experience an overall decline in
CERTIFICATES. property values so that the outstanding balances of the mortgage
loans, and any secondary financing on the mortgaged properties,
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 these losses are not covered
by any applicable insurance policies or other credit enhancement,
certificateholders will bear all risk of loss resulting from
default by mortgagors. The amount of losses will depend primarily
upon the value of the mortgaged properties for recovery of the
outstanding principal and unpaid interest of the defaulted
mortgage loans.
[THE FDIC HAS SPECIAL [The mortgage loans were transferred to the Depositor by
POWERS UNDER BANKING LAWS TO [_________], a [____________] bank whose deposits are
TAKE ACTIONS DURING THE insured by the Federal Deposit Insurance Corporation (the
INSOLVENCY OF THE SELLER.] "FDIC"). If the FDIC were appointed as a conservator or
receiver for [____________], it would have the power to invalidate
certain transfers of [____________]'s assets, including the
transfer of the mortgage loans to the Depositor. Therefore, in
order to provide additional protection to the certificateholders,
[____________] has granted a security interest in the mortgage
loans in favor of the Trustee, which should not be subject to
avoidance by the FDIC. However, if [____________] were to become
subject to a conservatorship or receivership, or a conservatorship
or receivership proceeding were to be commenced involving
[____________], you may experience delays in payments or possibly
reductions in payments on the certificates if the conservator or
receiver were to take any of the following actions:
asserts that the Trustee's interest in the mortgage loans
should not be enforceable,
it asserts that the Trustee's interest should be subject to
avoidance,
requires the Trustee to establish its right to payments by
submitting to and completing the administrative claims procedure
under the Federal Deposit Insurance Act (the "FDIA"),
it requests a stay of proceedings with respect to [____________]
as provided under the FDIA.
In addition, the appointment of a receiver or conservator could
result in administrative expenses of the receiver or conservator
having priority over the interest of the Trustee in the mortgage
loans.]
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
THE BANKRUPTCY OF THE If the Servicer becomes the subject of bankruptcy proceedings,
SERVICER COULD FURTHER DELAY the Trustee's claim to collections in the Servicer's possession at
OR REDUCE PAYMENTS TO YOU. the time of the bankruptcy filing may not be perfected. In this
event, funds available to pay principal and interest on your
certificates may be reduced.
Additionally, if the Servicer defaults on its obligations under
the pooling and servicing agreement solely because it becomes
insolvent, the bankruptcy court might have the power to prevent
the appointment of a new servicer. In this event, the ability of
the servicer to service the receivables could be impaired by its
bankruptcy and its actions would be supervised by the bankruptcy
court, which could cause delays in payments being made on your
certificates.
ATTEMPTED RECHARACTERIZATION We expect that the transfer of the mortgage loans from ABN AMRO
OF THE TRANSFER FROM THE Mortgage Corporation, as Depositor, to the Trust will be
DEPOSITOR TO THE TRUST COULD characterized as a sale. The Depositor has documented the transfer
DELAY OR REDUCE PAYMENTS TO by it to the trust as a sale. However, a bankruptcy trustee or
YOU. creditor of the Depositor may take the position that the transfer
of the mortgage loans to the Trust should be recharacterized as a
pledge. If so, the Trustee for the Trust would be required to go
through court proceedings to establish its rights to collections
on the receivables in the Trust. If these events occur, payments
to you could be delayed or reduced.
[Additional risk factors applicable to a specific series.]
</TABLE>
S-10
<PAGE>
THE TRUST
The primary assets of [the Trust] [REMIC I] will consist of a pool
("MORTGAGE POOL") of mortgage loans ("LOANS"). [The Trust] [REMIC I] will also
contain (1) certain insurance policies related to the Loans, (2) any property
which secured a Loan and which is acquired by foreclosure or by deed in lieu of
foreclosure after the Cut-Off Date, (3) amounts held in the certificate account
established by the Trustee to facilitate distributions to certificateholders
(the "CERTIFICATE ACCOUNT"), and (4) certain other assets all as described in
this prospectus supplement.
The Depositor will assign the Loans to the Trustee, together with all
principal and interest due on the Loans after the Cut-Off Date. The Trustee
will, concurrently with such assignment, authenticate and deliver the
certificates. Each Loan will be identified in a Loan schedule appearing as an
exhibit to the Pooling and Servicing Agreement which will specify with respect
to each Loan, among other things, 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(*)
GENERAL
The Mortgage Pool will consist of Loans that have an aggregate principal
balance outstanding as of the Cut-Off Date, after deducting payments due on or
before that date, of approximately [____________]. Each of the Loans has an
original term to maturity of at least [____________] years but no more than
[____________] years. Certain of the risks of loss on certain Loans will be
covered by primary insurance policies up to specified limits.
First deeds of trust or other similar security instruments creating first
liens on one- to four-family residential properties and rights to own and occupy
apartments in cooperative buildings secure the Loans. The mortgaged properties
may include detached homes, townhouses, individual condominium units, and
individual units in planned unit developments, so long as the property subject
to the lien of the related
- --------
(*) The description herein of the Mortgage Pool and the mortgaged properties is
based upon the 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 Loans
refer in each case to the percentage of the aggregate principal balance of the
Loans, based on the outstanding principal balances of the Loans after giving
effect to scheduled monthly payments due on or before 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
Loans (determined as described in the preceding sentence). Prior to the issuance
of the certificates, Loans may be removed from the Mortgage Pool as a result of
principal prepayments in full, delinquencies or otherwise. In such event, other
Loans may be included in the Mortgage Pool. The Depositor 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 Loans in the Mortgage Pool may
vary. See "--Additional Information".
S-11
<PAGE>
mortgage consists of no more than four units, and has the additional
characteristics described below and in the prospectus.
The Depositor acquired all of the Loans for inclusion in the Mortgage Pool
pursuant to a Mortgage Loan Purchase Agreement to be dated as of [____________
___, _____], between the Seller and the Depositor. [____________] originated
[100%] of the Loans pursuant to [a "full documentation" program] and in
accordance with the underwriting standards described in "The Trusts--The
Loans--Loan Underwriting Policies" in the prospectus.
[ ____________ Approximately [____]% of the Loans have FICO Scores. The
weighted average FICO Score for the Loans that were scored is [____]. "FICO
SCORES" are statistical credit scores obtained by many mortgage lenders in
connection with a 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
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, meaning 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 Depositor does not make any representations or
warranties as to the actual performance of any 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 Loan according to its terms.]
The Depositor will assign the Loans to the Trustee for the ultimate benefit
of the certificateholders. The [Master] Servicer will service the Loans directly
as [Master] Servicer pursuant to the Pooling and Servicing Agreement, and will
receive compensation for such services. See "The Pooling and Servicing
Agreement--Assignment of Loans" in the prospectus.
Pursuant to the terms of the Mortgage Loan Purchase Agreement, the
Seller has made certain representations and warranties with respect to the Loans
which the Depositor will assign to the Trustee for the benefit of the
certificateholders. If the Seller breaches any of the representations and
warranties with respect to any Loan, the Seller will be obligated to cure such
breach in all material respects or shall repurchase the Loan or any property
acquired in respect thereof.
In addition, the Depositor will make representations and warranties
regarding the Loans in the Pooling and Servicing Agreement, but its assignment
of the Loans to the Trustee will be without recourse and the Depositor's
obligations relating to the 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 [Master] Servicer is required to make
certain advances of its own funds in respect of the Loans to the limited extent
set forth under "Description of the Certificates-- Advances" in the prospectus
and "Servicing of the Loans--Advances" in this prospectus supplement.
S-12
<PAGE>
All of the Loans will have principal and interest payable on the [first]
day of each month, which day is called the due date. The latest original
scheduled maturity date of any Loan will be [_________ __, 20 ___]. Each of the
Loans will have original terms to maturity of not more than [____] years. At
origination, based upon the lower of the purchase price paid for or the
appraisal amount of the Loans had approximate loan-to-value ratios as described
in the table below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Percentage of Loans
Approximate Loan-to-Value Ratio by Principal Balance
- -------------------------------------------------------------------------------------------
<S> <C>
Less than or equal to 80% [_____]%
Greater than 80%, but less than or equal to 95% [_____]%
Greater than 95% [_____]%
- -------------------------------------------------------------------------------------------
</TABLE>
The scheduled principal balance of a Loan as of any Distribution Date is
the unpaid principal balance of such 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 partial
principal prepayments, the payment of principal due on such [first] day of the
month and any reduction of the principal balance of such Loan by a bankruptcy
court, irrespective of any delinquency in payment by the related mortgagor.
All of the Loans having loan-to-value ratios greater than 80% at
origination are covered by primary mortgage insurance policies. [No Loan permits
negative amortization or the deferral of accrued interest, and none of the Loans
are secured by a leasehold interest in the mortgaged property.]
ADDITIONAL INFORMATION
Appendix B, attached hereto, sets forth in tabular format certain
information, as of the Cut-Off Date, with respect to the Loans.
Each mortgagor must maintain a standardized hazard insurance policy in an
amount equal to the maximum insurable value of the improvements securing such
Loan or the principal balance of such Loan, whichever is less. See "Description
of the Certificates -- 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
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, the Depositor may add or remove Loans
from the Mortgage Pool if it deems such addition or removal necessary or
appropriate.
S-13
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Trustee will issue the certificates pursuant to a Pooling and
Servicing Agreement to be dated as of the Cut-Off Date among ABN AMRO Mortgage
Corporation, as Depositor, [____________], as [Master] Servicer, and
[____________], as 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 [____________] ("[RATING AGENCY]")
and [____________] ("[RATING AGENCY]") indicated under "Certificate Ratings". As
of the date of their issuance, the offered certificates, other than the
[____________] certificates, will qualify as "mortgage related securities"
within the meaning of the Secondary Mortgage Market Enhancement Act of 1984. See
"Legal Investment Matters" in the prospectus.
The [Master] Servicer will be obligated to make advances with respect
to delinquent payments on the Loans as described under "--Advances".
[The certificates, other than the Class R certificate, will evidence
all the beneficial ownership in a trust called REMIC II established by the
Depositor to hold the regular interests of REMIC I into which the mortgage loans
will be deposited.]
[Only the [____________] certificates are offered hereby. The
[____________] certificates are not offered hereby.] The class principal balance
for any class of certificates will equal the aggregate amount of principal to
which such class is entitled, after giving effect to prior (1) distributions of
principal to such class and (2) allocations of losses required to be borne by
such class. [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 Loans less the class
principal balance of all other classes of certificates senior to such
certificates.] As used in this prospectus supplement, the principal balance of a
class means the class principal balance 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 Loans as of the
Cut-Off Date. The offered certificates (other than the Class R certificate) are
offered in minimum denominations equivalent to at least $______ 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]
[A global certificate registered in the name of the nominee of DTC will
initially represent each class of Book-Entry certificates. DTC has advised the
Depositor that DTC's nominee will be Cede & Co. ("CEDE"). Accordingly, Cede is
expected to be the holder of record of the Book-Entry certificates. Unless the
events described in "--Definitive Certificates" have occurred, the Trustee will
not issue the certificates in fully registered, certificated form as "DEFINITIVE
CERTIFICATES."
S-14
<PAGE>
Unless and until the Trustee issues Definitive Certificates, all
references in this prospectus supplement to actions by Book-Entry
certificateholders shall refer to actions taken by DTC upon instructions from
DTC participants. Further, all references in this prospectus supplement 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 the certificates, for distribution to Book-Entry
certificateholders in accordance with DTC procedures.
Unless the Trustee issues Definitive Certificates, 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 Distribution 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 Book-Entry 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.
[DEFINITIVE CERTIFICATES]
[The Trustee will issue the Book-Entry certificates as Definitive
Certificates to certificateholders or their nominees, rather than to DTC or its
nominee, only if (1) the Depositor 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 Depositor is
unable to locate a qualified successor, (2) the Depositor, at its option, elects
to terminate the book-entry system through DTC or (3) after the occurrence of an
event of default, Book-Entry certificateholders 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.
The Trustee (or its duly appointed paying agent, if any) will
distribute principal and interest on the Definitive Certificates, as well as the
other classes of certificates, directly to holders of such certificates in
accordance with the procedures set forth in this prospectus supplement and in
the Pooling and Servicing Agreement. The Trustee will distribute principal and
interest on each Distribution Date 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. The Trustee will make
distributions 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 Trustee will make the final payment on any
certificate (whether a Definitive Certificate or the global certificates
registered in the name of Cede) only upon presentation and surrender of such
certificate at its offices or its agent's office or such office or agency as is
specified in the notice of final distribution to holders of certificates being
retired. The
S-15
<PAGE>
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 Class R certificate, will be
transferable and exchangeable at the offices of the Trustee or its agent. The
Trustee may impose a reasonable service charge 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.]
[TRANSFER RESTRICTIONS]
[The [____________] certificates and the Class R certificate are
subject to transfer restrictions described in this prospectus supplement under
"ERISA Considerations--Restrictions on the [____________] Certificates and Class
R Certificate". The Class R certificate is subject to further transfer
restrictions described in the prospectus under "Federal Income Tax
Consequences--REMIC--Taxation of Owners of Residual Certificates".]
AVAILABLE DISTRIBUTION AMOUNT
On each Distribution Date, the Available Distribution Amount for any
Distribution Date which, in each case, will generally include scheduled
principal and interest payments due on the related due date, partial principal
prepayments received in the previous calendar month (as set forth below),
prepayments in full received in the applicable Prepayment Period to the extent
set forth below and amounts received with respect to liquidations of Loans in
the previous calendar month, and will be distributed by or on behalf of the
Trustee to the certificateholders, as specified in this prospectus supplement.
The "DUE DATE" related to each Distribution Date is the [first] day of
the month in which such Distribution Date occurs. The "DETERMINATION DATE" is a
day not later than the [___]th day preceding the related Distribution Date in
the month in which such Distribution Date occurs.
The "AVAILABLE DISTRIBUTION AMOUNT" for any Distribution Date, as more
fully described in the Pooling and Servicing Agreement, will equal the sum of
the following amounts:
(1) the total amount of all cash received by or on behalf of the
[Master] Servicer for the Loans by the Determination Date and
not previously distributed, including amounts received in
connection with the liquidation of defaulted Loans whether
through trustee's sale, foreclosure sale, proceeds of
insurance policies, condemnation proceeds or otherwise
("LIQUIDATION PROCEEDS") except:
all scheduled payments of principal and interest collected
but due on a date after the related Due Date;
all partial principal prepayments received after the
previous calendar month, together with any interest
payment received with the prepayments to the extent that
it represents the payment of interest accrued on the loans
for the period after the previous calendar month;
all prepayments in full received after the applicable
calendar month immediately before the Determination Date,
together with any interest payment received with the
prepayments in full to the extent that it represents the
payment of interest accrued on the Loans for the period
after the previous calendar month;
Liquidation Proceeds received on the Loans after the
previous calendar month;
S-16
<PAGE>
all amounts in the Custodial Account for P&I which are due
and reimbursable to the [Master] Servicer pursuant to the
terms of the Pooling and Servicing Agreement;
the servicing fee for each Loan; and
the excess, if any, of the total amount received in
connection with the liquidation of defaulted Loans
received during the previous calendar month over the
amount that would have been received if prepayments in
full had been made on these Loans on the date that the
liquidation proceeds were received ("EXCESS LIQUIDATION
PROCEEDS");
(2) all advances made by the [Master] Servicer to the Trustee on
that Distribution Date;
(3) any amounts payable as "COMPENSATING INTEREST" by the [Master]
Servicer on that Distribution Date which will be equal to the
lesser of :
any shortfall for the related month of interest
collections resulting from the timing of prepayments in
full on the related Loans made during the related
Prepayment Period; and
the sum of (a) one-twelfth of [____]% of the aggregate
outstanding principal balance of each Loan on such
Distribution Date, (b) any reinvestment income realized by
the [Master] Servicer during the related Prepayment Period
relating to prepayments in full on the related Loans made
during the related Prepayment Period and (c) interest
payments on such prepayments in full received during the
related Prepayment Period; and
(4) the total amount of any cash received by the Trustee or the
[Master] Servicer in respect of the obligation of the
Depositor or the seller to repurchase any Loans.
ADVANCES
With respect to each Loan, the [Master] Servicer will make advances to
the Certificate Account on the day before each Distribution Date to cover any
shortfall between (1) payments scheduled to be received with respect to such
Loan and (2) the amounts actually deposited in the Certificate Account on
account of such payments; provided, that the [Master] Servicer determines on
such Distribution Date, in good faith, that such advances will be recoverable
from insurance proceeds, Liquidation Proceeds or other amounts received with
respect to that Loan. Advances are reimbursable to the [Master] Servicer from
cash in the Certificate Account remitted by the [Master] Servicer with respect
to Loans before payments to the certificateholders if the [Master] Servicer
determines that such advances previously made are not recoverable from insurance
proceeds, Liquidation Proceeds or other amounts recoverable with respect to the
applicable Loan and so notifies the Trustee.
[GLOSSARY OF DEFINITIONS RELATING TO THE PRIORITY OF DISTRIBUTIONS]
[Definitions will be added to or deleted from this section as applicable for
each series]
Certain definitions are necessary to understand the priority of
interest and principal distributions to the certificates. These terms are
defined below and highlighted within the various definitions:
"CLASS [____] NOTIONAL AMOUNT" will initially be approximately $[___________]
and with respect to any Distribution Date will equal the total principal
balance, as of the first day of the month of such Distribution Date, of the
PREMIUM LOANS multiplied by the following fraction:
S-17
<PAGE>
the weighted average of the PASS-THROUGH RATES of the
Premium Loans as of the first day of such month minus [ ]%
------------------------------------------------------------
[____]%
"CREDIT SUPPORT DEPLETION DATE" is the first Distribution Date on which the
class principal balances of all of the [________] certificates have been or will
be reduced to zero.
"DISCOUNT FRACTION" with respect to a DISCOUNT LOAN means the following
fraction:
[ ]% minus the PASS-THROUGH RATE on such DISCOUNT LOAN
--------------------------------------------------------
[____]%.
"DISCOUNT FRACTIONAL PRINCIPAL AMOUNT" means the DISCOUNT FRACTION of the
principal received with respect to a DISCOUNT LOAN.
"DISCOUNT FRACTIONAL PRINCIPAL SHORTFALL" means an amount generally equal to:
(1) the DISCOUNT FRACTION of any loss on a DISCOUNT LOAN other
than a Special Hazard Loss in excess of the Special Hazard
Coverage, a Fraud Loss in excess of the Fraud Coverage or a
Bankruptcy Loss in excess of the Bankruptcy Coverage as
described in "--Subordination and Allocation of Losses"; and
(2) 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; provided, however,
that such payments in respect of losses shall not cause a
further reduction of the outstanding Class [__] class
principal balance.
"DISCOUNT LOAN" means any Loan with a PASS-THROUGH RATE of less than [____]% per
annum.
"LIQUIDATED LOAN" is a Loan as to which the [Master] Servicer has determined
that all amounts which it expects to recover from or on account of such Loan,
whether from insurance proceeds, LIQUIDATION PROCEEDS or otherwise, have been
recovered.
"LIQUIDATION PRINCIPAL" is the principal portion of LIQUIDATION PROCEEDS
received with respect to each Loan which became a LIQUIDATED LOAN (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
the DISCOUNT FRACTIONAL PRINCIPAL AMOUNT, if any.
"LIQUIDATION PROCEEDS" are amounts received by the [Master] Servicer in
connection with the liquidation of a defaulted Loan whether through trustee's
sale, foreclosure sale, proceeds of insurance policies, condemnation proceeds or
otherwise.
"PASS-THROUGH RATE" for each Loan is equal to the mortgage interest rate thereon
less [___]% (which is the rate at which the related servicing fee is
calculated).
"PREMIUM LOAN" means any Loan with a PASS-THROUGH RATE in excess of [____]% per
annum.
S-18
<PAGE>
"PREPAYMENT PERIOD" means with respect to each Distribution Date and each
partial principal prepayment or payoff on any Loan, the calendar month preceding
the month in which the related Distribution Date occurs.
"PRINCIPAL PAYMENT AMOUNT" is the sum, for any Distribution Date of:
(1) scheduled principal payments on the Loans due on the related
due date;
(2) the principal portion of repurchase proceeds received with
respect to any 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
(3) any other unscheduled payments of principal which were
received on the Loans during the preceding calendar month,
other than prepayments in full, partial principal prepayments
or LIQUIDATION PRINCIPAL.
"PRINCIPAL PREPAYMENT AMOUNT" for any Distribution Date is the sum of all
partial principal prepayments and all prepayments in full which were received
during the applicable PREPAYMENT PERIOD.
"SENIOR LIQUIDATION AMOUNT" is the aggregate, for each Loan which became a
LIQUIDATED LOAN during the calendar month preceding the month of the
Distribution Date, of the lesser of:
(1) the SENIOR PERCENTAGE of the principal balance of such Loan
(exclusive of the portion thereof attributable to the DISCOUNT
FRACTIONAL PRINCIPAL AMOUNT); and
(2) the SENIOR PREPAYMENT PERCENTAGE of the LIQUIDATION PRINCIPAL
with respect to such Loan.
"SENIOR PERCENTAGE" as of the Closing Date will be approximately [____]% and for
any Distribution Date will equal the sum of the class principal balances of the
Senior certificates immediately preceding such Distribution Date (other than the
Principal Only certificates) divided by the aggregate scheduled principal
balance of all Loans immediately preceding such Distribution Date (exclusive of
the DISCOUNT FRACTION thereof).
"SENIOR PREPAYMENT PERCENTAGE" is subject to certain conditions specified in the
Pooling and Servicing Agreement. It will generally be equal to the percentage
amount set forth in the table below, except that on any Distribution Date where
the SENIOR PERCENTAGE exceeds the initial SENIOR PERCENTAGE, then the SENIOR
PREPAYMENT PERCENTAGE for such Distribution Date will equal 100%.
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN SENIOR PREPAYMENT PERCENTAGE
------------------------------ ----------------------------
<S> <C>
________ _____ through ________ _____.............. 100%
________ _____ through ________ _____.............. SENIOR PERCENTAGE + 70% of the SUBORDINATE PERCENTAGE
________ _____ through ________ _____.............. SENIOR PERCENTAGE + 60% of the SUBORDINATE PERCENTAGE
________ _____ through ________ _____.............. SENIOR PERCENTAGE + 40% of the SUBORDINATE PERCENTAGE
________ _____ through ________ _____.............. SENIOR PERCENTAGE + 20% of the SUBORDINATE PERCENTAGE
________ _____and thereafter........................ SENIOR PERCENTAGE
</TABLE>
"SENIOR PRINCIPAL AMOUNT" for any Distribution Date will equal the sum of:
(1) the SENIOR PERCENTAGE of the PRINCIPAL PAYMENT AMOUNT
(exclusive of the portion thereof attributable to the DISCOUNT
FRACTIONAL PRINCIPAL AMOUNT);
(2) the SENIOR PREPAYMENT PERCENTAGE of the PRINCIPAL PREPAYMENT
AMOUNT (exclusive of the portion thereof attributable to the
DISCOUNT FRACTIONAL PRINCIPAL AMOUNT); and
S-19
<PAGE>
(3) the SENIOR LIQUIDATION AMOUNT.
"STEP DOWN PERCENTAGE" for any Distribution Date will be the percentage
indicated below:
<TABLE>
<CAPTION>
STEP DOWN
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
- ------------------------------ -----------
<S> <C>
________ _____ through ________ _____................... 0%
________ _____ through ________ _____................... 30%
________ _____ through ________ _____................... 40%
________ _____ through ________ _____................... 60%
________ _____ through ________ _____................... 80%
________ _____ and thereafter............................ 100%
</TABLE>
"SUBORDINATE LIQUIDATION AMOUNT" will equal the excess, if any, of the aggregate
LIQUIDATION PRINCIPAL for all Loans which became LIQUIDATED LOANS during the
calendar month preceding the month of the Distribution Date, minus the SENIOR
LIQUIDATION AMOUNT for such Distribution Date.
"SUBORDINATE PERCENTAGE" is equal to 100% minus the SENIOR PERCENTAGE.
Initially, the SUBORDINATE PERCENTAGE will be approximately [____]%.
"SUBORDINATE PREPAYMENT PERCENTAGE" on any Distribution Date will equal the
excess of 100% over the SENIOR PREPAYMENT PERCENTAGE. Initially the SUBORDINATE
PREPAYMENT PERCENTAGE will be 0%.
"SUBORDINATE PRINCIPAL AMOUNT" for any Distribution Date will be equal to the
sum of:
(1) the SUBORDINATE PERCENTAGE of the PRINCIPAL PAYMENT AMOUNT
(exclusive of the portion thereof attributable to the DISCOUNT
FRACTIONAL PRINCIPAL AMOUNT);
(2) the SUBORDINATE PRINCIPAL PREPAYMENT AMOUNT; and
(3) the SUBORDINATE LIQUIDATION AMOUNT;
provided, however, that the SUBORDINATE PRINCIPAL AMOUNT shall be reduced by the
amounts required to be distributed to the Principal Only certificates with
respect to the DISCOUNT FRACTIONAL PRINCIPAL SHORTFALL on such Distribution
Date. Any reduction in the SUBORDINATE PRINCIPAL AMOUNT pursuant to the
provisions above shall offset the amount calculated pursuant to first clause
(1), second clause (3) and then clause (2), in each case of the definition
thereof.
"SUBORDINATE PRINCIPAL PREPAYMENT AMOUNT" as of any Distribution Date is the
SUBORDINATE PREPAYMENT PERCENTAGE of the PRINCIPAL PREPAYMENT AMOUNT (exclusive
of the portion thereof attributable to the DISCOUNT FRACTIONAL PRINCIPAL
AMOUNT).
"SUBORDINATION LEVEL" on any specified date with respect to any class of
Subordinate certificates is the percentage obtained by dividing:
(1) the sum of the class principal balances of all classes of
certificates which are subordinate in right of payment to such
class as of such date before giving effect to distributions or
allocations of Realized Losses on the Loans on such date; by
(2) the sum of the class principal balances of all classes of
certificates as of such date before giving effect to
distributions or allocations of Realized Losses on the Loans
on such date.]
S-20
<PAGE>
PRIORITY OF DISTRIBUTIONS
[Description of the order and priority that payments on the Loans will
be passed through to certificateholders.]
With respect to each class of certificates (except for the Principal
Only certificates), interest will be passed through monthly on each Distribution
Date, commencing in ________ ____. With respect to each Distribution Date,
interest will accrue in an amount determined by the following formula:
1/12th of the the related principal
applicable x balance or notional
interest rate for amount for each class
each class
For purposes of this formula, the notional amount on any Distribution
Date for the Class [_____] certificates will be equal to the Class [____]
Notional Amount.
The interest rates for each class of certificates are [fixed]
[adjustable] as described on page ii.
Interest accrued on any class of certificates will be reduced by the
following amounts:
(1) the pro rata share allocated to such class of all interest
shortfalls resulting from (1) prepayments in full on the Loans
during the related Prepayment Period, to the extent not
covered by Compensating Interest, (2) partial prepayments on
the Loans during the related Prepayment Period, to the extent
not covered by Compensating Interest and (3) reductions in
interest payable on the Loans by operation of law (such
shortfalls are allocated among all classes pro rata according
to the amount of interest to which such class would otherwise
be entitled); and
(2) the portion of Realized Losses attributable to interest
allocated to such class.
In addition, the amount of interest payable to each class of
certificates will include accrued but unpaid interest from prior Distribution
Dates (together with interest thereon at the applicable rate), but only up to
the Available Distribution Amount.
[SUBORDINATION AND ALLOCATION OF LOSSES]
[Description of subordination features]
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 the Class R certificate described in this prospectus supplement,
the Trustee will distribute any amounts remaining (which are expected to be
zero) in the Certificate Account from the Available Distribution Amount after
distributions of interest and
S-21
<PAGE>
principal on the certificates and payment of expenses, if any, [of REMIC II] to
the Class R certificateholders, together with Excess Liquidation Proceeds, if
any. Distributions of such remaining amounts (but not the Excess Liquidation
Proceeds) to 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 Trust] [REMIC II] will be distributable to the
Class R certificateholder. Such remaining assets are expected to be minimal.
See "--Optional Termination".
LAST SCHEDULED DISTRIBUTION DATE
The last scheduled Distribution Date for the certificates is the
Distribution Date in [________ __, 20__] which is the Distribution Date
occurring in the month after the scheduled maturity date for the latest maturing
Loan.
The actual last Distribution Date on any class of certificates will
depend on the rate of payments of principal on the 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 with respect to the Loans.
OPTIONAL TERMINATION
On any Distribution Date after the first date on which the aggregate
outstanding principal balance of the Loans is less than [__]% of the aggregate
principal balance of the Loans as of the Cut-Off Date, the Depositor may
repurchase the Loans and all property acquired in respect of any Loan remaining
in [the Trust] [REMIC I], and thereby, effect the termination of [the Trust]
[REMIC I and REMIC II] and the retirement of the certificates. [The repurchase
price will equal, after deductions of related advances by the [Master] Servicer,
the sum of (1) 100% of the aggregate outstanding principal balance of such Loans
(other than Liquidated 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 Loans not already allocated
to the certificates, and (2) the fair market value of all other property.] The
Trustee will treat the proceeds of such repurchase as a prepayment of the Loans
for purposes of distributions to certificateholders. Accordingly, an optional
termination of [the Trust] [REMIC II] will cause the outstanding principal
balance of the certificates to be paid in full through the distribution of such
proceeds and the allocation of the associated Realized Losses, if any, on each
mortgaged property in [the Trust] [REMIC I] having a fair market value less than
the aggregate principal balance of the related Loan as of the time that [the
Trust] [REMIC I] acquired such mortgaged property. Upon payment in full of the
certificates, the Trustee will terminate [the Trust] [REMIC I] and [REMIC II].
In no event will [the Trust] [either 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--Optional Termination of a Trust" in the prospectus.
S-22
<PAGE>
SERVICING
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Loans will be serviced by [___________________________] (also
referred to as the [Master] Servicer) pursuant to the Pooling and Servicing
Agreement. The [Master] Servicer is a __________ corporation.
The executive offices of the [Master] Servicer are located at
[_____________________________], telephone number [___-___-____].
At [______________ __, _____] the [Master] Servicer provided servicing
for approximately $[_____] 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, 1997 and 1998, and
[_____ __, ____], on approximately $_____, $_____, $_____, $_____ and $_____,
respectively, in outstanding principal balances of one- to four-unit mortgage
loans serviced by the [Master] Servicer.
ONE- TO FOUR-UNIT RESIDENTIAL LOANS
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, [_____
__,]
---------------------------------------------------------- --------------
Delinquent Loans at Period End(1): 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
30 to 59 days.......................................
60 to 89 days.......................................
90 to 119 days......................................
120 days or more....................................
Total Delinquencies........................
Foreclosures........................................
Total Delinquencies and Foreclosures................
</TABLE>
- ----------------
(1) as a percentage of the total number of loans serviced.
There can be no assurance that the delinquency and foreclosure
experience with respect to the Loans comprising the Mortgage Pool will
correspond to the delinquency and foreclosure experience of the [Master]
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 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 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 Loans comprising the Mortgage Pool become equal to or greater
than the value
S-23
<PAGE>
of the related mortgaged properties, the actual rates of delinquencies and
foreclosures could be significantly higher than those previously experienced by
the [Master] 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 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 in
this prospectus supplement, such losses will be borne, at least in part, by the
holders of the Class [__] certificates and Class [__] certificate. See
"Description of the Certificates" in this prospectus supplement.
The [Master] Servicer will receive a servicing fee for its services as
[Master] Servicer under the Pooling and Servicing Agreement. The [Master]
Servicer will retain as its servicing fee an amount which will be calculated
monthly as a per annum percentage for each Loan equal to [_____]% of the
outstanding principal balance of such Loan. The [Master] Servicer will pay fees
to the Trustee equal to [_____]% of the servicing fee it receives.
[In addition, the [Master] Servicer is obligated to remit Compensating
Interest to the Certificate Account on the day before each Distribution Date.]
The [Master] Servicer will pay all expenses incurred in connection with its
activities as [Master] Servicer. The [Master] Servicer is entitled to
reimbursement for certain expenses incurred by it in connection with the
liquidation of defaulted Loans. In addition, the [Master] Servicer is entitled
to reimbursement of expenditures incurred by it in connection with the
restoration of a damaged mortgaged property.
SPECIAL SERVICING AGREEMENTS
[Description of any applicable Special Servicing Agreements.]
PREPAYMENT AND YIELD 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 interest rate, the actual characteristics of the Loans, the rate of
principal payments (including principal prepayments) on the Loans and the rate
of liquidations on the Loans. The yield to maturity to holders of the
certificates will be lower than the yield to maturity otherwise produced by the
applicable interest rate and purchase price of such certificates, because
principal and interest distributions will not be payable to such
certificateholders until the [___]th day of the month following the month of
accrual (without any additional distribution of interest or earnings thereon
with respect to such delay).
PRINCIPAL PREPAYMENTS AND COMPENSATING INTEREST
When a mortgagor prepays a Loan in full between Due Dates for such
Loan, the mortgagor pays interest on the amount prepaid only to the date of
prepayment, instead of for the entire month. Also, when a partial principal
prepayment is made on a Loan together with the scheduled Monthly payment for a
month on or after the related Due Date, the principal balance of the Loan is
reduced by the amount of the partial principal prepayment as of such Due Date.
However, the additional principal is not distributed to related
certificateholders
S-24
<PAGE>
until the Distribution Date in the next month. Therefore, one month of interest
shortfall accrues on the amount of such partial principal prepayment.
[The [Master] Servicer will pass through Compensating Interest to the
related certificateholders to reduce the adverse effect on certificateholders
from the deficiency in interest payable as a result of a prepayment in full on a
Loan between its Due Dates. Full principal prepayments of any Loans received
during the period from the first day through the last day of any month will be
passed through on the Distribution Date in the following month. The [Master]
Servicer will pass through Compensating Interest to related certificateholders
with respect to such period to provide for a full month's interest payment with
respect to the prior month. No Compensating Interest or other payment will be
made by the [Master] Servicer with respect to interest shortfalls due to partial
principal prepayments. To the extent that the amount allocated to pay
Compensating Interest is insufficient to cover the deficiency in interest
payable as a result of a full or partial principal prepayment on a Loan, such
remaining deficiency will be allocated to the certificates 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 Loans. If the
actual rate and severity of losses on the 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 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 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 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--Subordination and Allocation of Losses". 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--Subordination and Allocation of Losses".]
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
Loans, which may be in the form of scheduled payments or principal prepayments.
See "Risk Factors" in this prospectus supplement and "Yield Considerations" in
the prospectus. Mortgagors may prepay the Loans at any time without penalty. A
higher-than-anticipated rate of principal prepayments would reduce the
aggregate principal balance of the Loans more quickly than expected. As a
consequence, aggregate interest payments with respect to the Loans would be
substantially less than expected; therefore, a higher rate of principal
prepayments 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 would reduce
the return to investors on any related classes of certificates purchased at a
discount, in that principal payments with respect to the 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 interest rate. Investors should fully consider all
of the associated risks.
S-25
<PAGE>
SPECIAL SENSITIVITIES
[Description of other special sensitivities particular to each series
of certificates]
PREPAYMENT SPEED ASSUMPTION AND MODELING ASSUMPTIONS
[Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this prospectus
supplement [(the "PREPAYMENT SPEED ASSUMPTION" or "PSA")] assumes that mortgages
will prepay at an annual rate of 0.2% in the first month after origination, that
the prepayment rate increases at an annual rate of 0.2% per month up to the 30th
month after origination and that the prepayment rate is constant at 6% per annum
in the 30th and later months (this assumption is called "100% [PSA]"). For
example, at 100% [PSA], mortgages with a loan age of three months (i.e.
mortgages in their fourth month after origination) are assumed to prepay at an
annual rate of 0.8%. "0% [PSA]" assumes no prepayments; "50% [PSA]" assumes
prepayment rates equal to one-half times 100% [PSA]; "200% [PSA]" assumes
prepayment rates equal to two times 100% [PSA]; and so forth. [PSA] is not a
description of historical prepayment experiences or a prediction of the
mortgages' rate of prepayment.
[PSA] 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 Loans will prepay at any given
percentage of [PSA]. The actual rate of principal prepayments on the 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 Loans, the Loans are likely to be subject to higher prepayment
rates than if prevailing rates remain at or above the interest rates on the
Loans. Conversely, if interest rates rise above the interest rates on the 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 Loans and an earlier-than-expected retirement of the
certificates.
The Depositor makes no representation as to the specific factors that
will affect the prepayment of the Loans or the relative importance of such
factors. Factors not identified by the Depositor or discussed in this prospectus
supplement may significantly affect the prepayment rate of the Loans. In
particular, the Depositor makes no representation as to the percentage of the
principal amount of the Loans that will be paid as of any date or as to the
overall rate of prepayment.
The tables set forth in Appendix A have been prepared assuming, among
other things, the following modeling assumptions (collectively, the "MODELING
ASSUMPTIONS"):
scheduled payments on all Loans are received on the first
day of each month beginning [--------- ----, -----],
any prepayments in full on the Loans are received on the
last day of each month, beginning on [_________ ____,
_____] and include a full month's of interest thereon,
there are no defaults or delinquencies on the Loans,
optional termination of the REMICs does not occur,
there are no partial prepayments on the Loans and
prepayments are computed after giving effect to scheduled
payments received on the following day,
the Loans prepay at the indicated constant percentages of
[PSA],
the date of issuance for the certificates is [_________
____, _____],
S-26
<PAGE>
cash distributions are received by the certificateholders
on the [____]th day of each month when due, and
the scheduled monthly payments for each Loan are computed
based upon its unpaid principal balance, mortgage interest
rate and amortized remaining term, such that the Loan will
fully amortize on its maturity date.
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 A. Such variations may
occur even if the average prepayment experience of all the Loans equals the
indicated percentage of the [Prepayment Speed Assumption]. There is no
assurance, however, that prepayment of the Loans will conform to any given
percentage of the [Prepayment Speed Assumption]. The Depositor makes no
representation that the actual rates of prepayments on the Loans will in any way
correspond to any of the assumptions made in this prospectus supplement.
Based on the foregoing assumptions, the tables in Appendix A indicate
the weighted average lives of the offered certificates and set forth the
percentages of the initial class principal balances of each such class of
offered certificates that would be outstanding after each of the Distribution
Dates shown at various constant percentages of the [Prepayment Speed
Assumption].
There are no historical prepayment data available for the Mortgage
Pool, and comparable data is not available because the 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"),
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") may not be comparable to prepayments expected to be
experienced by the Mortgage Pool because the Loans may have characteristics
which differ from the mortgage loans underlying certificates issued by GNMA,
FNMA and FHLMC.
The Depositor makes no representation that the 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 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
Loans and the suitability of the certificates to their investment objectives.]
[YIELD CONSIDERATIONS OF THE INTEREST ONLY AND PRINCIPAL ONLY CERTIFICATES]
[The yield to maturity on the Interest Only and the Principal Only
certificates will be extremely sensitive to the level of principal prepayments
on certain of the Loans as described in "Prepayment and Yield
Considerations--Special Sensitivities".
To illustrate the significance of different rates of prepayment on the
distributions to the Interest Only and Principal Only certificates, the
following tables indicate the approximate pre-tax yields to maturity (on a
corporate bond equivalent basis) under the different constant percentages of
[PSA] indicated. Because the rate of distribution of interest on the Interest
Only certificates, and the rate of distribution of principal on the Principal
Only certificates will be directly related to the actual amortization (including
prepayments) of the Loans, which will include 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 these certificates are
likely to differ from
S-27
<PAGE>
those shown in the following tables even if all the Loans prepay at the
indicated constant percentages of [PSA]. Any differences between such
assumptions and the actual characteristics and performance of the 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
Loans will prepay at a constant level of [PSA] until maturity or that all of
such 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 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 Interest Only certificates
may be adversely affected if an optional termination of [the Trust] [REMIC II]
occurs.
The sensitivity tables for the Interest Only and Principal Only
certificates set forth below are based on the Modeling Assumptions and assume
further that the certificates are purchased at prices equal to that set forth in
the tables plus accrued interest, if any. There can be no assurance that the
Loans will have the assumed characteristics, will prepay at any of the rates
shown in this prospectus supplement, or that the purchase prices of the
certificates will be as assumed or that the pre-tax yields to maturity will
correspond to any of the pre-tax yields shown in this prospectus supplement. 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.
The pre-tax yields for the Interest Only and Principal Only
certificates could differ significantly from those shown in the tables below if
the Loans were to prepay at a different rate than shown.]
[PREPAYMENT 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 Interest Only and Principal Only certificates, would cause the discounted
present values of such assumed streams of cash flows to equal the assumed
purchase price, including accrued interest. 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
certificates and thus do not reflect the return on any investment in the
Interest Only and Principal Only 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 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 Loans may have
characteristics which differ from the mortgage loans underlying certificates
issued by GNMA, FNMA and FHLMC.
S-28
<PAGE>
The Depositor makes no representation that the 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 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
Loans and the suitability of the certificates to their investment objectives.]
[ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE CLASS R CERTIFICATE]
[Holders of interests in the Class R certificate may have tax
liabilities with respect to their certificates during the early years of the
REMICs' 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 "Federal Income Tax
Consequences" in this prospectus supplement and in the prospectus.]
ADDITIONAL INFORMATION
The Depositor 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. [______________] prepared such tables and materials 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 prospectus supplement.
[LEGAL ASPECTS OF THE MORTGAGE LOANS UNDER CALIFORNIA LAW]
[As of the Cut-Off Date, approximately [____]% of the initial principal
balance of the Loans are secured by liens on mortgaged properties located in
California. See also "Legal Aspects of the Mortgage Loans" in the prospectus.]
[FEDERAL INCOME TAX CONSEQUENCES]
[YEAR 2000 PROJECT]
[Description of any additional developments not covered in the base
prospectus.]
S-29
<PAGE>
[ERISA CONSIDERATIONS]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor 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 Depositor from the sale
of the offered certificates, before deducting expenses payable by the Depositor
(which are estimated to be $[________]), will be approximately [_________]% 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 Depositor and the
proceeds from the sale of such certificates realized by the Underwriters will
constitute underwriting discounts and commissions. The Underwriters may effect
such transactions by selling the offered certificates to or through dealers, and
such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act.
The Depositor has agreed to indemnify the Underwriters against certain
civil liabilities, including liabilities under the Act, or to contribute to
payments the Underwriters may be obligated to make in respect thereof.
ABN AMRO Incorporated is an affiliate of the Depositor.
The Underwriters intend to make a market for the purchase and sale of
the offered certificates after their initial issuance but have no obligation to
do so. There is no assurance that such a secondary market will develop or, if it
develops, that it will continue.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Kirk
Flores, Counsel of the Depositor and by Mayer, Brown & Platt, New York, New
York. Mayer, Brown & Platt will also pass upon certain legal matters for ABN
AMRO Incorporated. [__________________________________] will pass upon certain
legal matters on behalf of [_______________________]
CERTIFICATE RATINGS
It is a condition to the issuance of the offered certificates that the
certificates each be rated "_____" by [___________________] ("RATING AGENCY")
and [_________________] ("RATING AGENCY").
S-30
<PAGE>
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.
The ratings on the offered certificates address the likelihood of the
receipt by certificateholders of all distributions with respect to the
underlying 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
"Prepayment and Yield Considerations".
The Depositor has not requested a rating on the offered certificates by
any rating agency other than [_____________]. 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-31
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
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.
<TABLE>
<S> <C>
Available Distribution Amount..........................................S-3, S-16
Cede........................................................................S-14
Certificate Account.........................................................S-11
Class [____] Notional Amount................................................S-18
Closing Date.................................................................S-1
Compensating Interest.......................................................S-17
Credit Support Depletion Date...............................................S-18
Cut-Off Date.................................................................S-1
Definitive Certificates.....................................................S-14
Depositor....................................................................S-1
Determination Date..........................................................S-16
Discount Fraction...........................................................S-18
Discount Fractional Principal Amount........................................S-18
Discount Fractional Principal Shortfall.....................................S-18
Discount Loan...............................................................S-18
Distribution Date............................................................S-1
Due Date....................................................................S-16
Excess Liquidation Proceeds.................................................S-17
FDIA.........................................................................S-9
FDIC.........................................................................S-9
FHLMC.......................................................................S-27
FICO Scores.................................................................S-12
FNMA........................................................................S-27
GNMA........................................................................S-27
Interest Only................................................................S-4
Liquidated Loan.............................................................S-18
Liquidation Principal.......................................................S-18
Liquidation Proceeds..................................................S-16, S-18
Loans.......................................................................S-11
[Master Servicer]............................................................S-1
Modeling Assumptions........................................................S-26
Mortgage Pool...............................................................S-11
Pass-Through Rate...........................................................S-19
Pass-Through Rates...........................................................S-4
Premium Loan................................................................S-19
Prepayment Period...........................................................S-19
Prepayment Speed Assumption.................................................S-26
Principal Only...............................................................S-4
Principal Payment Amount....................................................S-19
Principal Prepayment Amount.................................................S-19
PSA.........................................................................S-26
Rating Agency.........................................................S-14, S-31
Seller.......................................................................S-1
Senior Liquidation Amount...................................................S-19
Senior Percentage...........................................................S-19
Senior Prepayment Percentage................................................S-19
Senior Principal Amount.....................................................S-20
Step Down Percentage........................................................S-20
Subordinate Liquidation Amount..............................................S-20
Subordinate Percentage......................................................S-20
Subordinate Prepayment Percentage...........................................S-20
Subordinate Principal Amount................................................S-20
Subordinate Principal Prepayment Amount.....................................S-20
Subordination Level.........................................................S-21
Trustee......................................................................S-1
Underwriters.................................................................S-1
</TABLE>
<PAGE>
ABN AMRO MORTGAGE CORPORATION
$[_________ -____]
MULTI-CLASS MORTGAGE
PASS-THROUGH CERTIFICATES,
SERIES [_________ -____]
[LOGO FOR ABN AMRO]
PROSPECTUS SUPPLEMENT
UNDERWRITERS
ABN AMRO INCORPORATED
[NAME OF OTHER UNDERWRITERS]
[__________, _____].
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the offered certificates in any state where the offer is not
permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the offered certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the offered
certificates will deliver a prospectus supplement and prospectus until
[__________, _____].
<PAGE>
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
[Alternate Cover Page - Form of Prospectus Supplement]
SUBJECT TO COMPLETION, DATED ______ ___, ____ [LOGO]
Prospectus supplement dated [____ __, ____] (to prospectus dated [____ __, ___]
[$___________]
ABN AMRO MORTGAGE CORPORATION
DEPOSITOR
ABN AMRO MORTGAGE GROUP, INC.
SERVICER
MULTI-CLASS MORTGAGE PASS-THROUGH CERTIFICATES, SERIES [_____-__]
The Trust will hold [___] pool[s] of conventional, [fixed-rate] [adjustable]
first lien residential mortgage loans.
The Trust will issue these classes of certificates that are offered under this
prospectus supplement:
[__] classes of senior certificates
[__] classes of subordinated certificates
Credit enhancement for all of these certificates will be provided by additional
subordination.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ IN THIS
PROSPECTUS SUPPLEMENT.
[______________ and] ABN AMRO Incorporated will offer [__] class of senior
certificates and [__] class of subordinated certificates to the public at
varying prices to be determined at the time of sale. From the sale of the
offered certificates, ABN AMRO Mortgage Corporation will receive [__]% of their
principal amount, plus accrued interest, less expenses.
This prospectus supplement and the related prospectus may be used by ABN AMRO
Incorporated, an affiliate of the Depositor, in connection with offers and sales
related to secondary market transactions in the certificates. ABN AMRO
Incorporated may act as principal or agent in these transactions. These sales
will be made at prices related to prevailing market prices at the time of sale
or otherwise.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE OFFERED
CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.
----------------------------------------
ABN AMRO INCORPORATED [NAME OF OTHER UNDERWRITERS]
<PAGE>
[Alternate Page - Form of Prospectus Supplement]
Method of Distribution
This prospectus supplement and the related prospectus may be used by ABN
AMRO Incorporated, an affiliate of the Depositor, in connection with offers and
sales relating to market making transactions in the certificates. ABN AMRO
Incorporated may act as principal or agent in these transactions. These sales
will be made at prices related to prevailing market prices at the time of sale.
ABN AMRO Incorporated does not have any obligation to make a market in the
certificates, and it may discontinue its market-making activities at any time
without notice, in its sole discretion. ABN AMRO Incorporated is among the
underwriters participating in the initial distribution of the certificates.
<PAGE>
[Alternate Back Cover Page - Form of Prospectus Supplement]
ABN AMRO Mortgage Corporation
$----------
Multi-Class Mortgage
Pass-Through Certificates,
Series ______
PROSPECTUS SUPPLEMENT
ABN AMRO Incorporated
[------- --, ----]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the offered certificates in any state where the offer is not
permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the offered certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the offered
certificates will deliver a prospectus supplement and prospectus until [_____
__, ____].
<PAGE>
[Alternate Page - Prospectus]
Plan of Distribution
This prospectus is to be used by ABN AMRO Incorporated ("AAI"), an
affiliate of the Depositor and Master Servicer, in connection with offers and
sales related to market-making transactions in the Certificates in which AAI
acts as principal. AAI may also act as agent in market-making transactions. [AAI
is a broker/dealer and a member of the national Association of Securities
Dealers, Inc. and the Securities Investor Protection Corporation. Sales will be
made at prices related to the prevailing prices at the time of sale. AAI is not
a bank or thrift, is a subsidiary of ABN AMRO Bank N.V. and an entity separate
from any affiliate of the Depositor, and is solely responsible for its
contractual obligations and commitments.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses except for the
registration and filing fees are estimated.
<TABLE>
<S> <C>
SEC Registration Fee......................................... $ 973,000
Blue Sky Fees and Expenses................................... 10,000
Legal Fees and Expenses...................................... 250,000
Accounting Fees and Expenses................................. 100,000
Trustee's Fees and Expenses (including counsel fees)......... 25,000
Printing and Engraving Fees.................................. 50,000
Rating Agency Fees........................................... 100,000
Miscellaneous................................................ 25,000
---------
Total................................................... $1,533,000
</TABLE>
----------------------
Item 15. Indemnification of Directors and Officers
The Pooling and Servicing Agreement (the "Agreement") will provide that
neither the Registrant nor any of its directors, officers, employees or agents
shall have any liability to the trust (the "Trust") created thereunder or to any
of the holders of the certificates, except with respect to liabilities resulting
from willful misfeasance, bad faith or gross negligence. The Agreement will
further provide that, with the exceptions stated above, the Registrant and its
directors, officers, employees and agents are entitled to be indemnified and
held harmless by the Trust against any loss, liability or expense incurred in
connection with legal actions relating to the Agreement or the certificates.
It is expected that the Underwriting Agreement will provide, under
certain circumstances, for indemnification of the Registrant and other certain
persons.
Item 16. Exhibits
(a) Financial Statements. Not applicable.
(b) Exhibits:
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of Registrant
3.2** Bylaws of Registrant
4.1* Form of Pooling and Servicing Agreement, including
forms of Class A and Class B Certificates and
Residual Certificates attached as Exhibits A, B and C
thereto.
4.2* Form of Mortgage Loan Purchase Agreement
5.1 Opinion of Mayer, Brown & Platt re legality.
8.1 Opinion of Mayer, Brown & Platt as to tax matters
(included as part of Exhibit 5.1).
23.1 Consent of Mayer, Brown & Platt (included as part
of Exhibit 5.1).
24.1*** Power of Attorney (included at page II-4)
</TABLE>
* Incorporated by reference to Registration Statement 333-42127
** Incorporated by reference to Registration Statement 333-57027
*** Previously filed.
<PAGE>
Item 17. Undertakings
(a) Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission that such indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) Undertakings pursuant to Rule 415.
The Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change of such information in the Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the information
required to be included in the post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement;
2. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(c) Undertakings pursuant to Rule 430A.
The Registrant hereby undertakes:
1. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective; and
2. For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona
II-2
<PAGE>
fide offering thereof.
(d) Undertakings in connection with incorporation by reference of certain
filings under the Securities Exchange Act of 1934.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Troy, State of Michigan on the 8th day of October,
1999.
ABN AMRO Mortgage Corporation
By s/s Stewart W. Fleming
----------------------------------
Name: Stewart W. Fleming
Title: Senior Vice President and Director
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Stewart
W. Fleming, his or her true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution for him or her and in his or her name,
place and stead, in any and all capacities (including his or her capacity as a
director and/or officer of ABN AMRO Mortgage Corporation), to sign this
Registration Statement and any or all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in fact and agent of any of them, or their
or his or her substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
Joseph Krul* Chairman of the Board and President 7-16-99
- ------------------------ (principal executive officer)
Joseph Krul
Michael Maher* Chief Financial Officer 7-16-99
- ------------------------ (principal financial and accounting officer)
Michael Maher
Stanley H. Rhodes* Senior Vice President and Director 7-16-99
- ------------------------
Stanley H. Rhodes
s/s Stewart W. Fleming Senior Vice President and Director 10-08-99
- ------------------------
Stewart W. Fleming
* Previously executed a Power of Attorney
By: s/s Stewart Fleming
____________________
(Attorney-in-fact)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
----------- ----------- -------------
<S> <C> <C>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation of Registrant
3.2** Bylaws of Registrant
4.1* Form of Pooling and Servicing Agreement, including forms of
Class A and Class B Certificates and Residual Certificates
attached as Exhibits A, B and C thereto.
4.2* Form of Mortgage Loan Purchase Agreement
5.1 Opinion of Mayer, Brown & Platt re legality.
8.1 Opinion of Mayer, Brown & Platt as to tax matters (included as
part of Exhibit 5.1).
23.1 Consent of Mayer, Brown & Platt (included as part
of Exhibit 5.1).
24.1*** Power of Attorney (included at page II-4)
</TABLE>
* Incorporated by reference to Registration Statement 333-42127
** Incorporated by reference to Registration Statement 333-57027
*** Previously filed.
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as.................................. 'SS'
<PAGE>
Exhibit 5.1
October 8, 1999
ABN AMRO Mortgage Corporation
181 West Madison Street, Suite 3250
Chicago, Illinois 60602-4510
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of the
Registration Statement on Form S-3 (the "Registration Statement"), and the
Prospectus and form of Prospectus Supplement forming a part thereof
(collectively, the "Prospectus"), filed by you with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act") relating to the Certificates (as defined below). The Registration
Statement and the Prospectus relate to the offer and sale of Mortgage
Pass-Through Certificates (Issuable in Series) (the "Certificates") to be
created and issued pursuant to one or more Pooling and Servicing Agreements to
be entered into between you, one or more trustees and possibly another entity as
the master servicer (collectively, the "Agreement") as described in the
Registration Statement. A form of Pooling and Servicing Agreement is included as
an Exhibit to the Registration Statement. We have examined the Registration
Statement, the Prospectus and such other documents as we have deemed necessary
or advisable for purposes of rendering this opinion. Additionally, our advice
has formed the basis for the description of the selected Federal income tax
consequences of the purchase, ownership and disposition of the Certificates to
an original purchaser that appears under the heading "Federal Income Tax
Consequences" in the Prospectus (the "Tax Description"). Except as otherwise
indicated herein, all terms defined in the Prospectus are used herein as so
defined.
We have assumed for the purposes of the opinions set forth below that
the Certificates will be issued in Series created as described in the
Registration Statement and that the Certificates will be sold by you for
reasonably equivalent consideration. We have also assumed that, except with
respect to ABN AMRO Mortgage Corporation, the Agreement and the Certificates
will be duly authorized by all necessary corporate action and that the
Certificates will be duly issued, executed, authenticated and delivered in
accordance with the provisions of the Agreement. In addition, we have assumed
that the parties to each Agreement will satisfy their respective obligations
thereunder. We express no opinion with respect to any Series of Certificates for
which we do not act as counsel to you.
The opinion set forth in paragraph 2 of this letter is based upon the
applicable provisions of the Internal Revenue Code of 1986, as amended, Treasury
regulations promulgated and proposed thereunder, current positions of the
Internal Revenue Service (the "IRS") contained in published Revenue Rulings and
Revenue Procedures, current administrative positions of the IRS and existing
judicial decisions. This opinion is subject to the explanations and
qualifications set forth under the caption "Federal Income Tax Consequences" in
the Prospectus. No tax rulings will be sought from the IRS with respect to any
of the matters discussed herein.
<PAGE>
On the basis of the foregoing examination and assumptions, and upon
consideration of applicable law, it is our opinion that:
1. When a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by the Depositor,
the Servicer and the Trustee, and the Certificates of such Series have been duly
executed, authenticated, delivered and sold as contemplated in the Registration
Statement, such Certificates will be legally and validly issued, fully paid and
nonassessable, and the holders of such Certificates will be entitled to the
benefits of such Pooling and Servicing Agreement.
2. While the Tax Description does not purport to discuss all possible
Federal income tax ramifications of the purchase, ownership, and disposition of
the Certificates, particularly to purchasers subject to special rules under the
Internal Revenue Code of 1986, we hereby adopt and confirm the opinions set
forth in the Prospectus under the heading "Federal Income Tax Consequences" and
"ERISA Considerations". There can be no assurance, however, that the tax
conclusions presented therein will not be successfully challenged by the IRS, or
significantly altered by new legislation, changes in IRS positions or judicial
decisions, any of which challenges or alterations may be applied retroactively
with respect to completed transactions. We note, however, that the form of
Prospectus Supplement filed herewith does not relate to a specific transaction.
Accordingly, the above-referenced description of the selected Federal income tax
consequences may, under certain circumstances, require modification when an
actual transaction is undertaken.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm in the Prospectus under
the caption "Federal Income Tax Consequences" and "Legal Matters". In giving
such consent, we do not admit that we are "experts" within the meaning of the
term used in the Act or the rules and regulations of the Securities and Exchange
Commission issued thereunder, with respect to any part of the Registration
Statement, including this opinion as an exhibit or otherwise.
Very truly yours,
s/s Mayer, Brown & Platt
------------------------
MAYER, BROWN & PLATT
DAC:LBT
