- -------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page S-12 of this
prospectus supplement.
Neither the offered certificates nor the underlying mortgage loans are insured
or guaranteed by any governmental agency or instrumentality.
The offered certificates will represent interests in the Trust only and will
not represent interests in or obligations of Bank of America Mortgage
Securities, Inc. or any other entity.
This prospectus supplement may be used to offer and sell the Offered
Certificates only if accompanied by the prospectus.
- -------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
(To Prospectus Dated March 22, 2001)
[LOGO OF BANK OF AMERICA]
Bank of America Mortgage Securities, Inc.
Depositor
Bank of America, N.A.
Seller and Servicer
$273,267,100
(Approximate)
Mortgage Pass-Through Certificates, Series 2001-A
Principal and interest payable monthly, commencing in May 2001
The Trust will Issue--
. Three classes of senior Class A Certificates.
. Six classes of Class B Certificates, all of which are subordinated to, and
provide credit enhancement for, the Class A Certificates. Each class of Class
B Certificates is also subordinated to each class of Class B Certificates, if
any, with a lower number.
The classes of Offered Certificates are listed under the heading "Offered
Certificates" in the table on page S-4.
The Assets of the Trust will Include--
. A pool of fully amortizing, adjustable-rate, one- to four-family, residential
first mortgage loans, substantially all of which have original terms to
stated maturity of approximately 30 years.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Offered Certificates or determined that this
prospectus supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Offered Certificates will be offered by Banc of America Securities LLC, as
underwriter, at varying prices to be determined at the time of sale to
investors. The anticipated delivery date for the Offered Certificates is April
24, 2001. Total proceeds to Bank of America Mortgage Securities, Inc. for the
Offered Certificates will be approximately 100.461% of the initial principal
balance of the Offered Certificates, before deducting expenses payable by the
Depositor.
Banc of America Securities LLC
April 20, 2001
Important Notice About Information Presented
in this Prospectus Supplement and the Prospectus
The Offered Certificates are described in two separate documents that
progressively provide more detail: (i) the accompanying Prospectus, which
provides general information, some of which may not apply to a particular
series of Certificates such as your Certificates; and (ii) this Prospectus
Supplement, which describes the specific terms of your Certificates and may
differ from information in the Prospectus.
If the description of the terms of your Certificates varies between this
Prospectus Supplement and the Prospectus, you should rely on the information in
this Prospectus Supplement.
Cross-references are included in this Prospectus Supplement and the
Prospectus to captions in these materials where you can find additional
information. The following Table of Contents and the Table of Contents in the
Prospectus provide the locations of these captions.
The Index of Significant Prospectus Supplement Definitions beginning on page
S-61 of this Prospectus Supplement and the Index of Significant Definitions
beginning on page 111 of the Prospectus direct you to the locations of the
definitions of capitalized terms used in each of the documents. Any capitalized
terms that are not defined in this Prospectus Supplement and that do not have
obvious meanings are defined in the Prospectus.
Bank of America Mortgage Securities, Inc.'s principal offices are located at
201 North Tryon Street, Charlotte, North Carolina 28255 and its phone number is
(704) 387-2111.
--------------
This Prospectus Supplement and the accompanying Prospectus contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended. Specifically, forward- looking statements, together with
related qualifying language and assumptions, are found in the material
(including tables) under the headings "Risk Factors" and "Prepayment and Yield
Considerations." Forward-looking statements are also found in other places
throughout this Prospectus Supplement and the Prospectus, and may be identified
by, among other things, accompanying language such as "expects," "intends,"
"anticipates," "estimates" or analogous expressions, or by qualifying language
or assumptions. These statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results or performance
to differ materially from the forward-looking statements. These risks,
uncertainties and other factors include, among others, general economic and
business conditions, competition, changes in political, social and economic
conditions, regulatory initiatives and compliance with governmental
regulations, customer preference and various other matters, many of which are
beyond the Depositor's control. These forward-looking statements speak only as
of the date of this Prospectus Supplement. The Depositor expressly disclaims
any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statements to reflect changes in the Depositor's expectations
with regard to those statements or any change in events, conditions or
circumstances on which any forward-looking statement is based.
S-2
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Important Notice About Information Presented in this Prospectus Supplement
and the Prospectus....................................................... S-2
Summary of Terms.......................................................... S-5
Risk Factors.............................................................. S-12
The Rate of Principal Payments on the Mortgage Loans Will Affect the
Yield on the Offered Certificates....................................... S-12
The Variable Rate of Interest on the Offered Certificates Will Affect
Your Yield.............................................................. S-13
Certificates May Not Be Appropriate for Individual Investors............. S-13
Subordination of Class A-2 and Class B Certificates Increases Risk of
Loss.................................................................... S-14
Limited Source of Payments -- No Recourse to Depositor, Seller, Servicer
or Trustee.............................................................. S-15
Limited Liquidity........................................................ S-15
Geographic Concentration May Increase Risk of Loss Due to Adverse
Economic Conditions or Natural Disaster................................. S-15
Rights of Beneficial Owners May Be Limited by Book-Entry System.......... S-16
Tax Consequences of Residual Certificate................................. S-16
The Mortgage Pool......................................................... S-17
Mortgage Loan Data....................................................... S-19
Underwriting Standards .................................................. S-24
Bank of America, N.A. .................................................... S-26
Servicing of Mortgage Loans............................................... S-26
Foreclosure and Delinquency Experience of Bank of America, N.A. ......... S-26
The Pooling and Servicing Agreement....................................... S-27
Assignment of Mortgage Loans............................................. S-27
Repurchases of Mortgage Loans............................................ S-28
Optional Repurchases of Certain Mortgage Loans........................... S-29
Payments on Mortgage Loans; Accounts..................................... S-29
Servicing Compensation and Payment of Expenses........................... S-29
Compensating Interest.................................................... S-30
Advances................................................................. S-30
Optional Termination..................................................... S-30
Special Servicing Agreements............................................. S-31
The Trustee.............................................................. S-31
Voting Rights............................................................ S-32
Description of the Certificates........................................... S-32
Denominations and Form................................................... S-32
Book-Entry Certificates.................................................. S-32
Distributions............................................................ S-34
Pool Distribution Amount................................................. S-35
Priority of Distributions................................................ S-35
Interest................................................................. S-35
Principal................................................................ S-37
Allocation of Losses..................................................... S-41
Restrictions on Transfer of the Class A-R Certificate.................... S-43
Prepayment and Yield Considerations....................................... S-45
Prepayment Considerations and Risks...................................... S-45
Assumptions Relating to Tables........................................... S-48
Weighted Average Lives of the Offered Certificates....................... S-49
Yield on the Class A-R Certificate....................................... S-51
Yield on the Subordinate Certificates.................................... S-52
Yield Considerations with Respect to the Class B-2 and Class B-3
Certificates............................................................ S-52
Credit Support............................................................ S-55
Use of Proceeds........................................................... S-56
Federal Income Tax Consequences........................................... S-56
Regular Certificates..................................................... S-56
Residual Certificate..................................................... S-57
Backup Withholding and Reporting Requirements............................ S-57
State Taxes............................................................... S-58
ERISA Considerations...................................................... S-58
Method of Distribution.................................................... S-59
Legal Matters............................................................. S-60
Certificate Ratings....................................................... S-60
Index of Significant Prospectus Supplement Definitions.................... S-61
S-3
THE SERIES 2001-A CERTIFICATES
Initial Rating of
Certificates(3)
Initial Class Pass-Through Interest -------------------
Class Balance(1) Rate Principal Types(2) Types(2) Fitch Moody's
- ----- ------------- ------------ ---------------------- ------------- -------- ---------
Offered Certificates
Class A-1............... $262,941,000 (4) Senior, Super Senior, Variable Rate AAA Aaa
Pass-Through
Class A-2............... $ 2,754,000 (4) Senior, Super Senior Variable Rate AAA Aaa
Support, Pass-Through
Class A-R............... $ 100 (4) Senior, Sequential Pay Variable Rate AAA None
Class B-1............... $ 4,130,000 (4) Subordinated Variable Rate AA None
Class B-2............... $ 2,478,000 (4) Subordinated Variable Rate A None
Class B-3............... $ 964,000 (4) Subordinated Variable Rate BBB None
Non-Offered Certificates
Class B-4............... $ 826,000 (4) Subordinated Variable Rate BB N/A
Class B-5............... $ 550,000 (4) Subordinated Variable Rate B N/A
Class B-6............... $ 689,013 (4) Subordinated Variable Rate N/A N/A
- --------------------
(1) Approximate. The aggregate initial class balance of the Offered
Certificates may vary by a total of plus or minus 5%.
(2) See "Description of the Certificates -- Categories of Classes of
Certificates" in the Prospectus for a description of these principal and
interest types and see "Description of the Certificates -- Priority of
Distributions" and "-- Allocation of Losses" in this Prospectus Supplement
for a description of the effects of subordination.
(3) See "Certificate Ratings" in this Prospectus Supplement.
(4) For the initial Distribution Date occurring in May 2001, interest will
accrue on these Certificates at the rate of approximately 6.7500% per
annum. For each Distribution Date after the initial Distribution Date,
interest will accrue on these Certificates at a per annum rate equal to
the weighted average of the Net Mortgage Interest Rates of the Mortgage
Loans (based on the Stated Principal Balances of the Mortgage Loans on the
due date in the month preceding the month of such Distribution Date).
S-4
SUMMARY OF TERMS
This summary highlights selected information from this Prospectus
Supplement. It does not contain all of the information that you need to
consider in making your investment decision. To understand the terms of the
Offered Certificates, you should read this entire Prospectus Supplement and the
Prospectus carefully.
Title of Series: Bank of America Mortgage Securities, Inc., Mortgage Pass-
Through Certificates, Series 2001-A (the "Certificates")
Depositor: Bank of America Mortgage Securities, Inc.
Issuer: Bank of America Mortgage 2001-A Trust (the "Trust")
Seller: Bank of America, N.A.
Servicer: Bank of America, N.A.
Trustee: The Bank of New York
Distribution Date: The 25th day of each month (or, if not a business day, the
next business day) beginning May 25, 2001
Closing Date: On or about April 24, 2001
Cut-off Date: April 1, 2001
Record Date: The last business day of the month preceding a Distribution
Date
----------------------------
The Certificates
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated April 24, 2001 (the "Pooling Agreement"), among the
Depositor, the Servicer and the Trustee. A summary chart of the initial class
balances, principal types, pass-through rates, interest types and ratings of
the Certificates is set forth on page S-4.
The Certificates represent all of the beneficial ownership interest in the
Trust.
Classifications of Classes of Certificates
- ---------------------------------------------------------------------
Offered Certificates: A-1, A-2, A-R, B-1, B-2 and B-3
- ---------------------------------------------------------------------
Non-Offered Certificates: B-4, B-5 and B-6
- ---------------------------------------------------------------------
Senior Certificates: A-1, A-2 and A-R
- ---------------------------------------------------------------------
Subordinate Certificates: B-1, B-2, B-3, B-4, B-5 and B-6
- ---------------------------------------------------------------------
Class A Certificates: A-1, A-2 and A-R
- ---------------------------------------------------------------------
Class B Certificates: B-1, B-2, B-3, B-4, B-5 and B-6
- ---------------------------------------------------------------------
Residual Certificate: A-R
- ---------------------------------------------------------------------
Super Senior Certificates: A-1
- ---------------------------------------------------------------------
Super Senior Support Certificates: A-2
- ---------------------------------------------------------------------
S-5
Only the Class A, Class B-1, Class B-2 and Class B-3 Certificates are being
offered by this Prospectus Supplement.
The Class B-4, Class B-5 and Class B-6 Certificates are not offered by this
Prospectus Supplement. These Non-Offered Certificates are subordinated to the
Offered Certificates for distributions of principal and interest and for
allocations of losses on the Mortgage Loans.
Information provided with respect to the Non-Offered Certificates is
included solely to aid your understanding of the Offered Certificates.
Mortgage Pool
The "Mortgage Pool" will consist of conventional, fully-amortizing mortgage
loans (the "Mortgage Loans") secured by first liens on one- to four-family
properties. The Mortgage Loans provide for a fixed interest rate during an
initial period of approximately five years from the date of origination of each
Mortgage Loan and thereafter provide for adjustments to that interest rate on
an annual basis. The interest rate of each Mortgage Loan will adjust to equal
the sum of an index and a gross margin. Interest rate adjustments will be
subject to certain limitations stated in the related mortgage note on increases
and decreases for any adjustment. In addition, interest rate adjustments will
be subject to an overall maximum mortgage interest rate. The index will be the
weekly average yield on United States Treasury Securities adjusted to a
constant maturity of one year. All of the Mortgage Loans were originated or
acquired by Bank of America, N.A., which is an affiliate of the Depositor and
the Underwriter.
The Depositor expects the Mortgage Loans to have the following approximate
characteristics:
Selected Mortgage Loan Data as of April 1, 2001
- --------------------------------------------------------------------------------
Range or Total Weighted Average
- --------------------------------------------------------------------------------
Number of Mortgage Loans 570 --
- --------------------------------------------------------------------------------
Aggregate Unpaid Principal
Balance $275,332,113.56 --
- --------------------------------------------------------------------------------
Unpaid Principal Balance $267,254.94 to $1,000,000.00 $483,038.80/(1)/
- --------------------------------------------------------------------------------
Current Interest Rate 6.000% to 8.625% 7.268%
- --------------------------------------------------------------------------------
Gross Margin 2.750% to 3.000% 2.753%
- --------------------------------------------------------------------------------
Rate Ceiling 11.000% to 13.625% 12.268%
- --------------------------------------------------------------------------------
Months to First Adjustment Date 52 to 60 months 58 months
- --------------------------------------------------------------------------------
Administrative Fee Rate 0.51811 --
- --------------------------------------------------------------------------------
Remaining Terms to Stated
Maturity 179 to 360 months 358 months
- --------------------------------------------------------------------------------
Original Term 180 to 360 months 359 months
- --------------------------------------------------------------------------------
Loan Age 0 to 8 months 2 months
- --------------------------------------------------------------------------------
Original Loan-to-Value Ratio 18.81% to 95.00% 70.26%
- --------------------------------------------------------------------------------
Latest Maturity Date April 1, 2031 --
- --------------------------------------------------------------------------------
Geographic Concentration of Mortgaged Properties in Excess of 5.00% of the
Aggregate Unpaid Principal Balance
California..................... 68.51%
Illinois....................... 6.46%
- --------------------------------------------------------------------------------
Maximum Single Zip Code
Concentration 1.76% --
- --------------------------------------------------------------------------------
/(1)/ The balance shown is the average unpaid principal balance of the Mortgage
Loans.
S-6
The characteristics of the Mortgage Pool may change because:
. Prior to the issuance of the Certificates, the Depositor may remove
Mortgage Loans from the Mortgage Pool. The Depositor also may substitute
new Mortgage Loans for Mortgage Loans in the Mortgage Pool prior to the
Closing Date.
. After the issuance of the Certificates, Mortgage Loans may be removed
from the Trust because of repurchases by the Depositor for breaches of
representations or failure to deliver required documents. Under certain
circumstances, the Depositor may make substitutions for repurchased
Mortgage Loans.
These removals and/or substitutions may result in changes in the Mortgage
Pool characteristics shown above. These changes may affect the weighted average
lives and yields to maturity of the Offered Certificates.
Additional information on the Mortgage Pool appears under "The Mortgage
Pool" in this Prospectus Supplement.
Optional Termination
At its option, the Depositor may purchase all remaining Mortgage Loans in
the Trust and effect early retirement of the Certificates on any Distribution
Date on which the aggregate scheduled principal balance of the Mortgage Pool is
less than 10% of the initial aggregate scheduled principal balance of the
Mortgage Pool.
See "The Pooling and Servicing Agreement -- Optional Termination" in this
Prospectus Supplement.
If the Depositor exercises its right to repurchase all of the Mortgage
Loans, the Certificates outstanding at that time will be retired earlier than
would otherwise be the case.
See "Prepayment and Yield Considerations" in this Prospectus Supplement.
Priority of Distributions
Distributions will be made on each Distribution Date from the Pool
Distribution Amount in the following order of priority:
. First, to the Trustee an amount in payment for its services for such
Distribution Date;
. Second, to each class of Senior Certificates to pay interest;
. Third, to the classes of Senior Certificates entitled to receive
distributions of principal, as set forth in this Prospectus Supplement
under "Description of the Certificates -- Principal," to pay principal;
. Fourth, to each class of Subordinate Certificates, first to pay interest
and then to pay principal in the order of numerical class designations,
beginning with the Class B-1 Certificates; and
. Fifth, to the Class A-R Certificate, any remaining amounts.
All of the distributions described above are subject to the limitations set
forth in this Prospectus Supplement under "Description of the Certificates --
Interest" and "-- Principal."
Under certain circumstances described in this Prospectus Supplement,
distributions that would otherwise be made on the Subordinate Certificates may
be made on the Senior Certificates instead. See "Description of the
Certificates -- Allocation of Losses" in this Prospectus Supplement.
S-7
Interest Distributions
The amount of interest that will accrue on your Certificates each month is
equal to:
. one-twelfth of the pass-through rate for your class (as set forth or
described on page S-4) multiplied by the principal balance of your
Certificate on the Distribution Date, minus
. the amount of certain interest shortfalls arising from the timing of
prepayments on the Mortgage Loans and interest losses allocated to your
class, as described under "Description of the Certificates -- Allocation
of Losses" in this Prospectus Supplement.
See "Description of the Certificates -- Distributions" and "-- Interest" in
this Prospectus Supplement.
Principal Distributions
On each Distribution Date, principal distributions to the Certificates will
be made in the order and priority described under "Description of the
Certificates -- Priority of Distributions" in this Prospectus Supplement.
Credit Support
Credit support for the Offered Certificates is provided by subordination as
follows:
[CHART APPEARS HERE]
- ----------
(1) The credit support percentage set forth in this chart shows the initial
balance of the classes of Certificates subordinate to a class or classes as
a percentage of the initial aggregate scheduled principal balance of the
Mortgage Pool.
(2) This order of loss allocation does not apply to losses due to fraud,
borrower bankruptcies or special hazards that are in excess of certain
amounts. These "excess losses" will be allocated to all of the Certificates
as described under "Description of the Certificates -- Allocation of
Losses" in this Prospectus Supplement.
S-8
After the Class B Certificates are no longer outstanding, any losses (other
than Excess Losses) allocated to the Class A-1 Certificates will be borne by
the Class A-2 Certificates, rather than the Class A-1 Certificates, for so long
as the Class A-2 Certificates are outstanding.
See "Description of the Certificates -- Priority of Distributions" and "--
Allocation of Losses" and "Credit Support" in this Prospectus Supplement.
Shifting Interest in Prepayments
Additional credit enhancement is provided by the allocation of all principal
prepayments to the Senior Certificates, subject to certain exceptions, for the
first ten years and the disproportionately greater allocation of prepayments to
the Senior Certificates over the following four years. The disproportionate
allocation of prepayments will accelerate the amortization of those Senior
Certificates relative to the amortization of the Subordinate Certificates. As a
result, the credit support percentage for the Class A Certificates should be
maintained and may be increased during the first fourteen years.
See "Description of the Certificates -- Principal" in this Prospectus
Supplement.
Prepayment and Yield Considerations
The yield to maturity on your Offered Certificates will be sensitive to the
rate and timing of principal payments (which will be affected by prepayments,
defaults and liquidations) on the Mortgage Loans. As a result, your yield may
fluctuate significantly.
. In general, if you purchased your Offered Certificate at a premium and
principal distributions occur at a rate faster than you assumed, your
actual yield to maturity will be lower than anticipated.
. Conversely, if you purchased your Offered Certificate at a discount and
principal distributions occur at a rate slower than you assumed, your
actual yield to maturity will be lower than anticipated.
Because the Class A-2 Certificates will bear losses (other than Excess
Losses) allocated to the Class A-1 Certificates, as well as their own share of
such losses, once the Class B Certificates are no longer outstanding, the yield
to maturity of the Class A-2 Certificates will be more sensitive to the amount
and timing of losses on the Mortgage Loans than the other Class A Certificates.
The yield to maturity of the Class B-1, Class B-2 and Class B-3 Certificates
will be increasingly sensitive to the amounts and timing of losses on the
Mortgage Loans due to the fact that, once the total balance of the Class B-4,
Class B-5 and Class B-6 Certificates has been reduced to zero, all losses
(other than the portion of any Excess Losses allocated to more senior classes
of Certificates) will be allocated to the Class B-3, Class B-2 and Class B-1
Certificates, in that order, until the balance of each class has been reduced
to zero.
Because the Mortgage Loans may be prepaid at any time, it is not possible to
predict the rate at which you will receive distributions of principal. Since
prevailing interest rates are subject to fluctuation, you may not be able to
reinvest your distributions at yields equaling or exceeding the yields on the
Offered Certificates. Yields on any reinvestments may be lower, and could be
significantly lower, than the yields on your Offered Certificates.
See "Prepayment and Yield Considerations" in this Prospectus Supplement and
in the Prospectus.
S-9
Weighted Average Lives (in years)/(1)/
CPR(2)
-------------------------------------
Class 0% 5% 10% 18% 25% 35% 50%
----- ----- ----- ----- ---- ---- ---- ----
A-1................................. 19.92 11.68 7.65 4.60 3.28 2.23 1.40
A-2................................. 19.92 11.68 7.65 4.60 3.28 2.23 1.40
A-R................................. 0.09 0.09 0.09 0.09 0.09 0.09 0.09
B-1................................. 19.92 17.49 12.77 7.86 5.90 4.46 3.21
B-2................................. 19.92 17.49 12.77 7.86 5.90 4.46 3.21
B-3................................. 19.92 17.49 12.77 7.86 5.90 4.46 3.21
- ----------
/(1)/ Determined as described under "Prepayment and Yield Considerations --
Weighted Average Lives of the Offered Certificates" in this Prospectus
Supplement. Prepayments will not occur at any assumed rate shown or any
other constant rate, and the actual weighted average lives of any or all
of the classes of Offered Certificates are likely to differ from those
shown, perhaps significantly.
/(2)/ "CPR" is the Constant Prepayment Rate which is described under
"Prepayment and Yield Considerations -- Weighted Average Lives of the
Offered Certificates" in this Prospectus Supplement.
Federal Income Tax Consequences
For federal income tax purposes, an election will be made to treat the Trust
as a "real estate mortgage investment conduit" (the "REMIC").
. The Offered Certificates (other than the Class A-R Certificate) will
constitute "regular interests" in the REMIC and will be treated as debt
instruments for federal income tax purposes.
. The Class A-R Certificate will constitute the sole class of "residual
interest" in the REMIC.
Interest on the Offered Certificates must be included in your income under
an accrual method of tax accounting, even if you are otherwise a cash method
taxpayer.
Certain classes may be issued with original issue discount for federal
income tax purposes. If you hold such a Certificate, you will be required to
include original issue discount in income as it accrues on a constant yield
method, regardless of whether you receive concurrently the cash attributable to
such original issue discount.
The holder of the Class A-R Certificate will be required to report the net
income or the net loss of the REMIC as ordinary income or loss and will be
required to fund tax liabilities with respect to any such net income although
no cash distributions are expected to be made with respect to the Class A-R
Certificate other than the distribution of its $100 class balance and interest
on that balance.
See "Federal Income Tax Consequences" in this Prospectus Supplement and in
the Prospectus.
Legal Investment
If your investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory
authorities, then you may be subject to restrictions on investment in the
Offered Certificates. You should consult your legal, tax and accounting
advisers for assistance in determining the suitability of and consequences to
you of the purchase, ownership and sale of Offered Certificates.
S-10
. The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended ("SMMEA"), so long as they
are rated in one of the two highest rating categories by at least one
nationally recognized rating agency.
. The Class B-2 and Class B-3 Certificates will not constitute "mortgage
related securities" under SMMEA.
See "Legal Investment" in the Prospectus.
ERISA Considerations
If you are a fiduciary or other person acting on behalf of any employee
benefit plan or arrangement, including an individual retirement account (an
"IRA"), subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), the Internal Revenue Code of 1986, as amended (the "Code"),
or any federal, state or local law ("Similar Law") which is similar to ERISA or
the Code (collectively, a "Plan"), you should carefully review with your legal
advisors whether the purchase or holding of an Offered Certificate could give
rise to a transaction prohibited or not otherwise permissible under ERISA, the
Code or Similar Law.
Subject to the considerations and conditions described under "ERISA
Considerations" in this Prospectus Supplement, it is expected that the Offered
Certificates (other than the Class A-R Certificate) may be purchased by Plans.
The Class A-R Certificate may not be acquired by Plans.
See "ERISA Considerations" in this Prospectus Supplement and in the
Prospectus.
S-11
- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
. The Offered Certificates are not suitable investments for all investors.
. The Offered Certificates are complex financial instruments, so you should
not purchase any Offered Certificates unless you or your financial
advisor possess the necessary expertise to analyze the potential risks
associated with an investment in mortgage-backed securities.
. You should not purchase any Offered Certificates unless you understand,
and are able to bear, the prepayment, credit, liquidity and market risks
associated with those Offered Certificates.
. You should carefully consider the risk factors discussed below in
addition to the other information contained in this Prospectus
Supplement and the Prospectus.
The Rate of Principal Payments on the Mortgage Loans Will Affect the Yield on
the Offered Certificates
The rate of distributions of principal and the yield to maturity on your
Certificates will be directly related to (i) the rate of payments of principal
on the Mortgage Loans and (ii) the amount and timing of defaults by borrowers
that result in losses on the Mortgage Loans. Borrowers are permitted to prepay
their Mortgage Loans, in whole or in part, at any time without penalty.
The rate of principal payments on the Mortgage Loans mainly will be affected
by the following:
. the amortization schedules of the Mortgage Loans;
. the rate of partial prepayments and full prepayments by borrowers due to
refinancing, job transfer, changes in property values or other factors;
. liquidations of the properties that secure defaulted Mortgage Loans;
. repurchases of Mortgage Loans by the Depositor as a result of defective
documentation or breaches of representations or warranties or as the
result of the conversion of a Mortgage Loan from an adjustable to a
fixed interest rate; and
. the optional repurchase of all the Mortgage Loans by the Depositor to
effect a termination of the trust.
For a more detailed discussion of these factors, see "The Pooling and
Servicing Agreement --Optional Termination" and "Prepayment and Yield
Considerations" in this Prospectus Supplement and "The Pooling and Servicing
Agreement -- Assignment of Mortgage Loans to the Trustee" and "-- Termination;
Optional Purchase of Mortgage Loans" and "Prepayment and Yield Considerations"
in the Prospectus.
The rate of payments (including prepayments) on mortgage loans is influenced
by a variety of economic, geographic, social and other factors, but depends
greatly on the level of mortgage interest rates:
. If prevailing interest rates for similar mortgage loans fall below the
interest rates on the Mortgage Loans, the rate of prepayment would
generally be expected to increase due to refinancings.
. Conversely, if prevailing interest rates for similar mortgage loans rise
above the interest rates on the Mortgage Loans, the rate of prepayment
would generally be expected to decrease.
S-12
Mortgage originators (including Bank of America, N.A.) make general and
targeted solicitations for refinancings. Any such solicited refinancings may
result in a rate of prepayment that is higher than you might otherwise expect.
If you are purchasing Offered Certificates at a discount, you should
consider the risk that if principal payments on the Mortgage Loans occur at a
rate slower than you expected, your yield will be lower than you expected.
If you are purchasing Offered Certificates at a premium, you should consider
the risk that if principal payments on the Mortgage Loans occur at a rate
faster than you expected, your yield may be lower than you expected.
See "Summary of Terms -- Prepayment and Yield Considerations" and
"Prepayment and Yield Considerations" in this Prospectus Supplement.
The Variable Rate of Interest
on the Offered Certificates
Will Affect Your Yield
The mortgage interest rate on each Mortgage Loan will be fixed for an
initial period of approximately five years from the date of origination of that
Mortgage Loan. Thereafter, each Mortgage Loan provides for adjustments to the
mortgage interest rate on an annual basis. The mortgage interest rate on each
Mortgage Loan will adjust to equal the sum of an index and a gross margin.
Mortgage interest rate adjustments will be subject to the limitations stated in
the mortgage note with respect to increases and decreases for any adjustment
(i.e., a "periodic cap"). In addition, the mortgage interest rate will be
subject to an overall maximum mortgage interest rate. See "The Mortgage Pool"
in this Prospectus Supplement.
The pass-through rate on each Certificate may decrease, and may decrease
significantly, after the mortgage interest rates on the Mortgage Loans begin to
adjust as a result of, among other factors, the dates of adjustment, the gross
margins and changes in the index. Moreover, although each Mortgage Loan has a
maximum mortgage interest rate, none of the Mortgage Loans has a specified
floor. Accordingly, the minimum mortgage interest rate to which the Mortgage
Loans may adjust will be the applicable gross margin. In addition, if, despite
increases in the index, the mortgage interest rate on any Mortgage Loan cannot
increase due to a maximum mortgage interest limitation or a periodic cap, the
yield on such Certificates could be adversely affected. In addition, because
the pass-through rate on each Certificate for each Distribution Date after the
initial Distribution Date will be equal to a per annum rate equal to the
weighted average of the Net Mortgage Interest Rates of the Mortgage Loans
(based on the Stated Principal Balances of the Mortgage Loans on the due date
in the month preceding the month of such Distribution Date), disproportionate
principal payments on the Mortgage Loans having Net Mortgage Interest Rates
higher or lower than the then-current pass-through rate on such Certificates
will affect the pass-through rate for such Certificates for future periods and
the yield on such Certificates. See "The Mortgage Pool" and "Prepayment and
Yield" in this Prospectus Supplement.
Certificates May Not Be Appropriate
For Individual Investors
If you are an individual investor who does not have sufficient resources or
expertise to evaluate the particular characteristics of the applicable class of
Offered Certificates, the Offered Certificates may not be an appropriate
investment for you. This may be the case because, among other things:
S-13
. if you purchase your Certificates at a price other than par, your yield
to maturity will be sensitive to the uncertain rate and timing of
principal prepayments on the Mortgage Loans;
. the rate of principal distributions on, and the weighted average lives
of, the Offered Certificates will be sensitive to the uncertain rate and
timing of principal prepayments on the Mortgage Loans and the priority
of principal distributions among the classes of Certificates, and as
such, the Offered Certificates may be inappropriate investments for you
if you require a distribution of a particular amount of principal on a
specific date or an otherwise predictable stream of distributions;
. you may not be able to reinvest amounts distributed in respect of
principal on your Certificates (which distributions, in general, are
expected to be greater during periods of relatively low interest rates)
at a rate at least as high as the applicable pass-through rate or your
expected yield;
. a secondary market for the Offered Certificates may not develop or
provide you with liquidity of investment; and
. you must report interest as well as original issue discount, if any, on
the accrual method of accounting, even if you are otherwise using the
cash method of accounting.
If you are an individual investor considering the purchase of an Offered
Certificate, you should also carefully consider the other risk factors
discussed in this Prospectus Supplement and the special considerations
discussed under the headings "Summary of Terms--Prepayment and Yield
Considerations" and "Prepayment and Yield Considerations" in this Prospectus
Supplement and "Prepayment and Yield Considerations" in the Prospectus.
Subordination of Class A-2 and Class B Certificates
Increases Risk of Loss
If you purchase Class B Certificates, you are more likely to suffer losses
as a result of losses or delinquencies on the Mortgage Loans than are holders
of the Class A Certificates.
. The rights of the holders of each class of Class B Certificates to
receive distributions of interest and principal are subordinated to the
rights of the holders of the Class A Certificates and the holders of
each class of Class B Certificates with a lower numerical designation.
For example, the holders of the Class B-2 Certificates will not receive
principal or interest on a Distribution Date until the holders of the
Class A and Class B-1 Certificates have received the amounts to which
they are entitled on that Distribution Date.
. Losses that are realized on the Mortgage Loans (other than Excess Losses)
will be allocated first to the Class B-6 Certificates, then to the Class
B-5 Certificates and so on, in reverse of the numerical order of the
Class B Certificates, until the outstanding balances of those classes
have been reduced to zero. After the outstanding balances of the Class B
Certificates have been reduced to zero, all losses will be allocated to
the Class A Certificates.
For a more detailed description of the subordination feature of the Class B
Certificates, see "Description of the Certificates -- Allocation of Losses" and
"Credit Support" in this Prospectus Supplement.
If you purchase Class A-2 Certificates, you should consider the risk that
after the Class B Certificates are no longer outstanding, the principal portion
of losses realized on the Mortgage Loans (other than Excess Losses) that are
allocated to the Class A-1 Certificates will be borne by your Class A-2
Certificates, rather than the Class A-1 Certificates, for so long as your Class
A-2 Certificates are outstanding.
S-14
Limited Source of Payments - No
Recourse to Depositor, Seller,
Servicer or Trustee
Proceeds of the Mortgage Loans will be the sole source of payments on the
Certificates. The Certificates do not represent an interest in or obligation of
the Depositor, the Seller, the Servicer, the Trustee or any of their
affiliates. There are, however, limited obligations of the Depositor with
respect to certain breaches of its representations and warranties, and limited
obligations of the Servicer with respect to its servicing obligations.
Neither the Certificates nor the Mortgage Loans will be guaranteed by or
insured by any governmental agency or instrumentality, the Depositor, the
Seller, the Servicer, the Trustee or any of their affiliates. Consequently, if
payments on the Mortgage Loans are insufficient or otherwise unavailable to
make all payments required on the Certificates, there will be no recourse to
the Depositor, the Seller, the Servicer, the Trustee or any of their
affiliates.
Limited Liquidity
The Underwriter intends to make a market for purchase and sale of the
Offered Certificates after their initial issuance, but the Underwriter has no
obligation to do so. There is no assurance that such a secondary market will
develop or, if it does develop, that it will provide you with liquidity of
investment or that it will continue for the life of the Offered Certificates.
As a result, you may not be able to sell your Certificates or you may not be
able to sell your Certificates at a high enough price to produce your desired
return on investment.
The secondary market for mortgage-backed securities has experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity means
that there may not be any purchasers for your class of Certificates. Although
any class of Certificates may experience illiquidity, it is more likely that
classes of Certificates that are more sensitive to prepayment, credit or
interest rate risk (such as the Class B Certificates) will experience
illiquidity.
Geographic Concentration May
Increase Risk of Loss Due to
Adverse Economic Conditions
or Natural Disaster
At various times, certain geographic regions will experience weaker economic
conditions and housing markets and, consequently, will experience higher rates
of delinquency and loss on mortgage loans generally. In addition, California,
Florida and several other states have experienced natural disasters, including
earthquakes, fires, floods and hurricanes, which may adversely affect property
values. Any concentration of mortgaged properties in a state or region may
present unique risk considerations. See the chart on page S-20 for a listing of
the locations and concentrations of mortgaged properties.
Any deterioration in housing prices in a state or region due to adverse
economic conditions, natural disaster or other factors, and any deterioration
of economic conditions in a state or region that adversely affects the ability
of borrowers to make payments on the Mortgage Loans, may result in losses on
the Mortgage Loans. Any losses may adversely affect the yield to maturity of
the Offered Certificates.
S-15
See "The Mortgage Pool" in this Prospectus Supplement for further
information regarding the geographic concentration of the Mortgage Loans.
Rights of Beneficial Owners May
Be Limited by Book-Entry System
All of the Offered Certificates, other than the Class A-R Certificate, are
Book-Entry Certificates and will be held through the book-entry system of The
Depository Trust Company. Transactions in the Book-Entry Certificates generally
can be effected only through DTC and DTC Participants. As a result:
. your ability to pledge Book-Entry Certificates to entities that do not
participate in the DTC system, or to otherwise act with respect to Book-
Entry Certificates, may be limited due to the lack of a physical
certificate for your Certificates; and
. under a book-entry format, you may experience delays in the receipt of
payments, since distributions will be made by the Trustee to DTC, and
not directly to you.
For a more detailed discussion of the Book-Entry Certificates, see
"Description of the Certificates --Book-Entry Certificates" in this Prospectus
Supplement.
Tax Consequences of Residual Certificate
. The Class A-R Certificate will be the sole "residual interest" in the
REMIC for federal income tax purposes.
. The holder of the Class A-R Certificate must report the net income or the
net loss of the REMIC as ordinary income or loss whether or not any cash
distributions are made to it. This allocation of income or loss may
result in a zero or negative after-tax return. No cash distributions are
expected to be made with respect to the Class A-R Certificate other than
the distribution of its $100 class balance and interest on that balance.
. Treasury regulations have been proposed, effective February 4, 2000 if
adopted, that would require a seller of the Class A-R Certificate to pay
the buyer an amount designed to compensate the buyer for assuming the
tax liability should the seller wish to qualify for "safe harbor"
protection from possible disregard of such a transfer.
. Due to its tax consequences, the Class A-R Certificate will be subject to
restrictions on transfer that may affect its liquidity. In addition, the
Class A-R Certificate may not be acquired by Plans.
. The IRS has provided guidance regarding safe harbors for transfers of
noneconomic residual interests such as the Class A-R Certificate.
See "Description of the Certificates -- Restrictions on Transfer of the
Class A-R Certificate," "Prepayment and Yield Considerations -- Yield on the
Class A-R Certificate," "ERISA Considerations" and "Federal Income Tax
Consequences" in this Prospectus Supplement.
S-16
- --------------------------------------------------------------------------------
THE MORTGAGE POOL
- --------------------------------------------------------------------------------
The following descriptions of the Mortgage Loans and the mortgaged
properties are based upon the expected characteristics of the Mortgage Loans as
of the close of business on the Cut-off Date. The balances shown have been
adjusted for the scheduled principal payments due on or before the Cut-off
Date. Prior to the Closing Date, Mortgage Loans may be removed from the
Mortgage Pool and other Mortgage Loans may be substituted for them. The
Depositor believes that the information set forth in this Prospectus Supplement
is representative of the characteristics of the Mortgage Pool as it will be
constituted on the Closing Date. Unless the context requires otherwise,
references below to percentages of the Mortgage Loans are approximate
percentages of the aggregate Stated Principal Balance of the Mortgage Loans as
of the Cut-off Date.
The Trust will consist primarily of a pool (the "Mortgage Pool") of
conventional, fully-amortizing mortgage loans (the "Mortgage Loans") secured by
first liens on one- to four-family residential properties. As of the Cut-off
Date, the Mortgage Pool is expected to include 570 Mortgage Loans with an
aggregate Stated Principal Balance of approximately $275,332,114. The Mortgage
Loans will have original terms to stated maturity ranging from 180 to 360
months. The Mortgage Loans will have scheduled monthly payments of interest and
principal due on the first day of each month.
Each Mortgage Loan has a fixed mortgage interest rate for approximately the
first five years after the origination of such Mortgage Loan. Each mortgage
note provides for adjustments to the mortgage interest rate thereon at the end
of the initial fixed-rate period and annually thereafter (each, an "Adjustment
Date"). Each Mortgage Loan is fully-amortizing over the term to maturity of
that Mortgage Loan.
The mortgage interest rate on each Mortgage Loan will adjust annually
commencing on or about the fifth anniversary of the first due date. On each
Adjustment Date, the mortgage interest rate of such Mortgage Loan will adjust
to the sum of the Index (as defined below) and the number of basis points
specified in the applicable mortgage note ( the "Gross Margin"), rounded up to
the nearest one-eighth of one percent, subject to the limitation that with
respect to each Adjustment Date, the interest rate after such adjustment may
not vary from the mortgage interest rate in effect prior to such adjustment by
more than the amount specified in the mortgage note (the "Periodic Cap"). The
Periodic Caps on the Mortgage Loans are generally 5% for the first Adjustment
Date and 2% for every Adjustment Date thereafter. In addition, adjustments to
the interest rate for each Mortgage Loan are subject to a lifetime maximum
mortgage interest rate (a "Rate Ceiling"). None of the Mortgage Loans is
subject to a lifetime minimum mortgage interest rate. Therefore, the minimum
mortgage interest rate for each Mortgage Loan will be the Gross Margin for that
Mortgage Loan. On the first due date following each Adjustment Date for each
Mortgage Loan, the monthly payment for the Mortgage Loan will be adjusted, if
necessary, to an amount that will fully amortize such Mortgage Loan at the
adjusted mortgage interest rate over its remaining scheduled term to maturity.
The index for the Mortgage Loans will be the One-Year CMT (the "Index").
"One-Year CMT" is defined to be the weekly average yield on United States
Treasury Securities adjusted to a constant maturity of one year, as made
available by the Federal Reserve Board, published in Federal Reserve
Statistical Release H.15 (519) and most recently available as of the date 45
days before the applicable Adjustment Date. In the event such Index is no
longer available, the Servicer will select a substitute Index in accordance
with the terms of the related mortgage note and in compliance with federal and
state law.
S-17
Listed below are historical values of One-Year CMT available as of the date
45 days before the dates shown below. The weekly averages shown are intended
only to provide an historical summary of the movements in yields on United
States Treasury Securities adjusted to a constant maturity of one year and may
not be indicative of future rates. The source of the values shown below is
Federal Reserve Statistical Release H.15 (519).
Year
----------------------------------
Date 2001 2000 1999 1998 1997 1996
- ---- ---- ---- ---- ---- ---- ----
January 1................................... 6.14% 5.50% 4.52% 5.44% 5.41% 5.45%
February 1.................................. 5.73 5.85 4.49 5.53 5.46 5.35
March 1..................................... 4.79 6.12 4.55 5.25 5.61 5.17
April 1..................................... 4.72 6.20 4.67 5.28 5.49 4.85
May 1....................................... -- 6.18 4.77 5.37 5.72 5.41
June 1...................................... -- 6.14 4.67 5.30 5.99 5.62
July 1...................................... -- 6.38 4.79 5.46 5.86 5.67
August 1.................................... -- 6.14 5.12 5.42 5.72 5.86
September 1................................. -- 6.09 5.01 5.36 5.54 5.90
October 1................................... -- 6.17 5.23 5.23 5.59 5.62
November 1.................................. -- 6.14 5.28 4.76 5.59 5.88
December 1.................................. -- 5.98 5.42 4.14 5.45 5.57
The Mortgage Pool consists of Mortgage Loans either (i) originated by the
Seller or (ii) purchased by the Seller from various entities that either
originated the Mortgage Loans or acquired the Mortgage Loans pursuant to
mortgage loan purchase programs operated by such entities. The Mortgage Loans
will be sold by the Seller to the Depositor on the Closing Date pursuant to a
mortgage loan purchase agreement between the Seller and the Depositor (the
"Mortgage Loan Purchase Agreement"). The Mortgage Loan Purchase Agreement will
provide the Depositor with remedies against the Seller for breaches of
representations and warranties made by the Depositor with respect to the
Mortgage Loans in the Pooling Agreement and for the failure to deliver
documentation with respect to the Mortgage Loans under the Pooling Agreement.
As of the Cut-off Date, approximately 7.38% of the Mortgage Loans (the
"Convertible Mortgage Loans") had mortgage interest rates that may be converted
to fixed interest rates at the option of the mortgagor on the first, second or
third Adjustment Date. Upon the conversion to a fixed interest rate, the
Depositor will be required by the Pooling Agreement to repurchase any such
Convertible Mortgage Loans at a price equal to the Purchase Price. Under the
Mortgage Loan Purchase Agreement, the Seller will agree to purchase any such
repurchased Convertible Mortgage Loans from the Depositor.
As of the Cut-off Date, no Mortgage Loan was delinquent and no Mortgage Loan
has been more than 30 days delinquent more than once during the preceding
twelve months. None of the Mortgage Loans will be subject to any buydown
agreement.
As of the Cut-off Date, no Mortgage Loan will have a Loan-to-Value Ratio of
more than 95.00%. For more information on the Loan-to-Value Ratios of the
Mortgage Loans, see the "Original Loan-to-Value Ratios" table below. Subject to
minor exceptions permitted in the Seller's discretion, each Mortgage Loan with
a Loan-to-Value Ratio at origination in excess of 80% will be covered by a
primary mortgage guaranty insurance policy which conforms to the standards of
Fannie Mae ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). No
such primary mortgage insurance policy will be required with respect to any
such Mortgage Loan after the date on which the related Loan-to-Value Ratio is
less than 80%.
S-18
The "Loan-to-Value Ratio" of a Mortgage Loan at any time is the percentage
equal to (i) the principal balance of the related Mortgage Loan divided by (ii)
the lesser of (a) the appraised value of the related mortgaged property
determined in an appraisal obtained by the originator at origination of the
Mortgage Loan and (b) except for Mortgage Loans made for refinancing purposes,
the sales price for the mortgaged property. The value of any mortgaged property
generally will change from the level that existed on the appraisal or sales
date. If residential real estate values generally or in a particular geographic
area decline, the Loan-to-Value Ratios might not be a reliable indicator of the
rates of delinquencies, foreclosures and losses that could occur with respect
to the Mortgage Loans.
Mortgage Loan Data
The following tables set forth certain characteristics of the Mortgage Loans
as of the Cut-off Date. The balances and percentages may not be exact due to
rounding.
Occupancy of Mortgaged Properties/(1)/
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Occupancy Loans Cut-off Date Balance
- --------- --------- ---------------- --------------
Primary Residence..................... 537 $258,083,438.53 93.74%
Second Home........................... 30 15,644,904.42 5.68
Investor Property..................... 3 1,603,770.61 0.58
--- --------------- ------
Total............................... 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) Based solely on representations of the mortgagor at the time of origination
of the related Mortgage Loan.
Property Types
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Property Type Loans Cut-off Date Balance
- ------------- --------- ---------------- --------------
Single Family Residence............... 327 $163,566,056.28 59.41%
PUD--Detached......................... 141 66,190,124.04 24.04
Condominium........................... 71 31,111,055.32 11.30
PUD--Attached......................... 20 8,371,752.48 3.04
2-Family.............................. 7 3,703,497.95 1.35
4-Family.............................. 3 1,894,085.11 0.69
3-Family.............................. 1 495,542.38 0.18
--- --------------- ------
Total............................... 570 $275,332,113.56 100.00%
=== =============== ======
Mortgage Loan Purpose
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Purpose Loans Cut-off Date Balance
- ------- --------- ---------------- --------------
Purchase.............................. 288 $130,005,006.05 47.22%
Refinance--Rate/Term.................. 211 113,678,727.33 41.29
Refinance--Cashout.................... 71 31,648,380.18 11.49
--- --------------- ------
Total............................... 570 $275,332,113.56 100.00%
=== =============== ======
S-19
Geographical Distribution of the Mortgaged Properties/(1)/
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Geographic Area Loans Cut-off Date Balance
- --------------- --------- ---------------- --------------
Arizona............................... 5 $ 1,864,630.00 0.68%
California............................ 390 188,624,359.75 68.51
Colorado.............................. 17 7,534,694.58 2.74
Connecticut........................... 3 1,996,529.82 0.73
Delaware.............................. 1 302,769.44 0.11
District of Columbia.................. 2 1,272,956.61 0.46
Florida............................... 8 3,884,380.11 1.41
Georgia............................... 13 5,446,613.46 1.98
Idaho................................. 1 598,938.34 0.22
Illinois.............................. 33 17,798,626.75 6.46
Indiana............................... 2 663,491.18 0.24
Kansas................................ 1 489,112.21 0.18
Kentucky.............................. 1 382,820.38 0.14
Maryland.............................. 9 4,510,276.52 1.64
Massachusetts......................... 5 2,454,257.26 0.89
Michigan.............................. 2 1,032,833.66 0.38
Minnesota............................. 1 749,429.31 0.27
Missouri.............................. 3 1,607,894.87 0.58
Nevada................................ 6 2,911,818.06 1.06
New Jersey............................ 3 1,209,056.63 0.44
New York.............................. 1 899,315.17 0.33
North Carolina........................ 9 5,481,448.89 1.99
Ohio.................................. 2 690,740.53 0.25
Oregon................................ 2 1,244,514.25 0.45
Pennsylvania.......................... 1 315,000.00 0.11
South Carolina........................ 10 4,345,775.27 1.58
Tennessee............................. 2 823,968.92 0.30
Texas................................. 11 5,484,309.56 1.99
Utah.................................. 1 335,744.33 0.12
Virginia.............................. 15 6,368,210.53 2.31
Washington............................ 8 3,067,981.33 1.11
Wisconsin............................. 2 939,615.84 0.34
--- --------------- ------
Total............................... 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) As of the Cut-off Date, no more than approximately 1.76% of the Mortgage
Loans are expected to be secured by mortgaged properties located in any one
five-digit postal zip code.
S-20
Current Mortgage Loan Principal Balances/(1)/
Aggregate
Stated % of
Number of Principal Cut-off Date
Current Mortgage Loan Principal Mortgage Balance as of Pool Principal
Balances Loans Cut-off Date Balance
- ------------------------------- --------- --------------- --------------
$250,000.01 to $300,000.00........... 27 $ 7,860,886.69 2.86%
$300,000.01 to $350,000.00........... 118 38,682,876.36 14.05
$350,000.01 to $400,000.00........... 91 34,244,937.10 12.44
$400,000.01 to $450,000.00........... 70 29,879,770.57 10.85
$450,000.01 to $500,000.00........... 66 31,675,361.33 11.50
$500,000.01 to $550,000.00........... 47 24,801,381.77 9.01
$550,000.01 to $600,000.00........... 40 23,194,933.85 8.42
$600,000.01 to $650,000.00........... 45 28,641,623.14 10.40
$650,000.01 to $700,000.00........... 6 4,127,259.40 1.50
$700,000.01 to $750,000.00........... 17 12,513,216.52 4.54
$750,000.01 to $800,000.00........... 5 3,903,724.56 1.42
$800,000.01 to $850,000.00........... 8 6,658,131.43 2.42
$850,000.01 to $900,000.00........... 6 5,329,852.43 1.94
$900,000.01 to $950,000.00........... 1 948,513.33 0.34
$950,000.01 to $1,000,000.00......... 23 22,869,645.08 8.31
--- --------------- ------
Total.............................. 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans is expected to be approximately $483,039.
Original Loan-to-Value Ratios/(1)/
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Original Loan-to-Value Ratios Loans Cut-off Date Balance
- ----------------------------- --------- ---------------- --------------
15.01% to 20.00%...................... 1 $ 299,518.76 0.11%
20.01% to 25.00%...................... 1 839,311.45 0.30
25.01% to 30.00%...................... 3 1,692,698.54 0.61
30.01% to 35.00%...................... 6 4,127,441.29 1.50
35.01% to 40.00%...................... 9 5,159,525.96 1.87
40.01% to 45.00%...................... 15 7,222,773.44 2.62
45.01% to 50.00%...................... 18 11,412,083.63 4.14
50.01% to 55.00%...................... 18 9,575,393.91 3.48
55.01% to 60.00%...................... 26 15,296,409.97 5.56
60.01% to 65.00%...................... 48 25,253,526.60 9.17
65.01% to 70.00%...................... 61 31,703,430.50 11.51
70.01% to 75.00%...................... 62 30,991,936.17 11.26
75.01% to 80.00%...................... 258 116,205,047.65 42.21
80.01% to 85.00%...................... 4 1,501,195.16 0.55
85.01% to 90.00%...................... 19 6,911,575.10 2.51
90.01% to 95.00%...................... 21 7,140,245.43 2.59
--- --------------- ------
Total............................... 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately 70.26%.
S-21
Current Mortgage Interest Rates/(1)/
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Current Mortgage Interest Rates Loans Cut-off Date Balance
- ------------------------------- --------- ---------------- --------------
5.751% to 6.000%..................... 2 $ 914,402.69 0.33%
6.001% to 6.250%..................... 3 1,327,192.24 0.48
6.251% to 6.500%..................... 6 2,068,233.67 0.75
6.501% to 6.750%..................... 34 15,004,303.71 5.45
6.751% to 7.000%..................... 99 48,120,707.11 17.48
7.001% to 7.250%..................... 172 83,271,276.54 30.24
7.251% to 7.500%..................... 176 86,956,621.09 31.58
7.501% to 7.750%..................... 38 19,602,269.34 7.12
7.751% to 8.000%..................... 25 11,232,605.53 4.08
8.001% to 8.250%..................... 13 5,939,975.11 2.16
8.251% to 8.500%..................... 1 368,756.27 0.13
8.501% to 8.750%..................... 1 525,770.26 0.19
--- --------------- ------
Total.............................. 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
Mortgage Loans is expected to be approximately 7.268% per annum.
Gross Margins/(1)/
Aggregate
Stated % of
Number of Principal Cut-off Date
Mortgage Balance as of Pool Principal
Gross Margins Loans Cut-off Date Balance
- ------------- --------- --------------- --------------
2.501% to 2.750%....................... 563 $272,532,904.06 98.98%
2.751% to 3.000%....................... 7 2,799,209.50 1.02
--- --------------- ------
Total................................ 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) As of the Cut-off Date, the weighted average Gross Margin of the Mortgage
Loans is expected to be approximately 2.753%.
Rate Ceilings/(1)/
Aggregate
Stated % of
Number of Principal Cut-off Date
Mortgage Balance as of Pool Principal
Rate Ceilings Loans Cut-off Date Balance
- ------------- --------- --------------- --------------
10.751% to 11.000%..................... 2 $ 914,402.69 0.33%
11.001% to 11.250%..................... 3 1,327,192.24 0.48
11.251% to 11.500%..................... 6 2,068,233.67 0.75
11.501% to 11.750%..................... 34 15,004,303.71 5.45
11.751% to 12.000%..................... 99 48,120,707.11 17.48
12.001% to 12.250%..................... 172 83,271,276.54 30.24
12.251% to 12.500%..................... 176 86,956,621.09 31.58
12.501% to 12.750%..................... 38 19,602,269.34 7.12
12.751% to 13.000%..................... 25 11,232,605.53 4.08
13.001% to 13.250%..................... 13 5,939,975.11 2.16
13.251% to 13.500%..................... 1 368,756.27 0.13
13.501% to 13.750%..................... 1 525,770.26 0.19
--- --------------- ------
Total................................ 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) As of the Cut-off Date, the weighted average Rate Ceiling of the Mortgage
Loans is expected to be approximately 12.268%.
S-22
First Adjustment Date/(1)/
Aggregate
Stated % of
Number of Principal Cut-off Date
Mortgage Balance as of Pool Principal
First Adjustment Date Loans Cut-off Date Balance
- --------------------- --------- --------------- --------------
August 1, 2005......................... 1 $ 373,828.36 0.14%
September 1, 2005...................... 3 1,496,152.19 0.54
October 1, 2005........................ 3 1,175,363.12 0.43
November 1, 2005....................... 7 2,392,388.67 0.87
December 1, 2005....................... 18 8,040,399.43 2.92
January 1, 2006........................ 30 12,472,922.20 4.53
February 1, 2006....................... 276 135,593,801.21 49.25
March 1, 2006.......................... 217 105,845,358.38 38.44
April 1, 2006.......................... 15 7,941,900.00 2.88
--- --------------- ------
Total................................ 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) As of the Cut-off Date, the weighted average months to first Adjustment
Date for the Mortgage Loans is expected to be approximately 58 months.
Remaining Terms/(1)/
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Remaining Term Loans Cut-off Date Balance
- -------------- --------- ---------------- --------------
121 to 180 months..................... 2 $ 621,996.19 0.23%
241 to 300 months..................... 1 998,837.03 0.36
301 to 360 months..................... 567 273,711,280.34 99.41
--- --------------- ------
Total............................... 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans is expected to be approximately 358 months.
Credit Scoring of Mortgagors/(1)/
Aggregate % of
Number of Stated Principal Cut-off Date
Mortgage Balance as of Pool Principal
Credit Scores Loans Cut-off Date Balance
- ------------- --------- ---------------- --------------
601 to 650............................ 28 $ 12,347,967.09 4.48%
651 to 700............................ 78 36,816,783.08 13.37
701 to 750............................ 233 111,232,948.45 40.40
751 to 800............................ 223 109,898,871.89 39.92
801 to 850............................ 6 3,513,492.37 1.28
Unknown Scores........................ 2 1,522,050.68 0.55
--- --------------- ------
Total............................... 570 $275,332,113.56 100.00%
=== =============== ======
- --------
(1) The scores shown are Bureau Credit Scores from Experian (FICO), Equifax
(Beacon) and TransUnion (Empirica).
S-23
Underwriting Standards
Each mortgage loan underwritten by the Seller has been underwritten in
accordance with guidelines established in the Seller's Product and Policy
Guides (the "Product Guides"). These underwriting standards applied by the
Seller in originating or acquiring mortgage loans are intended to evaluate the
applicants' repayment ability, credit standing and assets available for
downpayment, closing costs and cash reserves. Additionally, guidelines are
established regarding the adequacy of the property as collateral for the loan
requested. The underwriting standards as established in the Product Guides are
continuously updated to reflect prevailing conditions in the residential
market, new mortgage products, and the investment market for residential
mortgage loans.
The use of standardized underwriting guidelines does not imply that each
specific criterion was satisfied individually. The Seller will consider a
mortgage loan to be originated in accordance with a given set of guidelines if,
based on an overall qualitative evaluation, the loan is in substantial
compliance with such underwriting guidelines. Even if one or more specific
criteria included in such underwriting guidelines were not satisfied, if other
factors compensated for the standards that were not satisfied, the mortgage
loan may be considered to be in substantial compliance with the underwriting
guidelines.
The real estate lending processes for one- to four-family mortgage loans
follow standard procedures, designed to comply with applicable federal and
state laws and regulations. Initially, a prospective borrower is required to
complete an application designed to provide pertinent information about the
prospective borrower, the property to be financed and the type of loan desired.
Information regarding the property to be financed may be provided by the
prospective borrower after the Seller has approved, subject to review of the
property to be financed, a loan to the prospective borrower. As part of the
description of the prospective borrower's financial condition, the Seller
generally requires a description of assets and liabilities and income and
expenses and obtains a credit report, which summarizes the prospective
borrower's credit history with merchants and lenders and any public records,
such as bankruptcy. In general, an employment verification is obtained
providing current and historical income information, and with respect to
certain loans, a telephonic employment confirmation is obtained. Such
employment verification may be obtained, either through analysis of the
prospective borrower's W-2 forms for the most recent two years and year to-date
earnings statement or most recent two years' tax returns, or from the
prospective borrower's employer, wherein the employer reports the length of
employment and current salary with that organization. Self-employed prospective
borrowers generally are required to submit their federal tax returns for the
past two years plus year-to-date financial statements, if the loan application
is made 120 days or longer after the end of the most recent tax year for which
a federal tax return was provided.
The Seller may, as part of its overall evaluation of a prospective
borrower's creditworthiness, use Credit Scores or a combination of Credit
Scores and Mortgage Scores. "Credit Scores" are statistical credit scores
designed to assess a borrower's creditworthiness and likelihood to default on a
consumer obligation over a two-year period based on a borrower's credit
history. Credit Scores were not developed to predict the likelihood of default
on mortgage loans and, accordingly, may not be indicative of the ability of a
mortgagor to repay its Mortgage Loan. A "Mortgage Score" takes into account not
only a borrower's credit history but also uses statistics to predict how the
majority of loans with common characteristics in a broad group of the
population will perform in the future. The Mortgage Score used by the Seller
will either have been developed by the Seller or by a third party and approved
by the Seller. Some mortgage loans originated by the Seller may have no Credit
Score or Mortgage Score or have a Credit Score that the Seller believes, as a
result of other factors, is not predictive of a borrower's capacity and
willingness to pay. In those cases, the Seller will obtain an alternative
credit history that has
S-24
at least three credit references, one of which is housing related. A
prospective borrower with (i) a higher Credit Score or (ii) a higher Credit
Score and Mortgage Score, which, in either event, indicates a more favorable
credit history, is eligible for one of the Seller's accelerated processing
programs (the "Accelerated Processing Programs"). Loans in the Accelerated
Processing Programs are subject to less stringent documentation requirements
but require income verification. Approximately 45.91% of the Mortgage Loans
have been originated under the Accelerated Processing Programs. On occasion,
the Seller may originate loans under its "All-Ready Home" refinance program.
Under this program, a borrower whose loan is serviced by the Seller may be
eligible for a reduced documentation refinancing if the borrower's mortgage
loan has had no delinquent payments in the previous twelve months and the only
change is the mortgage interest rate or term of the mortgage loan. The Seller
still requires a full application for this program and the satisfaction of all
collateral requirements, including evaluation, title and insurance.
Once all applicable employment and deposit documentation and the credit
report are received, a determination is made as to whether the prospective
mortgagor has sufficient monthly income available (i) to meet the mortgager's
monthly obligations on the proposed mortgage loan and other expenses related to
the mortgaged property (such as property taxes, hazard insurance and
maintenance and utility costs) and (ii) to meet other financial obligations and
monthly living expenses.
To determine the adequacy of the mortgaged property as collateral, generally
an independent appraisal is made of each mortgaged property considered for
financing. In certain instances the appraisal may be conducted by an employee
of the Seller or an affiliate. An appraiser is required to inspect the
mortgaged property and verify that it is in acceptable condition and that
construction, if recent, has been completed. The evaluation is based on the
appraiser's estimate of value, giving appropriate weight to both the market
value of comparable housing, as well as the cost of replacing the mortgaged
property.
Certain states where the mortgaged properties securing the Mortgage Loans
are located are "anti-deficiency" states, where, in general, lenders providing
credit on one-to-four family properties must look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of the
Mortgage Loans -- Anti-Deficiency Legislation, the Bankruptcy Code and Other
Limitations on Lenders" in the Prospectus. The Seller's underwriting guidelines
in all states (including anti-deficiency states) require that the value of the
mortgaged property being financed, as indicated by the independent evaluation,
currently supports and is anticipated to support in the future the outstanding
loan balance and provides sufficient value to mitigate the effects of adverse
shifts in real estate values, although there can be no assurance that such
value will support the outstanding loan balance in the future.
The Seller may provide secondary financing to a borrower contemporaneously
with the origination of the first mortgage loan but only if the first mortgage
loan does not have a Loan-to-Value Ratio exceeding 80% and a combined loan-to-
value ratio exceeding 90%. The underwriting guidelines applied to the first
mortgage loan are based on the combined higher loan-to-value ratio with the
exception of the requirement of primary mortgage insurance. Secondary financing
by a lender other than the Seller is not prohibited but the terms of such
financing are subject to review by the Seller and may not be as stringent as
the Seller's underwriting guidelines for secondary financings.
Approximately 4.52% of the Mortgage Loans were purchased by the Seller from
correspondents who have satisfied financial and operational standards specified
by the Seller in bulk purchase transactions (the "Bulk Purchase Mortgage
Loans"). The Bulk Purchase Mortgage Loans were underwritten by the related
correspondents using underwriting standards which may vary from the
underwriting standards used by the Seller. However, the Seller has in each case
reviewed and approved the underwriting standards prior to purchase and
determined that such standards are not materially
S-25
different from the underwriting standards currently employed by the Seller. The
Seller will have performed post-purchase reviews of a sampling of the mortgage
loans for compliance with approved underwriting standards.
- --------------------------------------------------------------------------------
BANK OF AMERICA, N.A.
- --------------------------------------------------------------------------------
Bank of America, N.A. is an indirect wholly-owned subsidiary of Bank of
America Corporation. Bank of America, N.A. is engaged in a general commercial
banking business, offering a full range of commercial, corporate,
international, financial and retail banking services to corporations,
governments and individuals. Bank of America, N.A. originates and services
residential mortgage loans and performs subservicing functions for affiliates.
Bank of America, N.A.'s headquarters and its executive offices are located
at 101 South Tryon Street, Charlotte, North Carolina 28255, and the telephone
number is (704) 388-5000. Bank of America, N.A. is subject to regulation,
supervision and examination by the Office of the Comptroller of the Currency
and has been approved as a mortgagee and seller/servicer by the Department of
Housing and Urban Development, the Veterans Administration, the Government
National Mortgage Association, FNMA and FHLMC.
- --------------------------------------------------------------------------------
SERVICING OF MORTGAGE LOANS
- --------------------------------------------------------------------------------
All of the Mortgage Loans will be serviced by Bank of America, N.A. (in its
capacity as servicer, the "Servicer") in accordance with the terms of the
Pooling Agreement. The Servicer may perform any of its obligations under the
Pooling Agreement through one or more subservicers. Despite the existence of
subservicing arrangements, the Servicer will be liable for its servicing duties
and obligations under the Pooling Agreement as if the Servicer alone were
servicing the Mortgage Loans. See "The Pooling and Servicing Agreement" in the
Prospectus.
Foreclosure and Delinquency Experienceof Bank of America, N.A.
The following table summarizes the delinquency and foreclosure experience on
the portfolio of one- to four-family first mortgage loans originated or
acquired by Bank of America, N.A. or certain of its affiliates and serviced or
subserviced by Bank of America, N.A., or serviced by Bank of America, N.A. for
others, other than (i) mortgage loans acquired through certain mergers with
previously unaffiliated entities, (ii) mortgage loans with respect to which the
servicing rights were acquired by Bank of America, N.A. in bulk and (iii)
certain other mortgage loans, to the extent such mortgage loans were originated
at bank branches of Bank of America, N.A.
The portfolio of mortgage loans serviced by Bank of America, N.A. includes
both fixed and adjustable interest rate mortgage loans, including "buydown"
mortgage loans, loans with balances conforming to FHLMC's and FNMA's limits as
well as jumbo loans, loans with stated maturities of 10 to 40 years and other
types of mortgage loans having a variety of payment characteristics, and
includes mortgage loans secured by mortgaged properties in geographic locations
that may not be representative of the geographic distribution or concentration
of the mortgaged properties securing the Mortgage Loans. There can be no
assurance that the delinquency, foreclosure and loss experience set forth below
will be similar to the results that may be experienced with respect to the
Mortgage Loans.
S-26
Bank of America, N.A
Delinquency and Foreclosure Experience on Mortgage Loans
At March 31, 2001 At December 31, 2000 At December 31, 1999 At December 31, 1998
------------------------ ------------------------ ------------------------ ------------------------
Number/% Outstanding Number/% Outstanding Number/% Outstanding Number/% Outstanding
of Principal of Principal of Principal of Principal
Mortgage Amount Mortgage Amount Mortgage Amount Mortgage Amount
Loans (In Millions) Loans (In Millions) Loans (In Millions) Loans (In Millions)
--------- ------------- --------- ------------- --------- ------------- --------- -------------
Total Portfolio......... 1,293,668 $181,933.7 1,272,637 $179,465.6 1,166,326 $160,078.3 1,020,195 $134,348.6
Delinquencies*
One Installment
delinquent............ 19,721 $ 2,259.6 26,907 $ 3,011.3 18,632 $ 1,962.4 17,085 $ 1,764.9
Percent Delinquent..... 1.5% 1.2% 2.1% 1.7% 1.6% 1.2% 1.7% 1.3%
Two Installments
delinquent............ 4,231 $ 440.2 4,939 $ 489.2 3,662 $ 355.6 3,606 $ 352.8
Percent Delinquent..... 0.3% 0.2% 0.4% 0.3% 0.3% 0.2% 0.4% 0.3%
Three or more
installments
delinquent............ 4,883 $ 485.1 5,148 $ 492.8 4,266 $ 391.0 3,599 $ 327.2
Percent Delinquent..... 0.4% 0.3% 0.4% 0.3% 0.4% 0.2% 0.4% 0.2%
In Foreclosure.......... 4,405 $ 450.2 4,216 $ 420.0 3,940 $ 385.4 4,036 $ 411.0
Percent in
Foreclosure........... 0.3% 0.2% 0.3% 0.2% 0.3% 0.2% 0.4% 0.3%
Delinquent and in
Foreclosure............ 33,240 3,635.1 41,210 $ 4,413.3 30,500 $ 3,094.4 28,326 $ 2,855.9
Percent Delinquent and
in Foreclosure**....... 2.6% 2.0% 3.2% 2.5% 2.6% 1.9% 2.8% 2.1%
- ----------
* A mortgage loan is deemed to have "one installment delinquent" if any
scheduled payment of principal or interest is delinquent past the end of the
month in which such payment was due, "two installments delinquent" if such
delinquency persists past the end of the month following the month in which
such payment was due, and so forth.
** The sums of the Percent Delinquent and Percent in Foreclosure set forth in
this table may not equal the Percent Delinquent and in Foreclosure due to
rounding.
- --------------------------------------------------------------------------------
THE POOLING AND SERVICING AGREEMENT
- --------------------------------------------------------------------------------
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated April 24, 2001 (the "Pooling Agreement"), among the
Depositor, the Servicer and the Trustee. The Prospectus contains important
additional information regarding the terms and conditions of the Pooling
Agreement and the Certificates. See "The Pooling and Servicing Agreement" in
the Prospectus.
The following summaries do not purport to be complete and are subject to the
provisions of the Pooling Agreement which are incorporated by reference. The
Depositor plans to file a final copy of the Pooling Agreement with the
Securities and Exchange Commission pursuant to a Current Report on Form 8-K
after the Closing Date.
Assignment of Mortgage Loans
In connection with the transfer and assignment of the Mortgage Loans to the
Trustee, the Depositor will deliver or cause to be delivered to the Trustee, or
a custodian for the Trustee, among other things, with respect to each Mortgage
Loan (collectively, the "Mortgage File"):
. the original Mortgage Note endorsed without recourse in blank or to the
order of the Trustee (or its nominee) or an affidavit signed by an
officer of the Seller certifying that the related original Mortgage Note
has been lost;
. the original or a certified copy of the Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned from
the public recording office, which will be delivered to the Trustee as
soon as the same is available to the Depositor);
S-27
. except as described below, an assignment in recordable form of the
Mortgage (or a copy, if such assignment has been submitted for
recording); and
. if applicable, any riders or modifications to such Mortgage Note and
Mortgage.
Assignments of the Mortgage Loans to the Trustee (or its nominee) will be
recorded in the appropriate public office for real property records, except (i)
in states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interests in the Mortgage
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor or the Seller, (ii) in states where recordation is
not required by either Rating Agency to obtain the initial ratings on the
Certificates described under "Certificate Ratings" in this Prospectus
Supplement or (iii) with respect to any Mortgage which has been recorded in the
name of Mortgage Electronic Registration Systems, Inc. ("MERS") or its
designee. With respect to any Mortgage which has been recorded in the name of
MERS or its designee, no mortgage assignment in favor of the Trustee will be
required to be prepared or delivered. Instead, the Servicer will be required to
take all actions as are necessary to cause the Trust to be shown as the owner
of the related Mortgage Loan on the records of MERS for purposes of the system
of recording transfers of beneficial ownership of mortgages maintained by MERS.
The Trustee will promptly review each Mortgage File after the Closing Date (or
promptly after the Trustee's receipt of any document permitted to be delivered
after the Closing Date) to determine if any of the foregoing documents is
missing.
Repurchases of Mortgage Loans
If any portion of the Mortgage File is not delivered to the Trustee or if a
Mortgage Loan breaches any of the representations made by the Depositor in the
Pooling Agreement in any material respect and the Depositor does not cure such
omission or defect within 90 days, the Depositor will be required on the
Distribution Date in the month following the expiration of the 90-day period
either (i) to repurchase the related Mortgage Loan (or any property acquired in
respect thereof) at a price (the "Purchase Price") equal to 100% of the unpaid
principal balance of such Mortgage Loan plus accrued and unpaid interest on
such principal balance at the related mortgage interest rate, or (ii) to
substitute an Eligible Substitute Mortgage Loan; however, such substitution
generally is permitted only within two years of the Closing Date. Any Mortgage
Loan repurchased or subject to a substitution as described in this paragraph is
referred to as a "Deleted Mortgage Loan."
An "Eligible Substitute Mortgage Loan" generally will:
. have a principal balance, after deduction of all Monthly Payments due in
the month of substitution, not in excess of, and not more than 10% less
than, the Stated Principal Balance of the Deleted Mortgage Loan (the
amount of any shortfall to be deposited by the Seller and held for
distribution to the certificateholders on the related Distribution Date
(a "Substitution Adjustment Amount"));
. have a Net Mortgage Interest Rate equal to that of the Deleted Mortgage
Loan;
. have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage
Loan;
. have a Gross Margin equal to that of the Deleted Mortgage Loan;
. have a Periodic Cap and Rate Ceiling equal to that of the Deleted
Mortgage Loan;
. have the same Index and frequency of mortgage interest rate adjustment as
the Deleted Mortgage Loan;
. have a remaining term to maturity not greater than (and not more than one
year less than) that of the Deleted Mortgage Loan; and
. comply with all of the representations and warranties in the Pooling
Agreement as of the date of substitution.
S-28
This cure, repurchase or substitution obligation constitutes the sole remedy
available to certificateholders or the Trustee for omission of, or a material
defect in, a Mortgage Loan document.
Optional Repurchases of Certain Mortgage Loans
The Depositor, in its sole discretion, may repurchase from the Trust:
. any Mortgage Loan that is at least 180 days delinquent; and
. any Mortgage Loan as to which the originator or prior owner of such
Mortgage Loan has breached a representation or warranty to the Seller
regarding the characteristics of such Mortgage Loan.
Any such repurchase will be at the Purchase Price.
Payments on Mortgage Loans; Accounts
On or prior to the Closing Date, the Servicer will establish an account (the
"Servicer Custodial Account"), which will be maintained as a separate trust
account by the Servicer in trust for the benefit of certificateholders. Funds
credited to the Servicer Custodial Account may be invested for the benefit and
at the risk of the Servicer in certain eligible investments, as described in
the Pooling Agreement, that are scheduled to mature on or prior to the business
day preceding the next Distribution Date. On or prior to the business day
immediately preceding each Distribution Date, the Servicer will withdraw from
the Servicer Custodial Account the Pool Distribution Amount and will deposit
such amount in an account established and maintained with the Trustee on behalf
of certificateholders (the "Certificate Account"). Funds credited to the
Certificate Account may be invested for the benefit and at the risk of the
Trustee in certain eligible investments, as described in the Pooling Agreement.
Servicing Compensation and Payment
of Expenses
The Administrative Fees with respect to the Trust are payable out of the
interest payments received on each Mortgage Loan. The "Administrative Fees"
consist of (a) servicing compensation payable to the Servicer in respect of its
servicing activities (the "Servicing Fee") and (b) fees paid to the Trustee.
The Administrative Fees will accrue on the Stated Principal Balance of each
Mortgage Loan at a rate (the "Administrative Fee Rate") equal to the sum of the
Servicing Fee Rate for such Mortgage Loan and the Trustee Fee Rate. The
"Trustee Fee Rate" will be 0.0040% per annum. The "Servicing Fee Rate" with
respect to each Mortgage Loan will be 0.51411% per annum.
The Servicer is obligated to pay certain ongoing expenses associated with
the Trust and incurred by the Servicer in connection with its responsibilities
under the Pooling Agreement. Those amounts will be paid by the Servicer out of
its Servicing Fee. The amount of the Servicer's Servicing Fee is subject to
adjustment with respect to prepaid Mortgage Loans, as described below under "--
Compensating Interest." The Servicer is also entitled to receive all late
payment fees, assumption fees and other similar charges and all investment
income earned on amounts on deposit in the Servicer Custodial Account.
The Trustee is also entitled to receive all investment income earned on
amounts on deposit in the Certificate Account. In addition to its compensation,
the Trustee is entitled to be reimbursed from and indemnified by the Trust for
certain expenses incurred by the Trustee in connection with its
responsibilities under the Pooling Agreement.
S-29
Compensating Interest
When a Mortgage Loan is subject to a partial prepayment or is prepaid in
full between due dates, the mortgagor is required to pay interest on the amount
prepaid only to the date of prepayment in the case of a prepayment in full or
to the due date in the month in which a partial prepayment is made. No interest
will be paid by the mortgagor on the amount prepaid after those dates.
Prepayments will be distributed to certificateholders on the Distribution Date
in the month following the month of receipt.
Pursuant to the Pooling Agreement, the aggregate Servicing Fee payable to
the Servicer for any month will be reduced by an amount equal to the lesser of
(i) one-twelfth of 0.25% of the balance of the Mortgage Loans and (ii) the
excess of (x) 30 days' interest at the mortgage interest rate (less the
Servicing Fee Rate) on the amount of each prepayment over (y) the amount of
interest actually paid by the related mortgagors on the amount of such
prepayments during the preceding month (any such reduction, "Compensating
Interest"). Any such shortfalls in interest as a result of prepayments in
excess of the amount of Compensating Interest for a month will reduce the
amount of interest available to be distributed to certificateholders from what
would have been the case in the absence of such prepayments. See "Description
of the Certificates -- Interest" in this Prospectus Supplement.
Advances
Subject to the following limitations, the Servicer will be required to
advance (any such advance, an "Advance") prior to each Distribution Date an
amount equal to the aggregate of payments of principal and interest (net of the
Servicing Fee) which were due on the related due date on the Mortgage Loans and
which were delinquent on the related Determination Date. Advances by the
Servicer will be made from its own funds or funds in the Servicer Custodial
Account that do not constitute a portion of the Pool Distribution Amount for
such Distribution Date. The obligation to make an Advance with respect to any
Mortgage Loan will continue until the ultimate disposition of the REO Property
or mortgaged property relating to such Mortgage Loan. An "REO Property" is a
mortgaged property that has been acquired by the Servicer on behalf of the
Trust through foreclosure or grant of a deed in lieu of foreclosure. With
respect to any Distribution Date, the "Determination Date" will be the
sixteenth day of the month in which such Distribution Date occurs or, if such
day is not a business day, the immediately preceding business day.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Servicer is obligated to make Advances if the Advances are,
in its judgment, reasonably recoverable from future payments and collections or
insurance payments or proceeds of liquidation of the related Mortgage Loan. If
the Servicer determines on any Determination Date to make an Advance, such
Advance will be included with the distribution to certificateholders on the
related Distribution Date. Any failure by the Servicer to make a required
Advance will constitute an event of default and the Trustee (if it succeeds to
the obligations of the Servicer under the Pooling Agreement) or the successor
servicer will be obligated to make the Advance, in accordance with the terms of
the Pooling Agreement.
Optional Termination
The circumstances under which the obligations created by the Pooling
Agreement will terminate in respect of the Certificates are described in "The
Pooling and Servicing Agreement -- Termination; Optional Purchase of Mortgage
Loans" in the Prospectus. In addition, the Depositor will have the option to
purchase all remaining Mortgage Loans and other assets in the Trust when the
scheduled balance of the Mortgage Pool as of the Distribution Date on which the
purchase proceeds are to be distributed is
S-30
less than 10% of the initial balance of the Mortgage Pool. This percentage may
be reduced through an amendment to the Pooling Agreement under the
circumstances described below. The purchase price will generally be equal to
the sum of the Stated Principal Balances of the Mortgage Loans and the fair
market value of any REO Properties held by the Trust together with the amount
of any unpaid interest shortfalls on the Certificates and one month's interest
on the Stated Principal Balance of each Mortgage Loan.
Distributions in respect of an optional termination will be paid to
certificateholders in order of their priority of distribution as described
below under "Description of the Certificates -- Priority of Distributions." The
proceeds from such a distribution may not be sufficient to distribute the full
amount to which each class is entitled if the purchase price is based in part
on the fair market value of the REO Property and such fair market value is less
than the scheduled balance of the related Mortgage Loan.
The Pooling Agreement may be amended without the consent of
certificateholders in order to reduce the percentage of the initial balance of
the Mortgage Pool at which the Depositor will have the option to purchase all
the remaining Mortgage Loans, if such reduction is considered necessary by the
Depositor, as evidenced by an officer's certificate delivered to the Trustee,
to preserve the treatment of the transfer of the Mortgage Loans to the
Depositor by Bank of America or to the Trust by the Depositor as a sale for
accounting purposes.
In no event will the trust created by the Pooling Agreement continue beyond
the later of (a) the repurchase described above, (b) the expiration of 21 years
from the death of the survivor of the person named in the Pooling Agreement and
(c) the final distribution to certificateholders of amounts received in respect
of the assets of the Trust. The termination of the Trust will be effected in a
manner consistent with applicable federal income tax regulations and the REMIC
status of the Trust.
Special Servicing Agreements
The Pooling Agreement will permit the Servicer to enter into a special
servicing agreement with an unaffiliated holder of a class of Class B
Certificates or of a class of securities representing interests in one or more
classes of Class B Certificates alone or together with other subordinated
mortgage pass-through certificates. Pursuant to such an agreement, such holder
may instruct the Servicer to commence or delay foreclosure proceedings with
respect to delinquent Mortgage Loans.
The Trustee
The Bank of New York will be the Trustee under the Pooling Agreement. The
Bank of New York is a New York banking corporation. The Bank of New York's
principal office is located at 101 Barclay Street-12 East, New York, New York
10286 (the "Corporate Trust Office"). Certificate transfer services are
conducted at the Corporate Trust Office. The telephone number of the Trustee is
(212) 815-5037. The Trustee may make available each month, to any interested
party, the monthly statement to certificateholders via the Trustee's website
located at "www.mbsreporting.com." The Depositor, the Seller and the Servicer
may maintain other banking relationships in the ordinary course of business
with the Trustee. The Trustee may appoint one or more co-trustees if necessary
to comply with the fiduciary requirements imposed by any jurisdiction in which
a mortgaged property is located.
S-31
Voting Rights
Voting rights for certain actions specified in the Pooling Agreement will
be allocated as follows:
. 99% of all voting rights will be allocated among the holders of the Class
A Certificates (other than the Class A-R Certificate) and Subordinate
Certificates based on the outstanding balances of their Certificates.
. 1% of all voting rights will be allocated to the holder of the Class A-R
Certificate.
The voting rights allocated to each class will be allocated among the
Certificates of such class based on their Percentage Interests.
The "Percentage Interest" of a Certificate of a class is the percentage
obtained by dividing the initial principal balance of such Certificate by the
aggregate initial class balance of such class.
- -------------------------------------------------------------------------------
DESCRIPTION OF THE CERTIFICATES
- -------------------------------------------------------------------------------
The Certificates will consist of (i) the six classes of Offered
Certificates listed in the table on page S-4 of this Prospectus Supplement and
(ii) the Class B-4, Class B-5 and Class B-6 Certificates, which are not
offered by this Prospectus Supplement.
The Senior Certificates in the aggregate will evidence an initial
beneficial ownership interest of approximately 96.50% in the Trust and the
Subordinate Certificates will evidence in the aggregate the remaining 3.50%
undivided interest in the Trust.
Denominations and Form
The Offered Certificates (other than the Class A-R Certificate) will be
issuable in book-entry form only (the "Book-Entry Certificates"). The Class A-
R Certificate will be issued in definitive, fully-registered form (such form,
the "Definitive Certificates"). The following table sets forth the original
Certificate form, the minimum denomination and the incremental denomination of
the Offered Certificates. The Offered Certificates are not intended to be and
should not be directly or indirectly held or beneficially owned in amounts
lower than such minimum denominations. A single certificate of each class may
be issued in an amount different than described above.
Form and Denominations of Offered Certificates
Original Minimum Incremental
Class Certificate Form Denomination Denomination
----- ---------------- ------------ ------------
Classes A-1 and A-2............... Book-Entry $1,000 $1
Class A-R ........................ Definitive $100 N/A
Classes B-1, B-2 and B-3.......... Book-Entry $25,000 $1
Book-Entry Certificates
Each class of the Book-Entry Certificates initially will be represented by
one or more physical certificates registered in the name of Cede & Co., as
nominee of The Depository Trust Company ("DTC"), which will be the "holder" or
"certificateholder" of such Certificates, as such terms are used in this
Prospectus Supplement. No beneficial owner acquiring an interest in a Book-
Entry Certificate will be entitled to receive a Definitive Certificate
representing their interest in the Book-Entry Certificate,
S-32
except as set forth below. Unless and until Definitive Certificates are issued
under the limited circumstances described in this Prospectus Supplement, all
references to actions taken by certificateholders or holders shall, in the
case of the Book-Entry Certificates, refer to actions taken by DTC upon
instructions from its DTC Participants, and all references to distributions,
notices, reports and statements to certificateholders or holders shall, in the
case of the Book-Entry Certificates, refer to distributions, notices, reports
and statements to DTC or Cede & Co., as the registered holder of the Book-
Entry Certificates, as the case may be, for distribution to beneficial owners
in accordance with DTC procedures.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("DTC Participants") and to facilitate the
clearance and settlement of securities transactions among DTC Participants
through electronic book-entries, thereby eliminating the need for physical
movement of certificates. DTC Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to banks, brokers, dealers, trust companies
and other institutions that clear through or maintain a custodial relationship
with a DTC Participant, either directly or indirectly ("Indirect DTC
Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and to receive and transmit
distributions of principal of and interest on the Book-Entry Certificates. DTC
Participants and Indirect DTC Participants with which beneficial owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective beneficial owners.
Beneficial owners that are not DTC Participants or Indirect DTC
Participants but desire to purchase, sell or otherwise transfer ownership of,
or other interests in, Book-Entry Certificates may do so only through DTC
Participants and Indirect DTC Participants. In addition, beneficial owners
will receive all distributions of principal and interest from the Trustee
through DTC Participants. DTC will forward such distributions to its DTC
Participants, which will forward them to Indirect DTC Participants or
beneficial owners. Beneficial owners will not be recognized by the Trustee,
the Servicer or any paying agent as certificateholders, as such term is used
in the Pooling Agreement, and beneficial owners will be permitted to exercise
the rights of certificateholders only indirectly through DTC and its DTC
Participants.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, beneficial owners may experience delays in their receipt of payments,
since distributions will be made by the Trustee to Cede & Co., as nominee for
DTC.
DTC has advised the Depositor that it will take any action permitted to be
taken by a certificateholder under the Pooling Agreement only at the direction
of one or more DTC Participants to whose accounts with DTC the Book-Entry
Certificates are credited. Additionally, DTC has advised the Depositor that it
will take such actions with respect to specified voting rights only at the
direction of and on behalf of DTC Participants whose holdings of Book-Entry
Certificates evidence such specified voting
S-33
rights. DTC may take conflicting actions with respect to voting rights to the
extent that DTC Participants whose holdings of Book-Entry Certificates evidence
such voting rights authorize divergent action.
None of the Depositor, the Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held
by Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests. In the event of
the insolvency of DTC, a DTC Participant or an Indirect DTC Participant in
whose name Book-Entry Certificates are registered, the ability of the
beneficial owners of such Book-Entry Certificates to obtain timely payment and,
if the limits of applicable insurance coverage by the Securities Investor
Protection Corporation are exceeded or if such coverage is otherwise
unavailable, ultimate payment, of amounts distributable with respect to such
Book-Entry Certificates may be impaired.
Definitive Certificates will be issued to beneficial owners of the Book-
Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC or
the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor; (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC; or (c) after
the occurrence of an event of default under the Pooling Agreement, beneficial
owners having voting rights aggregating not less than 51% of all voting rights
evidenced by each class of the Book-Entry Certificates advise the Trustee
through DTC, in writing, that the continuation of a book- entry system through
DTC (or a successor thereto) is no longer in the best interests of beneficial
owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC
Participants of Definitive Certificates. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Certificates and
instructions for re-registration, the Trustee will issue the Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as "certificateholders" under the Pooling Agreement.
Distributions
Distributions on the Certificates will be made by the Trustee on the 25th
day of each month (or, if not a business day, the next business day),
commencing in May 2001 (each, a "Distribution Date"), to the persons in whose
names such Certificates are registered at the close of business on the last
business day of the month preceding the month of such Distribution Date (the
"Record Date").
Distributions on each Distribution Date will be made by check mailed to your
address as it appears on the applicable certificate register or, if you hold
100% of a class of Certificates or if you hold Certificates with an aggregate
initial certificate balance of $1,000,000 or more and have notified the Trustee
in writing in accordance with the Pooling Agreement, by wire transfer in
immediately available funds to your account at a bank or other depository
institution having appropriate wire transfer facilities. However, the final
distribution in retirement of a Certificate will be made only upon presentment
and surrender of the Certificate at the Corporate Trust Office of the Trustee.
If you own a Book-Entry Certificate, distributions will be made to you through
the facilities of DTC, as described above under "-- Book-Entry Certificates."
S-34
Pool Distribution Amount
The "Pool Distribution Amount" with respect to any Distribution Date will be
equal to the sum of:
(i) all scheduled installments of interest (net of the Servicing Fee)
and principal due on the due date in the month in which such Distribution
Date occurs and received prior to the related Determination Date, together
with any Advances in respect thereof or any Compensating Interest;
(ii) all proceeds of any primary mortgage guaranty insurance policies
and any other insurance policies with respect to the Mortgage Loans, to the
extent such proceeds are not applied to the restoration of the related
mortgaged property or released to the mortgagor in accordance with the
Servicer's normal servicing procedures and all other cash amounts received
and retained in connection with the liquidation of defaulted Mortgage
Loans, by foreclosure or otherwise (collectively, "Liquidation Proceeds"),
during the calendar month preceding the month of such Distribution Date (in
each case, net of unreimbursed expenses incurred in connection with a
liquidation or foreclosure and unreimbursed Advances, if any);
(iii) all partial or full prepayments received during the calendar
month preceding the month of such Distribution Date; and
(iv) amounts received with respect to such Distribution Date as the
Substitution Adjustment Amount or Purchase Price in respect of any Deleted
Mortgage Loan or amounts received in connection with the optional
termination of the Trust as of such Distribution Date, reduced by amounts
in reimbursement for Advances previously made and other amounts as to which
the Servicer is entitled to be reimbursed pursuant to the Pooling
Agreement.
The Pool Distribution Amount will not include any profit received by the
Servicer on the foreclosure of a Mortgage Loan. Such amounts, if any, will be
retained by the Servicer as additional servicing compensation.
Priority of Distributions
As more fully described herein, distributions will be made on each
Distribution Date from the Pool Distribution Amount in the following order of
priority (the "Pool Distribution Amount Allocation"):
(i) to the Trustee an amount in payment for its services for such
Distribution Date;
(ii) to each class of Senior Certificates, to pay interest;
(iii) to the classes of Senior Certificates entitled to receive
distributions of principal, based on the Senior Principal Distribution
Amount, as described below under "-- Principal," to pay principal;
(iv) to each class of Subordinate Certificates, first to pay
interest and then to pay principal in the order of their numerical class
designations, beginning with the Class B-1 Certificates; and
(v) to the Class A-R Certificate, any remaining amounts in the REMIC,
subject to the limitations set forth below under "-- Interest" and "--
Principal."
Interest
The pass-through rate for each class of Offered Certificates for each
Distribution Date is as set forth or described in the table on page S-4 of this
Prospectus Supplement.
S-35
On each Distribution Date, to the extent of the Pool Distribution Amount,
each class of Certificates will be entitled to receive interest (as to each
class, the "Interest Distribution Amount") with respect to the related Interest
Accrual Period. The Interest Distribution Amount for any class of Certificates
will be equal to the sum of (i) interest accrued during the related Interest
Accrual Period at the applicable pass-through rate on the related class balance
and (ii) the sum of the amounts, if any, by which the amount described in
clause (i) above on each prior Distribution Date exceeded the amount actually
distributed in respect of interest on such prior Distribution Dates and not
subsequently distributed.
The interest entitlement described in clause (i) of the Interest
Distribution Amount for each class of Certificates will be reduced by the
amount of Net Interest Shortfalls for such Distribution Date. With respect to
any Distribution Date, the "Net Interest Shortfall" is equal to the sum of (i)
the shortfall in interest received with respect to any Mortgage Loan as a
result of (a) a Relief Act Reduction or (b) a Special Hazard Loss, Fraud Loss
or Bankruptcy Loss, after the exhaustion of the amounts of coverage provided by
the Subordinate Certificates for those types of losses and (ii) any Non-
Supported Interest Shortfalls. Net Interest Shortfalls on any Distribution Date
will be allocated pro rata among all classes of interest-bearing Certificates,
based on the amount of interest accrued on each such class of Certificates on
such Distribution Date before taking into account any reduction in such amounts
resulting from such Net Interest Shortfalls. A "Relief Act Reduction" is a
reduction in the amount of monthly interest payment on a Mortgage Loan pursuant
to the Soldiers' and Sailors' Civil Relief Act of 1940. See "Certain Legal
Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil Relief Act and
Similar Laws" in the Prospectus. With respect to any Distribution Date, the
"Non-Supported Interest Shortfall" is the amount by which the aggregate of
Prepayment Interest Shortfalls during the calendar month preceding the month of
such Distribution Date exceeds Compensating Interest for such period. A
"Prepayment Interest Shortfall" is the amount by which interest paid by a
mortgagor in connection with a prepayment of principal on a Mortgage Loan is
less than one month's interest at the related mortgage interest rate (net of
the Servicing Fee Rate) on the amount of such prepayment.
Accrued interest to be distributed on any Distribution Date will be
calculated for each class of Certificates on the basis of the related class
balance immediately prior to such Distribution Date. Interest will be
calculated and payable on the basis of a 360-day year consisting of twelve 30-
day months.
If on a particular Distribution Date, the Pool Distribution Amount applied
in the order described above under "-- Priority of Distributions" is not
sufficient to make a full distribution of the Interest Distribution Amount for
each class of Certificates, interest will be distributed on each class of
Certificates of equal priority pro rata based on the Interest Distribution
Amount the class would otherwise have been entitled to receive in the absence
of such shortfall. Any unpaid amount will be carried forward and added to the
Interest Distribution Amount that holders of that class of Certificates will be
entitled to receive on the next Distribution Date. Such a shortfall could
occur, for example, if Realized Losses on the Mortgage Loans were exceptionally
high or were concentrated in a particular month. Any such unpaid amount will
not bear interest.
Interest will accrue on each class of Certificates during each one-month
period ending on the last day of the month preceding the month in which each
Distribution Date occurs (each, an "Interest Accrual Period"). The initial
Interest Accrual Period will be deemed to have commenced on April 1, 2001.
Interest which accrues on such class of Certificates during an Interest Accrual
Period will be calculated on the assumption that distributions in reduction of
the principal balances thereof on the Distribution Date in that Interest
Accrual Period are made on the first day of the Interest Accrual Period.
The class balance of a class of Certificates at any time will equal (a) its
initial class balance less (i) all distributions of principal made to such
class, (ii) losses allocated to such class as described under
S-36
"-- Allocation of Losses" and (iii) other adjustments made to such class
balance as described under "-- Allocation of Losses" below.
After the Senior Credit Support Depletion Date, for so long as the Class A-
2 Certificates are outstanding, the amount that would have reduced the class
balance of the Class A-1 Certificates as a result of the adjustments described
under "--Allocation of Losses," will instead reduce the class balance of the
Class A-2 Certificates. As a result, after the Senior Credit Support Depletion
Date, the Class A-2 Certificates will bear the principal portion of all
Realized Losses allocable to the Class A-1 Certificates, other than Excess
Losses, for so long as the Class A-2 Certificates are outstanding.
The "Net Mortgage Interest Rate" of a Mortgage Loan is the excess of its
mortgage interest rate over the applicable Administrative Fee Rate.
Principal
On each Distribution Date, certificateholders will be entitled to receive
principal distributions from the Pool Distribution Amount to the extent
described below and in accordance with the priorities set forth under "--
Priority of Distributions" above. The principal distributions distributed to
a class on any Distribution Date will be allocated among the holders of such
class pro rata in accordance with their respective Percentage Interests.
All payments and other amounts received in respect of principal of the
Mortgage Loans will be allocated between the Senior Certificates and the
Subordinate Certificates.
On each Distribution Date, the Principal Amount will be distributed (i) as
principal of the Senior Certificates in an amount up to the Senior Principal
Distribution Amount and (ii) as principal of the Subordinate Certificates in
an amount up to the Subordinate Principal Distribution Amount.
The "Principal Amount" for any Distribution Date will equal the sum of:
(a) all monthly payments of principal due on each Mortgage Loan on the
related due date;
(b) the principal portion of the Purchase Price of each Mortgage Loan
that was repurchased by the Depositor pursuant to the Pooling Agreement as
of that Distribution Date;
(c) any Substitution Adjustment Amount in connection with a Deleted
Mortgage Loan received with respect to that Distribution Date;
(d) any Liquidation Proceeds allocable to recoveries of principal of
Mortgage Loans that are not yet Liquidated Mortgage Loans received during
the calendar month preceding the month of that Distribution Date;
(e) with respect to each Mortgage Loan that became a Liquidated Mortgage
Loan during the calendar month preceding the month of that Distribution
Date, the amount of the Liquidation Proceeds allocable to principal
received with respect to that Mortgage Loan; and
(f) all partial and full principal prepayments by mortgagors received
during the calendar month preceding the month of that Distribution Date.
The amounts described in clauses (a) through (d) are referred to as
"Scheduled Principal Payments." The amounts described in clauses (e) and (f)
are referred to as "Unscheduled Principal Payments."
S-37
Senior Principal Distribution Amount
On each Distribution Date, an amount equal to the lesser of (a) the Senior
Principal Distribution Amount for such Distribution Date and (b) the Pool
Distribution Amount remaining after payment of funds due to the Trustee and
distributions of interest on the Senior Certificates will be distributed as
principal of the following classes of Senior Certificates sequentially as
follows:
first, to the Class A-R Certificate, until its class balance has
been reduced to zero; and
second, concurrently, to the Class A-1 and Class A-2 Certificates,
pro rata, until their class balances have been reduced to zero.
The preceding distribution priorities will not apply on any Distribution
Date on or after the Senior Credit Support Depletion Date. On each of those
Distribution Dates, the amount to be distributed as principal to the Senior
Certificates will be distributed, concurrently, as principal of the classes of
Senior Certificates pro rata in accordance with their respective class balances
immediately prior to that Distribution Date.
The "Senior Credit Support Depletion Date" is the date on which the
aggregate balance of the Subordinate Certificates has been reduced to zero.
The "Senior Principal Distribution Amount" for any Distribution Date will
equal the sum of:
(a) the Senior Percentage of the Scheduled Principal Payments for that
Distribution Date; and
(b) the Senior Prepayment Percentage of the Unscheduled Principal
Payments for that Distribution Date;
provided, however, that if a Debt Service Reduction that is an Excess Loss is
sustained with respect to a Mortgage Loan that is not a Liquidated Mortgage
Loan, the Senior Principal Distribution Amount will be reduced on the related
Distribution Date by the Senior Percentage of the principal portion of the Debt
Service Reduction.
"Stated Principal Balance" means, as to any Mortgage Loan and due date, the
unpaid principal balance of such Mortgage Loan as of such due date, as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of any moratorium or similar
waiver or grace period), after giving effect to any previous partial principal
prepayments and Liquidation Proceeds received and to the payment of principal
due on such due date and irrespective of any delinquency in payment by the
related mortgagor and after giving effect to any Deficient Valuation.
The "Pool Principal Balance" with respect to any Distribution Date equals
the aggregate of the Stated Principal Balances of the Mortgage Loans
outstanding on the due date in the month preceding the month of such
Distribution Date.
The "Senior Percentage" for any Distribution Date will equal (i) the
aggregate class balance of the Senior Certificates immediately prior to such
date, divided by (ii) the aggregate class balance of the Certificates
immediately prior to such date.
The "Subordinate Percentage" for any Distribution Date will equal 100% minus
the Senior Percentage for such date.
As of the Cut-off Date, the Senior Percentage and the Subordinate Percentage
are expected to be approximately 96.4999% and 3.5001%, respectively.
S-38
The "Senior Prepayment Percentage" for any Distribution Date occurring
during the periods set forth below will be as follows:
Distribution Date Occurring In Senior Prepayment Percentage
- ------------------------------ ----------------------------
May 2001 through April 2011....................... 100%;
May 2011 through April 2012....................... the Senior Percentage, plus 70%
of the Subordinate Percentage;
May 2012 through April 2013....................... the Senior Percentage, plus 60%
of the Subordinate Percentage;
May 2013 through April 2014....................... the Senior Percentage, plus 40%
of the Subordinate Percentage;
May 2014 through April 2015....................... the Senior Percentage, plus 20%
of the Subordinate Percentage;
and
May 2015 and thereafter........................... the Senior Percentage;
provided, however, (i) if on any Distribution Date the Senior Percentage
exceeds the initial Senior Percentage, the Senior Prepayment Percentage for
such Distribution Date will equal 100%, (ii) if on any Distribution Date before
the Distribution Date in May 2004, prior to giving effect to any distributions
on such Distribution Date, the Subordinate Percentage for such Distribution
Date is greater than or equal to twice the initial Subordinate Percentage, then
the Senior Prepayment Percentage for such Distribution Date will equal the
Senior Percentage plus 50% of the Subordinate Percentage and (iii) if on any
Distribution Date on or after the Distribution Date in May 2004, prior to
giving effect to any distributions on such Distribution Date, the Subordinate
Percentage for such Distribution Date is greater than or equal to twice the
initial Subordinate Percentage, then the Senior Prepayment Percentage for such
Distribution Date will equal the Senior Percentage.
No decrease in the Senior Prepayment Percentage from the previous period
will occur, and that Senior Prepayment Percentage for such prior period will be
calculated without regard to clause (ii) or (iii) of the paragraph above, if as
of the first Distribution Date as to which any such decrease applied, (i) the
outstanding principal balance of all Mortgage Loans (including, for this
purpose, any Mortgage Loans in foreclosure or any REO Property) delinquent 60
days or more (averaged over the preceding six-month period), as a percentage of
the aggregate class balance of the Subordinate Certificates (averaged over the
preceding six-month period), is equal to or greater than 50%, or (ii)
cumulative Realized Losses with respect to the Mortgage Loans exceed the
percentages of the aggregate balance of the Subordinate Certificates as of the
Closing Date (the "Original Subordinate Principal Balance") indicated below:
Percentage of
Original Subordinate
Distribution Date Occurring In Principal Balance
- ------------------------------ --------------------
May 2001 through April 2012................................ 30%
May 2012 through April 2013................................ 35%
May 2013 through April 2014................................ 40%
May 2014 through April 2015................................ 45%
May 2015 and thereafter.................................... 50%
This disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the
Senior Certificates while, in the absence of Realized Losses, increasing the
relative interest in the Pool Principal Balance evidenced by the Subordinate
Certificates. Increasing the respective interest of the Subordinate
Certificates relative to that of the Senior Certificates is intended to
preserve the availability of the subordination provided by the Subordinate
Certificates.
S-39
The "Subordinate Prepayment Percentage" as of any Distribution Date will
equal 100% minus the Senior Prepayment Percentage for such date.
If on any Distribution Date the allocation to any class of Senior
Certificates then entitled to distributions of full and partial principal
prepayments and other amounts to be allocated in accordance with the Senior
Prepayment Percentage, as described above, would reduce the outstanding class
balance of such class below zero, the distribution to that class of the Senior
Prepayment Percentage of those amounts for such Distribution Date will be
limited to the percentage necessary to reduce the related class balance to
zero.
Subordinate Principal Distribution Amount
On each Distribution Date, each class of Subordinate Certificates that is
entitled to receive a principal distribution will receive its pro rata share
(based on the class balances of all the Subordinate Certificates that are
entitled to receive a principal distribution) of the Subordinate Principal
Distribution Amount, to the extent that the remaining Pool Distribution Amount
is sufficient therefor. With respect to each class of Subordinate Certificates,
if on any Distribution Date the Fractional Interest is less than the Fractional
Interest for that class on the Closing Date, no classes with a higher numerical
designation will be entitled to receive a principal distribution.
Notwithstanding the first sentence of this paragraph, (a) if on any
Distribution Date prior to the Distribution Date in May 2015, the Fractional
Interest of a class is less than twice its Fractional Interest on the Closing
Date and (b) the Senior Prepayment Percentage for such Distribution Date is
determined in accordance with clause (ii) or (iii) of the proviso in the
definition of "Senior Prepayment Percentage," the classes of Subordinate
Certificates that have higher numerical designations will receive in respect of
clause (b) of the Subordinate Principal Distribution Amount, an amount equal to
the product of their pro rata shares calculated in accordance with the first
sentence of this paragraph and the percentages set forth in the following
table:
Distribution Date Occurring In Percentage
------------------------------ ----------
May 2001 through April 2011.................................... 0%
May 2011 through April 2012.................................... 30%
May 2012 through April 2013.................................... 40%
May 2013 through April 2014.................................... 60%
May 2014 through April 2015.................................... 80%
Each class of Subordinate Certificates that received a full pro rata share
will be allocated any remaining amount in respect of clause (b) of the
Subordinate Principal Distribution Amount, pro rata (based on the class
balances of only those Subordinate Certificates that received a full pro rata
share).
Distributions of principal on the Subordinate Certificates that are entitled
to receive a principal distribution on a Distribution Date will be made
sequentially to each class of Subordinate Certificates in the order of their
numerical class designations, beginning with the Class B-1 Certificates, until
each such class has received its respective share calculated as described in
the preceding paragraph for the Distribution Date.
The "Fractional Interest" with respect to any Distribution Date and each
class of Subordinate Certificates will equal (i) the aggregate of the class
balances immediately prior to such Distribution Date of all classes of
Subordinate Certificates that have higher numerical class designations than
such class, divided by (ii) the aggregate balance of all the Certificates
immediately prior to such Distribution Date.
S-40
The approximate Fractional Interests for the Subordinate Certificates on
the Closing Date are expected to be as follows:
Class B-1........................................................... 2.00%
Class B-2........................................................... 1.10%
Class B-3........................................................... 0.75%
Class B-4........................................................... 0.45%
Class B-5........................................................... 0.25%
Class B-6........................................................... 0.00%
The "Subordinate Principal Distribution Amount" for any Distribution Date
will equal the sum of:
(a) the Subordinate Percentage of the Scheduled Principal Payments for
such Distribution Date; and
(b) the Subordinate Prepayment Percentage of the Unscheduled Principal
Payments for such Distribution Date;
provided, however, that if a Debt Service Reduction that is an Excess Loss is
sustained with respect to a Mortgage Loan that is not a Liquidated Mortgage
Loan, the Subordinate Principal Distribution Amount will be reduced on the
related Distribution Date by the Subordinate Percentage of the principal
portion of that Debt Service Reduction.
Residual Certificate
The Class A-R Certificate will remain outstanding for so long as the Trust
exists, whether or not it is receiving current distributions of principal or
interest. In addition to distributions of interest and principal as described
above, on each Distribution Date, the holder of the Class A-R Certificate will
be entitled to receive any Pool Distribution Amount remaining after the
payment of (i) interest and principal on the Senior Certificates and (iii)
interest and principal on the Subordinate Certificates, as described above. It
is not anticipated that there will be any significant amounts remaining for
any such distribution.
Allocation of Losses
On each Distribution Date, the class balance of the class of Subordinate
Certificates then outstanding with the highest numerical class designation
will be reduced if and to the extent that the aggregate of the class balances
of all classes of Certificates (after taking into account the amount of all
distributions to be made on such Distribution Date and the allocation of
Realized Losses on such Distribution Date) exceeds the Adjusted Pool Amount
for such Distribution Date.
On each Distribution Date, any Realized Loss, other than any Excess Loss,
will be allocated first to the Subordinate Certificates, in the reverse order
of their numerical class designations (beginning with the class of Subordinate
Certificates then outstanding with the highest numerical class designation),
in each case until the class balance of the respective class of Certificates
has been reduced to zero, and then to the Senior Certificates, pro rata based
on their respective class balances.
After the Senior Credit Support Depletion Date, on each Distribution Date,
the aggregate of the class balances of all classes of Senior Certificates then
outstanding will be reduced if and to the extent that such aggregate balance
(after taking into account the amount of all distributions to be made on such
Distribution Date and the allocation of Realized Losses on such Distribution
Date) exceeds the Adjusted Pool Amount for such Distribution Date. The amount
of any such reduction will be allocated among the Senior Certificates, pro
rata based on their respective class balances.
Also, after the Senior Credit Support Depletion Date, the principal portion
of Realized Losses (other than Excess Losses) allocated to the Class A-1
Certificates and any reduction allocated to the
S-41
Class A-1 Certificates pursuant to the preceding paragraph will be borne by the
Class A-2 Certificates (in addition to other Realized Losses allocated to the
Class A-2 Certificates), rather than the Class A-1 Certificates, for so long as
the Class A-2 Certificates are outstanding. Therefore, the class balance of the
Class A-2 Certificates will be reduced by such Realized Losses rather than the
class balance of the Class A-1 Certificates.
On each Distribution Date, Excess Losses will be allocated pro rata among
the Senior Certificates in the aggregate, based on their aggregate balance and
the classes of Subordinate Certificates based upon their respective class
balances. Excess Losses allocated to the Senior Certificates will be allocated
among such classes pro rata based upon their respective class balances.
In general, a "Realized Loss" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the
Mortgage Loan exceeds the amount of Liquidation Proceeds applied to the
principal balance of the related Mortgage Loan. "Excess Losses" are (i) Special
Hazard Losses in excess of the Special Hazard Loss Amount, (ii) Bankruptcy
Losses in excess of the Bankruptcy Loss Amount and (iii) Fraud Losses in excess
of the Fraud Loss Amount. "Bankruptcy Losses" are losses that are incurred as a
result of Debt Service Reductions and Deficient Valuations. "Special Hazard
Losses" are Realized Losses in respect of Special Hazard Mortgage Loans. "Fraud
Losses" are Realized Losses sustained by reason of a default arising from
fraud, dishonesty or misrepresentations. See "Credit Support" in this
Prospectus Supplement.
As used in this Prospectus Supplement, a "Deficient Valuation" occurs when a
bankruptcy court establishes the value of a mortgaged property at an amount
less than the then-outstanding principal balance of the Mortgage Loan secured
by such mortgaged property or reduces the then-outstanding principal balance of
a Mortgage Loan. In the case of a reduction in the value of the related
mortgaged property, the amount of the secured debt could be reduced to such
value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the then-outstanding principal balance of such Mortgage
Loan exceeds the value so assigned to the mortgaged property by the bankruptcy
court. In addition, certain other modifications of the terms of a Mortgage Loan
can result from a bankruptcy proceeding, including the reduction (a "Debt
Service Reduction") of the amount of the Monthly Payment on the related
Mortgage Loan. However, none of these events shall be considered a Debt Service
Reduction or Deficient Valuation so long as the Servicer is pursuing any other
remedies that may be available with respect to the related Mortgage Loan and
(i) such Mortgage Loan is not in default with respect to any payment due
thereunder or (ii) scheduled Monthly Payments are being advanced by the
Servicer without giving effect to any Debt Service Reduction.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Servicer has determined that all recoverable Liquidation Proceeds have been
received. A "Special Hazard Mortgage Loan" is a Liquidated Mortgage Loan as to
which the ability to recover the full amount due thereunder was substantially
impaired by a hazard not insured against under a standard hazard insurance
policy of the type described in the Prospectus under "Description of the
Certificates -- Other Credit Enhancement -- Special Hazard Insurance Policy."
See "Credit Support" in this Prospectus Supplement.
With respect to any Distribution Date, the "Adjusted Pool Amount" will equal
the aggregate unpaid principal balance of the Mortgage Loans as of the Cut-off
Date minus the sum of (i) all amounts in respect of principal received in
respect of the Mortgage Loans (including amounts received as Advances,
principal prepayments and Liquidation Proceeds in respect of principal) and
distributed to holders of the Certificates on such Distribution Date and all
prior Distribution Dates and (ii) the principal portion of all Realized Losses
(other than Debt Service Reductions) incurred on the Mortgage Loans from the
Cut-off Date through the end of the month preceding such Distribution Date.
S-42
Restrictions on Transfer of the Class A-R Certificate
The Class A-R Certificate will be subject to the following restrictions on
transfer and will contain a legend describing such restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations (as defined in the Prospectus) and (ii) certain
Pass-Through Entities (as defined in the Prospectus) that have Disqualified
Organizations as beneficial owners. No tax will be imposed on a Pass-Through
Entity (other than an "electing large partnership" (as defined in the
Prospectus)) with respect to the Class A-R Certificate to the extent it has
received an affidavit from the owner thereof that such owner is not a
Disqualified Organization or a nominee for a Disqualified Organization.
The Pooling Agreement will provide that no legal or beneficial interest in
the Class A-R Certificate may be transferred to or registered in the name of
any person unless:
. the proposed purchaser provides to the Trustee an affidavit to the effect
that, among other items, such transferee is not a Disqualified
Organization and is not purchasing the Class A-R Certificate as an agent
for a Disqualified Organization (i.e., as a broker, nominee or other
middleman thereof); and
. the transferor states in writing to the Trustee that it has no actual
knowledge that such affidavit is false.
Further, such affidavit will require the transferee to affirm that it (a)
historically has paid its debts as they have come due and intends to do so in
the future, (b) understands that it may incur tax liabilities with respect to
the Class A-R Certificate in excess of cash flows generated thereby, (c)
intends to pay taxes associated with holding the Class A-R Certificate as such
taxes become due and (d) will not transfer the Class A-R Certificate to any
person or entity that does not provide a similar affidavit. The transferor must
certify in writing to the Trustee that, as of the date of the transfer, it had
no knowledge or reason to know that the affirmations made by the transferee
pursuant to the preceding sentence were false.
In addition to the foregoing, Treasury regulations have been proposed,
effective February 4, 2000 if adopted, that would add additional requirements
for a transfer of a noneconomic residual interest, such as the Class A-R
Certificate, to be eligible for a safe harbor against possible disregard of
such transfer. Under the proposed Treasury regulations, the transferor of the
Class A-R Certificate would be required to pay the transferee thereof an amount
designed to compensate the transferee for assuming the related tax liability.
In order to meet the safe harbor of the proposed Treasury regulations, the
present value of the anticipated tax liabilities associated with holding the
noneconomic residual interest must not exceed the sum of:
(i) the present value of any consideration given to the transferee to
acquire the residual interest;
(ii) the present value of the expected future distributions on the
residual interest; and
(iii) the present value of the anticipated tax savings associated with
holding the residual interest as the REMIC generates losses.
S-43
For purposes of these computations, the transferee is assumed to pay tax at the
highest rate of tax specified in Section 11(b)(1) of the Code. Further, present
values generally are computed using a discount rate equal to the applicable
Federal rate set forth in Section 1274(d) of the Code compounded semiannually.
However, a lower rate may be used if the transferee can demonstrate that it
regularly borrows, in the course of its trade or business, substantial funds at
such lower rate from unrelated third parties. In some situations, to satisfy
this condition, the transferor of a noneconomic residual interest may have to
pay more consideration to the transferee than would otherwise be the case if
the proposed regulations were not applicable.
Additionally, the IRS issued Revenue Procedure 2001-12 (the "Revenue
Procedure") dealing with the transfer of noneconomic residual interests such as
the Class A-R Certificate. The Revenue Procedure restates the safe harbor
described in the proposed Treasury regulations discussed above and adds an
alternative test for meeting the safe harbor. Under the alternative test, (i)
the transferee must be a domestic "C" corporation (other than a corporation
exempt from taxation or a regulated investment company or real estate
investment trust) that meets certain asset tests; (ii) the transferee must
agree in writing that any subsequent transfer of the residual interest would be
an eligible "C" corporation and would meet the requirements for a safe harbor
transfer under the Revenue Procedure; and (iii) the facts and circumstances
known to the transferor on or before the date of the transfer must not
reasonably indicate that the taxes associated with ownership of the residual
interest will not be paid by the transferee.
The Pooling Agreement will not require that transfers of the Class A-R
Certificate meet the safe harbor under either the test contained in the
Treasury regulations or the alternative test of the Revenue Procedure. The
holder of the Class A-R Certificate is advised to consult its tax advisor
regarding the advisability of meeting the safe harbor.
In addition, the Class A-R Certificate may not be purchased by or
transferred to any person that is not a U.S. Person, unless:
. such person holds the Class A-R Certificate in connection with the
conduct of a trade or business within the United States and furnishes
the transferor and the Trustee with an effective Internal Revenue
Service Form W-8ECI; or
. the transferee delivers to both the transferor and the Trustee an opinion
of a nationally-recognized tax counsel to the effect that such transfer
is in accordance with the requirements of the Code and the regulations
promulgated thereunder and that such transfer of the Class A-R
Certificate will not be disregarded for federal income tax purposes.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation or partnership (unless, in the case of a partnership, Treasury
regulations are adopted that provide otherwise) created or organized in or
under the laws of the United States, any state thereof or the District of
Columbia, including an entity treated as a corporation or partnership for
federal income tax purposes, an estate whose income is subject to United States
federal income tax regardless of its source, or a trust if a court within the
United States is able to exercise primary supervision over the administration
of such trust, and one or more such U.S. Persons have the authority to control
all substantial decisions of such trust (or, to the extent provided in
applicable Treasury regulations, certain trusts in existence on August 20, 1996
which are eligible to elect to be treated as U.S. Persons).
The Pooling Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee.
S-44
Any transferor or agent to whom the Trustee provides information as to any
applicable tax imposed on such transferor or agent may be required to bear the
cost of computing or providing such information.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates" in the Prospectus.
The Class A-R Certificate may not be purchased by or transferred to any Plan
or any person acting on behalf of or investing the assets of such Plan.
See "ERISA Considerations" in this Prospectus Supplement and in the
Prospectus.
- --------------------------------------------------------------------------------
PREPAYMENT AND YIELD CONSIDERATIONS
- --------------------------------------------------------------------------------
Delinquencies on the Mortgage Loans which are not advanced by or on behalf
of the Servicer (because amounts, if advanced, would be nonrecoverable), will
adversely affect the yield on the Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Subordinate Certificates (in the reverse order of their
priority of their numerical designations), and then by the Senior Certificates.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, although all losses initially will be borne by the
Subordinate Certificates, as described in this Prospectus Supplement under
"Description of the Certificates -- Allocation of Losses," Excess Losses will
be borne by all classes of Certificates in the manner set forth in that
section. As a result, the yields on the Offered Certificates will depend on the
rate and timing of Realized Losses, including Excess Losses. Excess Losses
could occur at a time when one or more classes of Subordinate Certificates are
still outstanding and otherwise available to absorb other types of Realized
Losses.
The effective yields to investors will be lower than the yields otherwise
produced by the applicable rate at which interest is passed through to
investors and the purchase price of their Certificates because monthly
distributions will not be payable to investors until the 25th day (or, if not a
business day, the next business day) of the month following the month in which
interest accrues on the Mortgage Loans (without any additional distribution of
interest or earnings thereon in respect of such delay).
Prepayment Considerations and Risks
Because principal payments on the Mortgage Loans will be distributed to
certificateholders currently, the rate of principal payments on the Offered
Certificates, the aggregate amount of each interest payment on the Offered
Certificates and the yield to maturity of Offered Certificates purchased at a
price other than par are directly related to the rate of payments of principal
on the Mortgage Loans. The principal payments on the Mortgage Loans may be in
the form of scheduled principal payments or principal prepayments (for this
purpose, the term "principal prepayment" includes prepayments and any other
recovery of principal in advance of its scheduled due date, including
repurchases and liquidations due to default, casualty, condemnation and the
like). Any such prepayments will result in distributions to you of amounts that
would otherwise be distributed over the remaining term of the Mortgage Loans.
See "Prepayment and Yield Considerations" in the Prospectus.
S-45
The rate at which mortgage loans in general prepay may be influenced by a
number of factors, including general economic conditions, mortgage market
interest rates, availability of mortgage funds and homeowner mobility.
. In general, if prevailing mortgage interest rates fall significantly
below the mortgage interest rates on the Mortgage Loans, the Mortgage
Loans are likely to prepay at higher rates than if prevailing mortgage
interest rates remain at or above the mortgage interest rates on the
Mortgage Loans.
. Conversely, if prevailing mortgage interest rates rise above the mortgage
interest rates on the Mortgage Loans, the rate of prepayment would be
expected to decrease.
The mortgage interest rates on the Mortgage Loans will be fixed for
approximately the first five years after origination and thereafter will adjust
annually and may vary significantly over time. When a Mortgage Loan begins its
adjustable period, increases and decreases in the mortgage interest rate on
that mortgage loan will be based on the Index in effect 45 days prior to the
related Adjustment Date plus the applicable Gross Margin and will be limited by
the applicable Periodic Cap and Rate Ceiling. The Index may not rise and fall
consistently with mortgage interest rates. As a result, the mortgage interest
rates on the Mortgage Loans at any time may not equal the prevailing mortgage
interest rates for similar adjustable-rate loans, and accordingly the
prepayment rate may be lower or higher than would otherwise be anticipated.
Moreover, some mortgagors who prefer the certainty provided by fixed-rate
mortgage loans may nevertheless obtain adjustable-rate mortgage loans at a time
when they regard the mortgage interest rates (and, therefore, the payments) on
fixed-rate mortgage loans as unacceptably high. These mortgagors may be induced
to refinance adjustable-rate mortgage loans (or, if such Mortgage Loans are
convertible to fixed-rate mortgage loans, make such conversion) when the
mortgage interest rates and monthly payments on comparable fixed-rate mortgage
loans decline to levels which these mortgagors regard as acceptable, even
though such mortgage interest rates and monthly payments may be significantly
higher than the current mortgage interest rates and monthly payments on the
mortgagors' adjustable-rate mortgage loans. The ability to refinance a mortgage
loan will depend on a number of factors prevailing at the time refinancing is
desired, including, without limitation, real estate values, the mortgagor's
financial situation, prevailing mortgage interest rates, the mortgagor's equity
in the related mortgaged property, tax laws and prevailing general economic
conditions.
The pass-through rate on the Certificates may decrease, and may decrease
significantly, after the mortgage interest rates on the Mortgage Loans begin to
adjust. In addition, because the pass-through rate on each Certificate for each
Distribution Date after the initial Distribution Date will be equal to a per
annum rate equal to the weighted average of the Net Mortgage Interest Rates of
the Mortgage Loans (based on the Stated Principal Balances of the Mortgage
Loans on the due date in the month preceding the month of such Distribution
Date), disproportionate principal payments on the Mortgage Loans having Net
Mortgage Interest Rates higher or lower than the then-current pass-through rate
on such Certificates will affect the pass-through rate for such Certificates
for future periods and the yield on such Certificates.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to you, even if the average rate of principal prepayments is
consistent with your expectations. In general, the earlier the payment of
principal of the Mortgage Loans the greater the effect on your yield to
maturity. As a result, the effect on your yield of principal prepayments
occurring at a rate higher (or lower) than the rate you anticipate during the
period immediately following the issuance of the Certificates will not be
offset by a subsequent like reduction (or increase) in the rate of principal
prepayments. You should also consider the risk, in the case of an Offered
Certificate purchased at a discount, that a slower than anticipated rate of
payments in respect of principal (including prepayments) on the Mortgage Loans
will
S-46
have a negative effect on the yield to maturity of such Offered Certificate.
You should also consider the risk, in the case of an Offered Certificate
purchased at a premium, that a faster than anticipated rate of payments in
respect of principal (including prepayments) on the Mortgage Loans will have a
negative effect on the yield to maturity of such Offered Certificate. You must
make your own decisions as to the appropriate prepayment assumptions to be used
in deciding whether to purchase Offered Certificates.
After the Senior Credit Support Depletion Date, the yield to maturity on the
Class A-2 Certificates will be more sensitive to losses due to liquidations of
the Mortgage Loans (and the timing thereof) than that on any other class of
Senior Certificates because the principal portion of Realized Losses (other
than Excess Losses) allocated to the Class A-1 Certificates will be borne by
the Class A-2 Certificates, rather than the Class A-1 Certificates, for so long
as the Class A-2 Certificates are outstanding.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part,
at any time without penalty. The rate of payment of principal may also be
affected by any repurchase of the Mortgage Loans permitted or required by the
Pooling Agreement including any optional termination of the Trust Fund by the
Depositor. See "The Pooling and Servicing Agreement -- Optional Termination" in
this Prospectus Supplement for a description of the Depositor's option to
repurchase the Mortgage Loans when the scheduled balance of the Mortgage Pool
is less than 10% of the initial balance of the Mortgage Pool. The Depositor may
be required to repurchase Mortgage Loans because of defective documentation or
material breaches in its representations and warranties with respect to such
Mortgage Loans or the conversion of any Convertible Mortgage Loan to a fixed
rate of interest. Any repurchases will shorten the weighted average lives of
the classes of Offered Certificates.
All of the Mortgage Loans will include "due-on-sale" clauses which allow the
holder of the Mortgage Loan to demand payment in full of the remaining
principal balance upon sale or certain transfers of the property securing such
Mortgage Loan. The Servicer will enforce "due-on-sale" clauses to the extent
permitted by applicable law unless, after the first Adjustment Date for any
Mortgage Loan, certain conditions to assumption specified in the related
mortgage note have been satisfied by the mortgagor. Each mortgage note which
contains "due-on-sale" provisions permits the holder of the mortgage note to
accelerate the maturity of the Mortgage Loan upon conveyance by the mortgagor
of the underlying mortgaged property. The Servicer will enforce any "due-on-
sale" clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying mortgaged property and reasonably believes that it
is entitled to do so under applicable law. However, the Servicer will not take
any action in relation to the enforcement of any "due-on-sale" provisions which
would impair or threaten to impair any recovery under any related primary
mortgage insurance policy. See "Prepayment and Yield Considerations" in the
Prospectus. Acceleration of Mortgage Loans as a result of enforcement of such
"due-on-sale" provisions in connection with transfers of the related mortgaged
properties or the occurrence of certain other events resulting in acceleration
would affect the level of prepayments on the Mortgage Loans, thereby affecting
the weighted average lives of the classes of the Offered Certificates.
As described in this Prospectus Supplement under "Description of the
Certificates -- Principal," the Senior Prepayment Percentage of all principal
prepayments (excluding for this purpose, liquidations due to default, casualty,
condemnation and the like) initially will be distributed to holders of the
classes of Senior Certificates then entitled to receive principal prepayment
distributions. This may result in all (or a disproportionate percentage) of
those principal prepayments being distributed to holders of the Senior
Certificates and none (or less than their pro rata share) of such principal
prepayments being distributed to holders of the Subordinate Certificates during
the periods of time described in the definition of "Senior Prepayment
Percentage."
S-47
Assumptions Relating to Tables
The tables beginning on page S-50 (the "Decrement Tables") have been
prepared on the basis of the following assumptions (the "Modeling
Assumptions"):
(a) the Mortgage Pool consists of nine hypothetical mortgage loans
having the following characteristics:
Current Months to
Unpaid Mortgage Remaining First
Principal Interest Term Age Adjustment
Balance Rate (Months) (Months) Gross Margin Rate Ceiling Date
- -------------- ------------ --------- -------- ------------ ------------- ----------
$ 373,828.36 7.7500000000% 352 8 2.7500000000% 12.7500000000% 52
1,496,152.19 8.2574708835 353 7 2.7500000000 13.2574708835 53
1,175,363.12 7.7931028051 354 6 2.7500000000 12.7931028051 54
2,392,388.67 7.8554543026 355 5 2.7848753188 12.8554543026 55
8,040,399.43 7.8133318042 356 4 2.7730716691 12.8133318042 56
12,472,922.20 7.8559761619 357 3 2.7752628133 12.8559761619 57
135,593,801.21 7.2039864091 358 2 2.7508537302 12.2039864091 58
105,845,358.38 7.2088909396 358 1 2.7500000000 12.2088909396 59
7,941,900.00 7.2135587832 353 0 2.7500000000 12.2135587832 60
(b) the initial balances and pass-through rates for the Offered
Certificates are as set forth or described in the table on page S-4;
(c) there are no Net Interest Shortfalls, delinquencies or Realized
Losses with respect to the Mortgage Loans;
(d) scheduled payments of principal and interest with respect to the
Mortgage Loans are received on the applicable due date beginning on May 1,
2001;
(e) there are no partial prepayments and all prepayments in full are
received, together with a 30 days' interest thereon, on the last day of
each month beginning in April 2001;
(f) the Mortgage Loans prepay at the indicated percentages of CPR;
(g) optional termination of the Trust does not occur;
(h) no Mortgage Loans are required to be repurchased from the Trust and
no Mortgage Loans are substituted for the Mortgage Loans included in the
Trust on the Closing Date;
(i) the Certificates are issued on the Closing Date;
(j) cash payments on the Certificates are received on the 25th day of
each month beginning in May 2001 in accordance with the priorities and
amounts described in this Prospectus Supplement under "Description of the
Certificates;"
(k) the Index remains constant at 4.48% per annum;
(l) the initial Periodic Cap is 5.00%, and each Periodic Cap thereafter
is 2.00%; and
(m) the Mortgage Loans adjust annually on each anniversary of the first
Adjustment Date.
Although the characteristics of the mortgage loans for the Decrement Tables
have been prepared on the basis of the weighted average characteristics of the
Mortgage Loans which are expected to be in the Mortgage Pool, there is no
assurance that the Modeling Assumptions will reflect the actual
characteristics or performance of the Mortgage Loans or that the performance
of the Offered Certificates will conform to the results set forth in the
tables.
S-48
Weighted Average Lives of the Offered Certificates
Weighted average life of a class of Offered Certificates refers to the
average amount of time that will elapse from the date of issuance of the
Certificate until each dollar in reduction of its balance is distributed to
investors. The weighted average lives of classes of Offered Certificates will
be influenced by, among other things, the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled principal
payments or principal prepayments (for this purpose, the term "prepayments"
includes prepayments and liquidations due to default, casualty, condemnation
and the like), the timing of changes in such rate of principal payments and the
priority sequence of distributions of principal of such Offered Certificates.
The interaction of the foregoing factors may have different effects on each
class of Offered Certificates and the effects on any such class may vary at
different times during the life of such class. Accordingly, no assurance can be
given as to the weighted average life of any such class of Offered
Certificates. For an example of how the weighted average lives of the Offered
Certificates are affected by the foregoing factors at various percentages of
CPR, see the Decrement Tables set forth below.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The prepayment model used in this Prospectus Supplement is
the Constant Prepayment Rate ("CPR"), which represents an assumed rate of
principal prepayment each year relative to the then-outstanding principal
balance of a pool of mortgage loans for the life of such mortgage loans. A
prepayment assumption of 5% CPR assumes constant prepayment rates of 5.0% per
annum of the then-outstanding principal balance of such mortgage loans. As used
in the table below, "0% CPR" assumes prepayment rates equal to 0% of CPR, i.e.,
no prepayments. Correspondingly, "18% CPR" assumes prepayment rates equal to
18% of CPR, and so forth. CPR does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the Mortgage Loans. The Depositor
believes that no existing statistics of which it is aware provide a reliable
basis for investors to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
The Decrement Tables set forth below have been prepared on the basis of the
Modeling Assumptions described above under "-- Assumptions Relating to Tables."
There will likely be discrepancies between the characteristics of the actual
Mortgage Loans included in the Mortgage Pool and the characteristics of the
Mortgage Loans assumed in preparing the Decrement Tables. Any such discrepancy
may have an effect upon the percentages of initial class balances outstanding
set forth in the Decrement Tables (and the weighted average lives of the
Offered Certificates). In addition, to the extent that the Mortgage Loans that
actually are included in the Mortgage Pool have characteristics that differ
from those assumed in preparing the following Decrement Tables, the class
balance of a class of Offered Certificates could be reduced to zero earlier or
later than indicated by such Decrement Tables.
Furthermore, the information contained in the Decrement Tables with respect
to the weighted average life of any Offered Certificate is not necessarily
indicative of the weighted average life of that class of Offered Certificates
that might be calculated or projected under different or varying prepayment
assumptions.
It is not likely that (i) all of the Mortgage Loans will have the interest
rates or remaining terms to maturity assumed or (ii) the Mortgage Loans will
prepay at the indicated percentage of CPR until maturity. In addition, the
diverse remaining terms to maturity of the Mortgage Loans (which include many
recently originated Mortgage Loans) could produce slower or faster reductions
of the class balances than indicated in the Decrement Tables at the various
percentages of CPR specified.
S-49
Based upon the Modeling Assumptions, the following Decrement Tables indicate
the projected weighted average life of each class of the Offered Certificates
and set forth the percentages of the initial class balance of each class that
would be outstanding after each of the dates shown at various constant
percentages of CPR.
Percentage of Initial Class Balance/(1)/ Outstanding
at the Respective Percentages of CPR Set Forth Below:
Classes A-1 and A-2
------------------------------------
Distribution Date 0% 5% 10% 18% 25% 35% 50%
- ----------------- ----- ----- ---- ---- ---- ---- ----
Initial Percentage........................ 100 100 100 100 100 100 100
April 25, 2002............................ 99 94 89 81 73 63 48
April 25, 2003............................ 98 88 79 65 54 40 23
April 25, 2004............................ 97 83 70 52 39 25 11
April 25, 2005............................ 96 77 62 42 29 16 5
April 25, 2006............................ 94 72 54 34 21 10 3
April 25, 2007............................ 93 67 48 27 16 7 1
April 25, 2008............................ 91 63 42 22 12 4 1
April 25, 2009............................ 90 58 37 18 9 3 *
April 25, 2010............................ 88 54 33 14 6 2 *
April 25, 2011............................ 86 50 29 11 5 1 *
April 25, 2012............................ 84 47 25 9 3 1 *
April 25, 2013............................ 82 43 22 7 2 * *
April 25, 2014............................ 80 40 19 6 2 * *
April 25, 2015............................ 77 36 17 5 1 * *
April 25, 2016............................ 74 33 15 4 1 * *
April 25, 2017............................ 71 30 13 3 1 * *
April 25, 2018............................ 68 28 11 2 * * *
April 25, 2019............................ 65 25 9 2 * * *
April 25, 2020............................ 61 22 8 1 * * *
April 25, 2021............................ 57 20 7 1 * * *
April 25, 2022............................ 53 18 6 1 * * *
April 25, 2023............................ 49 15 5 1 * * *
April 25, 2024............................ 44 13 4 * * * *
April 25, 2025............................ 39 11 3 * * * *
April 25, 2026............................ 33 9 2 * * * *
April 25, 2027............................ 27 7 2 * * * *
April 25, 2028............................ 21 5 1 * * * *
April 25, 2029............................ 14 3 1 * * * *
April 25, 2030............................ 6 1 * * * * *
April 25, 2031............................ 0 0 0 0 0 0 0
Weighted Average Life (in years)(1)....... 19.92 11.68 7.65 4.60 3.28 2.23 1.40
- --------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial balance of that class.
* Less than 0.5%, but greater than zero.
S-50
Percentage of Initial Class Balance Outstanding
at the Respective Percentages of CPR Set Forth Below:
Class A-R Classes B-1, B-2 and B-3
---------------------------------- -------------------------------------
Distribution Date 0% 5% 10% 18% 25% 35% 50% 0% 5% 10% 18% 25% 35% 50%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ----- ----- ----- ---- ---- ---- ----
Initial Percentage...... 100 100 100 100 100 100 100 100 100 100 100 100 100 100
April 25, 2002.......... 0 0 0 0 0 0 0 99 99 99 99 99 99 99
April 25, 2003.......... 0 0 0 0 0 0 0 98 98 98 98 98 91 72
April 25, 2004.......... 0 0 0 0 0 0 0 97 97 97 97 89 73 50
April 25, 2005.......... 0 0 0 0 0 0 0 96 96 96 87 66 47 25
April 25, 2006.......... 0 0 0 0 0 0 0 94 94 94 70 49 30 12
April 25, 2007.......... 0 0 0 0 0 0 0 93 93 93 57 36 19 6
April 25, 2008.......... 0 0 0 0 0 0 0 91 91 87 46 27 12 3
April 25, 2009.......... 0 0 0 0 0 0 0 90 90 77 37 20 8 1
April 25, 2010.......... 0 0 0 0 0 0 0 88 88 68 30 14 5 1
April 25, 2011.......... 0 0 0 0 0 0 0 86 86 60 24 11 3 *
April 25, 2012.......... 0 0 0 0 0 0 0 84 83 53 19 8 2 *
April 25, 2013.......... 0 0 0 0 0 0 0 82 79 46 15 6 1 *
April 25, 2014.......... 0 0 0 0 0 0 0 80 74 40 12 4 1 *
April 25, 2015.......... 0 0 0 0 0 0 0 77 69 35 10 3 1 *
April 25, 2016.......... 0 0 0 0 0 0 0 74 63 31 8 2 * *
April 25, 2017.......... 0 0 0 0 0 0 0 71 58 26 6 2 * *
April 25, 2018.......... 0 0 0 0 0 0 0 68 53 23 5 1 * *
April 25, 2019.......... 0 0 0 0 0 0 0 65 47 19 4 1 * *
April 25, 2020.......... 0 0 0 0 0 0 0 61 43 17 3 1 * *
April 25, 2021.......... 0 0 0 0 0 0 0 57 38 14 2 * * *
April 25, 2022.......... 0 0 0 0 0 0 0 53 33 12 2 * * *
April 25, 2023.......... 0 0 0 0 0 0 0 49 29 10 1 * * *
April 25, 2024.......... 0 0 0 0 0 0 0 44 25 8 1 * * *
April 25, 2025.......... 0 0 0 0 0 0 0 39 21 6 1 * * *
April 25, 2026.......... 0 0 0 0 0 0 0 33 17 5 * * * *
April 25, 2027.......... 0 0 0 0 0 0 0 27 13 4 * * * *
April 25, 2028.......... 0 0 0 0 0 0 0 21 10 2 * * * *
April 25, 2029.......... 0 0 0 0 0 0 0 14 6 1 * * * *
April 25, 2030.......... 0 0 0 0 0 0 0 6 3 1 * * * *
April 25, 2031.......... 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1).......... 0.09 0.09 0.09 0.09 0.09 0.09 0.09 19.92 17.49 12.77 7.86 5.90 4.46 3.21
- --------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the class
balance thereof by the number of years from the date of the issuance of
such class to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the initial balance of that class.
* Less than 0.5%, but greater than zero.
Yield on the Class A-R Certificate
The after-tax rate of return to the holder of the Class A-R Certificate will
reflect its pre-tax rate of return, reduced by the taxes required to be paid
with respect to such Certificate. If you hold the Class A-R Certificate, you
may have tax liabilities during the early years of the REMIC's term that
substantially exceed any distributions payable thereon during any such period.
In addition, the present value of the tax liabilities with respect to your
Class A-R Certificate may substantially exceed the present value of
S-51
expected distributions on your Class A-R Certificate and of any tax benefits
that may arise with respect to it. Accordingly, the after-tax rate of return on
the Class A-R Certificate may be negative or may be otherwise significantly
adversely affected. The timing and amount of taxable income attributable to the
Class A-R Certificate will depend on, among other things, the timing and
amounts of prepayments and losses experienced with respect to the Mortgage
Loans.
If you own the Class A-R Certificate, you should consult your tax advisors
regarding the effect of taxes and the receipt of any payments made in
connection with the purchase of the Class A-R Certificate on your after-tax
rate of return. See "Federal Income Tax Consequences" in this Prospectus
Supplement and in the Prospectus.
Yield on the Subordinate Certificates
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in increasing order of their numerical class designation, will be
progressively more sensitive to the rate and timing of mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those you assumed, the
actual yield to maturity of your Subordinate Certificate may be lower than the
yield you expected. The timing of losses on Mortgage Loans will also affect
your actual yield to maturity, even if the rate of defaults and severity of
losses over the life of the Trust are consistent with your expectations. In
general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity. Realized Losses on the Mortgage Loans will be allocated to
reduce the balance of the applicable class of Subordinate Certificates (as
described in this Prospectus Supplement under "Description of the
Certificates -- Allocation of Losses"), without the receipt of cash equal to
the reduction. In addition, shortfalls in cash available for distributions on
the Subordinate Certificates will result in a reduction in the balance of the
class of Subordinate Certificates then outstanding with the highest numerical
class designation if and to the extent that the aggregate balance of all
classes of Certificates, following all distributions and the allocation of
Realized Losses on a Distribution Date, exceeds the balance of the Mortgage
Pool as of the due date occurring in the month of such Distribution Date. As a
result of such reductions, less interest will accrue on that class of
Subordinate Certificates than otherwise would be the case. The yield to
maturity of the Subordinate Certificates will also be affected by the
disproportionate allocation of principal prepayments to the Senior
Certificates, Net Interest Shortfalls and other cash shortfalls in the Pool
Distribution Amount. See "Description of the Certificates -- Allocation of
Losses" in this Prospectus Supplement.
If on any Distribution Date, the Fractional Interest for any class of
Subordinate Certificates is less than its original Fractional Interest, all
partial principal prepayments and principal prepayments in full available for
distribution on the Subordinate Certificates will be allocated solely to that
class and all other classes of Subordinate Certificates with lower numerical
class designations, thereby accelerating the amortization thereof relative to
that of the classes junior to that class and reducing the weighted average
lives of the classes of Subordinate Certificates receiving such distributions.
Accelerating the amortization of the classes of Subordinate Certificates with
lower numerical class designations relative to the other classes of Subordinate
Certificates is intended to preserve the availability of the subordination
provided by those other classes.
Yield Considerations with Respect to
the Class B-2 and Class B-3 Certificates
Defaults on mortgage loans may be measured relative to a default standard or
model. The model used in this Prospectus Supplement, the standard default
assumption ("SDA"), represents an assumed rate of default each month relative
to the outstanding performing principal balance of a pool of new
S-52
mortgage loans. A default assumption of 100% SDA assumes constant default rates
of 0.02% per annum of the outstanding principal balance of such mortgage loans
in the first month of the life of the mortgage loans and an additional 0.02%
per annum in each month thereafter until the 30th month. Beginning in the 30th
month and in each month thereafter through the 60th month of the life of the
mortgage loans, 100% SDA assumes a constant default rate of 0.60% per annum
each month. Beginning in the 61st month and in each month thereafter through
the 120th month of the life of the mortgage loans, 100% SDA assumes that the
constant default rate declines each month by 0.0095% per annum, and that the
constant default rate remains at 0.03% per annum in each month after the 120th
month. For the following tables, it is assumed that there is no delay between
the default and liquidation of the mortgage loans. As used in the following
tables, "0% SDA" assumes no defaults. SDA is not a historical description of
default experience or a prediction of the rate of default of any pool of
mortgage loan.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class B-2 and Class B-3 Certificates to various rates of
prepayment and varying levels of Realized Losses. The tables set forth below
are based upon, among other things, the Modeling Assumptions (other than the
assumption that no defaults shall have occurred with respect to the Mortgage
Loans) and the additional assumption that liquidations (other than those
scenarios indicated as 0% of SDA (no defaults)) occur monthly on the last day
of the preceding month (other than on a due date) at the percentages of SDA set
forth in the table.
In addition, it was assumed that (i) Realized Losses on liquidations of 25%
or 50% of the outstanding principal balance of the Liquidated Mortgage Loans,
as indicated in the tables below (referred to as a "Loss Severity Percentage"),
will occur at the time of liquidation, (ii) there are no Special Hazard Losses,
Fraud Losses or Bankruptcy Losses and (iii) the Class B-2 and Class B-3
Certificates are purchased on the Closing Date at assumed purchase prices equal
to 98.25% and 94.25%, in each case, of their balance plus accrued interest from
April 1, 2001 to (but not including) the Closing Date.
It is highly unlikely that the Mortgage Loans will have the precise
characteristics referred to in this Prospectus Supplement or that they will
prepay or liquidate at any of the rates specified or that the Realized Losses
will be incurred according to one particular pattern. The assumed percentages
of SDA and CPR and the Loss Severity Percentages shown below are for
illustrative purposes only. Those assumptions may not be correct and the actual
rates of prepayment and liquidation and loss severity experience of the
Mortgage Loans may not correspond to any of the assumptions made in this
Prospectus Supplement. For these reasons, and because the timing of cash flows
is critical to determining yield, the pre-tax yield to maturity of the Class B-
2 and Class B-3 Certificates are likely to differ from the pre-tax yields to
maturity shown below.
The pre-tax yields to maturity set forth below were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class B-2 and Class B-3 Certificates,
would cause the discounted present value of those assumed streams of cash flows
to equal the aggregate assumed purchase prices of the Class B-2 and Class B-3
Certificates set forth above. In all cases, monthly rates were then converted
to the semi-annual corporate bond equivalent yields shown below. Implicit in
the use of any discounted present value or internal rate or return calculations
such as these is the assumption that intermediate cash flows are reinvested at
the discount rates at which investors may be able to reinvest funds received by
them as distributions on the Class B-2 and Class B-3 Certificates.
Consequently, these yields do not purport to reflect the total return on any
investment in the Class B-2 and Class B-3 Certificates when reinvestment rates
are considered.
S-53
Sensitivity of Pre-Tax Yields to Maturity of the Class B-2
Certificates to Prepayments and Realized Losses
Percentage of CPR
Loss ----------------------------------------------
Percentage Severity
of SDA Percentage 0% 5% 10% 18% 25% 35% 50%
- ---------- ---------- ------ ------ ------ ------ ---- ---- ----
0%................. 0% 6.95 6.96 6.99 7.07 7.13 7.20 7.32
50%................. 25% 6.94 6.97 6.99 7.07 7.13 7.21 7.33
50%................. 50% 6.93 6.97 6.98 7.06 7.14 7.21 7.33
75%................. 25% 6.94 6.97 6.99 7.07 7.14 7.21 7.33
75%................. 50% 4.90 6.80 6.97 7.05 7.14 7.21 7.33
100%................. 25% 6.93 6.97 6.98 7.06 7.14 7.21 7.33
100%................. 50% (2.66) 3.92 6.24 7.03 7.13 7.21 7.34
150%................. 25% 5.05 6.86 6.97 7.05 7.14 7.22 7.33
150%................. 50% (35.89) (27.63) (0.58) 5.48 7.10 7.22 7.34
Sensitivity of Pre-Tax Yields to Maturity of the Class B-3
Certificates to Prepayments and Realized Losses
Percentage of CPR
Loss ----------------------------------------------
Percentage Severity
of SDA Percentage 0% 5% 10% 18% 25% 35% 50%
- ---------- ---------- ------ ------ ------ ------ ---- ---- ----
0%................. 0% 7.37 7.41 7.53 7.82 8.06 8.37 8.86
50%................. 25% 7.29 7.42 7.48 7.78 8.07 8.36 8.87
50%................. 50% 3.46 7.23 7.45 7.69 8.05 8.37 8.88
75%................. 25% 7.28 7.38 7.45 7.75 8.06 8.38 8.87
75%................. 50% (27.48) (17.43) 4.11 7.59 7.97 8.37 8.90
100%................. 25% 3.70 7.28 7.45 7.70 8.06 8.37 8.88
100%................. 50% (41.04) (34.21) (25.07) 4.96 7.84 8.36 8.91
150%................. 25% (27.10) (15.72) 4.34 7.60 7.98 8.37 8.90
150%................. 50% (61.94) (56.13) (49.30) (34.72) 0.45 8.32 8.88
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-off
Date.
Aggregate Realized Losses
Percentage of CPR
Loss ----------------------------------------------
Percentage Severity
of SDA Percentage 0% 5% 10% 18% 25% 35% 50%
- ---------- ---------- ------ ------ ------ ------ ---- ---- ----
50%.................. 25% 0.49 0.38 0.30 0.21 0.16 0.10 0.06
50%.................. 50% 0.98 0.76 0.60 0.42 0.32 0.21 0.11
75%.................. 25% 0.73 0.57 0.45 0.32 0.24 0.16 0.09
75%.................. 50% 1.46 1.14 0.90 0.63 0.47 0.31 0.17
100%................. 25% 0.97 0.75 0.60 0.42 0.31 0.21 0.11
100%................. 50% 1.94 1.51 1.20 0.84 0.63 0.42 0.23
150%................. 25% 1.44 1.12 0.89 0.63 0.47 0.31 0.17
150%................. 50% 2.88 2.24 1.78 1.26 0.94 0.62 0.34
You should make your investment decisions based on your determinations of
anticipated rates of prepayment and Realized Losses under a variety of
scenarios. If you are purchasing Class B-2 or Class
S-54
B-3 Certificates you should fully consider the risk that Realized Losses on the
Mortgage Loans could result in the failure to fully recover your investments.
- --------------------------------------------------------------------------------
CREDIT SUPPORT
- --------------------------------------------------------------------------------
The rights of holders of each class of Class B Certificates to receive
distributions of principal and interest are subordinated to such rights of
holders of the Class A Certificates and the holders of each class of Class B
Certificates with a lower numerical designation. For example, the holders of
the Class B-2 Certificates will not receive principal or interest on a
Distribution Date until the holders of the Class A and Class B-1 Certificates
have received the amounts to which they are entitled on that Distribution Date.
The subordination described above is intended to increase the likelihood of
receipt by holders of the Class A Certificates and the holders of the Class B
Certificates with lower numerical class designations of the amount to which
they are entitled on any Distribution Date and to provide those holders with
protection against Realized Losses, other than Excess Losses.
The Class B Certificates also will provide limited protection against
Special Hazard Losses, Bankruptcy Losses and Fraud Losses up to the Special
Hazard Loss Amount, Bankruptcy Loss Amount and Fraud Loss Amount, as described
below. Realized Losses, other than Excess Losses, will be allocated to the
class of Class B Certificates then outstanding with the highest numerical class
designation.
The Class B Certificates will provide protection to the classes of
Certificates of higher relative priority against (i) Special Hazard Losses in
an initial amount of approximately $5,176,244 (the "Special Hazard Loss
Amount"), (ii) Bankruptcy Losses in an initial amount of approximately $100,000
(the "Bankruptcy Loss Amount") and (iii) Fraud Losses in an initial amount of
approximately $5,506,642 (the "Fraud Loss Amount").
On any Distribution Date, the Special Hazard Loss Amount will be reduced to
equal the lesser of (a) the greatest of (i) 1.88% of the scheduled balance of
the Mortgage Pool, (ii) twice the principal balance of the largest Mortgage
Loan and (iii) the aggregate principal balance of the Mortgage Loans secured by
mortgaged properties located in the single California postal zip code area
having the highest aggregate principal balance of any zip code area and (b) the
initial Special Hazard Loss Amount less any Special Hazard Losses incurred
since the Closing Date. All principal balances for the purpose of this
definition will be calculated as of the first day of the month preceding the
Distribution Date after giving effect to scheduled installments of principal
and interest due on the Mortgage Loans, whether or not paid.
For the period from the Closing Date through the first anniversary of the
Cut-off Date, the Fraud Loss Amount equals the initial Fraud Loss Amount
reduced by the cumulative amount of Fraud Losses allocated to the Certificates.
After that period, the Fraud Loss Amount equals the lesser of (i) the initial
Fraud Loss Amount reduced by the cumulative amount of Fraud Losses allocated to
the Certificates and (ii) for each Distribution Date occurring (a) during the
period from the day after the first anniversary through the third anniversary
of the Cut-off Date, 2% of the scheduled balance of the Mortgage Pool, (b)
during the period from the day after the third anniversary through the fifth
anniversary of the Cut-off Date, 0.5% of the scheduled balance of the Mortgage
Pool and (c) after the fifth anniversary of the Cut-off Date, zero.
The Bankruptcy Loss Amount will be reduced, from time to time, by the
Bankruptcy Losses allocated to the Certificates.
S-55
The amount of coverage provided by the Class B Certificates for Special
Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or reduced
if the ratings of the Certificates assigned by the Rating Agencies are not
adversely affected. In addition, a reserve fund or other form of credit support
may be substituted for the protection provided by the Class B Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses.
Generally, the Senior Certificates will receive 100% of the principal
prepayments received with respect to the Mortgage Loans until the tenth
anniversary of the first Distribution Date. During the following four years,
those Senior Certificates will receive a large, but generally decreasing, share
of such principal prepayments. This disproportionate allocation of prepayments
will result in an acceleration of the amortization of those Senior Certificates
and will enhance the likelihood that holders of those Certificates will receive
the entire amount of principal to which they are entitled. In addition to this
acceleration mechanism, on any Distribution Date on which the Senior Percentage
exceeds the initial Senior Percentage, the Senior Certificates will be entitled
to receive 100% of the principal prepayments received with respect to the
Mortgage Loans. See "Description of the Certificates -- Principal" in this
Prospectus Supplement.
- --------------------------------------------------------------------------------
USE OF PROCEEDS
- --------------------------------------------------------------------------------
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSEQUENCES
- --------------------------------------------------------------------------------
An election will be made to treat the Trust as a "real estate mortgage
investment conduit" (the "REMIC") for federal income tax purposes under the
Internal Revenue Code of 1986, as amended (the "Code").
. The Certificates (other than the Class A-R Certificate) will be
designated as "regular interests" in the REMIC. All the Certificates
(other than the Class A-R Certificate) are "Regular Certificates" for
purposes of the following discussion.
. The Class A-R Certificate will be designated as the sole class of
"residual interest" in the REMIC.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates" in the Prospectus.
Regular Certificates
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting.
Certain classes of Offered Certificates may, depending on their respective
issue prices, be treated for federal income tax purposes as having been issued
with original issue discount. See "Federal Income Tax Consequences -- Federal
Income Tax Consequences for REMIC Certificates -- Taxation of Regular
Certificates -- Original Issue Discount" in the Prospectus. Certain classes of
the Regular Certificates
S-56
may be treated for federal income tax purposes as having been issued at a
premium. Whether any holder of such a class of Certificates will be treated as
holding a Certificate with amortizable bond premium will depend on such
certificateholder's purchase price and the distributions remaining to be made
on such Certificate at the time of its acquisition by such certificateholder.
Holders of such classes of Certificates should consult their own tax advisors
regarding the possibility of making an election to amortize such premium. See
"Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Premium" in the Prospectus.
For purposes of determining the amount and the rate of accrual of original
issue discount and market discount, the Depositor intends to assume that there
will be prepayments on the Mortgage Loans at a rate equal to 18% CPR. No
representation is made as to the actual rate at which the Mortgage Loans will
be prepaid.
The Regular Certificates will be treated as regular interests in a REMIC
under Section 860G of the Code. Accordingly, to the extent described in the
Prospectus:
. the Regular Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code;
. the Regular Certificates will be treated as "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Code; and
. interest on the Regular Certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning of
Section 856(c)(3)(B) of the Code.
See "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Status of REMIC Certificates" in the Prospectus.
Residual Certificate
If you hold the Class A-R Certificate, you must include the taxable income
or loss of the REMIC in determining your federal taxable income. Your resulting
tax liability may exceed cash distributions to you during certain periods. In
addition, all or a portion of the taxable income you recognize from the Class
A-R Certificate may be treated as "excess inclusion" income, which, among other
consequences, will result in your inability to use net operating losses to
offset such income from the REMIC.
You should consider carefully the tax consequences of any investment in the
Class A-R Certificate discussed in the Prospectus and should consult your tax
advisors with respect to those consequences. See "Federal Income Tax
Consequences" in the Prospectus. Specifically, you should consult your tax
advisors regarding whether, at the time of acquisition, the Class A-R
Certificate will be treated as a "noneconomic" residual interest and "tax
avoidance potential" residual interest. See "Federal Income Tax Consequences --
Federal Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates -- Tax-Related Restrictions on Transfer of Residual
Certificates -- Noneconomic Residual Interests," "-- Foreign Investors" and "--
Mark to Market Regulations" in the Prospectus. Additionally, for information
regarding Prohibited Transactions, see "Federal Income Tax Consequences --
Federal Income Tax Consequences for REMIC Certificates --Taxes That May Be
Imposed on the REMIC Pool -- Prohibited Transactions" in the Prospectus.
Backup Withholding and Reporting Requirements
Certain holders or other beneficial owners of Offered Certificates may be
subject to backup withholding at the rate of 31% with respect to interest paid
on the Offered Certificates if those holders or beneficial owners, upon
issuance, fail to supply the Trustee or their broker with their taxpayer
identification number, furnish an incorrect taxpayer identification number,
fail to report interest, dividends or other "reportable payments" (as defined
in the Code) properly, or, under certain
S-57
circumstances, fail to provide the Trustee or their broker with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding. See "Federal Income Tax Consequences --Federal Income Tax
Consequences for REMIC Certificates -- Backup Withholding" in the Prospectus.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each certificateholder of record, the amount of
interest paid (and original issue discount accrued, if any) on the Regular
Certificates and the amount of interest withheld for federal income taxes, if
any, for each calendar year, except as to exempt holders (generally, holders
that are corporations, certain tax-exempt organizations or nonresident aliens
who provide certification as to their status as nonresidents). As long as the
only "certificateholder" of record of the Offered Certificates (other than the
Class A-R Certificate) is Cede & Co., as nominee for DTC, beneficial owners of
the Offered Certificates and the IRS will receive tax and other information
including the amount of interest paid on such Certificates from DTC
Participants rather than from the Trustee. (The Trustee, however, will respond
to requests for necessary information to enable DTC Participants and certain
other persons to complete their reports.) See "Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates --
Reporting Requirements" in the Prospectus.
All investors should consult their tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Offered Certificates.
- --------------------------------------------------------------------------------
STATE TAXES
- --------------------------------------------------------------------------------
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their tax advisors regarding such tax consequences.
- --------------------------------------------------------------------------------
ERISA CONSIDERATIONS
- --------------------------------------------------------------------------------
A fiduciary or other person acting on behalf of any employee benefit plan or
arrangement, including an individual retirement account (an "IRA"), subject to
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the
Code or any federal, state or local law ("Similar Law") which is similar to
ERISA or the Code (collectively, a "Plan") should carefully review with its
legal advisors whether the purchase or holding of an Offered Certificate could
give rise to a transaction prohibited or not otherwise permissible under ERISA,
the Code or Similar Law. See "ERISA Considerations" in the Prospectus.
The U.S. Department of Labor has extended to Bank of America Corporation, as
successor to NationsBank Corporation, the corporate parent of Banc of America
Securities LLC, an administrative exemption (Prohibited Transaction Exemption
93-31; Exemption Application No. D-9105) (the "Exemption") from certain of the
prohibited transaction rules of ERISA and the related excise tax provisions of
Section 4975 of the Code with respect to the initial purchase, the holding and
the subsequent resale by certain Plans of certificates in pass-through trusts
that consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. The Exemption applies to mortgage
loans such as the Mortgage Loans, but does not cover certain IRAs and certain
employee benefit plans covering only self-employed individuals which are
subject to the prohibited transaction provisions of the Code.
S-58
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations --
Administrative Exemptions -- Individual Administrative Exemptions" in the
Prospectus.
The Underwriter believes that the Exemption will cover the acquisition and
holding of the Offered Certificates (other than the Class A-R Certificate) by
the Plans to which it applies and that all conditions of the Exemption other
than those within the control of the investors will be met. In addition, as of
the date hereof, there is no single mortgagor that is the obligor on 5% of the
initial balance of the Mortgage Pool.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA, the Code and Similar Law, the applicability of
PTE 83-1 described under "ERISA Considerations" in the Prospectus and the
Exemption, and the potential consequences in their specific circumstances,
prior to making an investment in the Offered Certificates. Moreover, each Plan
fiduciary should determine whether under the governing plan instruments and the
applicable fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
The Class A-R Certificate may not be purchased by or transferred to a Plan
or a person acting on behalf of or investing assets of a Plan. See "Description
of the Certificates -- Restrictions on Transfer of the Class A-R Certificate"
in this Prospectus Supplement.
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METHOD OF DISTRIBUTION
- --------------------------------------------------------------------------------
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Depositor, Banc of America Securities
LLC (the "Underwriter"), and Bank of America, N.A., the Depositor has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, all of the Offered Certificates. Proceeds to the Depositor from the
sale of the Offered Certificates are expected to be approximately 100.461% of
the initial balance of those Certificates, before deducting expenses payable by
the Depositor.
Distribution of the Offered Certificates will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. In connection with the purchase and sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Depositor has been advised by the Underwriter that it intends to make a
market in the Offered Certificates but has no obligation to do so. There can be
no assurance that a secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
The Underwriter is an affiliate of the Depositor, the Seller and the
Servicer, and is a registered broker/dealer. Any obligations of the Underwriter
are the sole responsibility of the Underwriter and do not create any obligation
or guarantee on the part of any affiliate of the Underwriter. This Prospectus
Supplement and the Prospectus may be used by the Underwriter in connection with
offers and sales
S-59
related to market-making transactions in the Offered Certificates. The
Underwriter may act as principal or agent in such transactions.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
The validity of and certain federal income tax matters with respect to the
Offered Certificates will be passed upon for the Depositor and Underwriter by
Cadwalader, Wickersham & Taft, New York, New York.
- --------------------------------------------------------------------------------
CERTIFICATE RATINGS
- --------------------------------------------------------------------------------
At their issuance, each class of Offered Certificates is required to receive
from Moody's Investor's Service, Inc. ("Moody's") and Fitch, Inc. ("Fitch") at
least the rating set forth in the table on page S-4 of this Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of payments required under the Pooling Agreement.
. Moody's and Fitch's ratings take into consideration the credit quality of
the Mortgage Pool, including any credit support, structural and legal
aspects associated with the Offered Certificates, and the extent to
which the payment stream of the Mortgage Pool is adequate to make
payments required under the Offered Certificates. Moody's and Fitch's
ratings on the Offered Certificates do not, however, constitute a
statement regarding frequency of prepayments on the Mortgage Loans.
. Moody's and Fitch's ratings do not address the remote possibility that,
in the event of the insolvency of the Seller, the sale of the Offered
Certificates may be recharacterized as a financing and that, as a result
of such recharacterization, the Offered Certificates may be accelerated.
As a result, holders of the Offered Certificates might suffer a lower
than anticipated yield.
The rating of the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
S-60
- --------------------------------------------------------------------------------
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS
- --------------------------------------------------------------------------------
Page
----
Accelerated Processing Programs............................................ S-25
Adjusted Pool Amount....................................................... S-42
Adjustment Date............................................................ S-17
Administrative Fee Rate.................................................... S-29
Administrative Fees........................................................ S-29
Advance.................................................................... S-30
Bankruptcy Loss Amount..................................................... S-55
Bankruptcy Losses.......................................................... S-42
Book-Entry Certificates.................................................... S-32
Bulk Purchase Mortgage Loans............................................... S-25
Certificate Account........................................................ S-29
Certificates............................................................... S-5
Class A Certificates....................................................... S-5
Class B Certificates....................................................... S-5
Closing Date............................................................... S-5
Code....................................................................... S-56
Compensating Interest...................................................... S-30
Corporate Trust Office..................................................... S-31
Convertible Mortgage Loans................................................. S-18
CPR........................................................................ S-49
Credit Scores.............................................................. S-24
Cut-off Date............................................................... S-5
Debt Service Reduction..................................................... S-42
Decrement Tables........................................................... S-48
Deficient Valuation........................................................ S-42
Definitive Certificates.................................................... S-32
Deleted Mortgage Loan...................................................... S-28
Depositor.................................................................. S-5
Determination Date......................................................... S-30
Distribution Date.......................................................... S-34
DTC........................................................................ S-32
DTC Participants........................................................... S-33
Eligible Substitute Mortgage Loan.......................................... S-28
ERISA...................................................................... S-58
Excess Losses.............................................................. S-42
Exemption.................................................................. S-58
FHLMC...................................................................... S-18
Fitch...................................................................... S-60
FNMA....................................................................... S-18
Fractional Interest........................................................ S-40
Fraud Loss Amount.......................................................... S-55
Fraud Losses............................................................... S-42
Gross Margin............................................................... S-17
Index...................................................................... S-17
Indirect DTC Participants.................................................. S-33
Interest Accrual Period.................................................... S-36
Interest Distribution Amount............................................... S-36
S-61
Page
----
IRA........................................................................ S-58
IRS........................................................................ S-58
Issuer..................................................................... S-5
Liquidated Mortgage Loan................................................... S-42
Liquidation Proceeds....................................................... S-35
Loan-to-Value Ratio........................................................ S-19
Loss Severity Percentage................................................... S-53
MERS....................................................................... S-28
Modeling Assumptions....................................................... S-48
Moody's.................................................................... S-60
Mortgage File.............................................................. S-27
Mortgage Loan Purchase Agreement........................................... S-18
Mortgage Loans............................................................. S-17
Mortgage Pool.............................................................. S-17
Mortgage Score............................................................. S-24
Net Interest Shortfall..................................................... S-36
Net Mortgage Interest Rate................................................. S-37
Non-Offered Certificates................................................... S-5
Non-Supported Interest Shortfall........................................... S-36
Offered Certificates....................................................... S-5
One-Year CMT............................................................... S-17
Original Subordinate Principal Balance..................................... S-39
Percentage Interest........................................................ S-32
Periodic Cap............................................................... S-17
Plan....................................................................... S-58
Pool Distribution Amount................................................... S-35
Pool Distribution Amount Allocation........................................ S-35
Pool Principal Balance..................................................... S-38
Pooling Agreement.......................................................... S-27
Prepayment Interest Shortfall.............................................. S-36
Principal Amount........................................................... S-37
Product Guides............................................................. S-24
Purchase Price............................................................. S-28
Rate Ceiling............................................................... S-17
Realized Loss.............................................................. S-42
Record Date................................................................ S-34
Regular Certificates....................................................... S-56
Relief Act Reduction....................................................... S-36
REMIC...................................................................... S-56
REO Property............................................................... S-30
Residual Certificate....................................................... S-5
Revenue Procedure.......................................................... S-44
Rules...................................................................... S-33
Scheduled Principal Payments............................................... S-37
SDA........................................................................ S-52
Seller..................................................................... S-5
Senior Certificates........................................................ S-5
Senior Credit Support Depletion Date....................................... S-38
Senior Percentage.......................................................... S-38
Senior Prepayment Percentage............................................... S-39
S-62
Page
----
Senior Principal Distribution Amount....................................... S-38
Servicer................................................................... S-26
Servicer Custodial Account................................................. S-29
Servicing Fee.............................................................. S-29
Servicing Fee Rate......................................................... S-29
Similar Law................................................................ S-58
SMMEA...................................................................... S-11
Special Hazard Loss Amount................................................. S-55
Special Hazard Losses...................................................... S-42
Special Hazard Mortgage Loan............................................... S-42
Stated Principal Balance................................................... S-38
Subordinate Certificates................................................... S-5
Subordinate Percentage..................................................... S-38
Subordinate Prepayment Percentage.......................................... S-40
Subordinate Principal Distribution Amount.................................. S-41
Substitution Adjustment Amount............................................. S-28
Super Senior Certificates.................................................. S-5
Super Senior Support Certificates.......................................... S-5
Trust...................................................................... S-5
Trustee.................................................................... S-5
Trustee Fee Rate........................................................... S-29
Underwriter................................................................ S-59
Underwriting Agreement..................................................... S-59
Unscheduled Principal Payments............................................. S-37
U.S. Person................................................................ S-44
S-63
Bank of America Mortgage Securities, Inc.
Depositor
Mortgage Pass-Through Certificates
(Issuable in Series by separate Trusts)
----------------
Each Trust--
You should
carefully . will issue a series of mortgage pass-through
consider the risk certificates, which will consist of one or more
factors beginning classes of certificates; and
on page 11 of
this prospectus. . will own--
Neither the . a pool or pools of fixed or adjustable interest
certificates of rate, conventional mortgage loans, each of
any series nor which is secured by a first lien on a one- to
the related four-family residential property; and
underlying
mortgage loans . other assets described in this prospectus and
will be insured the accompanying prospectus supplement.
or guaranteed by
any governmental Each Pool of Mortgage Loans--
agency or
instrumentality. . will be sold to the related Trust by the Depositor,
who will have in turn purchased them from
The certificates affiliated or unaffiliated sellers;
of each series
will represent . will be underwritten to such standards as described
interests in the in this prospectus or the accompanying prospectus
related Trust supplement; and
only and will not
represent . will be serviced by servicers affiliated or
interests in or unaffiliated with the Depositor.
obligations of
the Depositor or Each Series of Certificates--
any other entity.
. will represent interests in the related Trust;
This prospectus
may be used to . may provide credit support by "subordinating"
offer and sell certain classes to other classes of certificates;
any series of any subordinated classes will be entitled to
certificates only payment subject to the payment of more senior
if accompanied by classes and may bear losses before more senior
the prospectus classes;
supplement for
that series. . may be entitled to one or more of the other types
of credit support described in this prospectus; and
. will be paid only from the assets of the related
Trust.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the certificates or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal
offense.
----------------
The date of this Prospectus is March 22, 2001.
Important Notice About Information Presented
in this Prospectus and the Prospectus Supplement
Information is provided to you about the Certificates in two separate
documents that progressively provide more detail: (a) this Prospectus, which
provides general information, some of which may not apply to a particular
Series of Certificates, including your Series, and (b) the accompanying
Prospectus Supplement, which will describe the specific terms of your Series
of Certificates, including:
. the principal balances and/or interest rates of each Class;
. the timing and priority of interest and principal payments;
. statistical and other information about the Mortgage Loans;
. information about credit enhancement, if any, for each Class;
. the ratings for each Class; and
. the method for selling the Certificates.
If the terms of a particular Series of Certificates vary between this
Prospectus and the Prospectus Supplement, you should rely on the information
in the Prospectus Supplement.
You should rely only on the information provided in this Prospectus and the
accompanying Prospectus Supplement including the information incorporated by
reference. No one has been authorized to provide you with different
information. The Certificates are not being offered in any state where the
offer is not permitted. The Depositor does not claim the accuracy of the
information in this Prospectus or the accompanying Prospectus Supplement as of
any date other than the dates stated on their respective covers.
Cross-references are included in this Prospectus and in the accompanying
Prospectus Supplement to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents included in the accompanying Prospectus Supplement provide the pages
on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
Prospectus are defined under the caption "Index of Significant Definitions"
beginning on page 111 in this Prospectus.
----------------
2
TABLE OF CONTENTS
PROSPECTUS
Page
----
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
PROSPECTUS SUPPLEMENT.................................................... 2
SUMMARY OF PROSPECTUS..................................................... 6
RISK FACTORS.............................................................. 11
Limited Liquidity....................................................... 11
Limited Assets for Payment of Certificates.............................. 11
Credit Enhancement is Limited in Amount and Coverage.................... 11
Real Estate Market Conditions Affect Mortgage Loan Performance.......... 12
Geographic Concentration May Increase Risk of Loss...................... 12
General Economic Conditions May Increase Risk of Loss................... 13
Yield is Sensitive to Rate of Principal Prepayment...................... 13
Bankruptcy of the Depositor or a Seller May Delay or Reduce Collections
on Mortgage Loans...................................................... 14
Book-Entry System for Certain Classes of Certificates May Decrease
Liquidity and Delay Payment............................................ 14
Cash Flow Agreements are Subject to Counterparty Risk................... 15
Consumer Protection Laws May Limit Remedies............................. 15
THE TRUST ESTATES......................................................... 16
General................................................................. 16
Mortgage Loans.......................................................... 16
Fixed Rate Loans...................................................... 18
Adjustable Rate Loans................................................. 18
Net 5 Loans........................................................... 19
Graduated Payment Loans............................................... 19
Subsidy Loans......................................................... 19
Buy-Down Loans........................................................ 20
Balloon Loans......................................................... 20
Pledged Asset Mortgage Loans.......................................... 21
THE DEPOSITOR............................................................. 21
THE MORTGAGE LOAN PROGRAMS................................................ 21
General................................................................. 21
Mortgage Loan Underwriting.............................................. 21
Representations and Warranties.......................................... 24
DESCRIPTION OF THE CERTIFICATES........................................... 25
Page
----
General................................................................. 25
Definitive Form......................................................... 26
Book-Entry Form......................................................... 26
Distributions to Certificateholders..................................... 28
General............................................................... 28
Distributions of Interest............................................. 30
Distributions of Principal............................................ 30
Categories of Classes of Certificates................................... 32
Other Credit Enhancement................................................ 36
Limited Guarantee..................................................... 36
Financial Guaranty Insurance Policy or Surety Bond.................... 37
Letter of Credit...................................................... 37
Pool Insurance Policy................................................. 37
Special Hazard Insurance Policy....................................... 37
Mortgagor Bankruptcy Bond............................................. 37
Reserve Fund.......................................................... 37
Cross Support......................................................... 37
Cash Flow Agreements.................................................... 38
PREPAYMENT AND YIELD CONSIDERATIONS....................................... 38
Pass-Through Rates...................................................... 38
Scheduled Delays in Distributions....................................... 39
Effect of Principal Prepayments......................................... 39
Weighted Average Life of Certificates................................... 39
SERVICING OF THE MORTGAGE LOANS........................................... 41
The Master Servicer..................................................... 41
The Servicers........................................................... 41
Payments on Mortgage Loans.............................................. 42
Periodic Advances and Limitations Thereon............................... 45
Collection and Other Servicing Procedures............................... 46
Enforcement of "Due-on-Sale Clauses"; Realization Upon Defaulted
Mortgage Loans......................................................... 47
Insurance Policies...................................................... 49
Fixed Retained Yield, Servicing Compensation and Payment of Expenses.... 50
Evidence as to Compliance............................................... 51
CERTAIN MATTERS REGARDING THE MASTER SERVICER............................. 52
THE POOLING AND SERVICING AGREEMENT....................................... 53
Assignment of Mortgage Loans to the Trustee............................. 53
3
Page
----
Optional Purchases...................................................... 55
Reports to Certificateholders........................................... 55
List of Certificateholders.............................................. 56
Events of Default....................................................... 56
Rights Upon Event of Default............................................ 57
Amendment............................................................... 58
Termination; Optional Purchase of Mortgage Loans........................ 59
The Trustee............................................................. 59
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS............................... 60
General................................................................. 60
Foreclosure............................................................. 60
Foreclosure on Shares of Cooperatives................................... 61
Rights of Redemption.................................................... 62
Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations
on Lenders............................................................. 62
Homeowners Protection Act of 1998....................................... 65
Texas Home Equity Loans................................................. 66
Soldiers' and Sailors' Civil Relief Act and Similar Laws................ 66
Environmental Considerations............................................ 66
"Due-on-Sale" Clauses................................................... 69
Applicability of Usury Laws............................................. 70
Enforceability of Certain Provisions.................................... 70
FEDERAL INCOME TAX CONSEQUENCES........................................... 71
Federal Income Tax Consequences for REMIC Certificates.................. 71
General................................................................. 71
Status of REMIC Certificates............................................ 71
Qualification as a REMIC................................................ 72
Taxation of Regular Certificates........................................ 74
General............................................................... 74
Original Issue Discount............................................... 74
Acquisition Premium................................................... 77
Variable Rate Regular Certificates.................................... 77
Market Discount....................................................... 79
Premium............................................................... 79
Election to Treat All Interest Under the Constant Yield Method........ 80
Treatment of Losses................................................... 80
Sale or Exchange of Regular Certificates.............................. 81
Taxation of Residual Certificates....................................... 82
Page
----
Taxation of REMIC Income.............................................. 82
Basis and Losses...................................................... 83
Treatment of Certain Items of REMIC Income and Expense................ 84
Limitations on Offset or Exemption of REMIC Income.................... 85
Tax-Related Restrictions on Transfer of Residual Certificates......... 85
Sale or Exchange of a Residual Certificate............................ 88
Mark to Market Regulations............................................ 89
Taxes That May Be Imposed on the REMIC Pool............................. 89
Prohibited Transactions............................................... 89
Contributions to the REMIC Pool After the Startup Day................. 89
Net Income from Foreclosure Property.................................. 90
Liquidation of the REMIC Pool........................................... 90
Administrative Matters.................................................. 90
Limitations on Deduction of Certain Expenses............................ 90
Taxation of Certain Foreign Investors................................... 91
Regular Certificates.................................................. 91
Residual Certificates................................................. 92
Backup Withholding...................................................... 92
Reporting Requirements.................................................. 93
Federal Income Tax Consequences for Certificates as to Which No REMIC
Election Is Made....................................................... 93
General................................................................. 93
Tax Status.............................................................. 94
Premium and Discount.................................................... 95
Premium............................................................... 95
Original Issue Discount............................................... 95
Market Discount....................................................... 95
Recharacterization of Servicing Fees.................................... 96
Sale or Exchange of Certificates........................................ 96
Stripped Certificates................................................... 97
General............................................................... 97
Status of Stripped Certificates....................................... 98
Taxation of Stripped Certificates..................................... 98
Reporting Requirements and Backup Withholding........................... 100
Taxation of Certain Foreign Investors................................... 100
ERISA CONSIDERATIONS...................................................... 101
General................................................................. 101
Certain Requirements Under ERISA and the Code........................... 101
4
Page
----
General................................................................ 101
Parties in Interest/Disqualified Persons............................... 101
Delegation of Fiduciary Duty........................................... 102
Applicability to Non-ERISA Plans....................................... 102
Administrative Exemptions................................................ 102
Individual Administrative Exemptions................................... 102
PTE 83-1............................................................... 104
Non-ERISA Plans and Exempt Plans......................................... 105
Unrelated Business Taxable Income--Residual Certificates................. 105
LEGAL INVESTMENT........................................................... 106
Page
----
PLAN OF DISTRIBUTION....................................................... 107
USE OF PROCEEDS............................................................ 109
LEGAL MATTERS.............................................................. 109
RATING..................................................................... 109
REPORTS TO CERTIFICATEHOLDERS.............................................. 109
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... 109
WHERE YOU CAN FIND MORE INFORMATION........................................ 110
INDEX OF SIGNIFICANT DEFINITIONS........................................... 111
5
SUMMARY OF PROSPECTUS
. This summary highlights selected information from this document, but does not
contain all of the information that you should consider in making your
investment decision. To understand all of the terms of a Series of
Certificates, please read this entire document and the accompanying
Prospectus Supplement carefully.
. This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the Certificates
and is qualified by the full description of these calculations, cash flows
and other information in this Prospectus and the accompanying Prospectus
Supplement.
RELEVANT PARTIES FOR EACH SERIES OF CERTIFICATES
Issuer
Each series (each, a "Series") of certificates (the "Certificates") will be
issued by a separate trust (a "Trust" and the assets owned by such Trust, a
"Trust Estate"). Each Trust will be formed pursuant to a pooling and servicing
agreement (each, a "Pooling and Servicing Agreement") among the Depositor, one
or more Servicers and/or the Master Servicer and the Trustee specified in the
applicable Prospectus Supplement.
Depositor
With respect to each Trust Estate, Bank of America Mortgage Securities, Inc.
(the "Depositor") will acquire the Mortgage Loans from affiliated or
unaffiliated mortgage loan originators or sellers (each, a "Seller") and will
transfer the Mortgage Loans to the Trust. The Depositor is a direct, wholly-
owned subsidiary of Bank of America, N.A.
Servicer(s)
One or more entities affiliated or unaffiliated with the Depositor specified
in the applicable Prospectus Supplement (each, a "Servicer") will service the
Mortgage Loans in each Trust. Each Servicer will perform certain servicing
functions with respect to the Mortgage Loans serviced by it pursuant to the
related Pooling and Servicing Agreement or a related servicing agreement (each,
an "Underlying Servicing Agreement").
Master Servicer
To the extent specified in the related Prospectus Supplement, if there is
more than one Servicer of the Mortgage Loans related to a Series or the sole
Servicer is not an affiliate of the Depositor, a master servicer, affiliated or
unaffiliated with the Depositor, (the "Master Servicer") may be appointed to
supervise the Servicers. In addition, the Master Servicer will generally be
required to make Periodic Advances with respect to the Mortgage Loans in each
Trust Estate if the related Servicer fails to make a required Periodic Advance.
THE MORTGAGE LOANS
Each Trust will own the related Mortgage Loans (other than the Fixed
Retained Yield described in this Prospectus, if any) and certain other related
property, as specified in the applicable Prospectus Supplement.
The Mortgage Loans in each Trust Estate:
.will be conventional, fixed or adjustable interest rate, mortgage loans
secured by first liens on some or all of the following types of
property, to the extent set forth in the applicable Prospectus
Supplement: (i) one-family attached or detached residences, (ii) two- to
four-family units, (iii) row
6
houses, (iv) townhouses, (v) condominium units, (vi) units within
planned unit developments, (vii) long-term leases with respect to any of
the foregoing, and (viii) shares issued by private non-profit housing
corporations and the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specified units in such
cooperatives' buildings.
.will have been acquired by the Depositor, either directly or indirectly
through an affiliate from the Sellers;
.will have been originated by mortgage loan originators which are either
affiliated or unaffiliated with the Depositor; and
.will have been underwritten to the standards specified herein or in the
applicable Prospectus Supplement.
See "The Trust Estates" and "The Mortgage Loan Programs--Mortgage Loan
Underwriting."
You should refer to the applicable Prospectus Supplement for the precise
characteristics or expected characteristics of the Mortgage Loans and a
description of the other property, if any, included in a particular Trust
Estate.
DISTRIBUTIONS ON THE CERTIFICATES
Each Series of Certificates will include one or more classes (each, a
"Class"). A Class of Certificates will be entitled, to the extent of funds
available, to either:
.principal and interest payments in respect of the related Mortgage Loans;
.principal distributions, with no interest distributions;
.interest distributions, with no principal distributions; or
.such other distributions as are described in the applicable Prospectus
Supplement.
Interest Distributions
With respect to each Series of Certificates, interest on the related
Mortgage Loans at the weighted average of their mortgage interest rates (net of
servicing fees and certain other amounts as described in this Prospectus or in
the applicable Prospectus Supplement), will be passed through to holders of the
related Classes of Certificates in accordance with the particular terms of each
such Class of Certificates. The terms of each Class of Certificates will be
described in the related Prospectus Supplement. See "Description of the
Certificates--Distributions to Certificateholders--Distributions of Interest."
Except as otherwise specified in the applicable Prospectus Supplement,
interest will accrue at the pass-through rate for each Class indicated in the
applicable Prospectus Supplement (each, a "Pass-Through Rate") on its
outstanding principal balance or notional amount.
Principal Distributions
With respect to a Series of Certificates, principal payments (including
prepayments) on the related Mortgage Loans will be passed through to holders of
the related Certificates or otherwise applied in accordance with the related
Pooling and Servicing Agreement on each Distribution Date. Distributions in
reduction of principal balance will be allocated among the Classes of
Certificates of a Series in the manner specified in the applicable Prospectus
Supplement. See "Description of the Certificates--Distributions to
Certificateholders--Distributions of Principal."
7
Distribution Dates
Distributions on the Certificates will generally be made on the 25th day
(or, if such day is not a business day, the business day following the 25th
day) of each month, commencing with the month following the month in which the
applicable Cut-Off Date occurs (each, a "Distribution Date"). The "Cut-Off
Date" for each Series will be the date specified in the applicable Prospectus
Supplement.
If so specified in the applicable Prospectus Supplement, distributions on
Certificates may be made on a different day of each month or may be made
quarterly, or semi-annually, on the dates specified in such Prospectus
Supplement.
Record Dates
Distributions will be made on each Distribution Date to Certificateholders
of record at the close of business on (unless a different date is specified in
the applicable Prospectus Supplement) the last business day of the month
preceding the month in which such Distribution Date occurs (each, a "Record
Date").
CREDIT ENHANCEMENT
Subordination
A Series of Certificates may include one or more Classes of senior
certificates (the "Senior Certificates") and one or more Classes of
subordinated certificates (the "Subordinated Certificates"). The rights of the
holders of Subordinated Certificates of a Series to receive distributions will
be subordinated to such rights of the holders of the Senior Certificates of the
same Series to the extent and in the manner specified in the applicable
Prospectus Supplement.
Subordination is intended to enhance the likelihood of the timely receipt by
the Senior Certificateholders of their proportionate share of scheduled monthly
principal and interest payments on the related Mortgage Loans and to protect
them from losses. This protection will be effected by:
.the preferential right of the Senior Certificateholders to receive, prior
to any distribution being made in respect of the related Subordinated
Certificates on each Distribution Date, current distributions on the
related Mortgage Loans of principal and interest due them on each
Distribution Date out of the funds available for distributions on such
date;
.the right of such holders to receive future distributions on the Mortgage
Loans that would otherwise have been payable to the holders of
Subordinated Certificates; and/or
.the prior allocation to the Subordinated Certificates of all or a portion
of losses realized on the underlying Mortgage Loans.
Other Types of Credit Enhancement
If so specified in the applicable Prospectus Supplement, the Certificates of
any Series, or any one or more Classes of a Series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
. limited guarantee . mortgage pool
. financial guaranty insurance policy
insurance policy . reserve fund
. surety bond . cross-support
. letter of credit
Any credit support will be described in the applicable Prospectus
Supplement.
See "Description of the Certificates--Other Credit Enhancement."
PERIODIC ADVANCES ON DELINQUENT PAYMENTS
In the event that a payment on a Mortgage Loan is delinquent, the Servicer
of the Mortgage
8
Loan will be obligated to make cash advances ("Periodic Advances") to the
Servicer Custodial Account or the Certificate Account if the Servicer
determines that it will be able to recover such amounts from future payments
and collections on such Mortgage Loan. A Servicer who makes Periodic Advances
will be reimbursed for such Periodic Advances as described in this Prospectus
and in the applicable Prospectus Supplement. In certain circumstances, the
Master Servicer or Trustee will be required to make Periodic Advances upon a
Servicer default.
See "Servicing of the Mortgage Loans--Periodic Advances and Limitations
Thereon."
FORMS OF CERTIFICATES
The Certificates will be issued either:
.in book-entry form ("Book-Entry Certificates") through the facilities of
The Depository Trust Company ("DTC"); or
.in fully-registered, certificated form ("Definitive Certificates").
If you own Book-Entry Certificates, you will not receive a physical
certificate representing your ownership interest in such Book-Entry
Certificates, except under extraordinary circumstances which are discussed in
"Description of the Certificates--Definitive Form" in this Prospectus. Instead,
DTC will effect payments and transfers by means of its electronic recordkeeping
services, acting through certain participating organizations. This may result
in certain delays in your receipt of distributions and may restrict your
ability to pledge your securities. Your rights with respect to Book-Entry
Certificates may generally only be exercised through DTC and its participating
organizations.
See "Description of the Certificates--Book-Entry Form."
OPTIONAL PURCHASE OF ALL MORTGAGE LOANS
If so specified in the Prospectus Supplement with respect to a Series, all,
but not less than all, of the Mortgage Loans in the related Trust and any
property acquired with respect to such Mortgage Loans may be purchased by the
Depositor or such other party as is specified in the applicable Prospectus
Supplement. Any such purchase must be made in the manner and at the price
specified in such Prospectus Supplement.
If an election is made to treat the related Trust Estate (or one or more
segregated pools of assets in the Trust Estate) as a "real estate mortgage
investment conduit" (a "REMIC"), any such purchase will be effected only
pursuant to a "qualified liquidation," as defined under Section 860F(a)(4)(A)
of the Internal Revenue Code of 1986, as amended (the "Code").
Exercise of the right of purchase will effect the early retirement of the
Certificates of that Series.
See "Prepayment and Yield Considerations."
ERISA LIMITATIONS
If you are a fiduciary of any employee benefit plan or another type of
retirement plan or arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), the Code or similar law, you should
carefully review with your legal advisors whether the purchase or holding of
Certificates could give rise to a transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain Classes of Certificates may not be transferred unless the Trustee
and the Depositor are furnished with a letter of representation or an opinion
of counsel to the effect that such transfer will not result in a violation of
the prohibited transaction provisions of ERISA or the Code and will not subject
the Trustee, the Depositor, any Servicers or the Master Servicer to additional
obligations.
9
See "ERISA Considerations."
TAX STATUS
The treatment of the Certificates for federal income tax purposes will
depend on:
.whether a REMIC election is made with respect to a Series of Certificates;
and
.if a REMIC election is made, whether the Certificates are Regular
Interests or Residual Interests.
See "Federal Income Tax Consequences."
LEGAL INVESTMENT
The applicable Prospectus Supplement will specify whether the Class or
Classes of Certificates offered will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended. If your investment authority is subject to legal restrictions you
should consult your own legal advisors to determine whether and to what extent
such Certificates constitute legal investments for you.
See "Legal Investment" in this Prospectus and "Summary of Terms--Legal
Investment" in the applicable Prospectus Supplement.
RATING
Certificates of any Series will not be offered pursuant to this Prospectus
and a Prospectus Supplement unless each offered Class is rated in one of the
four highest rating categories by at least one nationally recognized
statistical rating organization (a "Rating Agency").
.A security rating is not a recommendation to buy, sell or hold the
Certificates of any Series and is subject to revision or withdrawal at
any time by the assigning rating agency.
.Ratings do not address the effect of prepayments on the yield you may
anticipate when you purchase your Certificates.
10
RISK FACTORS
Investors should consider, among other things, the following description of
the material risks associated with the purchase of Certificates.
Limited Liquidity
The liquidity of your Certificates may be limited. You should consider that:
.a secondary market for the Certificates of any Series may not develop, or
if it does, it may not provide you with liquidity of investment, or it
may not continue for the life of the Certificates of any Series;
.the Prospectus Supplement for any Series of Certificates may indicate that
an underwriter intends to establish a secondary market in such
Certificates, but no underwriter will be obligated to do so; and
.unless specified in the applicable Prospectus Supplement, the Certificates
will not be listed on any securities exchange.
Limited Assets for Payment of Certificates
Except for any related insurance policies and any reserve fund or credit
enhancement described in the applicable Prospectus Supplement:
.Mortgage Loans included in the related Trust Estate will be the sole
source of payments on the Certificates of a Series;
.the Certificates of any Series will not represent an interest in or
obligation of the Depositor, the Trustee or any of their affiliates,
except for the Depositor's limited obligations with respect to certain
breaches of its representations and warranties and, to the extent an
affiliate of the Depositor acts as such, its obligations as a Servicer
or Master Servicer, if applicable; and
.neither the Certificates of any Series nor the related Mortgage Loans will
be guaranteed or insured by any governmental agency or instrumentality,
the Depositor, the Trustee, any of their affiliates or any other person.
Consequently, in the event that payments on the Mortgage Loans underlying
your Series of Certificates are insufficient or otherwise unavailable to make
all payments required on your Certificates, there will be no recourse to the
Depositor, the Trustee or any of their affiliates or, except as specified in
the applicable Prospectus Supplement, any other entity.
Credit Enhancement is Limited in Amount and Coverage
With respect to each Series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the underlying
Mortgage Loans. Credit enhancement will be provided in one or more of the forms
referred to in this Prospectus, including, but not limited to: subordination of
other Classes of Certificates of the same Series; a limited guarantee; a
financial guaranty insurance policy; a surety bond; a letter of credit; a pool
insurance policy; a special hazard insurance policy; a mortgagor bankruptcy
bond; a reserve fund; cross-support; and any combination of the preceding types
of credit enhancement. See "Description of the Certificates--Other Credit
Enhancement."
Regardless of the form of credit enhancement provided:
.the amount of coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula;
11
.may provide only very limited coverage as to certain types of losses, and
may provide no coverage as to certain other types of losses; and
.all or a portion of the credit enhancement for any Series of Certificates
will generally be permitted to be reduced, terminated or substituted
for, in the sole discretion of the Servicer or the Master Servicer, if
each applicable Rating Agency indicates that the then-current ratings
will not be adversely affected.
If losses exceed the amount of coverage provided by any credit enhancement
or losses of a type not covered by any credit enhancement occur, such losses
will be borne by the holders of the related Certificates (or certain Classes).
The rating of any Class of Certificates by a Rating Agency may be lowered
following its issuance as a result of the downgrading of the obligations of any
applicable credit support provider, or as a result of losses on the related
Mortgage Loans in excess of the levels contemplated by such Rating Agency at
the time of its initial rating analysis.
Neither the Depositor nor any of its affiliates will have any obligation to
replace or supplement any credit enhancement, or to take any other action to
maintain any rating of any Class of Certificates.
See "Description of the Certificates--Other Credit Enhancement."
Real Estate Market Conditions Affect Mortgage Loan Performance
An investment in securities such as the Certificates, which generally
represent interests in pools of residential mortgage loans, may be affected by
a decline in real estate values and changes in the mortgagor's financial
condition. There is no assurance that the values of the Mortgaged Properties
securing the Mortgage Loans underlying any Series of Certificates have remained
or will remain at their levels on the dates of origination of the related
Mortgage Loans.
If the residential real estate market should experience an overall decline
in property values such that the outstanding balances of the Mortgage Loans
contained in a particular Trust Estate and any secondary financing on the
Mortgaged Properties, become equal to or greater than the value of the
Mortgaged Properties, delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry and those
experienced in a Servicer's servicing portfolio.
If losses on Mortgage Loans underlying a Series are not covered by credit
enhancement, Certificateholders of the Series will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to the
value of the Mortgaged Properties for recovery of the outstanding principal and
unpaid interest on the defaulted Mortgage Loans. See "The Trusts Estates--
Mortgage Loans" and "The Mortgage Loan Programs--Mortgage Loan Underwriting."
Geographic Concentration May Increase Risk of Loss
The Mortgage Loans underlying certain Series of Certificates may be
concentrated in certain regions. Such concentration may present risk
considerations in addition to those generally present for similar mortgage-
backed securities without such concentration. Certain geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets or be directly or indirectly affected by natural
disasters or civil disturbances such as earthquakes, hurricanes, floods,
eruptions or riots. Mortgage loans in such areas will experience higher rates
of loss and delinquency than on mortgage loans generally. Although Mortgaged
Properties located in certain
12
identified flood zones will be required to be covered, to the maximum extent
available, by flood insurance, as described under "Servicing of the Mortgage
Loans--Insurance Policies," no Mortgaged Properties will otherwise be required
to be insured against earthquake damage or any other loss not covered by
Standard Hazard Insurance Policies, as described under "Servicing of the
Mortgage Loans--Insurance Policies."
See "The Mortgage Pool" in the related Prospectus Supplement for further
information regarding the geographic concentration of the Mortgage Loans
underlying the Certificates of any Series. See also "The Mortgage Loan
Programs--Mortgage Loan Underwriting" and "Prepayment and Yield
Considerations--Weighted Average Life of Certificates."
General Economic Conditions May Increase Risk of Loss
Adverse economic conditions generally, in particular geographic areas or
industries, or affecting particular segments of the borrowing community (such
as mortgagors relying on commission income and self-employed mortgagors) and
other factors which may or may not affect real property values (including the
purposes for which the Mortgage Loans were made and the uses of the Mortgaged
Properties) may affect the timely payment by mortgagors of scheduled payments
of principal and interest on the Mortgage Loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to any Trust
Estate. See "The Mortgage Loan Programs--Mortgage Loan Underwriting" and
"Prepayment and Yield Considerations--Weighted Average Life of Certificates."
If such losses are not covered by the applicable credit enhancement, holders of
Certificates of the Series evidencing interests in the related Trust Estate
will bear all risk of loss resulting from default by mortgagors and will have
to look primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans. See
"The Trust Estates--Mortgage Loans" and "The Mortgage Loan Programs--Mortgage
Loan Underwriting."
Yield is Sensitive to Rate of Principal Prepayment
The yield on the Certificates of each Series will depend in part on the rate
of principal payment on the Mortgage Loans (including prepayments, liquidations
due to defaults and mortgage loan repurchases). Such yield may be adversely
affected, depending upon whether a particular Certificate is purchased at a
premium or a discount, by a higher or lower than anticipated rate of
prepayments on the related Mortgage Loans. In particular:
.the yield on Classes of Certificates entitling their holders primarily or
exclusively to payments of interest or primarily or exclusively to
payments of principal will be extremely sensitive to the rate of
prepayments on the related Mortgage Loans; and
.the yield on certain Classes of Certificates may be relatively more
sensitive to the rate of prepayment of specified Mortgage Loans than
other Classes of Certificates.
The rate of prepayments on Mortgage loans is influenced by a number of
factors, including:
.prevailing mortgage market interest rates;
.local and national economic conditions;
.homeowner mobility; and
.the ability of the borrower to obtain refinancing.
In addition, your yield may be adversely affected by interest shortfalls
which may result from the timing of the receipt of prepayments or liquidations
to the extent that such interest shortfalls are not
13
covered by aggregate Servicing Fees or other mechanisms specified in the
applicable Prospectus Supplement. Your yield will be also adversely affected to
the extent that losses on the Mortgage Loans in the related Trust Estate are
allocated to your Certificates and may be adversely affected to the extent of
unadvanced delinquencies on the Mortgage Loans in the related Trust. Classes of
Certificates identified in the applicable Prospectus Supplement as Subordinated
Certificates are more likely to be affected by delinquencies and losses than
other Classes of Certificates.
See "Prepayment and Yield Considerations."
Bankruptcy of the Depositor or a Seller May Delay or Reduce Collections on
Mortgage Loans
Neither the United States Bankruptcy Code nor similar applicable state laws
(the "Insolvency Laws") prohibit the Depositor from filing a voluntary
application for relief under the Insolvency Laws. However, the transactions
contemplated hereby and by the related Prospectus Supplement will be structured
such that the voluntary or involuntary application for relief under the
Insolvency Laws by the Depositor is unlikely and such filings by a Seller which
is an affiliate of the Depositor from whom the Depositor acquires the Mortgage
Loans should not result in consolidation of the assets and liabilities of the
Depositor with those of such Seller. These steps include the creation of the
Depositor as a separate, limited purpose subsidiary, the certificate of
incorporation of which contains limitations on the nature of the Depositor's
business and restrictions on the ability of the Depositor to commence voluntary
or involuntary cases or proceedings under the Insolvency Laws without the prior
unanimous affirmative vote of all its directors. However, there can be no
assurance that the activities of the Depositor would not result in a court
concluding that the assets and liabilities of the Depositor should be
consolidated with those of such Seller.
Each Seller will transfer its related Mortgage Loans to the Depositor and
the Depositor will transfer the Mortgage Loans to the related Trust Estate. If
a Seller were to become a debtor in a bankruptcy case, a creditor or trustee
(or the debtor itself) may take the position that the contribution or transfer
of the Mortgage Loans by the Seller to the Depositor should be characterized as
a pledge of such Mortgage Loans to secure a borrowing of such debtor, with the
result that the Depositor is deemed to be a creditor of such Seller, secured by
a pledge of the applicable Mortgage Loans. If such an attempt were successful,
delays in payments of collections on the Mortgage Loans could occur or
reductions in the amount of such payments could result, or such a trustee in
bankruptcy could elect to accelerate payment of the obligation to the Depositor
and liquidate the Mortgage Loans.
Book-Entry System for Certain Classes of Certificates May Decrease Liquidity
and Delay Payment
Since transactions in the Classes of Book-Entry Certificates of any Series
generally can be effected only through DTC, DTC Participants and Indirect DTC
Participants:
.your ability to pledge Book-Entry Certificates to someone who does not
participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate;
.you may experience delays in your receipt of payments on Book-Entry
Certificates because distributions will be made by the Trustee, or a
Paying Agent on behalf of the Trustee, to Cede, as nominee for DTC; and
.the liquidity of Book-Entry Certificates in any secondary trading market
that may develop may be limited because investors may be unwilling to
purchase securities for which they cannot obtain delivery of physical
certificates.
14
See "Description of the Certificates--Book-Entry Form."
Cash Flow Agreements are Subject to Counterparty Risk
The assets of a Trust Estate may, if specified in the related Prospectus
Supplement, include agreements, such as interest rate swap, cap, floor or
similar agreements (each a "Cash Flow Agreement"), which will require the
provider of such instrument (the "Counterparty") to make payments to the Trust
Estate under the circumstances described in the Prospectus Supplement. If
payments on the Certificates of the related Series depend in part on payments
to be received under a Cash Flow Agreement, the ability of the Trust Estate to
make payments on the Certificates will be subject to the credit risk of the
Counterparty. The Prospectus Supplement for a Series of Certificates will
describe any mechanism, such as the payment of "breakage fees," which may exist
to facilitate replacement of a Cash Flow Agreement upon the default or credit
impairment of the related Counterparty. However, there can be no assurance that
any such mechanism will result in the ability of the Master Servicer to obtain
a replacement Cash Flow Agreement.
Consumer Protection Laws May Limit Remedies
There are various federal and state laws, public policies and principles of
equity that protect consumers. Among other things, these laws, policies and
principles:
.regulate interest rates and other charges;
.require certain disclosures;
.require licensing of mortgage loan originators;
.prohibit discriminatory lending practices;
.regulate the use of consumer credit information; and
.regulate debt collection practices.
Violation of certain provisions of these laws, policies and principles:
.may limit a Servicer's ability to collect all or part of the principal of
or interest on the Mortgage Loans;
.may entitle the borrower to a refund of amounts previously paid; and
.could subject a Servicer to damages and administrative sanctions.
See "Certain Legal Aspects of the Mortgage Loans."
In addition, certain of the Mortgage Loans secured by Mortgaged Properties
located in Texas may be subject to the provisions of Texas laws which regulate
loans other than purchase money loans. These laws provide for certain
disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure to comply with any requirement may
render the Mortgage Loan unenforceable and/or the lien on the Mortgaged
Property invalid. There are also similar risks involved in servicing such
Mortgage Loans (such as the failure to comply with an obligation to the
borrower within a reasonable time after receiving notification from the
borrower) that can result in the forfeiture of all principal and interest due
on the Mortgage Loan.
See "Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency
Legislation, the Bankruptcy Code and Other Limitations on Lenders", "--Texas
Home Equity Loans" and "--Homeowners Protection Act of 1998."
15
THE TRUST ESTATES
General
The Trust Estate for each Series of Certificates will consist primarily of
mortgage loans (the "Mortgage Loans") evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or other instruments
creating first liens (the "Mortgages") on some or all of the following eight
types of property (as so secured, the "Mortgaged Properties"), to the extent
set forth in the applicable Prospectus Supplement: (i) one-family attached or
detached residences, (ii) two- to four-family units, (iii) row houses, (iv)
townhouses, (v) condominium units, (vi) units within planned unit developments,
(vii) long-term leases with respect to any of the foregoing, and (viii) shares
issued by private non-profit housing corporations ("cooperatives") and the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specified units in such cooperatives' buildings. In addition, a Trust
Estate will also include (i) amounts held from time to time in the related
Certificate Account, (ii) the Depositor's interest in any primary mortgage
insurance, hazard insurance, title insurance or other insurance policies
relating to a Mortgage Loan, (iii) any property which initially secured a
Mortgage Loan and which has been acquired by foreclosure or trustee's sale or
deed in lieu of foreclosure or trustee's sale, (iv) if applicable, and to the
extent set forth in the applicable Prospectus Supplement, any reserve fund or
funds, (v) if applicable, and to the extent set forth in the applicable
Prospectus Supplement, contractual obligations of any person to make payments
in respect of any form of credit enhancement or any interest subsidy agreement
and (vi) such other assets of the kind described herein as may be specified in
the applicable Prospectus Supplement. The Trust Estate will not include the
portion of interest on the Mortgage Loans which constitutes the Fixed Retained
Yield, if any. See "Servicing of the Mortgage Loans--Fixed Retained Yield,
Servicing Compensation and Payment of Expenses."
Mortgage Loans
The Mortgage Loans will have been acquired by the Depositor from affiliates
of the Depositor or unaffiliated mortgage loan originators or sellers (each, a
"Seller"). The Mortgage Loans will have been originated by affiliated or
unaffiliated mortgage loan originators. Each Mortgage Loan will have been
underwritten either to the standards set forth herein or to such other
standards set forth in the applicable Prospectus Supplement. See "The Mortgage
Loan Programs--Mortgage Loan Underwriting."
Each of the Mortgage Loans will be secured by a Mortgage on a Mortgaged
Property located in any of the 50 states or the District of Columbia.
If specified in the applicable Prospectus Supplement, the Mortgage Loans may
be secured by leases on real property under circumstances that the applicable
Seller determines in its discretion are commonly acceptable to institutional
mortgage investors. A Mortgage Loan secured by a lease on real property is
secured not by a fee simple interest in the Mortgaged Property but rather by a
lease under which the mortgagor has the right, for a specified term, to use the
related real estate and the residential dwelling located thereon. Generally, a
Mortgage Loan will be secured by a lease only if the use of leasehold estates
as security for mortgage loans is customary in the area where the Mortgaged
Property is located, the lease is not subject to any prior lien that could
result in termination of the lease and the term of the lease ends at least five
years beyond the maturity date of the related Mortgage Loan. The provisions of
each lease securing a Mortgage Loan will expressly permit (i) mortgaging of the
leasehold estate, (ii) assignment of the lease without the lessor's consent and
(iii) acquisition by the holder of the Mortgage, in its own or its nominee's
name, of the rights of the lessee upon foreclosure or assignment in lieu of
foreclosure, unless alternative arrangements provide the holder of the Mortgage
with substantially
16
similar protections. No lease will contain provisions which (i) provide for
termination upon the lessee's default without the holder of the Mortgage being
entitled to receive written notice of, and opportunity to cure, such default,
(ii) provide for termination in the event of damage or destruction as long as
the Mortgage is in existence or (iii) prohibit the holder of the Mortgage from
being insured under the hazard insurance policy or policies related to the
premises.
The Prospectus Supplement will set forth the geographic distribution of
Mortgaged Properties and the number and aggregate unpaid principal balances of
the Mortgage Loans by category of Mortgaged Property. The Prospectus Supplement
for each Series will also set forth the range of original terms to maturity of
the Mortgage Loans in the Trust Estate, the weighted average remaining term to
stated maturity at the Cut-Off Date of such Mortgage Loans, the earliest and
latest months of origination of such Mortgage Loans, the range of Mortgage
Interest Rates borne by such Mortgage Loans, if such Mortgage Loans have
varying Net Mortgage Interest Rates, the weighted average Net Mortgage Interest
Rate at the Cut-Off Date of such Mortgage Loans, the range of loan-to-value
ratios at the time of origination of such Mortgage Loans and the range of
principal balances at origination of such Mortgage Loans.
A Mortgage Loan will generally provide for level monthly installments
(except, in the case of Balloon Loans, the final payment) consisting of
interest equal to one-twelfth of the applicable Mortgage Interest Rate times
the unpaid principal balance, with the remainder of such payment applied to
principal (an "Actuarial Mortgage Loan"). No adjustment is made if payment on
an Actuarial Mortgage Loan is made earlier or later than the Due Date, although
the mortgagor may be subject to a late payment charge. If so specified in the
applicable Prospectus Supplement, some Mortgage Loans may provide for payments
that are allocated to principal and interest according to the daily simple
interest method (each, a "Simple Interest Mortgage Loan"). A Simple Interest
Mortgage Loan provides for the amortization of the amount financed under the
Mortgage Loan over a series of equal monthly payments (except, in the case of a
Balloon Loan, the final payment). Each monthly payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the Mortgage Loan multiplied by the stated Mortgage
Interest Rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of
interest was made and the denominator of which is the number of days in the
annual period for which interest accrues on such Mortgage Loan. As payments are
received under a Simple Interest Mortgage Loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a fixed
monthly installment on a Simple Interest Mortgage Loan before its scheduled due
date, the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. The next scheduled
payment, however, will result in an allocation of a greater amount to interest
if such payment is made on its scheduled due date. Conversely, if a borrower
pays a fixed monthly installment after its scheduled due date, the portion of
the payment allocable to interest for the period since the preceding payment
was made will be greater than it would have been had the payment been made as
scheduled, and the remaining portion, if any, of the payment applied to reduce
the unpaid principal balance will be correspondingly less. Accordingly, if the
borrower consistently makes scheduled payments after the scheduled due date,
the Mortgage Loan will amortize more slowly than scheduled. If a Mortgage Loan
is prepaid, the borrower is required to pay interest only to the date of
prepayment.
The information with respect to the Mortgage Loans and Mortgaged Properties
described in the preceding three paragraphs may be presented in the Prospectus
Supplement for a Series as ranges in
17
which the actual characteristics of such Mortgage Loans and Mortgaged
Properties are expected to fall. In all such cases, information as to the final
characteristics of the Mortgage Loans and Mortgaged Properties will be
available in a Current Report on Form 8-K which will be filed with the
Commission within 15 days of the initial issuance of the related Series.
The Mortgage Loans in a Trust Estate will generally have monthly payments
due on the first of each month (each, a "Due Date") but may, if so specified in
the applicable Prospectus Supplement, have payments due on a different day of
each month and will be of one of the following types of mortgage loans:
a. Fixed Rate Loans. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fixed-rate, fully-amortizing Mortgage
Loans providing for level monthly payments of principal and interest and terms
at origination or modification of not more than 30 years. If specified in the
applicable Prospectus Supplement, fixed rates on certain Mortgage Loans may be
converted to adjustable rates after origination of such Mortgage Loans and upon
the satisfaction of other conditions specified in the applicable Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, the
Pooling and Servicing Agreement will require the Depositor or another party to
repurchase each such converted Mortgage Loan at the price set forth in the
applicable Prospectus Supplement. A Trust Estate containing fixed-rate Mortgage
Loans may contain convertible Mortgage Loans which have converted from an
adjustable interest rate prior to the formation of the Trust Estate and which
are subject to no further conversions.
b. Adjustable Rate Loans. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain adjustable-rate, fully-amortizing
Mortgage Loans having an original or modified term to maturity of not more than
40 years with a related Mortgage Interest Rate which generally adjusts
initially either one, three or six months, one, three, five, seven or ten years
subsequent to the initial Due Date, and thereafter at either one-month, six-
month, one-year or other intervals over the term of the Mortgage Loan to equal
the sum of a fixed margin set forth in the related Mortgage Note (the "Note
Margin") and an index. The applicable Prospectus Supplement will set forth the
relevant index and the highest, lowest and weighted average Note Margin with
respect to the adjustable-rate Mortgage Loans in the related Trust Estate. The
applicable Prospectus Supplement will also indicate any periodic or lifetime
limitations on the adjustment of any Mortgage Interest Rate.
If specified in the applicable Prospectus Supplement, adjustable rates on
certain Mortgage Loans may be converted to fixed rates after origination of
such Mortgage Loans and upon the satisfaction of the conditions specified in
the applicable Prospectus Supplement. If specified in the applicable Prospectus
Supplement, the Depositor or another party will generally be required to
repurchase each such converted Mortgage Loan at the price set forth in the
applicable Prospectus Supplement. A Trust Estate containing adjustable-rate
Mortgage Loans may contain convertible Mortgage Loans which have converted from
a fixed interest rate prior to the formation of the Trust Estate.
If so specified in the applicable Prospectus Supplement, a Trust Estate may
contain adjustable-rate Mortgage Loans which have Mortgage Interest Rates that
generally adjust monthly or may adjust at other intervals as specified in the
applicable Prospectus Supplement. The scheduled monthly payment will be
adjusted as and when described in the applicable Prospectus Supplement (at
intervals which may be different from those at which the Mortgage Interest Rate
is adjusted) to an amount that would fully amortize the Mortgage Loan over its
remaining term on a level debt service basis. Increases in the scheduled
monthly payment may be subject to certain limitations, as specified in the
applicable Prospectus Supplement, which may result in negative amortization of
principal. If an adjustment to the Mortgage Interest Rate on such a Mortgage
Loan causes the amount of interest accrued thereon in any
18
month to exceed the current scheduled monthly payment on such mortgage loan,
the resulting amount of interest that has accrued but is not then payable
("Deferred Interest") will be added to the principal balance of such Mortgage
Loan.
c. Net 5 Loans. If so specified in the applicable Prospectus Supplement, a
Trust Estate may contain Mortgage Loans having an original term to maturity of
not more than 30 years with a Mortgage Interest Rate which adjusts initially
five years subsequent to the initial payment date, and thereafter at one-month,
six-month, one-year or other intervals (with corresponding adjustments in the
amount of monthly payments) over the term of the mortgage loan to equal the sum
of the related Note Margin and index, and providing for monthly payments of
interest only prior to the date of the initial Mortgage Interest Rate
adjustment and monthly payments of principal and interest thereafter sufficient
to fully-amortize the Mortgage Loans over their remaining terms to maturity
("Net 5 Loans"). The related Prospectus Supplement will set forth the relevant
index and the highest, lowest and weighted average Note Margin with respect to
the Net 5 Loans in the related Trust Estate. The related Prospectus Supplement
will also indicate any periodic or lifetime limitations on changes in any per
annum Mortgage Interest Rate at the time of any adjustment.
d. Graduated Payment Loans. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fixed-rate, graduated-payment Mortgage
Loans having original or modified terms to maturity of not more than 30 years
with monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage
Interest Rate on such Mortgage Loan. Such monthly payments increase at the
beginning of the second year by a specified percentage of the monthly payment
during the preceding year and each year specified thereafter to the extent
necessary to amortize the Mortgage Loan over the remainder of its term or other
shorter period. Mortgage Loans incorporating such graduated payment features
may include (i) "Graduated Pay Mortgage Loans," pursuant to which amounts
constituting Deferred Interest are added to the principal balances of such
Mortgage Loans, (ii) "Tiered Payment Mortgage Loans," pursuant to which, if the
amount of interest accrued in any month exceeds the current scheduled payment
for such month, such excess amounts are paid from a subsidy account (usually
funded by a home builder or family member) established at closing and (iii)
"Growing Equity Mortgage Loans," for which the monthly payments increase at a
rate which has the effect of amortizing the loan over a period shorter than the
stated term.
e. Subsidy Loans. If so specified in the applicable Prospectus Supplement, a
Trust Estate may contain Mortgage Loans subject to temporary interest subsidy
agreements ("Subsidy Loans") pursuant to which the monthly payments made by the
related mortgagors will be less than the scheduled monthly payments on such
Mortgage Loans with the present value of the resulting difference in payment
("Subsidy Payments") being provided by the employer of the mortgagor, generally
on an annual basis. Subsidy Payments will generally be placed in a custodial
account ("Subsidy Account") by the related Servicer. Despite the existence of a
subsidy program, a mortgagor remains primarily liable for making all scheduled
payments on a Subsidy Loan and for all other obligations provided for in the
related Mortgage Note and Mortgage Loan.
Subsidy Loans are offered by employers generally through either a graduated
or fixed subsidy loan program, or a combination thereof. The terms of the
subsidy agreements relating to Subsidy Loans generally range from one to ten
years. The subsidy agreements relating to Subsidy Loans made under a graduated
program generally will provide for subsidy payments that result in effective
subsidized interest rates between three percentage points and five percentage
points below the Mortgage Interest Rates specified in the related Mortgage
Notes. Generally, under a graduated program, the subsidized rate for a Mortgage
Loan will increase approximately one percentage point per year until it equals
the full
19
Mortgage Interest Rate. For example, if the initial subsidized interest rate is
five percentage points below the Mortgage Interest Rate in year one, the
subsidized rate will increase to four percentage points below the Mortgage
Interest Rate in year two, and likewise until year six, when the subsidized
rate will equal the Mortgage Interest Rate. Where the subsidy agreements
relating to Subsidy Loans are in effect for longer than five years, the
subsidized interest rates generally increase at smaller percentage increments
for each year. The subsidy agreements relating to Subsidy Loans made under a
fixed program generally will provide for subsidized interest rates at fixed
percentages (generally one percentage point to two percentage points) below the
Mortgage Interest Rates for specified periods, generally not in excess of ten
years. Subsidy Loans are also offered pursuant to combination fixed/graduated
programs. The subsidy agreements relating to such Subsidy Loans generally will
provide for an initial fixed subsidy of up to five percentage points below the
related Mortgage Interest Rate for up to five years, and then a periodic
reduction in the subsidy for up to five years, at an equal fixed percentage per
year until the subsidized rate equals the Mortgage Interest Rate.
Generally, employers may terminate subsidy programs in the event of (i) the
mortgagor's death, retirement, resignation or termination of employment, (ii)
the full prepayment of the Subsidy Loan by the mortgagor, (iii) the sale or
transfer by the mortgagor of the related Mortgaged Property as a result of
which the mortgagee is entitled to accelerate the Subsidy Loan pursuant to the
"due-on-sale" clause contained in the Mortgage, or (iv) the commencement of
foreclosure proceedings or the acceptance of a deed in lieu of foreclosure. In
addition, some subsidy programs provide that if prevailing market rates of
interest on mortgage loans similar to a Subsidy Loan are less than the Mortgage
Interest Rate of such Subsidy Loan, the employer may request that the mortgagor
refinance such Subsidy Loan and may terminate the related subsidy agreement if
the mortgagor fails to refinance such Subsidy Loan. In the event the mortgagor
refinances such Subsidy Loan, the new loan will not be included in the Trust
Estate. See "Prepayment and Yield Considerations." In the event a subsidy
agreement is terminated, the amount remaining in the Subsidy Account will be
returned to the employer, and the mortgagor will be obligated to make the full
amount of all remaining scheduled payments, if any. The mortgagor's reduced
monthly housing expense as a consequence of payments under a subsidy agreement
is used by certain Sellers in determining certain expense-to-income ratios
utilized in underwriting a Subsidy Loan. See "The Mortgage Loan Programs--
Mortgage Loan Underwriting."
f. Buy-Down Loans. If so specified in the applicable Prospectus Supplement,
a Trust Estate may contain Mortgage Loans subject to temporary buy-down plans
("Buy-Down Loans") pursuant to which the monthly payments made by the mortgagor
during the early years of the Mortgage Loan will be less than the scheduled
monthly payments on the Mortgage Loan. The resulting difference in payment will
be compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source, including the originator of the Mortgage
Loan (generally on a present value basis) and, if so specified in the
applicable Prospectus Supplement, placed in a custodial account (the "Buy-Down
Fund") by the related Servicer. If the mortgagor on a Buy-Down Loan prepays
such Mortgage Loan in its entirety, or defaults on such Mortgage Loan and the
Mortgaged Property is sold in liquidation thereof, during the period when the
mortgagor is not obligated, by virtue of the buy-down plan, to pay the full
monthly payment otherwise due on such loan, the unpaid principal balance of
such Buy-Down Loan will be reduced by the amounts remaining in the Buy-Down
Fund with respect to such Buy-Down Loan, and such amounts will be deposited in
the Servicer Custodial Account or the Certificate Account, net of any amounts
paid with respect to such Buy-Down Loan by any insurer, guarantor or other
person pursuant to a credit enhancement arrangement described in the applicable
Prospectus Supplement.
g. Balloon Loans. If so specified in the applicable Prospectus Supplement,
a Trust Estate may contain Mortgage Loans which are amortized over a fixed
period not exceeding 30 years but which
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have shorter terms to maturity ("Balloon Loans") that causes the outstanding
principal balance of the related Mortgage Loan to be due and payable at the end
of a certain specified period (the "Balloon Period"). The borrower of such
Balloon Loan will be obligated to pay the entire outstanding principal balance
of the Balloon Loan at the end of the related Balloon Period. In the event the
related mortgagor refinances a Balloon Loan at maturity, the new loan will not
be included in the Trust Estate. See "Prepayment and Yield Considerations"
herein.
h. Pledged Asset Mortgage Loans. If so specified in the applicable
Prospectus Supplement, a Trust Estate may contain fixed-rate mortgage loans
having original terms to stated maturity of not more than 30 years which are
either (i) secured by a security interest in additional collateral (normally
securities) owned by the borrower or (ii) supported by a third party guarantee
(usually a parent of the borrower); which is in turn secured by a security
interest in collateral (usually securities) owned by such guarantor (any such
loans, "Pledged Asset Mortgage Loans," and any such collateral, "Additional
Collateral"). Generally, the amount of such Additional Collateral will not
exceed 30% of the amount of such loan, and the requirement to maintain
Additional Collateral will terminate when the principal amount of the loan is
paid down to a predetermined amount.
A Trust Estate may also include other types of first-lien, residential
Mortgage Loans to the extent set forth in the applicable Prospectus Supplement.
THE DEPOSITOR
Bank of America Mortgage Securities, Inc. (the "Depositor") was incorporated
in the State of Delaware on May 6, 1996 and filed a Certificate of Amendment of
Certificate of Incorporation changing its name to "Bank of America Mortgage
Securities, Inc." on January 8, 1999. The Depositor is a wholly-owned
subsidiary of Bank of America, N.A. It is not expected that the Depositor will
have any business operations other than offering Certificates and related
activities.
The Depositor maintains its principal executive office at 201 North Tryon
Street, Charlotte, North Carolina 28255. Its telephone number is 704-388-4503.
THE MORTGAGE LOAN PROGRAMS
General
The Depositor will purchase the Mortgage Loans, either directly or through
its affiliates, from Sellers. The Sellers may be affiliated or unaffiliated
with the Depositor. The Mortgage Loans will generally have been underwritten in
accordance with the underwriting standards set forth below. In the event the
Mortgage Loans in a particular Trust Estate have been originated in accordance
with underwriting standards which vary materially from those described below,
the underwriting standards will be described in the related Prospectus
Supplement.
Mortgage Loan Underwriting
The underwriting guidelines are intended to evaluate the mortgagor's credit
standing and repayment ability and the value and adequacy of the mortgaged
property as collateral. The underwriting guidelines are applied in a standard
procedure which is intended to comply with applicable federal and state laws
and regulations. With respect to the underwriting guidelines described below,
as well as any other underwriting guidelines that may be applicable to the
Mortgage Loans, such underwriting standards
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generally include a set of specific criteria pursuant to which the underwriting
evaluation is made. However, the application of such underwriting guidelines
does not imply that each specific criteria was satisfied individually. A Seller
will have considered a Mortgage Loan to be originated in accordance with a
given set of underwriting guidelines if, based on an overall qualitative
evaluation, the loan is in substantial compliance with such underwriting
guidelines. A Mortgage Loan may be considered to comply with a set of
underwriting standards, even if one or more specific criteria included in such
underwriting standards were not satisfied, if other factors compensated for the
criteria that were not satisfied or the Mortgage Loan is considered to be in
substantial compliance with the underwriting standards.
Initially, a prospective mortgagor is required to fill out a detailed
application designed to provide pertinent credit information. As part of the
description of the prospective mortgagor's financial condition, the applicant
is required to provide current information describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply
for a credit report which summarizes the applicant's credit history with
merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained either from the applicant's employer
wherein the employer reports the length of employment with that organization,
the current salary and an indication as to whether it is expected that the
applicant will continue such employment in the future or through analysis of
copies of federal withholding (IRS W-2) forms, current payroll earnings
statements and account statements of the applicant. If a prospective mortgagor
is self-employed, the applicant is required to submit copies of signed tax
returns. The applicant also authorizes deposit verification at all financial
institutions where the applicant has accounts. A Seller may, as part of its
overall evaluation of the applicant's creditworthiness, use a credit scoring
system or mortgage scoring system to evaluate in a statistical manner the
expected performance of a Mortgage Loan based on the pertinent credit
information concerning the applicant provided through national credit bureaus,
certain other information provided by the applicant and an assessment of
specific mortgage loan characteristics, including loan-to-value ratio and type
of loan product.
Certain Sellers may use an automated process to assist in making credit
decisions on certain mortgage loans. A prospective borrower's credit history is
assigned a score based on standard criteria designed to predict the possibility
of a default by the prospective borrower on a mortgage loan. An application
from a prospective borrower whose score indicates a high probability of default
will receive scrutiny from a senior underwriter who may override a decision
based on the credit score. An application from a prospective borrower whose
score indicates a lower probability of default is subject to less stringent
underwriting guidelines and documentation standards to verify the information
in the application.
In addition, certain Sellers may maintain alternative underwriting
guidelines for certain qualifying Mortgage Loans underwritten through an
underwriting program ("Limited or Reduced Documentation Guidelines") designed
to streamline the loan underwriting process. Certain reduced loan documentation
programs may not require income, employment or asset verifications. Generally,
in order to be eligible for a reduced loan documentation program, the Mortgaged
Property must have a loan-to-value ratio which supports the amount of the
Mortgage Loan and the mortgagor must have a good credit history. Eligibility
for such program may be determined by use of a credit scoring model.
Once all applicable employment and deposit documentation and the credit
report are received, a determination is made as to whether the prospective
mortgagor has sufficient monthly income available to meet the mortgagor's
monthly obligations on the proposed mortgage loan and other expenses related
22
to the mortgaged property (such as property taxes, hazard insurance and
maintenance and utility costs) and to meet other financial obligations and
monthly living expenses.
To determine the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraisal is
conducted by either a staff appraiser of the applicable Seller or an
independent appraiser. The appraiser is required to inspect the property and
verify that it is in acceptable condition and that construction, if recent, has
been completed. The appraisal is based on various factors including the
appraiser's estimate of values, giving appropriate weight to both the market
value of comparable housing, as well as the cost of replacing the property.
Appraisers may be required by a Seller to note on their appraisal any
environmental hazard the appraiser becomes aware of while appraising the
property. Properties with contaminated water or septic may be ineligible for
financing by certain originators. EPA Lead Paint requirements for notice and an
inspection period are standard for properties built before 1978. Properties
containing other hazards may be eligible for financing if the appraiser can
value the property showing the impact of the hazard, and the borrower executes
a "hold harmless" letter to the lender.
The title insurance policy may include Environmental Protection Lien
Endorsement coverage (ALTA Form 8.1 or its equivalent) excepting only
Superliens which may arise after the loan is made. See "Certain Legal Aspects
of the Mortgage Loans--Environmental Considerations."
With respect to certain mortgage loans, the underwriting of such mortgage
loans may be based on data obtained by parties, other than the applicable
Seller, that are involved at various stages in the mortgage origination or
acquisition process. This typically occurs under circumstances in which loans
are subject to more than one approval process, as when correspondents, certain
mortgage brokers or similar entities that have been approved by a Seller to
process loans on its behalf, or independent contractors hired by such Seller to
perform underwriting services on its behalf make initial determinations as to
the consistency of loans with such Seller's underwriting guidelines. The
underwriting of mortgage loans acquired by a Seller pursuant to a delegated
underwriting arrangement with a correspondent may not be reviewed prior to
acquisition of the mortgage loan by such Seller although the mortgage loan file
may be reviewed by such Seller to confirm that certain documents are included
in the file. Instead, such Seller may rely on (i) the correspondent's
representations that such mortgage loan was underwritten in accordance with
such Seller's underwriting standards and (ii) a post-purchase review of a
sampling of all mortgage loans acquired from such originator. In addition, in
order to be eligible to sell mortgage loans to such Seller pursuant to a
delegated underwriting arrangement, the originator must meet certain
requirements including, among other things, certain quality, operational and
financial guidelines.
Certain states where the Mortgaged Properties securing the Mortgage Notes
are located are "anti-deficiency" states where, in general, lenders providing
credit on one-to-four-family properties must look solely to the property for
repayment in the event of foreclosure, see "Certain Legal Aspects of the
Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy Code and Other
Limitations on Lenders." The underwriting guidelines in all states (including
anti-deficiency states) require that the value of the property being financed,
as indicated by the appraisal, currently supports and is anticipated to support
in the future the outstanding loan balance and provides sufficient value to
mitigate the effects of adverse shifts in real estate values, although there
can be no assurance that such value will support the outstanding loan balance
in the future.
Except as described in the related Prospectus Supplement, Mortgage Loans
originated with Loan-to-Value Ratios in excess of 80% will be covered by
primary mortgage insurance. The "Loan-to-Value Ratio" is the ratio, expressed
as a percentage, of the principal amount of the Mortgage Loan at
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origination to the lesser of (i) the appraised value of the related Mortgaged
Property, as established by an appraisal obtained by the originator prior to
origination, or (ii) the sale price for such property. For the purpose of
calculating the Loan-to-Value Ratio of any Mortgage Loan that is the result of
the refinancing (including a refinancing for "equity take out" purposes) of an
existing mortgage loan, the appraised value of the related Mortgaged Property
is generally determined by reference to an appraisal obtained in connection
with the origination of the replacement loan.
Certain of the Mortgage Loans may be purchased by the Depositor either
directly or through an affiliate in negotiated transactions, and such
negotiated transactions may be governed by contractual agreements. The
contractual agreements with Sellers may provide the commitment by the Depositor
or an affiliate to accept the delivery of a certain dollar amount of mortgage
loans over a specific period of time; this commitment may allow for the
delivery of mortgage loans one at a time or in multiples as aggregated by the
Seller. Many of the contractual agreements allow the delegation of all
underwriting functions to the Seller, who will represent that the Mortgage
Loans have been originated in accordance with underwriting standards agreed to
by the Depositor or its affiliate. In the event such standards differ naturally
from those set forth above, the related Prospectus Supplement will describe
such standards.
Representations and Warranties
In connection with the transfer of the Mortgage Loans related to any Series
by the Depositor to the Trust Estate, the Depositor will generally make certain
representations and warranties regarding the Mortgage Loans. If so indicated in
the applicable Prospectus Supplement, the Depositor may, rather than itself
making representations and warranties, cause the representations and warranties
made by the Seller in connection with its sale of Mortgage Loans to the
Depositor or to another affiliate of the Depositor to be assigned to the Trust
Estate. In such cases, the Seller's representations and warranties may have
been made as of a date prior to the date of execution of the Pooling and
Servicing Agreement. Such representations and warranties (whether made by the
Depositor or another party) will generally include the following with respect
to the Mortgage Loans, or each Mortgage Loan, as the case may be: (i) the
schedule of Mortgage Loans appearing as an exhibit to such Pooling and
Servicing Agreement is correct in all material respects at the date or dates
respecting which such information is furnished as specified therein; (ii)
immediately prior to the transfer and assignment contemplated by the Pooling
and Servicing Agreement, the Depositor is the sole owner and holder of the
Mortgage Loan, free and clear of any and all liens, pledges, charges or
security interests of any nature and has full right and authority to sell and
assign the same; (iii) to the knowledge of the representing party, no Mortgage
Note or Mortgage is subject to any right of rescission, set-off, counterclaim
or defense; (iv) the Mortgage Loan is covered by a title insurance policy (or
in the case of any Mortgage Loan secured by a Mortgaged Property located in a
jurisdiction where such policies are generally not available, an opinion of
counsel of the type customarily rendered in such jurisdiction in lieu of title
insurance is instead received); (v) the Mortgage is a valid, subsisting and
enforceable first lien on the related Mortgaged Property; (vi) the Mortgaged
Property is undamaged by water, fire, earthquake or earth movement, windstorm,
flood, tornado or similar casualty (excluding casualty from the presence of
hazardous wastes or hazardous substances, as to which no representation is
made), so as to affect adversely the value of the Mortgaged Property as
security for the Mortgage Loan or the use for which the premises were intended;
(vii) all payments required to be made up to the Due Date immediately preceding
the Cut-Off Date for such Mortgage Loan under the terms of the related Mortgage
Note have been made and no Mortgage Loan had more than one delinquency in the
12 months preceding the Cut-Off Date; and (viii) any and all requirements of
any federal, state or local law with respect to the origination of the Mortgage
Loans including, without limitation, usury, truth-in-lending, real estate
settlement procedures, consumer credit protection, equal credit opportunity or
disclosure laws applicable to the Mortgage Loans have been complied with.
24
No representations or warranties are made by the Depositor or any other
party as to the environmental condition of any Mortgaged Property including the
absence, presence or effect of hazardous wastes or hazardous substances on such
Mortgaged Property or any effect from the presence or effect of hazardous
wastes or hazardous substances on, near or emanating from such Mortgaged
Property. See "Certain Legal Aspects of the Mortgage Loans--Environmental
Considerations."
See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans to
the Trustee" for a description of the limited remedies available in connection
with breaches of the foregoing representations and warranties.
DESCRIPTION OF THE CERTIFICATES
General
Each Series of Certificates will include one or more Classes. Any Class of
Certificates may consist of two or more non-severable components, each of which
may exhibit any of the principal or interest payment characteristics described
herein with respect to a Class of Certificates. A Series may include one or
more Classes of Certificates entitled, to the extent of funds available, to (i)
principal and interest distributions in respect of the related Mortgage Loans,
(ii) principal distributions, with no interest distributions, (iii) interest
distributions, with no principal distributions or (iv) such other distributions
as are described in the applicable Prospectus Supplement.
Each Series of Certificates will be issued on the date specified in the
applicable Prospectus Supplement (the "Closing Date") pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") among the
Depositor, the Servicer(s) (or, if applicable, the Master Servicer), and the
Trustee named in the applicable Prospectus Supplement. An illustrative form of
Pooling and Servicing Agreement has been filed as an exhibit to the
registration statement of which this Prospectus is a part. The following
summaries describe material provisions common to the Certificates and to each
Pooling and Servicing Agreement. The summaries are subject to, and are
qualified by reference to, the further material provisions of the Pooling and
Servicing Agreement for each specific Series of Certificates, as described in
the applicable Prospectus Supplement. Wherever particular sections or defined
terms of the Pooling and Servicing Agreement are referred to, such sections or
defined terms are thereby incorporated herein by reference from the form of
Pooling and Servicing Agreement filed as an exhibit to the registration
statement.
Distributions to holders of Certificates (the "Certificateholders") of all
Series (other than the final distribution in retirement of the Certificates)
will be made by check mailed to the address of the person entitled thereto
(which in the case of Book-Entry Certificates will be Cede as nominee for DTC)
as it appears on the certificate register, except that, with respect to any
holder of a Certificate evidencing not less than a certain minimum denomination
set forth in the applicable Prospectus Supplement, distributions will be made
by wire transfer in immediately available funds, provided that the Trustee or
the Paying Agent acting on behalf of the Trustee shall have been furnished with
appropriate wiring instructions not less than seven business days prior to the
related Distribution Date. The final distribution in retirement of Certificates
will be made only upon presentation and surrender of the Certificates at the
office or agency maintained by the Trustee or other entity for such purpose, as
specified in the final distribution notice to Certificateholders.
Each Series of Certificates will represent ownership interests in the
related Trust Estate. An election may be made to treat the Trust Estate (or one
or more segregated pools of assets therein) with respect to a Series of
Certificates as a REMIC. If such an election is made, such Series will consist
of one or more
25
Classes of Certificates that will represent "regular interests" within the
meaning of Code Section 860G(a)(1) (such Class or Classes collectively referred
to as the "Regular Certificates") and one Class of Certificates with respect to
each REMIC that will be designated as the "residual interest" within the
meaning of Code Section 860G(a)(2) (the "Residual Certificates") representing
the right to receive distributions as specified in the Prospectus Supplement
for such Series. See "Federal Income Tax Consequences."
The Depositor may sell certain Classes of the Certificates of a Series,
including one or more Classes of Subordinated Certificates, in privately
negotiated transactions exempt from registration under the Securities Act.
Alternatively, if so specified in a Prospectus Supplement relating to such
Subordinated Certificates, the Depositor may offer one or more Classes of the
Subordinated Certificates of a Series by means of this Prospectus and such
Prospectus Supplement.
Definitive Form
Certificates of a Series that are issued in fully-registered, certificated
form are referred to herein as "Definitive Certificates." Distributions of
principal of, and interest on, the Definitive Certificates will be made
directly to holders of Definitive Certificates in accordance with the
procedures set forth in the Pooling and Servicing Agreement. The Definitive
Certificates of a Series offered hereby and by means of the applicable
Prospectus Supplements will be transferable and exchangeable at the office or
agency maintained by the Trustee or such other entity for such purpose set
forth in the applicable Prospectus Supplement. No service charge will be made
for any transfer or exchange of Definitive Certificates, but the Trustee or
such other entity may require payment of a sum sufficient to cover any tax or
other governmental charge in connection with such transfer or exchange.
In the event that an election is made to treat the Trust Estate (or one or
more segregated pools of assets therein) as a REMIC, the "residual interest"
thereof will be issued as a Definitive Certificate. No legal or beneficial
interest in all or any portion of any "residual interest" may be transferred
without the receipt by the transferor and the Trustee of an affidavit signed by
the transferee stating, among other things, that the transferee (i) is not a
disqualified organization within the meaning of Code Section 860E(e) or an
agent (including a broker, nominee or middleman) thereof and (ii) understands
that it may incur tax liabilities in excess of any cash flows generated by the
residual interest. Further, the transferee must state in the affidavit that it
(a) historically has paid its debts as they have come due, (b) intends to pay
its debts as they come due in the future and (c) intends to pay taxes
associated with holding the residual interest as they become due. The
transferor must certify to the Trustee that, as of the time of the transfer, it
has no actual knowledge that any of the statements made in the transferee
affidavit are false and no reason to know that the statements made by the
transferee pursuant to clauses (a), (b) and (c) of the preceding sentence are
false. See "Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates."
Book-Entry Form
Each Class of the Book-Entry Certificates of a Series initially will be
represented by one or more physical certificates registered in the name of Cede
& Co. ("Cede"), as nominee of DTC, which will be the "holder" or
"Certificateholder" of such Certificates, as such terms are used herein. No
person acquiring an interest in a Book-Entry Certificate (a "Beneficial Owner")
will be entitled to receive a Definitive Certificate representing such person's
interest in the Book-Entry Certificate, except as set forth below. Unless and
until Definitive Certificates are issued under the limited circumstances
described herein, all references to actions taken by Certificateholders or
holders shall, in the case of the Book-Entry
26
Certificates, refer to actions taken by DTC upon instructions from its DTC
Participants, and all references herein to distributions, notices, reports and
statements to Certificateholders or holders shall, in the case of the Book-
Entry Certificates, refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Book-Entry Certificates, as the
case may be, for distribution to Beneficial Owners in accordance with DTC
procedures.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered pursuant to Section 17A of the Securities Exchange Act of
1934, as amended. DTC was created to hold securities for its participating
organizations ("DTC Participants") and to facilitate the clearance and
settlement of securities transactions among DTC Participants through electronic
book entries, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers (which
may include any underwriter identified in the Prospectus Supplement applicable
to any Series), banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to banks, brokers, dealers, trust
companies and other institutions that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly ("Indirect
DTC Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and to receive and transmit
distributions of principal of and interest on the Book-Entry Certificates. DTC
Participants and Indirect DTC Participants with which Beneficial Owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Beneficial Owners.
Beneficial Owners that are not DTC Participants or Indirect DTC Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through DTC Participants
and Indirect DTC Participants. In addition, Beneficial Owners will receive all
distributions of principal and interest from the Trustee, or a Paying Agent on
behalf of the Trustee, through DTC Participants. DTC will forward such
distributions to its DTC Participants, which thereafter will forward them to
Indirect DTC Participants or Beneficial Owners. Beneficial Owners will not be
recognized by the Trustee, any Servicer, or the Master Servicer or any Paying
Agent as Certificateholders, as such term is used in the Pooling and Servicing
Agreement, and Beneficial Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its DTC Participants.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Trustee, or a Paying Agent on behalf of
the Trustee, to Cede, as nominee for DTC.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Certificateholder under the Pooling and Servicing Agreement only at
the direction of one or more DTC Participants to whose accounts with DTC the
Book-Entry Certificates are credited. Additionally, DTC has advised the
Depositor that it will take such actions with respect to specified Voting
Interests only at the direction of and on behalf of DTC Participants whose
holdings of Book-Entry Certificates evidence
27
such specified Voting Interests. DTC may take conflicting actions with respect
to Voting Interests to the extent that DTC Participants whose holdings of Book-
Entry Certificates evidence such Voting Interests authorize divergent action.
None of the Depositor, any Servicer, the Master Servicer or the Trustee will
have any responsibility for any aspect of the records relating to or payments
made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests. In
the event of the insolvency of DTC, a DTC Participant or an Indirect DTC
Participant in whose name Book-Entry Certificates are registered, the ability
of the Beneficial Owners of such Book-Entry Certificates to obtain timely
payment and, if the limits of applicable insurance coverage by the Securities
Investor Protection Corporation are exceeded or if such coverage is otherwise
unavailable, ultimate payment, of amounts distributable with respect to such
Book-Entry Certificates may be impaired.
The Book-Entry Certificates will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i) the Trustee is advised in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Book-Entry Certificates and the Trustee is unable to locate a
qualified successor, (ii) the Servicer(s) or the Master Servicer, as
applicable, optionally, elect to terminate the book-entry system through DTC,
(iii) after the occurrence of a dismissal or resignation of the Servicer(s) or
the Master Servicer, as applicable, under the Pooling and Servicing Agreement,
Beneficial Owners representing not less than 51% of the Voting Interests of the
outstanding Book-Entry Certificates advise the Trustee through DTC, in writing,
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the Beneficial Owners' best interest or (iv) under
such other circumstances as described in the related Prospectus Supplement.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Beneficial Owners through
DTC Participants of the availability of Definitive Certificates. Upon surrender
by DTC of the physical certificates representing the Book-Entry Certificates
and receipt of instructions for re-registration, the Trustee will reissue the
Book-Entry Certificates as Definitive Certificates to Beneficial Owners. The
procedures relating to payment on and transfer of Certificates initially issued
as Definitive Certificates will thereafter apply to those Book-Entry
Certificates that have been reissued as Definitive Certificates.
Distributions to Certificateholders
General. On each Distribution Date, each holder of a Certificate of a Class
will be entitled to receive its Certificate's Percentage Interest of the
portion of the Pool Distribution Amount allocated to such Class. The undivided
percentage interest (the "Percentage Interest") represented by any Certificate
of a Class in distributions to such Class will be equal to the percentage
obtained by dividing the initial principal balance (or notional amount) of such
Certificate by the aggregate initial principal balance (or notional amount) of
all Certificates of such Class.
In general, the funds available for distribution to Certificateholders of a
Series of Certificates with respect to each Distribution Date for such Series
(the "Pool Distribution Amount") will be the sum of all previously
undistributed payments or other receipts on account of principal (including
principal prepayments and Liquidation Proceeds, if any) and interest on or in
respect of the related Mortgage Loans received by the related Servicer after
the Cut-Off Date (except for amounts due on or prior to the Cut-Off Date), or
received by the related Servicer on or prior to the Cut-Off Date but due after
the Cut-Off Date, in either case received on or prior to the business day
preceding the Determination Date in the
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month in which such Distribution Date occurs, plus all Periodic Advances with
respect to payments due to be received on the Mortgage Loans on the Due Date
preceding such Distribution Date, but excluding the following:
(a) amounts received as late payments of principal or interest
respecting which one or more unreimbursed Periodic Advances has been made;
(b) that portion of Liquidation Proceeds with respect to a Mortgage Loan
which represents any unreimbursed Periodic Advances;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent (i) the Fixed Retained Yield, if any, (ii) the
applicable Servicing Fee, (iii) the applicable Master Servicing Fee, if
any, (iv) the Trustee Fee and (v) any other amounts described in the
applicable Prospectus Supplement;
(d) all amounts representing scheduled payments of principal and
interest due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e) all proceeds (including Liquidation Proceeds other than, in certain
cases as specified in the applicable Prospectus Supplement, Liquidation
Proceeds which were received prior to the related Servicer's determination
that no further recoveries on a defaulted Mortgage Loan will be forthcoming
("Partial Liquidation Proceeds")) of any Mortgage Loans, or property
acquired in respect thereof, that were liquidated, foreclosed, purchased or
repurchased pursuant to the applicable Pooling and Servicing Agreement,
which proceeds were received on or after the Due Date occurring in the
month in which such Distribution Date occurs and all principal prepayments
in full, partial principal prepayments and Partial Liquidation Proceeds
received by the related Servicer on or after the Determination Date (or,
with respect to any such amount, and if specified in the applicable
Prospectus Supplement, the Due Date) occurring in the month in which such
Distribution Date occurs, and all related payments of interest on such
amounts;
(f) that portion of Liquidation Proceeds which represents any unpaid
Servicing Fees, Master Servicing Fee or any Trustee Fee to which the
related Servicer, the Trustee or the Master Servicer, respectively, is
entitled and any unpaid Fixed Retained Yield;
(g) if an election has been made to treat the applicable Trust Estate as
a REMIC, any Liquidation Profits with respect to such Distribution Date;
(h) all amounts representing certain expenses reimbursable to the Master
Servicer or any Servicer and other amounts permitted to be withdrawn by the
Master Servicer or such Servicer from the Certificate Account, in each case
pursuant to the applicable Pooling and Servicing Agreement;
(i) all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees which the related Servicer is entitled to retain
pursuant to the applicable Underlying Servicing Agreement or applicable
Pooling and Servicing Agreement;
(j) reinvestment earnings on payments received in respect of the
Mortgage Loans; and
(k) any recovery of an amount in respect of principal which had
previously been allocated as a realized loss to such Series of
Certificates.
The applicable Prospectus Supplement for a Series will describe any
variation in the calculation of the Pool Distribution Amount for such Series.
"Foreclosure Profits" with respect to a Distribution Date and a liquidated
Mortgage Loan will be the excess of the amount by which net Liquidation
Proceeds on such liquidated Mortgage Loan exceed the unpaid principal balance
thereof plus accrued interest thereon at the Mortgage Interest Rate.
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Distributions of Interest. With respect to each Series of Certificates,
interest on the related Mortgage Loans at the weighted average of the
applicable Net Mortgage Interest Rates thereof, will be passed through monthly
to holders of the related Classes of Certificates in the aggregate, in
accordance with the particular terms of each such Class of Certificates. The
"Net Mortgage Interest Rate" for each Mortgage Loan in a given period will
equal the mortgage interest rate for such Mortgage Loan in such period, as
specified in the related Mortgage Note (the "Mortgage Interest Rate"), less the
portion thereof, if any, not contained in the Trust Estate (the "Fixed Retained
Yield"), and less amounts payable to the Servicer for servicing the Mortgage
Loan (the "Servicing Fee"), the fee payable to the Master Servicer, if any (the
"Master Servicing Fee"), the fee payable to the Trustee (the "Trustee Fee") and
any related expenses specified in the applicable Prospectus Supplement.
Interest will accrue on the principal balance (or notional amount, as
described below) of each Class of Certificates entitled to interest at the
Pass-Through Rate for such Class indicated in the applicable Prospectus
Supplement (which may be a fixed rate or an adjustable rate) from the date and
for the periods specified in such Prospectus Supplement. To the extent the Pool
Distribution Amount is available therefor, interest accrued during each such
specified period on each Class of Certificates entitled to interest (other than
a Class that provides for interest that accrues, but is not currently payable,
referred to hereinafter as "Accrual Certificates") will be distributable on the
Distribution Dates specified in the applicable Prospectus Supplement until the
principal balance (or notional amount) of such Class has been reduced to zero.
Distributions allocable to interest on each Certificate that is not entitled to
distributions allocable to principal will generally be calculated based on the
notional amount of such Certificate. The notional amount of a Certificate will
not evidence an interest in or entitlement to distributions allocable to
principal but will be solely for convenience in expressing the calculation of
interest and for certain other purposes.
With respect to any Class of Accrual Certificates, any interest that has
accrued but is not paid on a given Distribution Date will be added to the
principal balance of such Class of Certificates on that Distribution Date.
Distributions of interest on each Class of Accrual Certificates will commence
only after the occurrence of the events or the existence of the circumstance
specified in such Prospectus Supplement and, prior to such time, or in the
absence of such circumstances, the principal balance of such Class will
increase on each Distribution Date by the amount of interest that accrued on
such Class during the preceding interest accrual period but that was not
required to be distributed to such Class on such Distribution Date. Any such
Class of Accrual Certificates will thereafter accrue interest on its
outstanding principal balance as so adjusted.
Distributions of Principal. The principal balance of any Class of
Certificates entitled to distributions of principal will generally be the
original principal balance of such Class specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Certificates as allocable to principal and any losses on the related Mortgage
Loans allocated to such Class of Certificates and (i) in the case of Accrual
Certificates, increased by all interest accrued but not then distributable on
such Accrual Certificates and (ii) in the case of a Series of Certificates
representing interests in a Trust Estate containing adjustable-rate Mortgage
Loans, increased by any Deferred Interest allocable to such Class. The
principal balance of a Class of Certificates generally represents the maximum
specified dollar amount (exclusive of any interest that may accrue on such
Class to which the holder thereof is entitled from the cash flow on the related
Mortgage Loans at such time) and will decline to the extent of distributions in
reduction of the principal balance of, and allocations of losses to, such
Class. Certificates with no principal balance will not receive distributions in
respect of principal. The applicable Prospectus Supplement will specify the
method by which the amount of principal to be
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distributed on the Certificates on each Distribution Date will be calculated
and the manner in which such amount will be allocated among the Classes of
Certificates entitled to distributions of principal.
If so provided in the applicable Prospectus Supplement, one or more Classes
of Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal that are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the months of such payments or of
other unscheduled principal receipts or recoveries in the percentages and under
the circumstances or for the periods specified in such Prospectus Supplement.
Any such allocation of principal prepayments or other unscheduled receipts or
recoveries in respect of principal to such Class or Classes of Senior
Certificates will have the effect of accelerating the amortization of such
Senior Certificates while increasing the interests evidenced by the
Subordinated Certificates in the Trust Estate. Increasing the interests of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination provided by the
Subordinated Certificates.
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Certificates for which
credit enhancement is provided through subordination to receive distributions
with respect to the Mortgage Loans in the related Trust Estate will be
subordinated to such rights of the holders of the Senior Certificates of the
same Series to the extent described below, except as otherwise set forth in
such Prospectus Supplement. This subordination is intended to enhance the
likelihood of regular receipt by holders of Senior Certificates of the full
amount of scheduled monthly payments of principal and interest due them and to
provide limited protection to the holders of the Senior Certificates against
losses due to mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a Series of
Certificates for which credit enhancement is provided by the subordination
feature described above will be effected by (i) the preferential right of such
holders to receive, prior to any distribution being made in respect of the
related Subordinated Certificates on each Distribution Date, current
distributions on the related Mortgage Loans of principal and interest due them
on each Distribution Date out of the funds available for distribution on such
date in the related Certificate Account, (ii) by the right of such holders to
receive future distributions on the Mortgage Loans that would otherwise have
been payable to the holders of Subordinated Certificates and/or (iii) by the
prior allocation to the Subordinated Certificates of all or a portion of losses
realized on the related Mortgage Loans.
Losses realized on liquidated Mortgage Loans (other than Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses as described
below) will be allocated to the holders of Subordinated Certificates through a
reduction of the amount of principal payments on the Mortgage Loans to which
such holders are entitled before any corresponding reduction is made in respect
of the Senior Certificate.
A "Special Hazard Loss" is a loss on a liquidated Mortgage Loan occurring as
a result of a hazard not insured against under a standard hazard insurance
policy of the type described herein under "Servicing of the Mortgage Loans--
Insurance Policies." A "Fraud Loss" is a loss on a liquidated Mortgage Loan as
to which there was fraud in the origination of such Mortgage Loan. A
"Bankruptcy Loss" is a loss on a liquidated Mortgage Loan attributable to
certain actions which may be taken by a bankruptcy court in connection with a
Mortgage Loan, including a reduction by a bankruptcy court of the principal
balance of or the interest rate on a Mortgage Loan or an extension of its
maturity. Special Hazard Losses in excess of the amount specified in the
applicable Prospectus Supplement (the "Special Hazard Loss Amount") are "Excess
Special Hazard Losses." Fraud Losses in excess of the amount specified in the
applicable Prospectus Supplement (the "Fraud Loss Amount") are "Excess Fraud
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Losses." Bankruptcy losses in excess of the amount specified in the applicable
Prospectus Supplement (the "Bankruptcy Loss Amount") are "Excess Bankruptcy
Losses." Any Excess Special Hazard Losses, Excess Fraud Losses or Excess
Bankruptcy Losses with respect to a Series will be allocated on a pro rata
basis among the related Classes of Senior and Subordinated Certificates. An
allocation of a loss on a "pro rata basis" among two or more Classes of
Certificates means an allocation on a pro rata basis to each such Class of
Certificates on the basis of their then-outstanding principal balances in the
case of the principal portion of a loss or based on the accrued interest
thereon in the case of an interest portion of a loss.
Since the Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy Loss
Amount for a Series of Certificates are each expected to be less than the
amount of principal payments on the Mortgage Loans to which the holders of the
Subordinated Certificates of such Series are initially entitled (such amount
being subject to reduction, as described above, as a result of allocation of
losses on liquidated Mortgage Loans that are not Special Hazard Losses, Fraud
Losses or Bankruptcy Losses), the holders of Subordinated Certificates of such
Series will bear the risk of Special Hazard Losses, Fraud Losses and Bankruptcy
Losses to a lesser extent than they will bear other losses on liquidated
Mortgage Loans.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans in a
Trust Estate were exceptionally high and were concentrated in a particular
month.
The holders of Subordinated Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there
are sufficient funds on a subsequent Distribution Date to make a full
distribution to holders of each Class of Senior Certificates of the same
Series.
Categories of Classes of Certificates
The Certificates of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a Series of Certificates may identify the Classes
which comprise such Series by reference to the following categories or another
category specified in the Prospectus Supplement.
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PRINCIPAL TYPES
Categories of Classes Definitions
Accretion Directed
Certificates............... A Class of Certificates that receives principal
payments from amounts that would otherwise be
distributed as interest on specified Accrual
Certificates. Such principal payments may be in
lieu of or in addition to principal payments
from principal receipts on the Mortgage Loans
for the related Series.
Companion Certificates (also
sometimes referred to as
"Support Certificates").... A Class of Certificates that is entitled to
receive principal payments on any Distribution
Date only if scheduled payments have been made
on specified Planned Amortization Certificates,
Targeted Amortization Certificates and/or
Scheduled Amortization Certificates.
Component Certificates...... A Class of Certificates consisting of two or
more specified components (each, a "Component"),
as described in the applicable Prospectus
Supplement. The Components of a Class of
Component Certificates may have different
principal and/or interest payment
characteristics but together constitute a single
class and do not represent severable interests.
Each Component of a Class of Component
Certificates may be identified as falling into
one or more of the categories in this chart.
Lockout Certificates........ A Class of Senior Certificates that is designed
not to participate in or to participate to a
limited extent in (i.e., to be "locked out" of),
for a specified period, the receipt of (1)
principal prepayments on the Mortgage Loans that
are allocated disproportionately to the Classes
of Senior Certificates of such Series as a group
pursuant to a "shifting interest" structure
and/or (2) scheduled principal payments on the
Mortgage Loans that are allocated to the senior
Classes as a group. A Class of Lockout
Certificates will typically not be entitled to
receive, or will be entitled to receive only a
restricted portion of, distributions of
principal prepayments and/or scheduled principal
prepayments, as applicable, for a period of
several years, during which time all or a
portion of such principal payments that it would
otherwise be entitled to receive in the absence
of a "lockout" structure will be distributed in
reduction of the Principal Balances of other
Senior Certificates. Lockout Certificates are
designed to minimize weighted average life
volatility during the lockout period.
Notional Amount
Certificates............... A Class of Certificates having no principal
balance and bearing interest on the related
notional amount. The notional amount is a
hypothetical balance used for calculating
interest distributions.
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Pass-Through Certificates... A Class of Senior Certificates that is entitled
to receive a specified percentage of the
principal payments that are distributable to the
Senior Certificates or applicable group of
Senior Certificates (other than any Ratio Strip
Certificates) in the aggregate on a Distribution
Date and that is not designated as a Class of
Sequential Pay Certificates.
Planned Amortization
Certificates (also
sometimes referred to as
"PAC Certificates")........ A Class of Certificates that is designed to
receive principal payments using a predetermined
principal balance schedule derived by assuming
two constant prepayment rates for the underlying
Mortgage Loans. These two rates are the
endpoints for the "structuring range" for a
Class of Planned Amortization Certificates. The
Classes of Planned Amortization Certificates in
any Series may be subdivided into different
categories (e.g., Planned Amortization I
Certificates ("PAC I Certificates"), Planned
Amortization II Certificates ("PAC II
Certificates") and so forth) derived using
different structuring ranges and/or payment
priorities. A Class of PAC Certificates is
designed to provide protection against
prepayments occurring at a constant rate within
the structuring range.
Ratio Strip Certificates.... A Class of Certificates that is entitled to
receive a constant proportion, or "ratio strip,"
of the principal payments on the underlying
Mortgage Loans.
Scheduled Amortization
Certificates............... A Class of Certificates that is designed to
receive principal payments using a predetermined
principal balance schedule but is not designated
as a Class of Planned Amortization Certificates
or Targeted Amortization Certificates. The
schedule is derived by assuming either two
constant prepayment rates or a single constant
prepayment rate for the underlying Mortgage
Loans. In the former case, the two rates are the
endpoints for the "structuring range" for a
Class of Scheduled Amortization Certificates and
such range generally is narrower than that for a
Class of Planned Amortization Certificates.
Typically, the Companion Certificates for the
applicable Series of Certificates generally will
represent a smaller percentage of a Class of
Scheduled Amortization Certificates than the
Companion Certificates generally would represent
in relation to a Class of Planned Amortization
Certificates or Targeted Amortization
Certificates. A Class of Scheduled Amortization
Certificates is generally less sensitive to
prepayments than a Class of Companion
Certificates, but more sensitive than a Class of
Planned Amortization Certificates or Targeted
Amortization Certificates.
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Senior Certificates......... A Class of Certificates that is entitled to
receive payments of principal and interest on
each Distribution Date prior to the Classes of
Subordinated Certificates.
Sequential Pay
Certificates............... Classes of Certificates that are entitled to
receive principal payments in a prescribed
sequence, that do not have predetermined
principal balance schedules and that, in most
cases, are entitled to receive payments of
principal continuously from the first
Distribution Date on which they receive
principal until they are retired. A Class of
Sequential Pay Certificates may receive
principal payments concurrently with one or more
other Classes of Sequential Pay Certificates. A
single Class that is entitled to receive
principal payments before or after other Classes
in the same Series of Certificates may be
identified as a Class of Sequential Pay
Certificates.
Subordinated Certificates... A Class of Certificates that is entitled to
receive payments of principal and interest on
each Distribution Date only after the Senior
Certificates and Classes of Subordinated
Certificates with higher priority of
distributions have received their full principal
and interest entitlements.
Super Senior Certificates... A Class of Senior Certificates that will not
bear its share of certain losses after the
Classes of Subordinated Certificates are no
longer outstanding for so long as one or more
specified Classes of Senior Certificates are
outstanding.
Super Senior Support
Certificates............... A Class of Senior Certificates that bears
certain losses allocated to one or more Classes
of Super Senior Certificates.
Targeted Amortization
Certificates
(also sometimes referred to
as "TAC Certificates")..... A Class of Certificates that is designed to
receive principal payments using a predetermined
principal balance schedule derived by assuming a
single constant prepayment rate for the
underlying Mortgage Loans. A Class of TAC
Certificates is designed to provide some
protection against prepayments at a rate
exceeding the assumed constant prepayment rate
used to derive such Class's principal balance
schedule.
INTEREST TYPES
Categories of Class Definitions
Accrual Certificates........ A Class of Certificates that accretes the amount
of accrued interest otherwise distributable on
such Class, which amount will be added as
principal to the principal balance of such Class
on each applicable
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Distribution Date. Such accretion may continue
until some specified event has occurred or until
the Class of Accrual Certificates is retired.
Fixed Rate Certificates..... A Class of Certificates with an interest rate
that is fixed throughout the life of the Class.
Floating Rate Certificates.. A Class of Certificates with an interest rate
that resets periodically based upon a designated
index and that varies directly with changes in
such index.
Interest Only Certificates.. A Class of Certificates that is entitled to
receive some or all of the interest payments
made on the Mortgage Loans and little or no
principal. Interest Only Certificates have
either a nominal principal balance or a notional
amount. A nominal principal balance represents
actual principal that will be paid on the Class.
It is referred to as nominal since it is
extremely small compared to other Classes. A
notional amount is the amount used as a
reference to calculate the amount of Interest
due on a Class of Interest Only Certificates
that is not entitled to any distributions in
respect of principal.
Inverse Floating Rate
Certificates............... A Class of Certificates with an interest rate
that resets periodically based upon a designated
index and that varies inversely with changes in
such index and with changes in the interest rate
payable on the related Class of Floating Rate
Certificates.
Principal Only
Certificates............... A Class of Certificates that does not bear
interest and is entitled to receive only
distributions in respect of principal.
Step Coupon Certificates.... A Class of Certificates with a fixed interest
rate that is reduced to a lower fixed rate after
a specified period of time. The difference
between the initial interest rate and the lower
interest rate will be supported by a reserve
fund established on the Closing Date.
Variable Rate Certificates.. A Class of Certificates with an interest rate
that resets periodically and is calculated by
reference to the rate or rates of interest
applicable to the Mortgage Loans.
Other Credit Enhancement
In addition to, or in substitution for, the subordination discussed above,
credit enhancement may be provided with respect to any Series of Certificates
in any other manner which may be described in the applicable Prospectus
Supplement, including, but not limited to, credit enhancement through an
alternative form of subordination and/or one or more of the methods described
below.
Limited Guarantee. If so specified in the Prospectus Supplement with respect
to a Series of Certificates, credit enhancement may be provided in the form of
a limited guarantee issued by a guarantor named therein.
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Financial Guaranty Insurance Policy or Surety Bond. If so specified in the
Prospectus Supplement with respect to a Series of Certificates, credit
enhancement may be provided in the form of a financial guaranty insurance
policy or a surety bond issued by an insurer named therein.
Letter of Credit. Alternative credit support with respect to a Series of
Certificates may be provided by the issuance of a letter of credit by the bank
or financial institution specified in the applicable Prospectus Supplement. The
coverage, amount and frequency of any reduction in coverage provided by a
letter of credit issued with respect to a Series of Certificates will be set
forth in the Prospectus Supplement relating to such Series.
Pool Insurance Policy. If so specified in the Prospectus Supplement relating
to a Series of Certificates, the Seller will obtain a pool insurance policy for
the Mortgage Loans in the related Trust Estate. The pool insurance policy will
cover any loss (subject to the limitations described in the applicable
Prospectus Supplement) by reason of default to the extent a related Mortgage
Loan is not covered by any primary mortgage insurance policy. The amount and
principal terms of any such coverage will be set forth in the Prospectus
Supplement.
Special Hazard Insurance Policy. If so specified in the applicable
Prospectus Supplement, for each Series of Certificates as to which a pool
insurance policy is provided, the Depositor will also obtain a special hazard
insurance policy for the related Trust Estate in the amount set forth in such
Prospectus Supplement. The special hazard insurance policy will, subject to the
limitations described in the applicable Prospectus Supplement, protect against
loss by reason of damage to Mortgaged Properties caused by certain hazards not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located. The amount and
principal terms of any such coverage will be set forth in the Prospectus
Supplement.
Mortgagor Bankruptcy Bond. If so specified in the applicable Prospectus
Supplement, losses resulting from a bankruptcy proceeding relating to a
mortgagor affecting the Mortgage Loans in a Trust Estate with respect to a
Series of Certificates will be covered under a mortgagor bankruptcy bond (or
any other instrument that will not result in a downgrading of the rating of the
Certificates of a Series by the Rating Agency or Rating Agencies that rated
such Series). Any mortgagor bankruptcy bond or such other instrument will
provide for coverage in an amount meeting the criteria of the Rating Agency or
Rating Agencies rating the Certificates of the related Series, which amount
will be set forth in the applicable Prospectus Supplement. The principal terms
of any such coverage will be set forth in the Prospectus Supplement.
Reserve Fund. If so specified in the applicable Prospectus Supplement,
credit enhancement with respect to a Series of Certificates may be provided by
the establishment of one or more reserve funds (each, a "Reserve Fund") for
such Series.
The Reserve Fund for a Series may be funded (i) by the deposit therein of
cash, U.S. Treasury securities or instruments evidencing ownership of principal
or interest payments thereon, letters of credit, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
applicable Prospectus Supplement, (ii) by the deposit therein from time to time
of certain amounts, as specified in the applicable Prospectus Supplement, to
which the certain Classes of Certificates would otherwise be entitled or (iii)
in such other manner as may be specified in the applicable Prospectus
Supplement.
Cross Support. If specified in the applicable Prospectus Supplement, the
beneficial ownership of separate groups of Mortgage Loans included in a Trust
Estate may be evidenced by separate Classes of
37
Certificates. In such case, credit support may be provided by a cross support
feature which requires that distributions be made with respect to certain
Classes from mortgage loan payments that would otherwise be distributed to
Subordinated Certificates evidencing a beneficial ownership interest in other
loan groups within the same Trust Estate. As a result, the amount of credit
enhancement available to a Class of Certificates against future losses on the
Mortgage Loans in which such Class represents an interest may be reduced as the
result of losses on a group of Mortgage Loans in which such Class has no
interest. The applicable Prospectus Supplement for a Series that includes a
cross support feature will describe the specific operation of any such cross
support feature.
Cash Flow Agreements
If specified in the Prospectus Supplement, the Trust Estate may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related Series of Certificates will be invested at
a specified rate. The Trust Estate may also include certain other agreements,
such as interest rate exchange or swap agreements, interest rate cap or floor
agreements, or similar agreements provided to reduce the effects of interest
rate fluctuations on the assets or on one or more Classes of Certificates. The
principal terms of any such guaranteed investment contract or other agreement
(any such agreement, a "Cash Flow Agreement"), including, without limitation,
provisions relating to the timing, manner and amount of payments thereunder and
provisions relating to the termination thereof, will be described in the
Prospectus Supplement for the related Series of Certificates. In addition, the
related Prospectus Supplement will provide certain information with respect to
the obligor under any such Cash Flow Agreement.
PREPAYMENT AND YIELD CONSIDERATIONS
Pass-Through Rates
Any Class of Certificates of a Series may have a fixed Pass-Through Rate, or
a Pass-Through Rate which varies based on changes in an index or based on
changes with respect to the underlying Mortgage Loans (such as, for example,
varying on the basis of changes in the weighted average Net Mortgage Interest
Rate of the underlying Mortgage Loans).
The Prospectus Supplement for each Series will specify the range and the
weighted average of the Mortgage Interest Rates and, if applicable, Net
Mortgage Interest Rates for the Mortgage Loans underlying such Series as of the
Cut-Off Date. If the Trust Estate includes adjustable-rate Mortgage Loans or
Net 5 Loans or includes Mortgage Loans with different Net Mortgage Interest
Rates, the weighted average Net Mortgage Interest Rate may vary from time to
time as set forth below. See "The Trust Estates." The Prospectus Supplement for
a Series will also specify the initial Pass-Through Rate for each Class of
Certificates of such Series and will specify whether each such Pass-Through
Rate is fixed or is variable.
The Net Mortgage Interest Rate for any adjustable-rate Mortgage Loan will
change with any changes in the index specified in the applicable Prospectus
Supplement on which such Mortgage Interest Rate adjustments are based, subject
to any applicable periodic or aggregate caps or floors on the related Mortgage
Interest Rate. The weighted average Net Mortgage Interest Rate with respect to
any Series may vary due to changes in the Net Mortgage Interest Rates of
adjustable-rate Mortgage Loans, to the timing of the Mortgage Interest Rate
readjustments of such Mortgage Loans and to different rates of payment of
principal of fixed- or adjustable-rate Mortgage Loans bearing different
Mortgage Interest Rates.
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Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each Series offered
hereby, the initial purchasers of a Class of Certificates may be required to
pay accrued interest at the applicable Pass-Through Rate for such Class from
the Cut-Off Date for such Series to, but not including, the date of issuance.
The effective yield to Certificateholders will be below the yield otherwise
produced by the applicable Pass-Through Rate because the distribution of
principal and interest which is due on each Due Date will not be made until the
25th day (or, if such day is not a business day, the first business day
following the 25th day) of the month in which such Due Date occurs (or until
such other Distribution Date specified in the applicable Prospectus
Supplement).
Effect of Principal Prepayments
When a Mortgage Loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment and not thereafter. Liquidation
Proceeds and amounts received in settlement of insurance claims are also likely
to include interest only to the time of payment or settlement. When a Mortgage
Loan is prepaid in full or in part, an interest shortfall may result depending
on the timing of the receipt of the prepayment and the timing of when those
prepayments are passed through to Certificateholders. To partially mitigate
this reduction in yield, the Pooling and Servicing Agreement and/or Underlying
Servicing Agreements relating to a Series may provide, to the extent specified
in the applicable Prospectus Supplement, that with respect to certain principal
prepayments received, the applicable Servicer or the Master Servicer will be
obligated, on or before each Distribution Date, to pay an amount equal to the
lesser of (i) the aggregate interest shortfall with respect to such
Distribution Date resulting from such principal prepayments by mortgagors and
(ii) all or a portion of the Servicer's or the Master Servicer's, as
applicable, servicing compensation for such Distribution Date specified in the
applicable Prospectus Supplement. No comparable interest shortfall coverage
will be provided by the Servicer or the Master Servicer with respect to
liquidations of any Mortgage Loans. Any interest shortfall arising from
liquidations will be covered by means of the subordination of the rights of
Subordinated Certificateholders or any other credit support arrangements.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount and a higher rate of principal
prepayments than anticipated would negatively affect the total return to
investors in the Certificates of a Series that are offered at a premium to
their principal amount. The yield on Certificates that are entitled solely or
disproportionately to distributions of principal or interest may be
particularly sensitive to prepayment rates, and further information with
respect to yield on such Certificates will be included in the applicable
Prospectus Supplement.
Weighted Average Life of Certificates
The Mortgage Loans may be prepaid in full or in part at any time. The
Mortgage Loans generally will not provide for a prepayment penalty but may so
provide if indicated in the related Prospectus Supplement. Fixed-rate Mortgage
Loans generally will contain due-on-sale clauses permitting the mortgagee to
accelerate the maturities of the Mortgage Loans upon conveyance of the related
Mortgaged Properties, and adjustable-rate Mortgage Loans generally will permit
creditworthy borrowers to assume the then-outstanding indebtedness on the
Mortgage Loans.
Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The Prospectus Supplement for each Series of Certificates
may describe one or more such prepayment standards or models and contain tables
setting forth the weighted average life of each Class
39
and the percentage of the original aggregate principal balance of each Class
that would be outstanding on specified Distribution Dates for such Series and
the projected yields to maturity on certain Classes thereof, in each case based
on the assumptions stated in such Prospectus Supplement, including assumptions
that prepayments on the Mortgage Loans are made at rates corresponding to
various percentages of the prepayment standard or model specified in such
Prospectus Supplement.
There is no assurance that prepayment of the Mortgage Loans underlying a
Series of Certificates will conform to any level of the prepayment standard or
model specified in the applicable Prospectus Supplement. A number of factors,
including but not limited to homeowner mobility, economic conditions, natural
disasters, changes in mortgagors' housing needs, job transfers, unemployment
or, in the case of borrowers relying on commission income and self-employed
borrowers, significant fluctuations in income or adverse economic conditions,
mortgagors' net equity in the properties securing the mortgage loans, including
the use of second or "home equity" mortgage loans by mortgagors or the use of
the properties as second or vacation homes, servicing decisions, enforceability
of due-on-sale clauses, mortgage market interest rates, mortgage recording
taxes, competition among mortgage loan originators resulting in reduced
refinancing costs, reduction in documentation requirements and willingness to
accept higher loan-to-value ratios, and the availability of mortgage funds, may
affect prepayment experience. In general, however, if prevailing mortgage
interest rates fall below the Mortgage Interest Rates borne by the Mortgage
Loans underlying a Series of Certificates, the prepayment rates of such
Mortgage Loans are likely to be higher than if prevailing rates remain at or
above the rates borne by such Mortgage Loans. Conversely, if prevailing
mortgage interest rates rise above the Mortgage Interest Rates borne by the
Mortgage Loans, the Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Interest Rates.
However, there can be no assurance that prepayments will rise or fall according
to such changes in mortgage interest rates. It should be noted that
Certificates of a Series may evidence an interest in a Trust Estate with
different Mortgage Interest Rates. Accordingly, the prepayment experience of
such Certificates will to some extent be a function of the mix of interest
rates of the Mortgage Loans. In addition, the terms of the Underlying Servicing
Agreements will require the related Servicer to enforce any due-on-sale clause
to the extent it has knowledge of the conveyance or the proposed conveyance of
the underlying Mortgaged Property; provided, however, that any enforcement
action that the Servicer determines would jeopardize any recovery under any
related primary mortgage insurance policy will not be required and provided,
further, that the Servicer may permit the assumption of defaulted Mortgage
Loans. See "Servicing of the Mortgage Loans--Enforcement of "Due-on-Sale"
Clauses; Realization Upon Defaulted Mortgage Loans" and "Certain Legal Aspects
of the Mortgage Loans--"Due-On-Sale" Clauses" for a description of certain
provisions of each Pooling and Servicing Agreement and certain legal
developments that may affect the prepayment experience on the Mortgage Loans.
At the request of the mortgagor, a Servicer may allow the refinancing of a
Mortgage Loan in any Trust Estate serviced by such Servicer by accepting
prepayments thereon and permitting a new loan secured by a Mortgage on the same
property. Upon such refinancing, the new loan will not be included in the Trust
Estate. A mortgagor may be legally entitled to require the Servicer to allow
such a refinancing. Any such refinancing will have the same effect as a
prepayment in full of the related Mortgage Loan. In this regard a Servicer may,
from time to time, implement programs designed to encourage refinancing through
such Servicer, including but not limited to general or targeted solicitations,
or the offering of pre-approved applications, reduced or nominal origination
fees or closing costs, or other financial incentives. A Servicer may also
encourage refinancing of defaulted Mortgage Loans, including Mortgage Loans
that would permit creditworthy borrowers to assume the outstanding
indebtedness.
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The Depositor will be obligated, under certain circumstances, to repurchase
certain of the Mortgage Loans. In addition, if specified in the applicable
Prospectus Supplement, the Pooling and Servicing Agreement will permit, but not
require, the Depositor, and the terms of certain insurance policies relating to
the Mortgage Loans may permit the applicable insurer, to purchase any Mortgage
Loan which is in default or as to which default is reasonably foreseeable. The
proceeds of any such purchase or repurchase will be deposited in the related
Certificate Account and such purchase or repurchase will have the same effect
as a prepayment in full of the related Mortgage Loan. See "The Pooling and
Servicing Agreement--Assignment of Mortgage Loans to the Trustee" and "--
Optional Purchases." In addition, if so specified in the applicable Prospectus
Supplement, the Depositor or another person identified therein will have the
option to purchase all, but not less than all, of the Mortgage Loans in any
Trust Estate under the limited conditions specified in such Prospectus
Supplement. For any Series of Certificates for which an election has been made
to treat the Trust Estate (or one or more segregated pools of assets therein)
as a REMIC, any such purchase or repurchase may be effected only pursuant to a
"qualified liquidation," as defined in Code Section 860F(a)(4)(A). See "The
Pooling and Servicing Agreement--Termination; Optional Purchase of Mortgage
Loans."
SERVICING OF THE MORTGAGE LOANS
The following includes a summary of the material provisions of the form of
Pooling and Servicing Agreement that has been filed as an exhibit to the
registration statement of which this Prospectus forms a part. Such summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all of the provisions of the Pooling and Servicing Agreement
for each Series of Certificates and the applicable Prospectus Supplement.
The Master Servicer
In the event that there is more than one Servicer with respect to the
Mortgage Loans related to a Series or the sole Servicer is not an affiliate of
the Depositor, a master servicer may act as the Master Servicer with respect to
such Series of Certificates. The Master Servicer may be affiliated or
unaffiliated with the Depositor. The Master Servicer generally will be
responsible under each Pooling and Servicing Agreement for, among other things,
(i) administering and supervising the performance by the Servicers of their
duties and responsibilities under the Underlying Servicing Agreements, (ii)
oversight of payments received on Mortgage Loans, (iii) preparation of periodic
reports to the Trustee with respect to the foregoing matters, (iv) performing
certain of the servicing obligations of a terminated Servicer as described
below under "--The Servicers" and (v) making advances of delinquent payments of
principal and interest on the Mortgage Loans to the limited extent described
below under the heading "--Periodic Advances and Limitations Thereon," if such
amounts are not advanced by a Servicer. The Master Servicer will also perform
additional duties as described in the applicable Pooling and Servicing
Agreement. The Master Servicer will be entitled to receive a portion of the
interest payments on the Mortgage Loans included in the Trust Estate for such a
Series to cover its fees as Master Servicer. The Master Servicer may
subcontract with any other entity the obligations of the Master Servicer under
any Pooling and Servicing Agreement. The Master Servicer will remain primarily
liable for any such contractor's performance in accordance with the applicable
Pooling and Servicing Agreement. The Master Servicer may be released from its
obligations in certain circumstances. See "Certain Matters Regarding the Master
Servicer."
The Servicers
With respect to any Series, one or more Servicers will provide certain
customary servicing functions with respect to the Mortgage Loans pursuant to
the related Pooling and Servicing Agreement or separate
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Underlying Servicing Agreements with the Depositor or an affiliate thereof.
Such Servicers are expected to be the Sellers of the Mortgage Loans or
affiliates of such Sellers. The rights of the Depositor or such affiliate under
the applicable Underlying Servicing Agreements in respect of the Mortgage Loans
included in the Trust Estate for any such Series will be assigned (directly or
indirectly) to the Trustee for the benefit of Certificateholders of such
Series. The Servicers may be entitled to withhold their Servicing Fees and
certain other fees and charges from remittances of payments received on
Mortgage Loans serviced by them.
Each Servicer generally will be approved by Fannie Mae ("FNMA") or The
Federal Home Loan Mortgage Corporation ("FHLMC") as a servicer of mortgage
loans.
The duties to be performed by each Servicer include collection and
remittance of principal and interest payments on the Mortgage Loans,
administration of mortgage escrow accounts, collection of insurance claims,
foreclosure procedures, and, if necessary, the advance of funds to the extent
certain payments are not made by the mortgagor and have not been determined by
the Servicer to be not recoverable under the applicable insurance policies with
respect to such Series, from proceeds of liquidation of such Mortgage Loans or
otherwise. Each Servicer also will provide such accounting and reporting
services as are necessary to provide required information to the Trustee or to
enable the Master Servicer to provide required information to the Trustee with
respect to the Mortgage Loans included in the Trust Estate for such Series.
Each Servicer is entitled to a periodic Servicing Fee equal to a specified
percentage of the outstanding principal balance of each Mortgage Loan serviced
by such Servicer. The servicing obligations of a Servicer may be delegated to
another person as provided in the Pooling and Servicing Agreement or Underlying
Servicing Agreement.
The Trustee, or if so provided in the applicable Pooling and Servicing
Agreement, the Master Servicer, may terminate a Servicer who has failed to
comply with its covenants or breached one of its representations contained in
the Underlying Servicing Agreement or in certain other circumstances. Upon
termination of a Servicer by the Trustee or the Master Servicer, the Master
Servicer will assume certain servicing obligations of the terminated Servicer,
or, at its option, may appoint a substitute Servicer acceptable to the Trustee
to assume the servicing obligations of the terminated Servicer. The Master
Servicer's obligations to act as substitute Servicer following the termination
of an Underlying Servicing Agreement will not, however, require the Master
Servicer to purchase a Mortgage Loan from the Trust Estate due to a breach by
the terminated Servicer of a representation or warranty in respect of such
Mortgage Loan.
Each Prospectus Supplement relating to such a Series of Certificates will
contain information concerning recent delinquency, foreclosure and loan loss
experience on the mortgage loans in a Servicer's servicing portfolio to the
extent such information is material and reasonably available to the Depositor.
Payments on Mortgage Loans
The Trustee for each Series will establish and maintain a separate trust
account in the name of the Trustee (the "Certificate Account"). Each such
account must be maintained with a depository institution (the "Depository")
either (i) whose long-term debt obligations (or, in the case of a Depository
which is part of a holding company structure, the long-term debt obligations of
such parent holding company) are, at the time of any deposit therein rated in
at least one of the two highest rating categories by the Rating Agency or
Rating Agencies rating the Certificates of such Series, or (ii) that is
otherwise acceptable to the Rating Agency or Rating Agencies rating the
Certificates of such Series and, if a REMIC election has been made, that would
not cause the related Trust Estate (or one or more
42
segregated pools of assets therein) to fail to qualify as a REMIC. To the
extent that the portion of funds deposited in the Certificate Account at any
time exceeds the limit of insurance coverage established by the Federal Deposit
Insurance Corporation (the "FDIC"), such excess will be subject to loss in the
event of the failure of the Depository. Such insurance coverage will be based
on the number of holders of Certificates, rather than the number of underlying
mortgagors. Holders of the Subordinated Certificates of a Series will bear any
such loss up to the amount of principal payments on the related Mortgage Loans
to which such holders are entitled.
Pursuant to the applicable Pooling and Servicing Agreement or the Underlying
Servicing Agreements, if any, with respect to a Series, each Servicer will be
required to establish and maintain one or more accounts (collectively, the
"Servicer Custodial Account") into which the Servicer will be required to
deposit on a daily basis amounts received with respect to Mortgage Loans
serviced by such Servicer included in the Trust Estate for such Series, as more
fully described below. Each Servicer Custodial Account must be a separate
custodial account insured to the available limits by the FDIC or otherwise
acceptable to the applicable Rating Agencies (such acceptable account, an
"Eligible Custodial Account") and limited to funds held with respect to a
particular Series, unless the Pooling and Servicing Agreement or the Underlying
Servicing Agreement specifies that a Servicer may establish an account which is
an eligible account to serve as a unitary Servicer Custodial Account both for
such Series and for other Series of Certificates as well as other Mortgage
Loans serviced by such Servicer.
Each Servicer will be required to deposit in the Certificate Account for
each Series of Certificates on the date the Certificates are issued any amounts
representing scheduled payments of principal and interest on the Mortgage Loans
serviced by such Servicer due after the applicable Cut-Off Date but received on
or prior thereto. Each Servicer will be required, not later than the 24th
calendar day of each month or such earlier day as may be specified in the
Pooling and Servicing Agreement or the applicable Underlying Servicing
Agreement (the "Remittance Date"), to remit to the Master Servicer for deposit
in an Eligible Custodial Account maintained by the Master Servicer in the name
of the Trustee (the "Master Servicer Custodial Account") or, if there is no
Master Servicer, to remit to the Trustee for deposit in the Certificate
Account, the following payments and collections received or made by such
Servicer with respect to the Mortgage Loans serviced by such Servicer
subsequent to the applicable Cut-Off Date (other than (a) payments due on or
before the Cut-Off Date and (b) amounts held for future distribution):
(i) all payments on account of principal, including prepayments, and
interest;
(ii) all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or property acquired in respect
thereof, whether through foreclosure sale or otherwise, including payments
in connection with defaulted Mortgage Loans received from the mortgagor
other than amounts required to be paid to the mortgagor pursuant to the
terms of the applicable Mortgage Loan or otherwise pursuant to law
("Liquidation Proceeds") less, to the extent permitted under the applicable
Underlying Servicing Agreement, the amount of any expenses incurred in
connection with the liquidation of such Mortgage Loans;
(iii) all proceeds received by the Servicer under any title, hazard or
other insurance policy covering any such Mortgage Loan, 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
Underlying Servicing Agreement;
(iv) all Periodic Advances made by the Servicer;
(v) all amounts withdrawn from Buy-Down Funds or Subsidy Funds, if any,
with respect to such Mortgage Loans, in accordance with the terms of the
respective agreements applicable thereto;
43
(vi) all proceeds of any such Mortgage Loans or property acquired in
respect thereof purchased or repurchased pursuant to the Pooling and
Servicing Agreement or the Underlying Servicing Agreement; and
(vii) all other amounts required to be deposited therein pursuant to the
applicable Pooling and Servicing Agreement or the Underlying Servicing
Agreement.
Notwithstanding the foregoing, if at any time the sums in (a) any Servicer
Custodial Account, other than any Eligible Custodial Account, exceed $100,000
or (b) any such Servicer Custodial Account, in certain circumstances, exceed
such amount less than $100,000 as shall have been specified by the Trustee,
each Servicer will be required within one business day to withdraw such excess
funds from such account and remit such amounts to the Master Servicer Custodial
Account or the Certificate Account.
Notwithstanding the foregoing, each Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
from any payment or other recovery on account of interest as received and prior
to deposit in the Servicer Custodial Account or (b) to withdraw from the
Servicer Custodial Account the applicable Servicing Fee after the entire
payment or recovery has been deposited in such account.
The Master Servicer or Trustee will deposit in the Certificate Account any
Periodic Advances made by the Master Servicer or Trustee, as applicable, in the
event of a Servicer default not later than the Distribution Date on which such
amounts are required to be distributed. All other amounts deposited in the
Master Servicer Custodial Account (other than Master Servicing Fees and, to the
extent the Master Servicer is entitled thereto under the applicable Pooling and
Servicing Agreement, interest on amounts in the Master Servicer Custodial
Account) are required to be remitted by the Master Servicer to the Trustee for
deposit in the Certificate Account not later than the business day preceding
the applicable Distribution Date. On each Distribution Date, the Trustee will
withdraw from the Certificate Account and remit to Certificateholders all
amounts allocable to the Pool Distribution Amount for such Distribution Date.
If a Servicer, the Master Servicer or the Trustee deposits in the
Certificate Account for a Series any amount not required to be deposited
therein, the Trustee may at any time withdraw such amount from such account for
itself or for remittance to such Servicer or the Master Servicer, as
applicable. Funds on deposit in the Certificate Account may be invested in
certain investments acceptable to the Rating Agencies ("Eligible Investments")
maturing in general not later than the business day preceding the next
Distribution Date. In the event that an election has been made to treat the
Trust Estate (or one or more segregated pools of assets therein) with respect
to a Series as a REMIC, no such Eligible Investments will be sold or disposed
of at a gain prior to maturity unless the Trustee has received an opinion of
counsel or other evidence satisfactory to it that such sale or disposition will
not cause the Trust Estate (or segregated pool of assets) to be subject to the
tax on "prohibited transactions" imposed by Code Section 860F(a)(1), otherwise
subject the Trust Estate (or segregated pool of assets) to tax, or cause the
Trust Estate (or any segregated pool of assets) to fail to qualify as a REMIC
while any Certificates of the Series are outstanding. All income and gain
realized from any such investment will generally be for the account of the
Trustee as additional compensation and all losses from any such investment will
be deposited by the Trustee out of its own funds to the Certificate Account
immediately as realized.
The Trustee is permitted, from time to time, to make withdrawals from the
Certificate Account for the following purposes, to the extent permitted in the
applicable Pooling and Servicing Agreement (and,
44
in the case of Servicer or Master Servicer reimbursements by the Trustee, only
to the extent funds in the respective Servicer Custodial Account or Master
Servicer Custodial Account are not sufficient therefor):
(i) to reimburse the Master Servicer, itself or any Servicer for
Advances;
(ii) to reimburse any Servicer for liquidation expenses and for amounts
expended by the Master Servicer or any Servicer, as applicable, in
connection with the restoration of damaged property;
(iii) to pay to the Master Servicer the applicable Master Servicing Fee
and any other amounts constituting additional master servicing
compensation, to pay itself the applicable Trustee Fee, to pay any other
fees described in the applicable Prospectus Supplement; and to pay to the
owner thereof any Fixed Retained Yield;
(iv) to reimburse the Master Servicer or any Servicer for certain
expenses (including taxes paid on behalf of the Trust Estate) incurred by
and recoverable by or reimbursable to the Master Servicer or the Servicer,
as applicable;
(v) to pay to the Depositor, a Servicer or the Master Servicer with
respect to each Mortgage Loan or property acquired in respect thereof that
has been repurchased by the Depositor or purchased by a Servicer or the
Master Servicer all amounts received thereon and not distributed as of the
date as of which the purchase price of such Mortgage Loan was determined;
(vi) to pay to itself any interest earned on or investment income earned
with respect to funds in the Certificate Account (all such interest or
income to be withdrawn not later than the next Distribution Date);
(vii) to pay to the Master Servicer, the Servicer and itself from net
Liquidation Proceeds allocable to interest, the amount of any unpaid Master
Servicing Fee, Servicing Fees or Trustee Fees and any unpaid assumption
fees, late payment charges or other mortgagor charges on the related
Mortgage Loan;
(viii) to withdraw from the Certificate Account any amount deposited in
such account that was not required to be deposited therein; and
(ix) to clear and terminate the Certificate Account.
The Trustee will be authorized to appoint a paying agent (the "Paying
Agent") to make distributions, as agent for the Trustee, to Certificateholders
of a Series. If the Paying Agent for a Series is not the Trustee for such
Series, the Trustee will, on each Distribution Date, deposit in immediately
available funds in an account designated by any such Paying Agent the amount
required to be distributed to the Certificateholders on such Distribution
Date.
The Trustee will cause any Paying Agent to execute and deliver to the Trustee
an instrument in which such Paying Agent agrees with the Trustee that such
Paying Agent will hold all amounts deposited with it by the Trustee for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to Certificateholders or
otherwise disposed of as provided in the applicable Pooling and Servicing
Agreement.
Periodic Advances and Limitations Thereon
Generally each Servicer will be required to make (i) Periodic Advances to
cover delinquent payments of principal and interest on such Mortgage Loan and
(ii) other advances of cash ("Other Advances" and, collectively with Periodic
Advances, "Advances") to cover (a) delinquent payments of taxes, insurance
premiums, and other escrowed items and (b) rehabilitation expenses and
foreclosure costs, including reasonable attorneys' fees, in either case unless
such Servicer has determined that any
45
subsequent payments on that Mortgage Loan or from the borrower will ultimately
not be available to reimburse such Servicer for such amounts. The failure of
the Servicer to make any required Periodic Advances or Other Advances under an
Underlying Servicing Agreement constitutes a default under such agreement for
which the Servicer will be terminated. Upon default by a Servicer, the Master
Servicer or the Trustee may, in each case if so provided in the Pooling and
Servicing Agreement, be required to make Periodic Advances to the extent
necessary to make required distributions on certain Certificates or certain
Other Advances, provided that the Master Servicer or Trustee, as applicable,
determines that funds will ultimately be available to reimburse it from
proceeds of the related Mortgaged Property. In the case of Certificates of any
Series for which credit enhancement is provided in the form of a mortgage pool
insurance policy, the Depositor may obtain an endorsement to the mortgage pool
insurance policy which obligates the pool insurer to advance delinquent
payments of principal and interest. The pool insurer would only be obligated
under such endorsement to the extent the mortgagor fails to make such payment
and the Master Servicer or Trustee fails to make a required advance.
The advance obligation of the Master Servicer and Trustee may be further
limited to an amount specified by the Rating Agency rating the Certificates.
Any such Periodic Advances by the Servicers, the Master Servicer or Trustee, as
the case may be, must be deposited into the applicable Servicer Custodial
Account or the Certificate Account and will be due no later than the business
day before the Distribution Date to which such delinquent payment relates.
Advances by the Servicers, the Master Servicer or Trustee, as the case may be,
will be reimbursable out of insurance proceeds or Liquidation Proceeds of, or,
except for Other Advances, future payments on, the Mortgage Loans for which
such amounts were advanced. If an Advance made by a Servicer, the Master
Servicer or the Trustee later proves, or is deemed by the Servicer, the Master
Servicer or the Trustee, to be unrecoverable, such Servicer, the Master
Servicer or the Trustee, as the case may be, will be entitled to reimbursement
from funds in the Certificate Account prior to the distribution of payments to
the Certificateholders to the extent provided in the Pooling and Servicing
Agreement.
Any Periodic Advances made by a Servicer, the Master Servicer or the Trustee
with respect to Mortgage Loans included in the Trust Estate for any Series are
intended to enable the Trustee to make timely payment of the scheduled
distributions of principal and interest on the Certificates of such Series.
However, none of the Master Servicer, the Trustee, any Servicer or any other
person will, except as specified in the applicable Prospectus Supplement with
respect to credit enhancement described therein, insure or guarantee the
Certificates of any Series or the Mortgage Loans included in the Trust Estate
for any Certificates.
Collection and Other Servicing Procedures
Each Servicer will be required by the related Underlying Servicing Agreement
to make reasonable efforts to collect all payments called for under the
Mortgage Loans and, consistent with the applicable Underlying Servicing
Agreement or the Pooling and Servicing Agreement and any applicable agreement
governing any form of credit enhancement, to follow such collection procedures
as it follows with respect to mortgage loans serviced by it that are comparable
to the Mortgage Loans. Consistent with the above, the Servicer may, in its
discretion, (i) waive any prepayment charge, assumption fee, late payment
charge or any other charge in connection with the prepayment of a Mortgage Loan
and (ii) arrange with a mortgagor a schedule for the liquidation of
deficiencies running for not more than 180 days (or such longer period to which
the Master Servicer and any applicable pool insurer or primary mortgage insurer
have consented) after the applicable Due Date.
Under each Underlying Servicing Agreement or the Pooling and Servicing
Agreement, each Servicer, to the extent permitted by law, will establish and
maintain one or more escrow accounts (each
46
such account, an "Escrow Account") in which each such Servicer will be required
to deposit any payments made by mortgagors in advance for taxes, assessments,
primary mortgage (if applicable) and hazard insurance premiums and other
similar items. Withdrawals from the Escrow Account may be made to effect timely
payment of taxes, assessments, mortgage and hazard insurance, to refund to
mortgagors amounts determined to be overages, to pay interest to mortgagors on
balances in the Escrow Account, if required, and to clear and terminate such
account. Each Servicer will be responsible for the administration of its Escrow
Account. A Servicer will be obligated to advance certain amounts which are not
timely paid by the mortgagors, to the extent that it determines, in good faith,
that they will be recoverable out of insurance proceeds, liquidation proceeds,
or otherwise. Alternatively, in lieu of establishing a Escrow Account, a
Servicer may procure a performance bond or other form of insurance coverage, in
an amount acceptable to the Master Servicer and each Rating Agency rating the
related Series of Certificates, covering loss occasioned by the failure to
escrow such amounts.
Enforcement of "Due-on-Sale Clauses"; Realization Upon Defaulted Mortgage Loans
With respect to each Mortgage Loan having a fixed interest rate, the
applicable Underlying Servicing Agreement or Pooling and Servicing Agreement
will generally provide that, when any Mortgaged Property is about to be
conveyed by the mortgagor, the Servicer will, to the extent it has knowledge of
such prospective conveyance, exercise its rights to accelerate the maturity of
such Mortgage Loan under the "due-on-sale" clause applicable thereto, if any,
unless it is not exercisable under applicable law or if such exercise would
result in loss of insurance coverage with respect to such Mortgage Loan or
would, in the Servicer's judgment, be reasonably likely to result in litigation
by the mortgagor and such Servicer, if applicable, has not obtained the Master
Servicer's consent to such exercise. In either case, the Servicer is authorized
to take or enter into an assumption and modification agreement from or with the
person to whom such Mortgaged Property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note and,
unless prohibited by applicable state law, the mortgagor remains liable
thereon, provided that the Mortgage Loan will continue to be covered by any
pool insurance policy and any related primary mortgage insurance policy and the
Mortgage Interest Rate with respect to such Mortgage Loan and the payment terms
shall remain unchanged. The Servicer will also be authorized, with the prior
approval of the pool insurer and the primary mortgage insurer, if any, to enter
into a substitution of liability agreement with such person, pursuant to which
the original mortgagor is released from liability and such person is
substituted as mortgagor and becomes liable under the Mortgage Note.
Each Underlying Servicing Agreement and Pooling and Servicing Agreement with
respect to a Series will require the Servicer or the Master Servicer, as the
case may be, to present claims to the insurer under any insurance policy
applicable to the Mortgage Loans included in the Trust Estate for such Series
and to take such reasonable steps as are necessary to permit recovery under
such insurance policies with respect to defaulted Mortgage Loans, or losses on
the Mortgaged Property securing the Mortgage Loans.
Each Servicer is obligated to realize upon defaulted Mortgage Loans in
accordance with its normal servicing practices, which will conform generally to
those of prudent mortgage lending institutions which service mortgage loans of
the same type in the same jurisdictions. Notwithstanding the foregoing, each
Servicer is authorized to permit the assumption of a defaulted Mortgage Loan
rather than to foreclose or accept a deed-in-lieu of foreclosure if, in the
Servicer's judgment, the default is unlikely to be cured and the assuming
borrower meets the applicable underwriting guidelines. In connection with any
such assumption, the Mortgage Interest Rate and the payment terms of the
related Mortgage Note will not be
47
changed. Each Servicer may also, with the consent of the Master Servicer,
modify the payment terms of Mortgage Loans that are in default, or as to which
default is reasonably foreseeable, that remain in the Trust Estate rather than
foreclose on such Mortgage Loans; provided that no such modification shall
forgive principal owing under such Mortgage Loan or permanently reduce the
interest rate on such Mortgage Loan. Any such modification will be made only
upon the determination by the Servicer and, if applicable, the Master Servicer
that such modification is likely to increase the proceeds of such Mortgage Loan
over the amount expected to be collected pursuant to foreclosure. See also "The
Pooling and Servicing Agreement--Optional Purchases," with respect to the
Seller's right to repurchase Mortgage Loans that are in default, or as to which
default is reasonably foreseeable. Further, a Servicer may encourage the
refinancing of such defaulted Mortgage Loans, including Mortgage Loans that
would permit creditworthy borrowers to assume the outstanding indebtedness.
In the case of foreclosure or of damage to a Mortgaged Property from an
uninsured cause, the Servicer will not be required to expend its own funds to
foreclose or restore any damaged property, unless it reasonably determines (i)
that such foreclosure or restoration will increase the proceeds to
Certificateholders of such Series of liquidation of the Mortgage Loan after
reimbursement to the related Servicer for its expenses and (ii) that such
expenses will be recoverable to it through Liquidation Proceeds or any
applicable insurance policy in respect of such Mortgage Loan. In the event that
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to be reimbursed from the Certificate Account for
such Series an amount equal to all costs and expenses incurred by it.
No Servicer will be obligated to foreclose on any Mortgaged Property which
it believes may be contaminated with or affected by hazardous wastes or
hazardous substances. See "Certain Legal Aspects of the Mortgage Loans--
Environmental Considerations." If a Servicer does not foreclose on a Mortgaged
Property, the Certificateholders of the related Series may experience a loss on
the related Mortgage Loan. A Servicer will not be liable to the
Certificateholders if it fails to foreclose on a Mortgaged Property which it
believes may be so contaminated or affected, even if such Mortgaged Property
is, in fact, not so contaminated or affected. Conversely, a Servicer will not
be liable to the Certificateholders if, based on its belief that no such
contamination or effect exists, the Servicer forecloses on a Mortgaged Property
and takes title to such Mortgaged Property, and thereafter such Mortgaged
Property is determined to be so contaminated or affected.
The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event a
deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation, the
Bankruptcy Code and Other Limitations on Lenders" for a discussion of the
availability of deficiency judgments), may proceed for the deficiency. It is
anticipated that in most cases the Servicer will not seek deficiency judgments,
and will not be required under the applicable Underlying Servicing Agreement to
seek deficiency judgments. In lieu of foreclosure, each Servicer may arrange
for the sale by the borrower of the Mortgaged Property related to a defaulted
Mortgage Loan to a third party, rather than foreclosing upon and selling such
Mortgaged Property.
With respect to a Trust Estate (or any segregated pool of assets therein) as
to which a REMIC election has been made, if the Trustee acquires ownership of
any Mortgaged Property as a result of a default or reasonably foreseeable
default of any Mortgage Loan secured by such Mortgaged Property, the Trustee or
Master Servicer will be required to dispose of such property prior to the close
of the third calendar year following the year the Trust Estate acquired such
property (or such shorter period as is provided in the applicable Underlying
Servicing Agreement) unless the Trustee (a) receives an opinion of
48
counsel to the effect that the holding of the Mortgaged Property by the Trust
Estate will not cause the Trust Estate to be subject to the tax on "prohibited
transactions" imposed by Code Section 860F(a)(1) or cause the Trust Estate (or
any segregated pool of assets therein as to which one or more REMIC elections
have been made or will be made) to fail to qualify as a REMIC or (b) applies
for and is granted an extension of the applicable period in the manner
contemplated by Code Section 856(e)(3). The Servicer also will be required to
administer the Mortgaged Property in a manner which does not cause the
Mortgaged Property to fail to qualify as "foreclosure property" within the
meaning of Code Section 860G(a)(8) or result in the receipt by the Trust Estate
of any "net income from foreclosure property" within the meaning of Code
Section 860G(c)(2), respectively. In general, this would preclude the holding
of the Mortgaged Property by a party acting as a dealer in such property or the
receipt of rental income based on the profits of the lessee of such property.
See "Federal Income Tax Consequences."
Insurance Policies
Each Servicer will be required to cause to be maintained for each Mortgage
Loan (other than Mortgage Loans secured by cooperative shares and condominium
apartments) a standard hazard insurance policy issued by a generally acceptable
insurer insuring the improvements on the Mortgaged Property underlying such
Mortgage Loan against loss by fire, with extended coverage (a "Standard Hazard
Insurance Policy"). Such Standard Hazard Insurance Policy will be required to
be in an amount at least equal to the lesser of 100% of the insurable value of
the improvements on the Mortgaged Property or the principal balance of such
Mortgage Loan; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Each Servicer will also maintain on property acquired
upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, a
Standard Hazard Insurance Policy in an amount that is at least equal to the
lesser of 100% of the insurable value of the improvements which are a part of
such property or the principal balance of such Mortgage Loan plus accrued
interest and liquidation expenses; provided, however, that such insurance may
not be less than the minimum amount required to fully compensate for any damage
or loss on a replacement cost basis. Any amounts collected under any such
policies (other than amounts to be applied to the restoration or repair of the
Mortgaged Property or released to the borrower in accordance with normal
servicing procedures) will be deposited in the Servicer Custodial Account for
remittance to the Certificate Account by the applicable Servicer.
The Standard Hazard Insurance Policies covering the Mortgage Loans generally
will cover physical damage to, or destruction of, the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm,
hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Because the Standard Hazard Insurance
Policies relating to such Mortgage Loans will be underwritten by different
insurers and will cover Mortgaged Properties located in various states, such
policies will not contain identical terms and conditions. The most significant
terms thereof, however, generally will be determined by state law and generally
will be similar. Most such policies typically will not cover any physical
damage resulting from the following: war, revolution, governmental actions,
floods and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), nuclear reaction, wet or dry rot, vermin, rodents,
insects or domestic animals, hazardous wastes or hazardous substances, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not all-inclusive.
In general, if the improvements on a Mortgaged Property are located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available) each Underlying Servicing Agreement will require the related
Servicer to cause to be maintained a flood insurance policy meeting the
requirements of the
49
current guidelines of the Federal Insurance Administration with a generally
acceptable insurance carrier. Generally, the Underlying Servicing Agreement
will require that such flood insurance be in an amount not less than the least
of (i) the outstanding principal balance of the Mortgage Loan, (ii) the full
insurable value of the improvements, or (iii) the maximum amount of insurance
which is available under the National Flood Insurance Act of 1968, as amended.
Each Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties in lieu of maintaining the required Standard
Hazard Insurance Policies and may maintain a blanket policy insuring against
special hazards in lieu of maintaining any required flood insurance. Each
Servicer will be liable for the amount of any deductible under a blanket policy
if such amount would have been covered by a required Standard Hazard Insurance
Policy or flood insurance, had it been maintained.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows, floods and hazardous wastes or hazardous
substances) or insufficient hazard insurance proceeds will adversely affect
distributions to the Certificateholders.
Fixed Retained Yield, Servicing Compensation and Payment of Expenses
Fixed Retained Yield with respect to any Mortgage Loan is that portion, if
any, of interest at the Mortgage Interest Rate that is not included in the
related Trust Estate and is retained by the Depositor or a Seller. The
Prospectus Supplement for a Series will describe the Fixed Retained Yield, if
any, with respect to the Mortgage Loans of such Series. If so, the Fixed
Retained Yield will be established on a loan-by-loan basis and will be
specified in the schedule of Mortgage Loans attached as an exhibit to the
applicable Pooling and Servicing Agreement. If the Seller retaining the Fixed
Retained Yield is a Servicer, such Servicer may deduct the Fixed Retained Yield
from mortgagor payments as received or deposit such payments in the Servicer
Custodial Account or Certificate Account for such Series and then request the
Master Servicer or the Trustee to withdraw the Fixed Retained Yield from the
Master Servicer Custodial Account or the Certificate Account for remittance to
such Servicer. In the case of any Fixed Retained Yield with respect to other
Mortgage Loans, serviced by the Master Servicer or the Trustee will make
withdrawals from the Master Servicer Custodial Account or the Certificate
Account for the purpose of remittances to the Owner of the Fixed Retained
Yield. Notwithstanding the foregoing, with respect to any payment of interest
received relating to a Mortgage Loan (whether paid by the mortgagor or received
as Liquidation Proceeds, insurance proceeds or otherwise) which is less than
the full amount of interest then due with respect to such Mortgage Loan, the
owner of the Fixed Retained Yield with respect to such Mortgage Loan will bear
a ratable share of such interest shortfall.
For each Series of Certificates, each Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans serviced by such Servicer until
termination of the applicable Underlying Servicing Agreement, or the Pooling
and Servicing Agreement. A Servicer, at its election, will pay itself the
Servicing Fee for a Series with respect to each Mortgage Loan by (a)
withholding the Servicing Fee from any scheduled payment of interest prior to
deposit of such payment in the Servicer Custodial Account for such Series or
(b) withdrawing the Servicing Fee from the Servicer Custodial Account after the
entire interest payment has been deposited in such account. A Servicer may also
pay itself out of the Liquidation Proceeds of a Mortgage Loan or other
recoveries with respect thereto, or withdraw from the Servicer Custodial
Account or request the Master Servicer or the Trustee to withdraw from the
Master Servicer Custodial Account or the Certificate Account for remittance to
the Servicer such amounts after the deposit thereof in such accounts. The
Servicing Fee or the range of Servicing Fees with respect to the Mortgage Loans
underlying the Certificates of a Series will be specified in the applicable
Prospectus
50
Supplement. Additional servicing compensation in the form of prepayment
charges, assumption fees, late payment charges, Liquidation Profits or
otherwise will be retained by the Servicers.
Each Servicer will pay all expenses incurred in connection with the
servicing of the Mortgage Loans serviced by such Servicer underlying a Series,
including, without limitation, payment of the Standard Hazard Insurance Policy
premiums. The Servicer will be entitled, in certain circumstances, to
reimbursement from the Certificate Account of Periodic Advances, of Other
Advances made by it to pay taxes, insurance premiums and similar items with
respect to any Mortgaged Property or for expenditures incurred by it in
connection with the restoration, foreclosure or liquidation of any Mortgaged
Property (to the extent of Liquidation Proceeds or insurance policy proceeds in
respect of such Mortgaged Property) and of certain losses against which it is
indemnified by the Trust Estate.
As set forth in the preceding paragraph, a Servicer may be entitled to
reimbursement for certain expenses incurred by it, and payment of additional
fees for certain extraordinary services rendered by it (provided that such fees
do not exceed those which would be charged by third parties for similar
services) in connection with the liquidation of defaulted Mortgage Loans and
related Mortgaged Properties. In the event that claims are either not made or
are not fully paid from any applicable form of credit enhancement, the related
Trust Estate will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicing Fee and the expenses of the Servicer, are less
than the principal balance of the related Mortgage Loan.
Evidence as to Compliance
Each Servicer will deliver annually to the Trustee or Master Servicer, as
applicable, on or before the date specified in the applicable Pooling and
Servicing Agreement or Underlying Servicing Agreement, an Officer's Certificate
stating that (i) a review of the activities of such Servicer during the
preceding calendar year and of performance under the applicable Pooling and
Servicing Agreement or Underlying Servicing Agreement has been made under the
supervision of such officer, and (ii) to the best of such officer's knowledge,
based on such review, such Servicer has fulfilled all its obligations under the
applicable Pooling and Servicing Agreement or Underlying Servicing Agreement
throughout such year, or, if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof. Such Officer's Certificate shall be accompanied by a
statement of a firm of independent public accountants to the effect that, on
the basis of an examination of certain documents and records relating to a
random sample of the mortgage loans being serviced by such Servicer pursuant to
such Pooling and Servicing Agreement or Underlying Servicing Agreement and/or
other similar agreements, conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers, the servicing of such
mortgage loans was conducted in compliance with the provisions of the
applicable Underlying Servicing Agreement and other similar agreements, except
for (i) such exceptions as such firm believes to be immaterial and (ii) such
other exceptions as are set forth in such statement.
The Master Servicer will deliver annually to the Trustee, on or before the
date specified in the applicable Pooling and Servicing Agreement, an Officer's
Certificate stating that such officer has received, with respect to each
Servicer, the Officer's Certificate and accountant's statement described in the
preceding paragraph, and, that on the basis of such officer's review of such
information, each Servicer has fulfilled all its obligations under the
applicable Underlying Servicing Agreement throughout such year, or, if there
has been a default in the fulfillment of any such obligation, specifying each
such default known to such officer and the nature and status thereof.
51
CERTAIN MATTERS REGARDING THE MASTER SERVICER
In the event there is a Master Servicer with respect to a Series of
Certificates, such Master Servicer may not resign from its obligations and
duties under the Pooling and Servicing Agreement for each Series without the
consent of the Trustee, except upon its determination that its duties
thereunder are no longer permissible under applicable law or are in material
conflict by reason of applicable law with any other activities of a type and
nature carried on by it. No such resignation will become effective until the
Trustee for such Series or a successor master servicer has assumed the Master
Servicer's obligations and duties under the Pooling and Servicing Agreement. If
the Master Servicer resigns for any of the foregoing reasons and the Trustee is
unable or unwilling to assume responsibility for its duties under the Pooling
and Servicing Agreement, it may appoint another institution to so act as
described under "The Pooling and Servicing Agreement--Rights Upon Event of
Default" below.
The Pooling and Servicing Agreement will also provide that neither the
Master Servicer nor any subcontractor, nor any partner, director, officer,
employee or agent of any of them, will be under any liability to the Trust
Estate or the Certificateholders, for the taking of any action or for
refraining from the taking of any action in good faith pursuant to the Pooling
and Servicing Agreement, or for errors in judgment; provided, however, that
neither the Master Servicer, any subcontractor, nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties or by reason of reckless disregard of his or its obligations and
duties thereunder. The Pooling and Servicing Agreement will further provide
that the Master Servicer, any subcontractor, and any partner, director,
officer, employee or agent of either of them shall be entitled to
indemnification by the Trust Estate 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, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties thereunder or by reason of
reckless disregard of its obligations and duties thereunder. In addition, the
Pooling and Servicing Agreement will provide that the Master Servicer will not
be under any obligation to appear in, prosecute or defend any legal action that
is not incidental to its duties under the Pooling and Servicing Agreement and
that in its opinion may involve it in any expense or liability. The Master
Servicer may, however, in its discretion, undertake any such action deemed by
it necessary or desirable with respect to the Pooling and Servicing Agreement
and the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Estate and the Master Servicer will be entitled to be
reimbursed therefor out of the Certificate Account, and any loss to the Trust
Estate arising from such right of reimbursement will be allocated first to the
Subordinated Certificate of a Series before being allocated to the related
Senior Certificates, or if such Series does not contain Subordinated
Certificates, pro rata among the various Classes of Certificates unless
otherwise specified in the applicable Pooling and Servicing Agreement.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger, conversion or consolidation to which the
Master Servicer is a party, or any person succeeding to the business through
the transfer of substantially all of its assets or all assets relating to such
business, or otherwise, of the Master Servicer will be the successor of the
Master Servicer under the Pooling and Servicing Agreement for each Series
provided that such successor or resulting entity has a net worth of not less
than $15,000,000 and is qualified to service mortgage loans for FNMA or FHLMC.
The Master Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each
Series; provided that, if the Master Servicer desires
52
to be released from its obligations under the Pooling and Servicing Agreement,
(i) the purchaser or transferee accepting such assignment or delegation is
qualified to service mortgage loans for FNMA or FHLMC, (ii) the purchaser is
satisfactory to the Trustee for such Series, in the reasonable exercise of its
judgment, and executes and delivers to the Trustee an agreement, in form and
substance reasonably satisfactory to the Trustee, which contains an assumption
by such purchaser or transferee of the due and punctual performance and
observance of each covenant and condition to be performed or observed by the
Master Servicer under the Pooling and Servicing Agreement from and after the
date of such agreement; and (iii) each applicable Rating Agency's rating of any
Certificates for such Series in effect immediately prior to such assignment,
sale or transfer would not be qualified, downgraded or withdrawn as a result of
such assignment, sale or transfer and the Certificates would not be placed on
credit review status by any such Rating Agency. The Master Servicer will be
released from its obligations under the Pooling and Servicing Agreement upon
any such assignment and delegation, except that the Master Servicer will remain
liable for all liabilities and obligations incurred by it prior to the time
that the conditions contained in clauses (i), (ii) and (iii) above are met.
THE POOLING AND SERVICING AGREEMENT
Assignment of Mortgage Loans to the Trustee
The Depositor will have acquired the Mortgage Loans included in each Trust
Estate pursuant to one or more agreements (each, a "Sale Agreement"). In
connection with the conveyance of the Mortgage Loans to the Depositor, a Seller
will (i) agree to deliver to the Depositor all of the documents which the
Depositor is required to deliver to the Trustee; (ii) make certain
representations and warranties to the Depositor which will be the basis of
certain of the Depositor's representations and warranties to the Trustee or
assign the representations and warranties made by the originator of the
Mortgage Loans; and (iii) agree to repurchase or substitute (or assign rights
to a comparable agreement of the originator of the Mortgage Loans) for any
Mortgage Loan for which any document is not delivered or is found to be
defective in any material respect, or which Mortgage Loan is discovered at any
time not to be in conformance with the representations and warranties the
Seller has made to the Depositor and the breach of such representations and
warranties materially and adversely affects the interests of the
Certificateholders in the related Mortgage Loan, if the Seller cannot deliver
such document or cure such defect or breach within 60 days after notice
thereof. Such agreement will inure to the benefit of the Trustee and is
intended to help ensure the Depositor's performance of its limited obligation
to repurchase or substitute for Mortgage Loans. See "The Mortgage Loan
Programs--Representations and Warranties" above. To the extent specified in the
related Prospectus Supplement, the applicable Seller or other entity specified
therein rather than the Depositor will have the limited obligation to
repurchase or substitute for Mortgage Loans.
At the time of issuance of each Series of Certificates, the Mortgage Loans
in the related Trust Estate will, pursuant to the applicable Pooling and
Servicing Agreement, be assigned to the Trustee for the benefit of the
Certificateholders, together with all principal and interest received on or
with respect to such Mortgage Loans after the applicable Cut-Off Date other
than principal and interest due and payable on or before such Cut-Off Date and
interest attributable to the Fixed Retained Yield on such Mortgage Loans, if
any. See "Servicing of the Mortgage Loans--Fixed Retained Yield, Servicing
Compensation and Payment of Expenses." The Trustee or its agent will,
concurrently with such assignment, authenticate and deliver the Certificates
evidencing such Series to the Depositor in exchange for the Mortgage Loans.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit to
the applicable Pooling and Servicing Agreement. Each such schedule will
include, among other things, the unpaid principal balance as of the close of
business on the applicable Cut-Off Date, the maturity date and the Mortgage
Interest Rate for each Mortgage Loan in the related Trust Estate.
53
In addition, with respect to each Mortgage Loan in a Trust Estate, the
mortgage or other promissory note, any assumption, modification or conversion
to fixed interest rate agreement, a mortgage assignment in recordable form and
the recorded Mortgage (or other documents as are required under applicable law
to create perfected security interest in the Mortgaged Property in favor of the
Trustee) will be delivered to the Trustee or, if indicated in the applicable
Prospectus Supplement, to a custodian; provided that, in instances where
recorded documents cannot be delivered due to delays in connection with
recording, copies thereof, certified by the Depositor to be true and complete
copies of such documents sent for recording, may be delivered and the original
recorded documents will be delivered promptly upon receipt. The assignment of
each Mortgage will be recorded promptly after the initial issuance of
Certificates for the related Trust Estate, except in states where, in the
opinion of counsel acceptable to the Trustee, such recording is not required to
protect the Trustee's interest in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, or
another affiliate that sold the Mortgage Loan to the Depositor, or the
originator of such Mortgage Loan. Notwithstanding the foregoing, with respect
to any Mortgage which has been recorded in the name of Mortgage Electronic
Registration Systems, Inc. ("MERS") or its designee, no mortgage assignment in
favor of the Trustee will be required to be prepared or delivered. Instead, the
applicable Servicers will be required to take all actions as are necessary to
cause the applicable Trust Estate to be shown as the owner of the related
Mortgage Loan on the records of MERS for purposes of the system of recording
transfers of beneficial ownership of mortgages maintained by MERS.
The Trustee or custodian will hold such documents in trust for the benefit
of Certificateholders of the related Series and will review such documents
within 90 days of the date of the applicable Pooling and Servicing Agreement.
If any document is not delivered or is found to be defective in any material
respect, or if the Depositor or other representing party is in breach of any of
its representations and warranties, and such breach materially and adversely
affects the interests of the Certificateholders in a Mortgage Loan, and the
Depositor or other entity specified in the related Prospectus Supplement cannot
deliver such document or cure such defect or breach within 90 days after
written notice thereof, the Depositor or other entity specified in the related
Prospectus Supplement will, within 90 days of such notice, either repurchase
the related Mortgage Loan from the Trustee at a price equal to the then unpaid
principal balance thereof, plus accrued and unpaid interest at the applicable
Mortgage Interest Rate (minus any Fixed Retained Yield) through the last day of
the month in which such repurchase takes place, or (in the case of a Series for
which one or more REMIC elections have been or will be made, unless the maximum
period as may be provided by the Code or applicable regulations of the
Department of the Treasury ("Treasury Regulations") shall have elapsed since
the execution of the applicable Pooling and Servicing Agreement) substitute for
such Mortgage Loan a new mortgage loan having characteristics such that the
representations and warranties of the Depositor or other representing party
made pursuant to the applicable Pooling and Servicing Agreement (except for
representations and warranties as to the correctness of the applicable schedule
of mortgage loans) would not have been incorrect had such substitute Mortgage
Loan originally been a Mortgage Loan. In the case of a repurchased Mortgage
Loan, the purchase price will be deposited by the Seller in the related
Certificate Account. In the case of a substitute Mortgage Loan, the mortgage
file relating thereto will be delivered to the Trustee or the custodian and the
Depositor or other entity specified in the related Prospectus Supplement will
deposit in the Certificate Account, an amount equal to the excess of (i) the
unpaid principal balance of the Mortgage Loan for which it is being substituted
(the "Removed Mortgage Loan"), over (ii) the unpaid principal balance of the
substitute Mortgage Loan, together with interest on such excess at the Mortgage
Interest Rate (minus any Fixed Retained Yield) to the next scheduled Due Date
of the Removed Mortgage Loan. In no event will any substitute Mortgage Loan
have (i) an unpaid principal balance greater than the scheduled principal
balance calculated in accordance with the amortization schedule (the "Scheduled
Principal Balance") of the Mortgage Loan for which it is
54
substituted (after giving effect to the scheduled principal payment due in the
month of substitution on the Removed Mortgage Loan), or (ii) a term greater
than, a Mortgage Interest Rate less than, a Mortgage Interest Rate more than
two percent per annum greater than or a loan-to-value ratio greater than, the
Removed Mortgage Loan. If substitution is to be made for an adjustable-rate
Mortgage Loan, the substitute Mortgage Loan will have (i) an unpaid principal
balance no greater than the Scheduled Principal Balance of the Removed Mortgage
Loan (after giving effect to the scheduled principal payment due in the month
of substitution on the Removed Mortgage Loan), (ii) a loan-to-value ratio less
than or equal to, and a Mortgage Interest Rate at least equal to, that of the
Removed Mortgage Loan, and (iii) will bear interest based on the same index,
margin and frequency of adjustment as the Removed Mortgage Loan. The repurchase
obligation and the mortgage substitution referred to above will constitute the
sole remedies available to the Certificateholders or the Trustee with respect
to missing or defective documents or breach of the Depositor's or other
representing entity's representations and warranties.
If no custodian is named in the related Pooling and Servicing Agreement, the
Trustee will be authorized to appoint a custodian to maintain possession of the
documents relating to the Mortgage Loans and to conduct the review of such
documents described above. Any custodian so appointed will keep and review such
documents as the Trustee's agent under a custodial agreement.
Optional Purchases
Subject to the provisions of the applicable Pooling and Servicing Agreement,
the Depositor or the Master Servicer may, at such party's option, repurchase
(i) any Mortgage Loan which is in default or as to which default is reasonably
foreseeable if, in the Depositor's or the Master Servicer's judgment, the
related default is not likely to be cured by the borrower or default is not
likely to be averted, up to the limit, if any, specified in such Pooling and
Servicing Agreement and (ii) any Mortgage Loan as to which the originator of
such Mortgage Loan breached a representation or warranty to a Seller regarding
the characteristics of such Mortgage Loan, at a price equal to the unpaid
principal balance thereof plus accrued interest thereon and under the
conditions set forth in the applicable Prospectus Supplement.
Reports to Certificateholders
Unless otherwise specified or modified in the related Pooling and Servicing
Agreement for each Series, the Trustee will prepare and include with each
distribution to Certificateholders of record of such Series a statement setting
forth the following information, if applicable:
(i) the amount of such distribution allocable to principal of the
related Mortgage Loans, separately identifying the aggregate amount of any
principal prepayments included therein, the amount of such distribution
allocable to interest on the related Mortgage Loans and the aggregate
unpaid principal balance of the Mortgage Loans evidenced by each Class
after giving effect to the principal distributions on such Distribution
Date;
(ii) the amount of servicing compensation with respect to the related Trust
Estate and such other customary information as is required to enable
Certificateholders to prepare their tax returns;
(iii) the amount by which the Servicing Fee or Master Servicing Fee, as
applicable, for the related Distribution Date has been reduced by interest
shortfalls due to prepayments;
(iv) the aggregate amount of any Periodic Advances by the Servicer, the
Master Servicer or the Trustee included in the amounts actually distributed to
the Certificateholders;
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(v) to each holder of a Certificate entitled to the benefits of payments
under any form of credit enhancement:
(a) the amounts so distributed under any such form of credit
enhancement on the applicable Distribution Date; and
(b) the amount of coverage remaining under any such form of credit
enhancement, after giving effect to any payments thereunder and other
amounts charged thereto on the Distribution Date;
(vi) in the case of a Class of Certificates with a variable Pass-Through
Rate, such Pass-Through Rate;
(vii) the book value of any collateral acquired by the Trust Estate
through foreclosure or otherwise;
(viii) the unpaid principal balance of any Mortgage Loan as to which the
Servicer has notified the Master Servicer and/or the Trustee that
such Servicer has determined not to foreclose because it believes the
related Mortgaged Property may be contaminated with or affected by
hazardous wastes or hazardous substances; and
(ix) the number and aggregate principal amount of Mortgage Loans one
month, two months and three or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will furnish a report to each Certificateholder of
record at any time during such calendar year such information as required by
the Code and applicable regulations thereunder to enable Certificateholders to
prepare their tax returns. In the event that an election has been made to treat
the Trust Estate (or one or more segregated pools of assets therein) as a
REMIC, the Trustee will be required to prepare and sign the federal and
applicable state and local income tax returns of the REMIC. See "Federal Income
Tax Consequences--Federal Income Tax Consequences for REMIC Certificates--
Administrative Matters."
List of Certificateholders
The Pooling and Servicing Agreement for each Series will require the Trustee
to provide access to the most current list of names and addresses of
Certificateholders of such Series to any group of five or more
Certificateholders who advise the Trustee in writing that they desire to
communicate with other Certificateholders with respect to their rights under
the Pooling and Servicing Agreement or under the Certificates.
Events of Default
Events of Default under the Pooling and Servicing Agreement for each Series
include (i) any failure by the Master Servicer or, if a Servicer has executed
the Pooling and Servicing Agreement, such Servicer, to make a required deposit
which continues unremedied for five days; (ii) any failure by the Master
Servicer or a Servicer that has executed the Pooling and Servicing Agreement
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 30 days after the giving of written notice of such failure to the Master
Servicer or such Servicer by the Trustee, or to the Master Servicer or such
Servicer and the Trustee by the holders of Certificates of such Series having
voting rights allocated to such Certificates ("Voting Interests") aggregating
not less than 25% of the Voting Interests allocated to all Certificates for
such Series; and (iii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain action
by the Master Servicer or a Servicer that has executed the Pooling and
Servicing Agreement indicating its insolvency, reorganization or inability to
pay its obligations.
56
Rights Upon Event of Default
So long as an Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series or holders of
Certificates of such Series evidencing not less than 51% of the Voting
Interests in the Trust Estate for such Series may terminate all of the rights
and obligations of the Master Servicer or a Servicer executing the Pooling and
Servicing Agreement, under the Pooling and Servicing Agreement and in and to
the Mortgage Loans (other than the Master Servicer's or such Servicer's right
to recovery of the aggregate Servicing Fees or Master Servicing Fees, as
applicable, due prior to the date of termination, and other expenses and
amounts advanced pursuant to the terms of the Pooling and Servicing Agreement,
which rights the Master Servicer or such Servicer will retain under all
circumstances), whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer or such Servicer under the
Pooling and Servicing Agreement and will be entitled to monthly compensation
not to exceed the aggregate fees together with the other compensation to which
the Master Servicer or such Servicer is entitled under the Pooling and
Servicing Agreement. In the event that the Trustee is unwilling or unable so to
act, it may select, pursuant to the public bid procedure described in the
applicable 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 $10,000,000 to act
as successor to the Master Servicer or such Servicer, under the provisions of
the Pooling and Servicing Agreement; provided however, that until such a
successor Master Servicer or Servicer is appointed and has assumed the
responsibilities, duties and liabilities of the Master Servicer or such
Servicer under the Pooling and Servicing Agreement, the Trustee shall continue
as the successor to the Master Servicer or such Servicer as described above. In
the event such public bid procedure is utilized, the successor would be
entitled to compensation in an amount equal to the aggregate fees, together
with the other compensation to which the Master Servicer or such Servicer, is
entitled under the Pooling and Servicing Agreement, and the Master Servicer or
such Servicer would be entitled to receive the net profits, if any, realized
from the sale of its rights and obligations under the Pooling and Servicing
Agreement.
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series 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 of such Series, and
holders of Certificates evidencing not less than 25% of the Voting Interests
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon the Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or
powers unless such Certificateholders have offered the Trustee reasonable
security or indemnity against the cost, expenses and liabilities which may be
incurred by the Trustee thereby. Also, the Trustee may decline to follow any
such direction if the Trustee determines that the action or proceeding so
directed may not lawfully be taken or would involve it in personal liability or
be unjustly prejudicial to the non-assenting Certificateholders.
No Certificateholder of a Series, solely by virtue of such holder's status
as a Certificateholder, will have any right under the Pooling and Servicing
Agreement for such Series to institute any proceeding with respect to the
Pooling and Servicing Agreement, unless (i) such holder previously has given to
the Trustee for such Series written notice of default and (ii) the holders of
Certificates evidencing not less than 25% of the Voting Interests for such
Series have made written request upon the Trustee to institute such proceeding
in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity and the Trustee for 60 days has neglected or refused to
institute any such proceeding.
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Amendment
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Servicer(s) (or the Master Servicer, if applicable) and the Trustee without the
consent of the Certificateholders, (i) to cure any ambiguity or mistake, (ii)
to correct or supplement any provision therein that may be inconsistent with
any other provision of the Pooling and Servicing Agreement or the related
Prospectus Supplement, (iii) if a REMIC election has been made, to modify,
eliminate or add to any of its provisions to such extent as shall be necessary
to maintain the qualification of the Trust Estate (or one or more segregated
pools of assets therein) as a REMIC at all times that any Certificates are
outstanding or to avoid or minimize the risk of the imposition of any tax on
the Trust Estate pursuant to the Code that would be a claim against the Trust
Estate, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or desirable to maintain such
qualification or to avoid or minimize the risk of the imposition of any such
tax and such action will not, as evidenced by such opinion of counsel,
adversely affect in any material respect the interests of any
Certificateholder, (iv) to change the timing and/or nature of deposits into the
Certificate Account, provided that such change will not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
any Certificateholder and that such change will not adversely affect the then
current rating assigned to any Certificates, as evidenced by a letter from each
Rating Agency to such effect, (v) if a REMIC election has been made, to add to,
modify or eliminate any provisions therein restricting transfers of Residual
Certificates to certain disqualified organizations described below under
"Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates," (vi) to make certain provisions with
respect to the denominations of, and the manner of payments on, certain Classes
of Certificates initially retained by the Depositor or an affiliate, or (vii)
to make any other provisions with respect to matters or questions arising under
such Pooling and Servicing Agreement that are not inconsistent with the
provisions thereof, provided that such action will not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
the Certificateholders of the related Series provided that such action will not
be considered to adversely affect in any material respect the interests of the
Certificateholders and no opinion of counsel will be required if each Rating
Agency rating the Certificates states in writing that such action will not
result in the downgrading or withdrawal of the ratings then assigned to the
Certificates. The Pooling and Servicing Agreement may also be amended by the
Depositor, the Servicer(s) (or the Master Servicer, if applicable) and the
Trustee with the consent of the holders of Certificates evidencing interests
aggregating not less than 66 2/3% of the Voting Interests evidenced by the
Certificates of each Class affected thereby, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Pooling and Servicing Agreement or of modifying in any manner the rights
of the Certificateholders; provided, however, that no such amendment may (i)
reduce in any manner the amount of, or delay the timing of, any payments
received on or with respect to Mortgage Loans that are required to be
distributed on any Certificate, without the consent of the holder of such
Certificate, (ii) adversely affect in any material respect the interests of the
holders of a Class of Certificates of a Series in a manner other than that set
forth in (i) above without the consent of the holders of Certificates
aggregating not less than 66 2/3% of the Voting Interests evidenced by such
Class, or (iii) reduce the aforesaid percentage of Certificates of any Class,
the holders of which are required to consent to such amendment, without the
consent of the holders of all Certificates of such affected Class then
outstanding. Notwithstanding the foregoing, the Trustee will not consent to any
such amendment if such amendment would subject the Trust Estate (or any
segregated pool of assets therein) to tax or, if a REMIC election has been
made, cause the Trust Estate (or any segregated pool of assets therein) to fail
to qualify as a REMIC.
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Termination; Optional Purchase of Mortgage Loans
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate on the Distribution Date following the final
payment or other liquidation of the last Mortgage Loan subject thereto and the
disposition of all property acquired upon foreclosure of any such Mortgage
Loan. In no event, however, will the trust created by the Pooling and Servicing
Agreement continue beyond the expiration of 21 years from the death of the last
survivor of certain persons named in such Pooling and Servicing Agreement. For
each Series of Certificates, the Trustee will give written notice of
termination of the Pooling and Servicing Agreement to each Certificateholder,
and the final distribution will be made only upon surrender and cancellation of
the Certificates at an office or agency appointed by the Depositor and
specified in the notice of termination.
If so provided in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the Depositor or such other party as is specified in the applicable
Prospectus Supplement, to purchase from the Trust Estate for such Series all
remaining Mortgage Loans at the time and price specified in such Prospectus
Supplement. In the event that such party has caused the related Trust Estate
(or any segregated pool of assets therein) to be treated as a REMIC, any such
purchase will be effected only pursuant to either (a) a "clean up call" as
defined in Treasury Regulations Section 1.860G-2(j) or (b) a "qualified
liquidation" as defined in Code Section 860F(a)(4)(A). Any qualified
liquidation will effect early retirement of the Certificates of that Series,
but the right so to purchase may be exercised only after the aggregate
principal balance of the Mortgage Loans for such Series at the time of purchase
is less than a specified percentage, not exceeding 10%, of the aggregate
principal balance at the Cut-Off Date for the Series, or after the date set
forth in the applicable Prospectus Supplement. A clean up call will result in
the early retirement of one or more Classes of Certificates as specified in the
related Prospectus Supplement. Such a clean up call may be effected only when
the outstanding principal balance of each Class to be redeemed is 10% or less
of the original principal balance of such Class.
The Trustee
The Trustee under each Pooling and Servicing Agreement (the "Trustee") will
be named in the applicable Prospectus Supplement. The commercial bank or trust
company serving as Trustee may have normal banking relationships with the
Depositor or any of its affiliates.
The Trustee generally will be responsible under each Pooling and Servicing
Agreement for providing general administrative services for the Trust Estate
for any such Series, including, among other things, (i) monitoring the amounts
on deposit in various trust accounts; (ii) calculation of the amounts payable
to Certificateholders on each Distribution Date; (iii) preparation of federal
and applicable state and local tax and information returns; (iv) preparation of
reports, if any, required under the Securities and Exchange Act of 1934, as
amended; (v) maintaining any mortgage pool insurance policy, mortgagor
bankruptcy bond, special hazard insurance policy or other form of credit
enhancement that may be required with respect to any Series; and (vi) making
Periodic Advances on the Mortgage Loans to the limited extent described under
"Servicing of the Mortgage Loans--Periodic Advances and Limitations Thereon,"
if such amounts are not advanced by a Servicer or the Master Servicer.
The Trustee may resign at any time, in which event the Master Servicer or,
if there is no Master Servicer, the Servicer(s) will be obligated to appoint a
successor trustee. The Master Servicer or, if there is no Master Servicer, the
Servicer(s) may also remove the Trustee if the Trustee ceases to be eligible to
act as Trustee under the Pooling and Servicing Agreement, if the Trustee
becomes insolvent or in order to change the situs of the Trust Estate for state
tax reasons. Upon becoming aware of such circumstances,
59
the Master Servicer or, if there is no Master Servicer, the Servicer(s) will
become obligated to appoint a successor trustee. The Trustee may also be
removed at any time by the holders of Certificates evidencing not less than 50%
of the Voting Interests in the Trust Estate, except that any Certificate
registered in the name of the Depositor or any affiliate thereof will not be
taken into account in determining whether the requisite Voting Interest in the
Trust Estate necessary to effect any such removal has been obtained. Any
resignation and removal of the Trustee, and the appointment of a successor
trustee, will not become effective until acceptance of such appointment by the
successor trustee. The Trustee, and any successor trustee, must have a combined
capital and surplus of at least $50,000,000, or be a member of a bank holding
system, the aggregate combined capital and surplus of which is at least
$50,000,000, provided that the Trustee's and any such successor trustee's
separate capital and surplus shall at all times be at least the amount
specified in Section 310(a)(2) of the Trust Indenture Act of 1939, as amended,
and will be subject to supervision or examination by federal or state
authorities.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the security for the
Mortgage Loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage
Loans.
General
The Mortgage Loans will be secured by either first mortgages, first deeds of
trust or similar security devices creating a first lien, 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. There
are two parties to a mortgage: the mortgagor, who is the borrower (or, in the
case of a Mortgage Loan secured by a property that has been conveyed to an
inter vivos revocable trust, the settlor of such trust); and the mortgagee, who
is the lender. In a mortgage instrument state, 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: a
borrower called the trustor (similar to a mortgagor), a lender called the
beneficiary (similar to a mortgagee), and a third-party grantee called the
trustee. Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale, to the
trustee to secure payment of the loan. The trustee's authority under a deed of
trust and the mortgagee's authority under a mortgage are governed by the
express provisions of the deed of trust or mortgage, applicable law, and, in
some cases, with respect to the deed of trust, the directions of the
beneficiary.
Foreclosure
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 of 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.
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Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place and,
in most states, published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest of
record in the property.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at 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 obtaining hazard insurance and making such repairs at its
own expense as are necessary to render the property suitable for sale. The
lender commonly will obtain the services of a real estate broker and pay the
broker a commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of mortgage insurance proceeds, if any, or by judicial action against
the borrower for the deficiency, if such action is permitted by law. See "--
Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders" below.
Foreclosure on Shares of Cooperatives
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the cooperative's certificate of incorporation and by-laws, as well as
in the proprietary lease or occupancy agreement, and may be canceled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such tenant-
stockholder. The proprietary lease or occupancy agreement generally permits the
cooperative to terminate such lease or agreement in the event an obligor fails
to make payments or defaults in the performance of covenants required
thereunder. Typically, the lender and the cooperative enter into a recognition
agreement which establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the tenant-
stockholder.
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The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited by the agreement in any rights it may have to dispossess the
tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a foreclosure sale has been conducted in a "commercially reasonable"
manner will depend on the facts in each case. In determining commercial
reasonableness, a court will look to the notice given the debtor and the
method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the tenant-
stockholder is generally responsible for the deficiency. See "--Anti-Deficiency
Legislation, the Bankruptcy Code and Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust and/or foreclosure of
a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
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 delay the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to 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, the Bankruptcy Code and Other Limitations on
Lenders
Certain states have imposed statutory prohibitions which 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
62
or mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former borrower equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following
a judicial sale to the excess of the outstanding debt over the fair market
value of the property at the time of public sale. The purpose of these statutes
is generally 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 judicial sale.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. Some courts have interpreted Section 9-504
of the UCC to prohibit a deficiency award unless the creditor establishes that
the sale of the collateral (which, in the case of a Mortgage Loan secured by
shares of a cooperative, would be such shares and the related proprietary lease
or occupancy agreement) was conducted in a commercially reasonable manner.
A Servicer generally will not be required under the Pooling and Servicing
Agreement or applicable Underlying Servicing Agreement to pursue deficiency
judgments on the Mortgage Loans even if permitted by law.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), and state laws
affording relief to debtors may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay, an action, the court may be
reluctant to take, particularly if the debtor has the prospect of restructuring
his or her debts and the mortgage collateral is not deteriorating in value. The
delay and the consequences thereof caused by such automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by
a mortgage on the property) may stay a senior lender from taking action to
foreclose.
A homeowner may file for relief under the Bankruptcy Code under any of three
different chapters of the Bankruptcy Code. Under Chapter 7, the assets of the
debtor are liquidated and a lender secured by a lien may "bid in" (i.e., bid up
to the amount of the debt) at the sale of the asset. See "--Foreclosure." A
homeowner may also file for relief under Chapter 11 of the Bankruptcy Code and
reorganize his or her debts through his or her reorganization plan.
Alternatively, a homeowner may file for relief under Chapter 13 of the
Bankruptcy Code and address his or her debts in a rehabilitation plan. (Chapter
13 is often referred to as the "wage earner chapter" or "consumer chapter"
because most individuals seeking to restructure their debts file for relief
under Chapter 13 rather than Chapter 11).
The Bankruptcy Code permits a mortgage loan that is secured by property that
does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value
63
is less than the amount due on the loan, thereby leaving the lender as a
general unsecured creditor for the difference between the value of the
collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may
include a reduction in the amount of each scheduled payment, which reduction
may result from a reduction in the rate of interest, an alteration of the
repayment schedule, an extension of the final maturity date, and/or a reduction
in the outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court's approval, a debtor in a case under
Chapter 11 of the Bankruptcy Code may have the power to grant liens senior to
the lien of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default
with respect to a mortgage loan on such debtor's residence by paying arrearages
over a period of time and to deaccelerate and reinstate the original mortgage
loan payment schedule, even though the lender accelerated the loan and a final
judgment of foreclosure had been entered in state court (provided no sale of
the property had yet occurred) prior to the filing of the debtor's petition
under the Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
such term commencing when repayment plan becomes effective, while defaults may
be cured over a longer period of time under a Chapter 11 plan of
reorganization.
Generally, a repayment plan in a case under Chapter 13 and a plan of
reorganization under Chapter 11 may not modify the claim of a mortgage lender
if the borrower elects to retain the property, the property is the borrower's
principal residence and the property is the lender's only collateral. Certain
courts have allowed modifications when the mortgage loan is secured both by the
debtor's principal residence and by collateral that is not "inextricably bound"
to the real property, such as appliances, machinery, or furniture.
The general protection for mortgages secured only by the debtor's principal
residence is not applicable in a case under Chapter 13 if the last payment on
the original payment schedule is due before the final date for payment under
the debtor's Chapter 13 plan (which date could be up to five years after the
debtor emerges from bankruptcy). Under several recently decided cases, the
terms of such a loan can be modified in the manner described above. While these
decisions are contrary to the holding in a prior case by a senior appellate
court, it is possible that the later decisions will become the accepted
interpretation in view of the language of the applicable statutory provision.
If this interpretation is adopted by a court considering the treatment in a
Chapter 13 repayment plan of a Mortgage Loan, it is possible that the Mortgage
Loan could be modified.
State statutes and general principles of equity may also provide a mortgagor
with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of a payment
to the lender. Moreover, the laws of
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certain states also give priority to certain tax and mechanics liens over the
lien of a mortgage. Under the Bankruptcy Code, if the court finds that actions
of the mortgagee have been unreasonable and inequitable, the lien of the
related mortgage may be subordinated to the claims of unsecured creditors.
Bankruptcy reform legislation that was passed by the Senate on September 23,
1998 would have amended the Bankruptcy Code (such amendment, the "TILA
Amendment") to authorize bankruptcy court judges to disallow claims based on
secured debt if the creditor failed to comply with certain provisions of the
federal Truth in Lending Act. As proposed, such provision would apply
retroactively to secured debt incurred by a debtor prior to the date of
effectiveness of such legislation, including the Mortgage Loans. The House bill
and the conference report did not have a similar provision, and Congress
adjourned from its last session without acting on the proposed legislation.
However, such legislation may be reintroduced in the current session. If the
TILA Amendment were to become law, a violation of the Truth in Lending Act with
respect to a Mortgage Loan could result in a total loss with respect to such
loan in a bankruptcy proceeding. Any such violation would be a breach of
representation and warranty of the depositor, and the depositor would be
obligated to repurchase such Mortgage Loan as described herein.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the Mortgage Loans in a trust have been considered by
Congress, and more such proposed legislation may be considered in the future.
No assurance can be given that any particular proposal will or will not be
enacted into law, or that any provision so enacted will not differ materially
from the proposals described above.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Trust-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
Homeowners Protection Act of 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance ("PMI").
The termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. Such
termination provisions govern when a mortgagor may cancel the requirement to
maintain PMI and when the requirement to maintain PMI is automatically
terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced
to 80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. Such disclosure requirements include
notification of the circumstances whereby a mortgagor may cancel PMI, the date
when PMI automatically terminates and servicer contact information. In
addition, HOPA provides that no later than 30 days after cancellation or
termination of PMI, the servicer shall provide written notification that such
PMI is terminated and no further payments are due or payable. Any servicer,
mortgagee or mortgage insurer that violates provisions of HOPA is subject to
possible liability which includes, but is not limited to, actual damages,
statutory damages and reasonable attorney's fees.
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Texas Home Equity Loans
Generally, any "cash-out" refinance or other non-purchase money transaction
(except for certain rate/term refinance loans and certain other narrow
exceptions) secured by a Texas resident's principal residence is subject to the
provisions set forth in Section 50(a)(6) of Article XVI of the Constitution of
Texas (the "Texas Home Equity Laws"). The Texas Home Equity Laws provide for
certain disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure, inadvertent or otherwise, to comply
with any requirement may render the Mortgage Loan unenforceable and/or the lien
on the Mortgaged Property invalid. Because mortgage loans which are subject to
the Texas Home Equity Laws can be foreclosed only pursuant to court order,
rather than non-judicial foreclosure as is available for other types of
mortgage loans in Texas, delays and increased losses may result in connection
with foreclosures of such loans. If a court were to find that any requirement
of the Texas Home Equity Laws was not complied with, the court could refuse to
allow foreclosure to proceed, declare the lien on the Mortgaged Property to be
invalid, and/or require the originating lender or the holder of the note to
forfeit some or all principal and interest of the related Mortgage Loan. Title
insurance generally available on such Mortgage Loans may exclude coverage for
some of the risks described in this paragraph.
Soldiers' and Sailors' Civil Relief Act and Similar Laws
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Mortgage Loan and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans in a Trust Estate. Any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Certificates of the related
Series. Further, the Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
Certain states have enacted comparable legislation which may interfere with or
affect the ability of the Servicer to timely collect payments of principal and
interest on, or to foreclose on, Mortgage Loans of borrowers in such states who
are active or reserve members of the armed services.
Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain
states, environmental contamination on a property may give rise to a lien on
the property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to
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such liens ("Superliens"). In the latter states, the security interest of the
Trustee in a property that is subject to such a Superlien could be adversely
affected. Environmental contamination on a property is likely to have a
negative impact on the value of such property, which may lead to losses on the
related Series of Certificates.
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to contamination on
the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may
held strictly, jointly and severally liable for environmental remediation
and/or damages at those off-site locations. Many states also have laws that are
similar to CERCLA. Liability under CERCLA or under similar state law could
exceed the value of the property itself as well as the aggregate assets of the
property owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on
a secured lender such as the Trust Estate. Under the laws of some states and
under CERCLA, a lender may be liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances on a
mortgaged property if such lender or its agents or employees have "participated
in the management" of the operations of the borrower, even though the
environmental damage or threat was caused by a prior owner or current owner or
operator or other third party. Excluded from CERCLA's definition of "owner or
operator," is a person "who without participating in the management of . . .
[the] facility, holds indicia of ownership primarily to protect his security
interest" (the "secured-creditor exemption"). This exemption for holders of a
security interest such as a secured lender applies only to the extent that a
lender seeks to protect its security interest in the contaminated facility or
property. Thus, if a lender's activities begin to encroach on the actual
management of such facility or property, the lender faces potential liability
as an "owner or operator" under CERCLA. Similarly, when a lender forecloses and
takes title to a contaminated facility or property, the lender may incur
potential CERCLA liability in various circumstances, including among others,
when it holds the facility or property as an investment (including leasing the
facility or property to a third party), fails to market the property in a
timely fashion or fails to properly address environmental conditions at the
property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under certain circumstances
the secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of the
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facility or participated in decisions relating to hazardous waste to be liable
under CERCLA; rather, liability could attach to a lender if its involvement
with the management of the facility were broad enough to support the inference
that the lender had the capacity to influence the borrower's treatment of
hazardous waste. The court added that a lender's capacity to influence such
decisions could be inferred from the extent of its involvement in the
facility's financial management. A subsequent decision by the United States
Court of Appeals for the Ninth Circuit in In re Bergsoe Metal Corp., apparently
disagreeing with, but not expressly contradicting, the Fleet Factors court,
held that a secured lender had no liability absent "some actual management of
the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the secured-
creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
On September 30, 1996 the President signed into law (the Asset Conservation,
Lender Liability and Deposit Insurance Protection Act of 1996 (the "Asset
Conservation Act"). The Asset Conservation Act was intended to clarify the
scope of the secured creditor exemption under both CERCLA and RCRA. The Asset
Conservation Act more clearly defined the kinds of "participation in
management" that would trigger liability under CERCLA and specified certain
activities that would not constitute "participation in management" or otherwise
result in a forfeiture of the secured-creditor exemption prior to foreclosure
or during a workout period. The Asset Conservation Act also clarified the
extent of protection against liability under CERCLA in the event of foreclosure
and authorized certain regulatory clarifications of the scope of the secured-
creditor exemption for purposes of RCRA, similar to the statutory protections
under CERCLA. However, since the courts have not yet had the opportunity to
interpret the new statutory provisions, the scope of the additional protections
offered by the Asset Conservation Act is not fully defined. It also is
important to note that the Asset Conservation Act does not offer complete
protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Estate and occasion a loss to the Trust Estate and to
Certificateholders in certain circumstances. The new secured creditor
amendments to CERCLA, also, would not necessarily affect the potential for
liability in actions by either a state or a private party under other federal
or state laws which may impose liability on "owners or operators" but do not
incorporate the secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to
any mortgaged property prior to the origination of the mortgage loan or prior
to foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, at the
time the Mortgage Loans were originated no such evaluations were required, nor
were any such evaluations required prior to foreclosure or accepting a deed-in-
lieu of foreclosure. Neither the Depositor nor any other entity makes any
representations or warranties or assumes any liability with respect to: the
environmental condition of such Mortgaged Property; the absence, presence or
effect of hazardous wastes or hazardous substances on any Mortgaged Property;
any casualty resulting from the presence or effect of hazardous wastes or
hazardous substances on, near or emanating from such Mortgaged Property; the
impact on Certificateholders of any environmental condition or presence of any
substance on or near such Mortgaged Property; or the compliance of any
Mortgaged Property with any environmental laws, nor is any agent, person or
entity otherwise affiliated with the Depositor authorized or able to make any
such representation, warranty or assumption of liability relative to any
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such Mortgaged Property. See "The Mortgage Loan Programs--Representations and
Warranties" and "Servicing of the Mortgage Loans--Enforcement of "Due-on-Sale"
Clauses; Realization Upon Defaulted Mortgage Loans" above.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of
the maturity of a loan if the borrower transfers its interest in the property.
In recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce such clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn Act") which purports to preempt
state laws which prohibit the enforcement of "due-on-sale" clauses by providing
among other matters, that "due-on-sale" clauses in certain loans (which loans
may include the Mortgage Loans) made after the effective date of the Garn Act
are enforceable, within certain limitations as set forth in the Garn Act and
the regulations promulgated thereunder. "Due-on-sale" clauses contained in
mortgage loans originated by federal savings and loan associations or federal
savings banks are fully enforceable pursuant to regulations of the Office of
Thrift Supervision ("OTS"), as successor to the Federal Home Loan Bank Board
("FHLBB"), which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to
preemptive regulations of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Garn Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by constitutional provision, statute or statewide court decision (the
"Window Period"). Though neither the Garn Act nor the OTS regulations actually
names the Window Period States, FHLMC has taken the position, in prescribing
mortgage loan servicing standards with respect to mortgage loans which it has
purchased, that the Window Period States were: Arizona, Arkansas, California,
Colorado, Georgia, Iowa, Michigan, Minnesota, New Mexico, Utah and Washington.
Under the Garn Act, unless a Window Period State took action by October 15,
1985, the end of the Window Period, to further regulate enforcement of "due-on-
sale" clauses in Window Period Loans, "due-on-sale" clauses would become
enforceable even in Window Period Loans. Five of the Window Period States
(Arizona, Minnesota, Michigan, New Mexico and Utah) have taken actions which
restrict the enforceability of "due-on-sale" clauses in Window Period Loans
beyond October 15, 1985. The actions taken vary among such states.
By virtue of the Garn Act, a Servicer may generally be permitted to
accelerate any conventional Mortgage Loan which contains a "due-on-sale" clause
upon transfer of an interest in the property subject to the mortgage or deed of
trust. With respect to any Mortgage Loan secured by a residence occupied or to
be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including (i) the granting of a leasehold interest
which has a term of three years or less and which does not contain an option to
purchase; (ii) a transfer to a relative resulting from the death of a borrower,
or a transfer where the spouse or children become an owner of the property in
each case where the transferee(s) will occupy the property; (iii) a transfer
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse becomes
an owner of the property; (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed); (v) a transfer by
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devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety; (vi) a transfer into an inter vivos trust in which the borrower
is the beneficiary and which does not relate to a transfer of rights of
occupancy; and (vii) other transfers as set forth in the Garn Act and the
regulations thereunder. Regulations promulgated under the Garn Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause. The extent of the effect of the Garn Act on
the average lives and delinquency rates of the Mortgage Loans cannot be
predicted. See "Prepayment and Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The OTS as successor
to the FHLBB is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to reimpose interest rate limits by adopting before April 1, 1983, a law
or constitutional provision which expressly rejects application of the federal
law. Fifteen states have adopted laws reimposing or reserving the right to
reimpose interest rate limits. In addition, even where Title V is not so
rejected, any state is authorized to adopt a provision limiting certain other
loan charges.
The Depositor or other entity specified in the related Prospectus Supplement
will represent and warrant in the Pooling and Servicing Agreement to the
Trustee for the benefit of Certificateholders that all Mortgage Loans are
originated in full compliance with applicable state laws, including usury laws.
See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans to the
Trustee."
Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan
is prepaid. Under the Pooling and Servicing Agreement, late charges and
prepayment fees (to the extent permitted by law and not waived by the Servicer)
will be retained by the Servicer as additional servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, such
as the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under the deeds of trust receive notices in addition to
the statutorily-prescribed minimum requirements. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust or under a
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mortgage having a power of sale does not involve sufficient state action to
afford constitutional protections to the borrower.
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FEDERAL INCOME TAX CONSEQUENCES
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The following discussion represents the opinion of Cadwalader, Wickersham &
Taft as to the material federal income tax consequences of the purchase,
ownership and disposition of Certificates. The discussion below does not
purport to address all federal income tax consequences that may be applicable
to particular categories of investors, some of which may be subject to special
rules. The authorities on which this discussion is based are subject to change
or differing interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the Code,
as well as regulations (the "REMIC Regulations") promulgated by the U.S.
Department of the Treasury. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of Certificates.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a Fixed Retained Yield with respect to the Mortgage Loans of a
Series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Estate that does
not include the Fixed Retained Yield. References to a "holder" or
"Certificateholder" in this discussion generally mean the Beneficial Owner of a
Certificate.
Federal Income Tax Consequences for REMIC Certificates
General
With respect to a particular Series of Certificates, an election may be made
to treat the Trust Estate or one or more segregated pools of assets therein as
one or more REMICs within the meaning of Code Section 860D. A Trust Estate or a
portion or portions thereof as to which one or more REMIC elections will be
made will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. With respect to each Series of REMIC Certificates,
Cadwalader, Wickersham & Taft, counsel to the Depositor, has advised the
Depositor that in its opinion, assuming (i) the making of an appropriate
election, (ii) compliance with the Pooling and Servicing Agreement, and (iii)
compliance with any changes in the law, including any amendments to the Code or
applicable Treasury regulations thereunder, each REMIC Pool will qualify as a
REMIC. In such case, the Regular Certificates will be considered to be "regular
interests" in the REMIC Pool and generally will be treated for federal income
tax purposes as if they were newly originated debt instruments, and the
Residual Certificates will be considered to be "residual interests" in the
REMIC Pool. The Prospectus Supplement for each Series of Certificates will
indicate whether one or more REMIC elections with respect to the related Trust
Estate will be made, in which event references to "REMIC" or "REMIC Pool"
herein shall be deemed to refer to each such REMIC Pool.
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same
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proportion that the assets of the REMIC Pool would be treated as "loans . . .
secured by an interest in real property which is . . . residential real
property" within the meaning of Code Section 7701(a)(19)(C)(v) or as other
assets described in Code Section 7701(a)(19)(C). REMIC Certificates held by a
real estate investment trust will constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A), and interest on the Regular Certificates
and income with respect to Residual Certificates will be considered "interest
on obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. If at all times 95% or more of the assets of the REMIC Pool qualify
for each of the foregoing treatments, the REMIC Certificates will qualify for
the corresponding status in their entirety. For purposes of Code Section
856(c)(4)(A), payments of principal and interest on the Mortgage Loans that are
reinvested pending distribution to holders of REMIC Certificates qualify for
such treatment. Regular Certificates held by a financial asset securitization
investment trust will be "permitted assets" within the meaning of Code Section
860L(a).
Where two REMIC Pools are a part of a tiered structure they will be treated
as one REMIC for purposes of the tests described above respecting asset
ownership of more or less than 95%. In addition, if the assets of the REMIC
include Buy-Down Loans, it is possible that the percentage of such assets
constituting "loans . . . secured by an interest in real property which is
. . . residential real property" for purposes of Code Section
7701(a)(19)(C)(v), may be required to be reduced by the amount of the related
Buy-Down Funds. REMIC Certificates held by a regulated investment company will
not constitute "Government securities" within the meaning of Code Section
851(b)(3)(A)(i). REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1). The Small Business Job Protection Act of 1996 (the "SBJPA of 1996")
repealed the reserve method for bad debts of domestic building and loan
associations and mutual savings banks, and thus has eliminated the asset
category of "qualifying real property loans" in former Code Section 593(d) for
taxable years beginning after December 31, 1995. The requirement in the SBJPA
of 1996 that such institutions must "recapture" a portion of their existing bad
debt reserves is suspended if a certain portion of their assets are maintained
in "residential loans" under Code Section 7701(a)(19)(C)(v), but only if such
loans were made to acquire, construct or improve the related real property and
not for the purpose of refinancing. However, no effort will be made to identify
the portion of the Mortgage Loans of any Series meeting this requirement, and
no representation is made in this regard.
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at
all times thereafter, may consist of assets other than "qualified mortgages"
and "permitted investments." The REMIC Regulations provide a safe harbor
pursuant to which the de minimis requirement will be met if at all times the
aggregate adjusted basis of the nonqualified assets is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets. An entity that fails
to meet the safe harbor may nevertheless demonstrate that it holds no more than
a de minimis amount of nonqualified assets. A REMIC Pool also must provide
"reasonable arrangements" to prevent its residual interests from being held by
"disqualified organizations" or agents thereof and must furnish applicable tax
information to transferors or agents that violate this requirement. See "--
Taxation of Residual Certificates--Tax-Related Restrictions on Transfer of
Residual Certificates--Disqualified Organizations."
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A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans, regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC and regular interests in a Financial Asset
Securitization Investment Trust (a "FASIT") within the meaning of Code Section
860L if 95% or more of the value of the assets of the FASIT is at all times
attributable to whole mortgage loans such as the Mortgage Loans. The REMIC
Regulations specify that loans secured by timeshare interests and shares held
by a tenant stockholder in a cooperative housing corporation can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage,
which is any property that would have been treated as a qualified mortgage if
it were transferred to the REMIC Pool on the Startup Day and that is received
either (i) in exchange for any qualified mortgage within a three-month period
thereafter or (ii) in exchange for a "defective obligation" within a two-year
period thereafter. A "defective obligation" includes (i) a mortgage in default
or as to which default is reasonably foreseeable, (ii) a mortgage as to which a
customary representation or warranty made at the time of transfer to the REMIC
Pool has been breached, (iii) a mortgage that was fraudulently procured by the
mortgagor, and (iv) a mortgage that was not in fact principally secured by real
property (but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in clause (iv)
that is not sold or, if within two years of the Startup Day, exchanged, within
90 days of discovery, ceases to be a qualified mortgage after such 90-day
period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC
Pool. A qualified reserve asset is any intangible property held for investment
that is part of any reasonably required reserve maintained by the REMIC Pool to
provide for payments of expenses of the REMIC Pool or amounts due on the
regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from the
assets in such fund for the year is derived from the sale or other disposition
of property held for less than three months, unless required to prevent a
default on the regular interests caused by a default on one or more qualified
mortgages. A reserve fund must be reduced "promptly and appropriately" as
payments on the Mortgage Loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally not held beyond the close of the
third calendar year following the year in which such property is acquired with
an extension that may be granted by the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests
or (ii) a single class of residual interests on which distributions, if any,
are made pro rata. A regular interest is an interest in a REMIC Pool that is
issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified mortgages. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of the total interest, or a qualified variable rate, inverse
variable rate or difference between two fixed or
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qualified variable rates on some or all of the qualified mortgages. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments on
qualified mortgages may be zero. A residual interest is an interest in a REMIC
Pool other than a regular interest that is issued on the Startup Day and that
is designated as a residual interest. An interest in a REMIC Pool may be
treated as a regular interest even if payments of principal with respect to
such interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments,
lower than reasonably expected returns on permitted investments, unanticipated
expenses incurred by the REMIC Pool or prepayment interest shortfalls.
Accordingly, the Regular Certificates of a Series will constitute one or more
classes of regular interests, and the Residual Certificates with respect to
that Series will constitute a single class of residual interests on which
distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, authorizes the Treasury Department
to issue regulations that address situations where failure to meet one or more
of the requirements for REMIC status occurs inadvertently and in good faith,
and disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
Taxation of Regular Certificates
General
In general, interest, original issue discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder"), and principal payments
on a Regular Certificate will be treated as a return of capital to the extent
of the Regular Certificateholder's basis in the Regular Certificate allocable
thereto (other than accrued market discount not previously reported as income).
Regular Certificateholders must use the accrual method of accounting with
regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
Original Issue Discount
Compound Interest Certificates will be, and other classes of Regular
Certificates may be, issued with "original issue discount" within the meaning
of Code Section 1273(a). Holders of any Class of Regular Certificates having
original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
following discussion is based in part on temporary and final Treasury
regulations issued on February 2, 1994, as amended on June 14, 1996, (the "OID
Regulations") under Code Sections 1271 through 1273 and 1275 and in part on the
provisions of the 1986 Act. Regular Certificateholders should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the Regular Certificates. To the
extent such issues are not addressed in such
74
regulations, it is anticipated that the Trustee will apply the methodology
described in the Conference Committee Report to the 1986 Act. No assurance can
be provided that the Internal Revenue Service will not take a different
position as to those matters not currently addressed by the OID Regulations.
Moreover, the OID Regulations include an anti-abuse rule allowing the Internal
Revenue Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under
the anti-abuse rule in the absence of a substantial effect on the present value
of a taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion herein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Certificateholder or by random lot (a "Non-Pro Rata Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over
its "issue price." The issue price of a Class of Regular Certificates offered
pursuant to this Prospectus generally is the first price at which a substantial
amount of such Class is sold to the public (excluding bond houses, brokers and
underwriters). Although unclear under the OID Regulations, it is anticipated
that the Trustee will treat the issue price of a Class as to which there is no
substantial sale as of the issue date or that is retained by the Seller as the
fair market value of that Class as of the issue date. The issue price of a
Regular Certificate also includes any amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate, unless the Regular Certificateholder
elects on its federal income tax return to exclude such amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always includes the original
principal amount of the Regular Certificate, but generally will not include
distributions of interest if such distributions constitute "qualified stated
interest." Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or a qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Certificate. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Certificate, it is possible
that no interest on any Class of Regular Certificates will be treated as
qualified stated interest. However, except as provided in the following three
sentences or in the applicable Prospectus Supplement, because the underlying
Mortgage Loans provide for remedies in the event of default, it is anticipated
that the Trustee will treat interest with respect to the Regular Certificates
as qualified stated interest. Distributions of interest on a Compound Interest
Certificate, or on other Regular Certificates with respect to which deferred
interest will accrue, will not constitute qualified stated interest, in which
case the stated redemption price at maturity of such Regular Certificates
includes all distributions of interest as well as principal thereon. Likewise,
it is anticipated that the Trustee will treat an interest-only Class or a Class
on which interest is substantially disproportionate to its principal amount (a
so-called "super-premium" Class) as having no qualified stated interest. Where
the interval between the issue date and the first Distribution Date on a
Regular Certificate is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts
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determined by multiplying the number of full years (i.e., rounding down partial
years) from the issue date until each distribution in reduction of stated
redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Certificate and the denominator of
which is the stated redemption price at maturity of the Regular Certificate.
The Conference Committee Report to the 1986 Act provides that the schedule of
such distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Certificates.
The Prepayment Assumption with respect to a Series of Regular Certificates will
be set forth in the applicable Prospectus Supplement. Holders generally must
report de minimis original issue discount pro rata as principal payments are
received, and such income will be capital gain if the Regular Certificate is
held as a capital asset. Under the OID Regulations, however, Regular
Certificateholders may elect to accrue all de minimis original issue discount
as well as market discount and market premium, under the constant yield method.
See "--Election to Treat All Interest Under the Constant Yield Method."
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The Trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. With respect to each Regular Certificate, a calculation will be made of
the original issue discount that accrues during each successive full accrual
period (or shorter period from the date of original issue) that ends on the day
before the related Distribution Date on the Regular Certificate. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. Other than
as discussed below with respect to a Non-Pro Rata Certificate, the original
issue discount accruing in a full accrual period would be the excess, if any,
of (i) the sum of (a) the present value of all of the remaining distributions
to be made on the Regular Certificate as of the end of that accrual period, and
(b) the distributions made on the Regular Certificate during the accrual period
that are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Certificate at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, and (iii) the Prepayment Assumption. For these purposes, the
adjusted issue price of a Regular Certificate at the beginning of any accrual
period equals the issue price of the Regular Certificate, increased by the
aggregate amount of original issue discount with respect to the Regular
Certificate that accrued in all prior accrual periods and reduced by the amount
of distributions included in the Regular Certificate's stated redemption price
at maturity that were made on the Regular Certificate in such prior periods.
The original issue discount accruing during any accrual period (as determined
in this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of
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principal payments with respect to certain Classes of Regular Certificates and
either an increase or decrease in the daily portions of original issue discount
with respect to such Regular Certificates.
In the case of a Non-Pro Rata Certificate, it is anticipated that the
Trustee will determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on each
Non-Pro Rata Certificate in a full accrual period would be its allocable share
of the original issue discount with respect to the entire Class, as determined
in accordance with the preceding paragraph. However, in the case of a
distribution in retirement of the entire unpaid principal balance of any Non-
Pro Rata Certificate (or portion of such unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to such Certificate (or
to such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Certificate of
such Class (or the remaining unpaid principal balance of a partially redeemed
Non-Pro Rata Certificate after a distribution of principal has been received)
will be adjusted by reducing the present value of the remaining payments on
such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the unpaid principal balance thereof that was
distributed. The Depositor believes that the foregoing treatment is consistent
with the "pro rata prepayment" rules of the OID Regulations, but with the rate
of accrual of original issue discount determined based on the Prepayment
Assumption for the Class as a whole. Investors are advised to consult their tax
advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under
the constant yield method, as described below under the heading "--Election to
Treat All Interest Under the Constant Yield Method."
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate," or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." A floating rate is
a qualified floating rate if variations in the rate can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds,
where such rate is subject to a fixed multiple that is greater than 0.65 but
not more than 1.35. Such rate may also be increased or decreased by a fixed
spread or subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Certificates may be issued under this Prospectus
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that does not have a variable rate under the foregoing rules, for example, a
Class that bears different rates at different times during the period it is
outstanding such that it is considered significantly "front-loaded" or "back-
loaded" within the meaning of the OID Regulations. It is possible that such a
Class may be considered to bear "contingent interest" within the meaning of the
OID Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to Regular Certificates.
However, if final regulations dealing with contingent interest with respect to
Regular Certificates apply the same principles as the OID Regulations, such
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations for non-contingent debt instruments.
Furthermore, application of such principles could lead to the characterization
of gain on the sale of contingent interest Regular Certificates as ordinary
income. Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Certificate that does not pay interest at a fixed rate
or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such
a rate that is subject to one or more caps or floors, or (ii) bearing one or
more such variable rates for one or more periods, or one or more fixed rates
for one or more periods, and a different variable rate or fixed rate for other
periods, qualifies as a regular interest in a REMIC. Accordingly, unless
otherwise indicated in the applicable Prospectus Supplement, it is anticipated
that the Trustee will treat Regular Certificates that qualify as regular
interests under this rule in the same manner as obligations bearing a variable
rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on such Regular Certificate generally to be determined by assuming
that interest will be payable for the life of the Regular Certificate based on
the initial rate (or, if different, the value of the applicable variable rate
as of the pricing date) for the relevant Class. Unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
such variable interest as qualified stated interest, other than variable
interest on an interest-only or super-premium Class, which will be treated as
non-qualified stated interest includible in the stated redemption price at
maturity. Ordinary income reportable for any period will be adjusted based on
subsequent changes in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
Regular Certificates bearing an interest rate that is a weighted average of the
net interest rates on Mortgage Loans as having qualified stated interest,
except to the extent that initial "teaser" rates cause sufficiently "back-
loaded" interest to create more than de minimis original issue discount. The
yield on such Regular Certificates for purposes of accruing original issue
discount will be a hypothetical fixed-rate based on the fixed rates, in the
case of fixed rate Mortgage Loans, and initial "teaser rates" followed by fully
indexed rates, in the case of adjustable-rate Mortgage Loans. In the case of
adjustable-rate Mortgage Loans, the applicable index used to compute interest
on the Mortgage Loans in effect on the pricing date (or possibly the issue
date) will be deemed to be in effect beginning with the period in which the
first weighted average adjustment date occurring after the issue date occurs.
Adjustments will be made in each accrual period either increasing or decreasing
the amount of ordinary income reportable to reflect the actual Pass-Through
Rate on the Regular Certificates.
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Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either (i) on
the basis of a constant interest rate, or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period
plus the remaining interest as of the end of such period, or in the case of a
Regular Certificate issued with original issue discount, in the ratio of
original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. A purchaser also generally will be
required to treat a portion of any gain on a sale or exchange of the Regular
Certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income as partial distributions
in reduction of the stated redemption price at maturity were received. A
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a
Regular Certificate over the interest distributable thereon. The deferred
portion of the interest expense in any taxable year generally will not exceed
the accrued market discount on the Regular Certificate for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later than
the year in which the related market discount income is recognized or the
Regular Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular Certificateholder
may elect to include market discount in income currently as it accrues on all
market discount instruments acquired by such Regular Certificateholder in that
taxable year or thereafter, in which case the interest deferral rule will not
apply. See "--Election to Treat All Interest Under the Constant Yield Method"
below regarding an alternative manner in which such election may be deemed to
be made.
By analogy to the OID Regulations, market discount with respect to a Regular
Certificate will be considered to be zero if the market discount is less than
0.25% of the remaining stated redemption price at maturity of such Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above in the third paragraph under "--
Original Issue Discount") remaining after the date of purchase. It appears that
de minimis market discount would be reported in a manner similar to de minimis
original issue discount. See "--Original Issue Discount" above. Treasury
regulations implementing the market discount rules have not yet been issued,
and therefore investors should consult their own tax advisors regarding the
application of these rules. Investors should also consult Revenue Procedure 92-
67 concerning the elections to include market discount in income currently and
to accrue market discount on the basis of the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
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Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. Such election will apply to all debt
obligations acquired by the Regular Certificateholder at a premium held in that
taxable year or thereafter, unless revoked with the permission of the Internal
Revenue Service. Final Treasury Regulations issued under Code Section 171 do
not by their terms apply to prepayable debt instruments such as the Regular
Certificates. However, the Conference Committee Report to the 1986 Act
indicates a Congressional intent that the same rules that apply to the accrual
of market discount on installment obligations will also apply to amortizing
bond premium under Code Section 171 on installment obligations such as the
Regular Certificates, although it is unclear whether the alternatives to the
constant interest method described above under "--Market Discount" are
available. Amortizable bond premium will be treated as an offset to interest
income on a Regular Certificate, rather than as a separate deduction item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were
issued on the holder's acquisition date in the amount of the holder's adjusted
basis immediately after acquisition. It is unclear whether, for this purpose,
the initial Prepayment Assumption would continue to apply or if a new
prepayment assumption as of the date of the holder's acquisition would apply. A
holder generally may make such an election on an instrument by instrument basis
or for a class or group of debt instruments. However, if the holder makes this
election with respect to a debt instrument with amortizable bond premium or
with market discount, the holder is deemed to have made elections to amortize
bond premium or to report market discount income currently as it accrues under
the constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own
tax advisors regarding the advisability of making this election.
Treatment of Losses
Regular Certificateholders will be required to report income with respect to
Regular Certificates on the accrual method of accounting, without giving effect
to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such amounts are uncollectible. Accordingly, the holder of a Regular
Certificate, particularly a Subordinated Certificate, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but
may not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectible, the Internal
Revenue Service may take the position that original issue discount must
continue to be accrued in spite of its uncollectibility until the debt
instrument is disposed of in a taxable transaction or becomes worthless in
accordance with the rules of Code Section 166. To the extent the rules of Code
Section 166 regarding bad debts are applicable, it appears that Regular
Certificateholders that are corporations or that otherwise hold the Regular
Certificates in connection with a trade or
80
business should in general be allowed to deduct as an ordinary loss such loss
with respect to principal sustained during the taxable year on account of any
such Regular Certificates becoming wholly or partially worthless, and that, in
general, Regular Certificateholders that are not corporations and do not hold
the Regular Certificates in connection with a trade or business should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any such Regular Certificates becoming
wholly worthless. Although the matter is not free from doubt, such non-
corporate Regular Certificateholders should be allowed a bad debt deduction at
the time the principal balance of such Regular Certificates is reduced to
reflect losses resulting from any liquidated Mortgage Loans. The Internal
Revenue Service, however, could take the position that non-corporate holders
will be allowed a bad debt deduction to reflect such losses only after all the
Mortgage Loans remaining in the Trust Estate have been liquidated or the
applicable Class of Regular Certificates has been otherwise retired. The
Internal Revenue Service could also assert that losses on the Regular
Certificates are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cash flow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against
future positive original issue discount or otherwise upon termination of the
Class. Regular Certificateholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
with respect to such Regular Certificates. While losses attributable to
interest previously reported as income should be deductible as ordinary losses
by both corporate and non-corporate holders, the Internal Revenue Service may
take the position that losses attributable to accrued original issue discount
may only be deducted as capital losses in the case of non-corporate holders who
do not hold the Regular Certificates in connection with a trade or business.
Special loss rules are applicable to banks and thrift institutions, including
rules regarding reserves for bad debts. Such taxpayers are advised to consult
their tax advisors regarding the treatment of losses on Regular Certificates.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate, the
Regular Certificateholder will recognize gain or loss equal to the difference,
if any, between the amount received and its adjusted basis in the Regular
Certificate. The adjusted basis of a Regular Certificate generally will equal
the cost of the Regular Certificate to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Regular Certificate and reduced by amounts included
in the stated redemption price at maturity of the Regular Certificate that were
previously received by the seller, by any amortized premium and by any
recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or short-
term depending on whether the Regular Certificate has been held for the
applicable holding period (as described below). Such gain will be treated as
ordinary income (i) if a Regular Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Regular Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable federal rate
under Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of such transaction,
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed
as investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if its yield on such Regular
Certificate were 110% of the applicable federal
81
rate as of the date of purchase, over (b) the amount of income actually
includible in the gross income of such holder with respect to such Regular
Certificate. In addition, gain or loss recognized from the sale of a Regular
Certificate by certain banks or thrift institutions will be treated as ordinary
income or loss pursuant to Code Section 582(c). Long-term capital gains of
certain non-corporate taxpayers generally are subject to a lower maximum tax
rate (20%) than ordinary income or short-term capital gains of such taxpayers
(39.6%) for property held for more than one year. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital
gains.
Taxation of Residual Certificates
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such
quarter and by allocating such daily portion among the Residual Holders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using the accrual method of
accounting, except, in addition to certain other adjustments, that (i) the
limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC Pool's gross
income includes interest, original issue discount income and market discount
income, if any, on the Mortgage Loans, reduced by amortization of any premium
on the Mortgage Loans, plus income from amortization of issue premium, if any,
on the Regular Certificates, plus income on reinvestment of cash flows and
reserve assets, plus any cancellation of indebtedness income upon allocation of
realized losses to the Regular Certificates. The REMIC Pool's deductions
include interest and original issue discount expense on the Regular
Certificates, servicing fees on the Mortgage Loans, other administrative
expenses of the REMIC Pool and realized losses on the Mortgage Loans. The
requirement that Residual Holders report their pro rata share of taxable income
or net loss of the REMIC Pool will continue until there are no Certificates of
any Class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income
or amortization of premium with respect to the Mortgage Loans, on the one hand,
and the timing of deductions for interest (including original issue discount)
or income from amortization of issue premium on the Regular Certificates on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is
prepaid, the Residual Holder may recognize taxable income without being
entitled to receive a corresponding amount of cash because (i) the prepayment
may be used in whole or in part to make distributions in reduction of principal
on the Regular Certificates and (ii) the discount on the Mortgage Loans which
is includible in income may exceed the deduction allowed upon such
distributions on those Regular Certificates on account of any unaccrued
original issue discount relating to those Regular Certificates. When there is
more than one Class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
Classes of Regular Certificates to the extent that such Classes are not issued
with substantial discount or are issued at a premium. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later maturing Classes
82
of Regular Certificates are made. Taxable income may also be greater in earlier
years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
such a Series of Regular Certificates, may increase over time as distributions
in reduction of principal are made on the lower yielding Classes of Regular
Certificates, whereas, to the extent the REMIC Pool consists of fixed- rate
Mortgage Loans, interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount
of that loan. Consequently, Residual Holders must have sufficient other sources
of cash to pay any federal, state, or local income taxes due as a result of
such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of "excess inclusions" below under "--Limitations on
Offset or Exemption of REMIC Income." The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a Series
of Certificates, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return. In addition, a Residual Holder's taxable income
during certain periods may exceed the income reflected by such Residual Holder
for such periods in accordance with generally accepted accounting principles.
Investors should consult their own accountants concerning the accounting
treatment of their investment in Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Holder and will be decreased (but not below
zero), first, by a cash distribution from the REMIC Pool and, second, by the
amount of loss of the REMIC Pool reportable by the Residual Holder. Any loss
that is disallowed on account of this limitation may be carried over
indefinitely with respect to the Residual Holder as to whom such loss was
disallowed and may be used by such Residual Holder only to offset any income
generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. This recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under "--Taxation of REMIC Income," the period of time over
which such issue price is effectively amortized may be longer than the economic
life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of a residual interest to
induce the transferee to acquire the interest, and Residual Holders should
consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of its basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income
83
otherwise reportable by such holder. The REMIC Regulations currently in effect
do not so provide. See "--Treatment of Certain Items of REMIC Income and
Expense" and "Market Discount" below regarding the basis of Mortgage Loans to
the REMIC Pool and "--Sale or Exchange of a Residual Certificate" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
Treatment of Certain Items of REMIC Income and Expense
It is anticipated that the Trustee will compute REMIC income and expense in
accordance with the Code and applicable regulations. However, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Trustee makes no representation as to the
specific method that the Trustee will use for reporting income with respect to
the Mortgage Loans and expenses with respect to the Regular Certificates and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Certificates as described above under "--Taxation of Regular Certificates--
Original Issue Discount" and "--Variable Rate Regular Certificates," without
regard to the de minimis rule described therein, and "--Premium."
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of such
market discount would be recognized currently as an item of ordinary income in
a manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "--Taxation of Regular
Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceed their unpaid principal balances, the REMIC Pool will be considered to
have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "--Taxation of Regular Certificates--Premium," a person that holds
a Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Loans originated after September
27, 1985 under the constant yield method. Amortizable bond premium will be
treated as an offset to interest income on the Mortgage Loans, rather than as a
separate deduction item. Because substantially all of the mortgagors on the
Mortgage Loans are expected to be individuals, Code Section 171 will not be
available for premium on Mortgage Loans originated on or prior to September 27,
1985. Premium with respect to such Mortgage Loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
84
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of
the long-term applicable federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code
Section 1274(d), multiplied by (ii) the adjusted issue price of such Residual
Certificate at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Certificate at the beginning of a quarter is
the issue price of the Residual Certificate, plus the amount of such daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Certificate
prior to the beginning of such quarterly period. Accordingly, the portion of
the REMIC Pool's taxable income that will be treated as excess inclusions will
be a larger portion of such income as the adjusted issue price of the Residual
Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on such Residual Holder's return. However,
net operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax
on unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who
are not U.S. Persons (as defined below under "--Tax-Related Restrictions on
Transfer of Residual Certificates--Foreign Investors"), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See "--Taxation of Certain Foreign
Investors--Residual Certificates" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by
the real estate investment trust or regulated investment company could not be
offset by net operating losses of its shareholders, would constitute unrelated
business taxable income for tax-exempt shareholders, and would be ineligible
for reduction of withholding to certain persons who are not U.S. Persons. The
SBJPA of 1996 has eliminated the special rule permitting Section 593
institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from Residual
Certificates that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except with respect to Residual Certificates continuously held by a thrift
institution since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual
Holder is determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a taxable year cannot be less
than the excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to any
excess inclusions. These rules are effective for taxable years beginning after
December 31, 1986, unless a Residual Holder elects to have such rules apply
only to taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the
85
product of (i) the present value of the total anticipated excess inclusions
with respect to such Residual Certificate for periods after the transfer and
(ii) the highest marginal federal income tax rate applicable to corporations.
The REMIC Regulations provide that the anticipated excess inclusions are based
on actual prepayment experience to the date of the transfer and projected
payments based on the Prepayment Assumption. The present value rate equals the
applicable federal rate under Code Section 1274(d) as of the date of the
transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. Such rate is applied to the anticipated
excess inclusions from the end of the remaining calendar quarters in which they
arise to the date of the transfer. Such a tax generally would be imposed on the
transferor of the Residual Certificate, except that where such transfer is
through an agent (including a broker, nominee or other middleman) for a
Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Certificate would in no event be liable for
such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that such affidavit is false. The tax also may be waived by
the Internal Revenue Service if the Disqualified Organization promptly disposes
of the Residual Certificate and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Certificate
is actually held by the Disqualified Organization.
In addition, if a Pass-Through Entity (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the Pass-
Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the electing
large partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed upon a Pass-Through Entity by Section 860E(c) of
the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "Disqualified Organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
is not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis, and (iii) an "electing large partnership"
means any partnership having more than 100 members during the preceding tax
year (other than certain service partnerships and commodity pools), which elect
to apply simplified reporting provisions under the Code. Except as may be
provided in Treasury regulations,
86
any person holding an interest in a Pass-Through Entity as a nominee for
another will, with respect to such interest, be treated as a Pass-Through
Entity.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee furnishes to the
Depositor and the Trustee an affidavit providing its taxpayer identification
number and stating that such transferee is the beneficial owner of the Residual
Certificate and is not a Disqualified Organization and is not purchasing such
Residual Certificate on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof) and (ii) the transferor provides a
statement in writing to the Depositor and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation of
these transfer restrictions will be null and void and will vest no rights in
any purported transferee. Each Residual Certificate with respect to a Series
will bear a legend referring to such restrictions on transfer, and each
Residual Holder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling and Servicing Agreement
required under the Code or applicable Treasury regulations to effectuate the
foregoing restrictions. Information necessary to compute an applicable excise
tax must be furnished to the Internal Revenue Service and to the requesting
party within 60 days of the request, and the Seller or the Trustee may charge a
fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a noneconomic residual
interest (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person, as defined below under "--Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual
interest in a REMIC (including a residual interest with a positive value at
issuance) is a "noneconomic residual interest" unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest federal corporate income tax rate
in effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes on each excess
inclusion. The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "--Disqualified
Organizations." The REMIC Regulations explain that a significant purpose to
impede the assessment or collection of tax exists if the transferor, at the
time of the transfer, either knew or should have known that the transferee
would be unwilling or unable to pay taxes due on its share of the taxable
income of the REMIC. A safe harbor is provided if (i) the transferor conducted,
at the time of the transfer, a reasonable investigation of the financial
condition of the transferee and found that the transferee historically had paid
its debts as they came due and found no significant evidence to indicate that
the transferee would not continue to pay its debts as they came due in the
future, and (ii) the transferee represents to the transferor that it
understands that, as the holder of the non-economic residual interest, the
transferee may incur tax liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due. The Pooling and Servicing
Agreement with respect to each Series of Certificates will require the
transferee of a Residual Certificate to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading "--
Disqualified Organizations."
87
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a U.S. Person (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value
of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (ii) the transferor reasonably expects that
the transferee will receive sufficient distributions from the REMIC Pool at or
after the time at which the excess inclusions accrue and prior to the end of
the next succeeding taxable year for the accumulated withholding tax liability
to be paid. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation or
partnership (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise) created or organized in or under the laws of
the United States, any state or the District of Columbia, including an entity
treated as a corporation or partnership for federal income tax purposes, an
estate that is subject to United States federal income tax regardless of its
source, or a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust, and one or more such
U.S. Persons have the authority to control all substantial decisions of such
trust (or, to the extent provided in applicable Treasury regulations, certain
trusts in existence on August 20, 1996 which are eligible to elect to be
treated as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Basis and Losses") of such
Residual Holder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Holder will have taxable income to the extent that any cash
distribution to it from the REMIC Pool exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC Pool may be treated as a sale or exchange of a Residual Holder's
Residual Certificate, in which case, if the Residual Holder has an adjusted
basis in its Residual Certificate remaining when its interest in the REMIC Pool
terminates, and if it holds such Residual Certificate as a capital asset under
Code Section 1221, then it will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii) in
the case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain
88
or loss recognized from the sale of a Residual Certificate or termination of
the REMIC Pool by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Internal Revenue Service has issued final regulations (the "Mark to
Market Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to
the extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark-to-market requirement, a Residual Certificate is not treated as a
security and thus may not be marked to market. The Mark to Market Regulations
apply to all Residual Certificates acquired on or after January 4, 1995.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be
taxed directly to the REMIC Pool at a 100% rate. Prohibited transactions
generally include (i) the disposition of a qualified mortgage other than for
(a) substitution within two years of the Startup Day for a defective
(including a defaulted) obligation (or repurchase in lieu of substitution of a
defective (including a defaulted) obligation at any time) or for any qualified
mortgage within three months of the Startup Day, (b) foreclosure, default, or
imminent default of a qualified mortgage, (c) bankruptcy or insolvency of the
REMIC Pool, or (d) a qualified (complete) liquidation, (ii) the receipt of
income from assets that are not the type of mortgages or investments that the
REMIC Pool is permitted to hold, (iii) the receipt of compensation for
services, or (iv) the receipt of gain from disposition of cash flow
investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv) of the preceding sentence, it is not a prohibited transaction to
sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional prepayment of the remaining principal balance of a
Class of Regular Certificates to save administrative costs when no more than a
small percentage of the Certificates is outstanding). The REMIC Regulations
indicate that the modification of a qualified mortgage generally will not be
treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a due-
on-sale or due-on-encumbrance clause, or the conversion of an interest rate by
a mortgagor pursuant to the terms of a convertible adjustable rate Mortgage
Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during
the three months following the Startup Day, (ii) made to a qualified reserve
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fund by a Residual Holder, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted in Treasury regulations yet to be issued. It is not anticipated that
there will be any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period not exceeding the close of the third
calendar year after the year in which the REMIC Pool acquired such property,
with a possible extension. Net income from foreclosure property generally means
gain from the sale of a foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated
that the REMIC Pool will have any taxable net income from foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC Pool's final tax return a date on which such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC Pool will not be subject to the prohibited transaction
rules on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims) to holders of Regular Certificates and
Residual Holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among
other things, items of REMIC income, gain, loss, deduction, or credit in a
unified administrative proceeding. A Servicer or the Master Servicer will be
obligated to act as "tax matters person," as defined in applicable Treasury
regulations, with respect to the REMIC Pool, in its capacity as either Residual
Holder or agent of the Residual Holders. If the Code or applicable Treasury
regulations do not permit a Servicer or the Master Servicer, as applicable, to
act as tax matters person in its capacity as agent of the Residual Holders, the
Residual Holder chosen by the Residual Holders or such other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $128,950 for 2000 ($64,475 in the
case of a married individual filing a separate return) (subject to adjustment
for inflation
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in subsequent years), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it
holds in another REMIC. Such investors who hold REMIC Certificates either
directly or indirectly through certain pass-through entities may have their pro
rata share of such expenses allocated to them as additional gross income, but
may be subject to such limitation on deductions. In addition, such expenses are
not deductible at all for purposes of computing the alternative minimum tax,
and may cause such investors to be subject to significant additional tax
liability. Temporary Treasury regulations provide that the additional gross
income and corresponding amount of expenses generally are to be allocated
entirely to the holders of Residual Certificates in the case of a REMIC Pool
that would not qualify as a fixed investment trust in the absence of a REMIC
election. However, such additional gross income and limitation on deductions
will apply to the allocable portion of such expenses to holders of Regular
Certificates, as well as holders of Residual Certificates, where such Regular
Certificates are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. Unless indicated otherwise in the
applicable Prospectus Supplement, all such expenses will be allocable to the
Residual Certificates. In general, such allocable portion will be determined
based on the ratio that a REMIC Certificateholder's income, determined on a
daily basis, bears to the income of all holders of Regular Certificates and
Residual Certificates with respect to a REMIC Pool. As a result, individuals,
estates or trusts holding REMIC Certificates (either directly or indirectly
through a grantor trust, partnership, S corporation, REMIC or certain other
pass-through entities described in the foregoing temporary Treasury
regulations) may have taxable income in excess of the interest income at the
pass-through rate on Regular Certificates that are issued in a single class or
otherwise consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Certificates.
Taxation of Certain Foreign Investors
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from
such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Certificate is a Non-U.S. Person, and the Non-U.S. Person provides the Trustee,
or the person who would otherwise be required to withhold tax from such
distributions under Code Section 1441 or 1442, with the appropriate Internal
Revenue Service form establishing the applicability of either of these two
exemptions. If such statement, or any other required statement, is not
provided, 30% withholding will apply unless reduced or eliminated pursuant to
an applicable tax treaty or unless the interest on the Regular Certificate is
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Person. In the latter case, such Non-U.S. Person will
be subject to United States federal income tax at regular rates. Investors who
are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning a Regular Certificate. The term
"Non-U.S. Person" means any person who is not a U.S. Person.
Final Treasury regulations (the "New Regulations"), provide alternative
methods of satisfying the beneficial ownership certification requirement
described above effective January 1, 2001. The New
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Regulations provide for a new series of withholding certificates that can be
used at present and must be used for all payments after December 31, 2000. The
New Regulations would require, in the case of Regular Certificates held by a
foreign partnership, that (x) the certification described above be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number in certain circumstances. A look-through rule would apply in the case of
tiered partnerships. Non-U.S. Persons should consult their own tax advisors
concerning the application of the certification requirements in the New
Regulations.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Certificates" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Estate or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Certificate relates, consists of obligations
issued in "registered form" within the meaning of Code Section 163(f)(1).
Generally, Mortgage Loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore, a
Residual Holder will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable
income that constitutes an "excess inclusion." See "--Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income." If the
amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Certificate is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See "--
Taxation of Residual Certificates--Tax-Related Restrictions on Transfer of
Residual Certificates--Foreign Investors" above concerning the disregard of
certain transfers having "tax avoidance potential." Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Certificates.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from distribution
on the Regular Certificates would be refunded by the Internal Revenue Service
or allowed as a credit against the Regular Certificateholder's federal income
tax liability. The New Regulations change certain of the rules relating to
certain presumptions currently available relating to information reporting and
backup withholding. Non-U.S. Persons are urged to contact their own tax
advisors regarding the application to them of backup withholding and
information reporting.
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Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and non-
charitable trusts, and partnerships who are either holders of record of Regular
Certificates or beneficial owners who own Regular Certificates through a broker
or middleman as nominee. All brokers, nominees and all other non-exempt holders
of record of Regular Certificates (including corporations, non-calendar year
taxpayers, securities or commodities dealers, real estate investment trusts,
investment companies, common trust funds, thrift institutions and charitable
trusts) may request such information for any calendar quarter by telephone or
in writing by contacting the person designated in Internal Revenue Service
Publication 938 with respect to a particular Series of Regular Certificates.
Holders through nominees must request such information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and
filed annually with the Internal Revenue Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Holders, furnished annually to holders of
Regular Certificates and filed annually with the Internal Revenue Service
concerning the percentage of the REMIC Pool's assets meeting the qualified
asset tests described above under "Status of REMIC Certificates."
Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made
General
In the event that no election is made to treat a Trust Estate (or a
segregated pool of assets therein) with respect to a Series of Certificates as
a REMIC, the Trust Estate will be classified as a grantor trust under subpart
E, Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no Fixed Retained Yield with respect to the Mortgage
Loans underlying the Certificates of a Series, and where such Certificates are
not designated as "Stripped Certificates," the holder of each such Certificate
in such Series will be treated as the owner of a pro rata undivided interest in
the ordinary income and corpus portions of the Trust Estate represented by its
Certificate and will be considered the beneficial owner of a pro rata undivided
interest in each of the Mortgage Loans, subject to the discussion below under
"--Recharacterization of Servicing Fees." Accordingly, the holder of a
Certificate of a particular Series will be required to report on its federal
income tax return its pro rata share of the entire income from the Mortgage
Loans represented by its Certificate, including interest at the coupon rate on
such Mortgage Loans, original issue discount (if any), prepayment fees,
assumption fees, and late payment charges received by the Servicer, in
accordance with such Certificateholder's method of accounting. A
Certificateholder generally will be able to deduct its share of the Servicing
Fee and all administrative and other expenses of the Trust Estate in accordance
with its method of accounting, provided that such amounts are reasonable
compensation for services rendered to that Trust Estate. However, investors who
93
are individuals, estates or trusts who own Certificates, either directly or
indirectly through certain pass-through entities, will be subject to limitation
with respect to certain itemized deductions described in Code Section 67,
including deductions under Code Section 212 for the Servicing Fee and all such
administrative and other expenses of the Trust Estate, to the extent that such
deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer
will be reduced by the lesser of (i) 3% of the excess, if any, of adjusted
gross income over $128,950 for 2000 ($64,475 in the case of a married
individual filing a separate return) (in each case, as adjusted for inflation
in subsequent years), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result, such investors holding
Certificates, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Certificates with respect to interest at the pass-through rate or as
discount income on such Certificates. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and
may cause such investors to be subject to significant additional tax liability.
Moreover, where there is Fixed Retained Yield with respect to the Mortgage
Loans underlying a Series of Certificates or where the servicing fees are in
excess of reasonable servicing compensation, the transaction will be subject to
the application of the "stripped bond" and "stripped coupon" rules of the Code,
as described below under "--Stripped Certificates" and "--Recharacterization of
Servicing Fees," respectively.
Tax Status
Cadwalader, Wickersham & Taft has advised the Depositor that, except as
described below with respect to Stripped Certificates:
(i) A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property which is
. . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Certificate is of the type described in such
section of the Code.
(ii) A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Trust
Estate consist of qualified assets, and interest income on such assets will
be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
(iii) A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Estate consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
(iv) A Certificate owned by a financial asset securitization investment
trust will be considered to represent "permitted assets" within the
meanings of Section 860L(c) to the extent that the assets of the related
Trust Estate consist of "debt instruments" within the meaning of Code
Section 860L(c)(1)(B).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in clauses 1 and 2 of the immediately
preceding paragraph. There is indirect authority supporting treatment of an
investment in a Buy-Down Loan as entirely secured by real property if the fair
market value of the real property securing the loan exceeds the principal
amount of the loan at the time of issuance or acquisition, as the case may be.
There is no assurance that the treatment
94
described above is proper. Accordingly, Certificateholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Certificateholder's investment for federal income tax
purposes.
Premium and Discount
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium
The treatment of premium incurred upon the purchase of a Certificate will be
determined generally as described above under "--Federal Income Tax
Consequences for REMIC Certificates--Taxation of Residual Certificates--
Treatment of Certain Items of REMIC Income and Expense--Premium."
Original Issue Discount
The original issue discount rules of Code Sections 1271 through 1275 will be
applicable to a Certificateholder's interest in those Mortgage Loans as to
which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible
by the borrower under applicable Code provisions or, under certain
circumstances, by the presence of "teaser" rates on the Mortgage Loans. See "--
Stripped Certificates" below regarding original issue discount on Stripped
Certificates.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if such Mortgage Loans acquired
by a Certificateholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
Market Discount
Certificateholders also will be subject to the market discount rules to the
extent that the conditions for application of those sections are met. Market
discount on the Mortgage Loans will be determined and will be reported as
ordinary income generally in the manner described above under "--Federal Income
Tax Consequences for REMIC Certificates--Taxation of Regular Certificates--
Market Discount," except that the ratable accrual methods described therein
will not apply. Rather, the holder will accrue market discount pro rata over
the life of the Mortgage Loans, unless the constant yield method is elected.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual.
95
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither
income nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Certificate, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. Internal
Revenue Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the Mortgage Loans to be treated
under the "stripped bond" rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that
the value of servicing fees in excess of such amounts is not greater than the
value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Certificates," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Certificates, and the original issue discount rules of the
Code would apply to the holder thereof. While Certificateholders would still be
treated as owners of beneficial interests in a grantor trust for federal income
tax purposes, the corpus of such trust could be viewed as excluding the portion
of the Mortgage Loans the ownership of which is attributed to the Servicer, or
as including such portion as a second class of equitable interest. Applicable
Treasury regulations treat such an arrangement as a fixed investment trust,
since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, such a recharacterization should not have any significant effect upon
the timing or amount of income reported by a Certificateholder, except that the
income reported by a cash method holder may be slightly accelerated. See "--
Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Certificates
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale
and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Certificate. In general, the aggregate adjusted basis will
equal the Certificateholder's cost for the Certificate, increased by the amount
of any income previously reported with respect to the Certificate and decreased
by the amount of any losses previously reported with respect to the Certificate
and the amount of any distributions received thereon. Except as provided above
with respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss generally would be capital gain or loss if the Certificate
was held as a capital asset. However, gain on the sale of a Certificate will be
treated as ordinary income (i) if a Certificate is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount
of interest that would have accrued on the Certificateholder's net investment
in the conversion transaction at 120% of the appropriate applicable Federal
rate in effect at the time the taxpayer entered into the transaction minus any
amount previously
96
treated as ordinary income with respect to any prior disposition of property
that was held as a part of such transaction or (ii) in the case of a non-
corporate taxpayer, to the extent such taxpayer has made an election under Code
Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. Long-term capital gains of certain noncorporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income or short-term capital gains of such taxpayers (39.6%) for property held
more than one year. The maximum tax rate for corporations is the same with
respect to both ordinary income and capital gains.
Stripped Certificates
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of Fixed Retained Yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Depositor
or any of its affiliates is treated as having an ownership interest in the
Mortgage Loans to the extent it is paid (or retains) servicing compensation in
an amount greater than reasonable consideration for servicing the Mortgage
Loans (see "--Recharacterization of Servicing Fees" above), and (iii) a Class
of Certificates issued in two or more Classes or subclasses representing the
right to non-pro-rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"--Recharacterization of Servicing Fees." Although not free from doubt, for
purposes of reporting to Stripped Certificateholders, the servicing fees will
be allocated to the Stripped Certificates in proportion to the respective
entitlements to distributions of each Class of Stripped Certificates for the
related period or periods. The holder of a Stripped Certificate generally will
be entitled to a deduction each year in respect of the servicing fees, as
described above under "Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made--General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Seller has been
advised by counsel that (i) the Trust Estate will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and
the OID Regulations. Although it is possible that computations with respect to
Stripped Certificates could be made in one of the ways described below under
"--Taxation of Stripped Certificates--Possible Alternative
97
Characterizations," the OID Regulations state, in general, that two or more
debt instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for OID
purposes, all payments on any Stripped Certificates should be aggregated and
treated as though they were made on a single debt instrument. The Pooling and
Servicing Agreement will require that the Trustee make and report all
computations described below using this aggregate approach, unless substantial
legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or, presumably, at a premium. This treatment
indicates that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations, assuming it is
not an interest-only or super-premium Stripped Certificate. Further, these
final regulations provide that the purchaser of such a Stripped Certificate
will be required to account for any discount as market discount rather than
original issue discount if either (i) the initial discount with respect to the
Stripped Certificate was treated as zero under the de minimis rule, or (ii) no
more than 100 basis points in excess of reasonable servicing is stripped off
the related Mortgage Loans. Any such market discount would be reportable as
described above under "Federal Income Tax Consequences for REMIC Certificates--
Taxation of Regular Certificates--Market Discount," without regard to the de
minimis rule therein, assuming that a prepayment assumption is employed in such
computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt, counsel
has advised the Seller that Stripped Certificates owned by applicable holders
should be considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A), "obligation[s] . . . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A),
and "loans . . . secured by an interest in real property" within the meaning of
Code Section 7701(a)(19)(C)(v), and interest (including original issue
discount) income attributable to Stripped Certificates should be considered to
represent "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), provided that in each case the
Mortgage Loans and interest on such Mortgage Loans qualify for such treatment.
The application of such Code provisions to Buy-Down Loans is uncertain. See "--
Tax Status" above.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "--General," each
Stripped Certificate will be considered to have been issued at an original
issue discount for Federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to the related income. Based in part on the OID Regulations and
the amendments to the original issue discount sections of the Code made by the
1986 Act, the amount of original issue discount required to be included in the
income of a holder of a Stripped Certificate (referred to in this discussion as
a "Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under " Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation as described
above under "--General," the issue price of a Stripped
98
Certificate will be the purchase price paid by each holder thereof, and the
stated redemption price at maturity will include the aggregate amount of the
payments to be made on the Stripped Certificate to such Stripped
Certificateholder, presumably under the Prepayment Assumption, other than
qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis
in such Stripped Certificate to recognize a loss (which may be a capital loss)
equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to prepayable
securities such as the Stripped Certificates. However, if final regulations
dealing with contingent interest with respect to the Stripped Certificates
apply the same principles as the OID Regulations, such regulations may lead to
different timing of income inclusion than would be the case under the OID
Regulations for non-contingent debt instruments. Furthermore, application of
such principles could lead to the characterization of gain on the sale of
contingent interest Stripped Certificates as ordinary income. Investors should
consult their tax advisors regarding the appropriate tax treatment of Stripped
Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "--Federal Income Tax Consequences for REMIC Certificates--
Taxation of Regular Certificates--Sale or Exchange of Regular Certificates."
To the extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser
will be required for federal income tax purposes to accrue and report such
excess as if it were original issue discount in the manner described above. It
is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Stripped Certificateholder other than an original
Stripped Certificateholder should be the Prepayment Assumption or a new rate
based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one Class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes such Classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible
interpretations of the applicable Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of (i) one installment
obligation consisting of such Stripped Certificate's pro rata share of the
payments attributable to principal on each Mortgage Loan and a second
installment obligation consisting of such Stripped Certificate's pro rata
share of the payments attributable to interest on each Mortgage Loan, (ii) as
many stripped bonds or stripped coupons as there are scheduled payments of
principal and/or interest on each Mortgage Loan, or (iii) a separate
installment
99
obligation for each Mortgage Loan, representing the Stripped Certificate's pro
rata share of payments of principal and/or interest to be made with respect
thereto. Alternatively, the holder of one or more Classes of Stripped
Certificates may be treated as the owner of a pro rata fractional undivided
interest in each Mortgage Loan to the extent that such Stripped Certificate, or
Classes of Stripped Certificates in the aggregate, represent the same pro rata
portion of principal and interest on each such Mortgage Loan, and a stripped
bond or stripped coupon (as the case may be), treated as an installment
obligation or contingent payment obligation, as to the remainder. Final
regulations issued on December 28, 1992 regarding original issue discount on
stripped obligations make the foregoing interpretations less likely to be
applicable. The preamble to those regulations states that they are premised on
the assumption that an aggregation approach is appropriate for determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis, and solicits comments on appropriate rules for aggregating stripped
bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, Stripped
Certificateholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Certificates for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described above)
as is necessary to enable such Certificateholders to prepare their federal
income tax returns. Such information will include the amount of original issue
discount accrued on Certificates held by persons other than Certificateholders
exempted from the reporting requirements. The amount required to be reported by
the Trustee may not be equal to the proper amount of original issue discount
required to be reported as taxable income by a Certificateholder, other than an
original Certificateholder that purchased at the issue price. In particular, in
the case of Stripped Certificates, unless provided otherwise in the applicable
Prospectus Supplement, such reporting will be based upon a representative
initial offering price of each Class of Stripped Certificates. The Trustee will
also file such original issue discount information with the Internal Revenue
Service. If a Certificateholder fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Certificateholder has not reported all interest and dividend income required to
be shown on his federal income tax return, 31% backup withholding may be
required in respect of any reportable payments, as described above under "--
Federal Income Tax Consequences for REMIC Certificates--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other non-U.S. persons ("foreign
persons") generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount recognized by the Certificateholder on the sale
or exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a foreign person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under "--
Federal Income Tax Consequences for REMIC Certificates--Taxation of Certain
Foreign Investors--Regular Certificates."
100
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ERISA CONSIDERATIONS
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General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans and arrangements to which they apply and on those persons who are
fiduciaries with respect to such employee benefit plans and arrangements. The
following is a general discussion of such requirements, and certain applicable
exceptions to and administrative exemptions from such requirements. For
purposes of this discussion, employee benefit plans and arrangements to which
both ERISA and the Code apply are referred to as "ERISA Plans." An individual
retirement account established under Code Section 408 (an "IRA") is an ERISA
Plan if the IRA is endorsed by or contributed to by the IRA participant's
employer or employee organization. Other IRAs, as well as certain employee
benefit plans covering only self-employed individuals (collectively, "Non-ERISA
Plans"), are not considered ERISA Plans, but such Non-ERISA Plans are subject
to ERISA-like requirements as well as the prohibited transaction provisions of
the Code. Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33)
of ERISA) (collectively, "Exempt Plans") are exempt from the provisions of
Title I of ERISA and the prohibited transaction provisions of the Code.
Accordingly, Exempt Plans also are not considered ERISA Plans, but such Exempt
Plans may be subject to the provisions and special requirements of other
applicable federal, state and local law. Exempt Plans, ERISA Plans and Non-
ERISA Plans are collectively referred to as "Benefit Plans."
Before purchasing any Certificates, an ERISA Plan fiduciary should consult
with its counsel and determine whether there exists any prohibition to such
purchase under the requirements of ERISA or the Code, whether prohibited
transaction exemptions such as PTE 83-1 or any individual administrative
exemption (as described below) applies, including whether the appropriate
conditions set forth therein would be met, or whether any statutory prohibited
transaction exemption is applicable, and further should consult the applicable
Prospectus Supplement relating to such Series of Certificates.
Certain Requirements Under ERISA and the Code
General
In accordance with ERISA's general fiduciary standards, before investing in
a Certificate, an ERISA Plan fiduciary should determine whether to do so is
permitted under the governing ERISA Plan instruments and is appropriate for the
ERISA Plan in view of its overall investment policy and the composition and
diversification of its portfolio. An ERISA Plan fiduciary should especially
consider the ERISA requirement of investment prudence and the sensitivity of
the return on the Certificates to the rate of principal repayments (including
prepayments) on the Mortgage Loans, as discussed in "Prepayment and Yield
Considerations" herein.
Parties in Interest/Disqualified Persons
Other provisions of ERISA (and corresponding provisions of the Code)
prohibit certain transactions involving the assets of an ERISA Plan and persons
who have certain specified relationships to the ERISA Plan (so-called "parties
in interest" within the meaning of ERISA or "disqualified persons" within the
meaning of the Code). The Depositor, the Master Servicer, any Servicer or the
Trustee or certain affiliates thereof might be considered or might become
"parties in interest" or "disqualified persons" with respect to an ERISA Plan.
If so, the acquisition or holding of Certificates by or on behalf of such ERISA
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an administrative exemption described
below or some other exemption is available.
101
Special caution should be exercised before the assets of an ERISA Plan
(including assets that may be held in an insurance company's separate or
general accounts where assets in such accounts may be deemed plan assets for
purposes of ERISA) are used to purchase a Certificate if, with respect to such
assets, the Depositor, any Servicer, the Master Servicer or the Trustee or an
affiliate thereof either: (a) has investment discretion with respect to the
investment of such assets of such ERISA Plan; or (b) has authority or
responsibility to give, or regularly gives, investment advice with respect to
such assets for a fee and pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect to
such assets and that such advice will be based on the particular investment
needs of the ERISA Plan.
Delegation of Fiduciary Duty
Further, if the assets included in a Trust Estate were deemed to constitute
assets of an ERISA Plan, it is possible that an ERISA Plan's investment in the
Certificates might be deemed to constitute a delegation, under ERISA, of the
duty to manage plan assets by the fiduciary deciding to invest in the
Certificates, and certain transactions involved in the operation of the Trust
Estate might be deemed to constitute prohibited transactions under ERISA and
the Code. Neither ERISA nor the Code define the term "plan assets."
The U.S. Department of Labor (the "Department") has issued regulations (the
"Regulations") concerning whether or not an ERISA Plan's assets would be deemed
to include an interest in the underlying assets of an entity (such as a Trust
Estate) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the ERISA Plan acquires an "equity
interest" (such as a Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
ERISA Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the assets of a
Trust Estate. However, it cannot be predicted in advance nor can there be any
continuing assurance whether such exceptions may be met, because of the factual
nature of certain of the rules set forth in the Regulations. For example, one
of the exceptions in the Regulations states that the underlying assets of an
entity will not be considered "plan assets" if less than 25% of the value of
all classes of equity interests are held by "benefit plan investors," which
term is defined to include ERISA Plans, Non-ERISA Plans and Exempt Plans and
any entity whose assets include "plan assets" by reason of benefit plan
investments in such entity, but this exception is tested immediately after each
acquisition of an equity interest in the entity whether upon initial issuance
or in the secondary market.
Applicability to Non-ERISA Plans
Since Non-ERISA Plans are subject to the prohibited transaction provisions
of the Code, the discussion above with respect to "disqualified persons,"
prohibited transactions, delegation of fiduciary duty and plan assets applies
to Non-ERISA Plans as well as ERISA Plans. However, the administrative
exemptions discussed below are not applicable to Non-ERISA Plans.
Administrative Exemptions
Individual Administrative Exemptions.
Several underwriters of mortgage-backed securities have applied for and
obtained individual administrative prohibited transaction exemptions (each, an
"Underwriter's Exemption") which are in some respects broader than Prohibited
Transaction Class Exemption 83-1 (described below). Such
102
exemptions can only apply to mortgage-backed securities which, among other
conditions, are sold in an offering with respect to which such underwriter
serves as the sole or a managing underwriter, or as a selling or placement
agent. If such an Underwriter's Exemption might be applicable to a Series of
Certificates, the applicable Prospectus Supplement will refer to such
possibility.
Among the conditions that must be satisfied for an Underwriter's Exemption
to apply are the following:
(1) The acquisition of Certificates by an ERISA Plan is on terms
(including the price for the Certificates) that are at least as favorable
to the ERISA Plan as they would be in an arm's length transaction with an
unrelated party.
(2) The Certificates acquired by the ERISA Plan have received a rating
at the time of such acquisition that is one of the four highest generic
rating categories from either Standard & Poor's, a division of The McGraw-
Hill Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's") or
Fitch, Inc. ("Fitch").
(3) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below).
(4) The sum of all payments made to and retained by the underwriter in
connection with the distribution of Certificates represents not more than
reasonable compensation for underwriting the Certificates. The sum of all
payments made to and retained by the Depositor pursuant to the assignment
of the Mortgage Loans to the Trust Estate represents not more than the fair
market value of such Mortgage Loans. The sum of all payments made to and
retained by the Servicer (and any other servicer) represents not more than
reasonable compensation for such person's services under the Pooling and
Servicing Agreement and reimbursement of such person's reasonable expenses
in connection therewith.
(5) The ERISA Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act of 1933, as amended (the "Securities Act").
The Trust Estate must also meet the following requirements:
(i) the assets of the Trust Estate must consist solely of assets of the
type that have been included in other investment pools in the marketplace;
(ii) certificates in such other investment pools must have been rated in
one of the four highest rating categories of S&P, Moody's, or Fitch for at
least one year prior to the ERISA Plan's acquisition of the Certificates; and
(iii) certificates evidencing interests in such other investment pools must
have been purchased by investors other than ERISA Plans for at least one
year prior to any ERISA Plan's acquisition of the Certificates.
If the conditions to an Underwriter's Exemption are met, whether or not an
ERISA Plan's assets would be deemed to include an ownership interest in the
Mortgage Loans in a mortgage pool, the acquisition, holding and resale of the
Certificates by ERISA Plans would be exempt from certain of the prohibited
transaction provisions of ERISA and the Code.
Moreover, an Underwriter's Exemption can provide relief from certain self-
dealing/conflict of interest prohibited transactions that may occur if an ERISA
Plan fiduciary causes an ERISA Plan to acquire and hold Certificates in a Trust
Estate in which the fiduciary (or its affiliate) is an obligor on the Mortgage
Loans held in the Trust Estate provided that, among other requirements: (i) in
the case of an
103
acquisition in connection with the initial issuance of Certificates, at least
fifty percent of each class of Certificates in which ERISA Plans have invested
is acquired by persons independent of the Restricted Group (as defined below)
and at least fifty percent of the aggregate interest in the Trust Estate is
acquired by persons independent of the Restricted Group; (ii) such fiduciary
(or its affiliate) is an obligor with respect to five percent or less of the
fair market value of the Mortgage Loans contained in the Trust Estate; (iii)
the ERISA Plan's investment in Certificates of any Class does not exceed
twenty-five percent of all of the Certificates of that Class outstanding at the
time of the acquisition and (iv) immediately after the acquisition no more than
twenty-five percent of the assets of the ERISA Plan with respect to which such
person is a fiduciary are invested in Certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity.
An Underwriter's Exemption does not apply to ERISA Plans sponsored by the
Depositor, the underwriter specified in the applicable Prospectus Supplement,
the Master Servicer, the Trustee, any Servicer, any insurer with respect to the
Mortgage Loans, any obligor with respect to Mortgage Loans included in the
Trust Estate constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Estate, or any affiliate of such
parties (the "Restricted Group").
PTE 83-1
Prohibited Transaction Class Exemption 83-1 for Certain Transactions
Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits certain
transactions involving the creation, maintenance and termination of certain
residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by ERISA Plans, whether or
not the ERISA Plan's assets would be deemed to include an ownership interest in
the mortgages in such mortgage pools, and whether or not such transactions
would otherwise be prohibited under ERISA or the Code.
The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTE 83-1, the
term "mortgage pool pass-through certificate" would include Certificates issued
in a single Class or in multiple Classes that evidence the beneficial ownership
of both a specified percentage of future interest payments (after permitted
deductions) and a specified percentage of future principal payments on a Trust
Estate.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of
a specified percentage of future interest payments (after permitted deductions)
on a Trust Estate or only of a specified percentage of future principal
payments on a Trust Estate, (b) Residual Certificates, (c) Certificates
evidencing ownership interests in a Trust Estate which includes Mortgage Loans
secured by multifamily residential properties or shares issued by cooperative
housing corporations, or (d) Certificates which are subordinated to other
Classes of Certificates of such Series. Accordingly, unless exemptive relief
other than PTE 83-1 applies, Plans should not purchase any such Certificates.
PTE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans or the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration
104
of the mortgage pool, must represent not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided
by the pool sponsor to the pool. The system of insurance or protection referred
to in clause (i) above must provide such protection and indemnification up to
an amount not less than the greater of one percent of the aggregate unpaid
principal balance of the pooled mortgages or the unpaid principal balance of
the largest mortgage in the pool. It should be noted that in promulgating PTE
83-1 (and a predecessor exemption), the Department did not have under its
consideration interests in pools of the exact nature as some of the
Certificates described herein.
Non-ERISA Plans and Exempt Plans
Although Non-ERISA Plans and Exempt Plans are not considered ERISA Plans for
purposes of the above discussion, Non-ERISA Plans are subject to the prohibited
transaction provisions of the Code, and both Non-ERISA Plans and Exempt Plans
may be subject to certain other ERISA-like requirements of applicable law.
Therefore, before purchasing any Certificates by or on behalf of a Non-ERISA
Plan or any Exempt Plan, the prospective purchaser should exercise special
caution and should consult with its legal counsel concerning the propriety and
implications of such investment under the Code or other applicable law.
Unrelated Business Taxable Income--Residual Certificates
The purchase of a Residual Certificate by an IRA or any employee benefit
plan qualified under Code Section 401(a) and exempt from taxation under Code
Section 501(a), including most varieties of Benefit Plans, may give rise to
"unrelated business taxable income" as described in Code Sections 511 through
515 and 860E. Further, prior to the purchase of Residual Certificates, a
prospective transferee may be required to provide an affidavit to a transferor
that it is not, nor is it purchasing a Residual Certificate on behalf of, a
"Disqualified Organization," which term as defined above includes certain tax-
exempt entities not subject to Code Section 511 such as certain governmental
plans, as discussed above under the caption "Federal Income Tax Consequences--
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual Certificates--
Disqualified Organizations." In addition, prior to the transfer of a Residual
Certificate, the Trustee or the Depositor may require an opinion of counsel to
the effect that the transferee is not a Disqualified Organization and that such
transfer will not subject the Trustee, the Depositor, the Master Servicer or
any Servicer to additional obligations imposed by ERISA or the Code.
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that
potential investors who are acting on behalf of a Benefit Plan or any other
employee benefit plan or arrangement consult with their counsel regarding the
consequences under ERISA, the Code or other applicable law of their acquisition
and ownership of Certificates.
The sale of Certificates to a Benefit Plan or any other employee benefit
plan or arrangement is in no respect a representation by the Depositor or the
applicable underwriter that this investment meets all relevant legal
requirements with respect to investments by employee benefit plans generally or
any particular plan or arrangement, or that this investment is appropriate for
employee benefit plans generally or any particular plan or arrangement.
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LEGAL INVESTMENT
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As will be specified in the applicable Prospectus Supplement, certain
Classes of Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency and (ii) are part of a Series
representing interests in a Trust Estate consisting of Mortgage Loans
originated by certain types of originators specified in SMMEA and secured by
first liens on real estate. As "mortgage related securities," such Classes will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including but not limited
to depository institutions, insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation, to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in "mortgage related securities," in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Certificates only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national
banks may purchase mortgage related securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. (S) 24 (Seventh), subject in each case to such regulations
as the applicable federal regulatory authority may prescribe. In this
connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards
concerning "safety and soundness" and retention of credit information in 12
C.F.R. (S) 1.5), certain "Type IV securities," defined in 12 C.F.R. (S) 1.2(1)
to include certain "residential mortgage-related securities." As so defined
"residential mortgage-related security" means, in relevant part, "mortgage
related security" within the meaning of SMMEA. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703 which
permit federal credit unions to invest in "mortgage related securities" under
certain limited circumstances, other than stripped mortgage related securities,
residual interests in mortgage related securities and commercial mortgage
related securities, unless the credit union has obtained written approval from
the NCUA to participate in the "investment pilot program" described in 12
C.F.R. (S) 703.140. The OTS has issued Thrift Bulletin 13a (December 1, 1998),
"Management of Interest Rate Risk, Investment Securities, and Derivative
Activities," which thrift institutions subject to the jurisdiction of the OTS
should consider before investing in any Certificates.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and by the
NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth general
guidelines which depository institutions
106
must follow in managing risks (including market, credit, liquidity, operational
(transaction), and legal risks) applicable to all securities (including
mortgage pass-through securities and mortgage-derivative products) used for
investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any of the
Certificates, as certain Series or Classes (in particular, Certificates which
are entitled solely or disproportionately to distributions of principal or
interest) may be deemed unsuitable investments, or may otherwise be restricted,
under such rules, policies or guidelines (in certain instances irrespective of
SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions
which may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit
investments in securities which are issued in book-entry form.
Except as to the status of certain Classes of Certificates as "mortgage
related securities," no representation is made as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent the Certificates of any Class constitute legal
investments or are subject to investment, capital or other restrictions and, if
applicable, whether SMMEA has been overridden in any jurisdiction relevant to
such investor.
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PLAN OF DISTRIBUTION
- --------------------------------------------------------------------------------
The Certificates are being offered hereby in Series through one or more of
the methods described below. The applicable Prospectus Supplement for each
Series will describe the method of offering being utilized for that Series and
will state the public offering or purchase price of each Class of Certificates
of such Series, or the method by which such price is to be determined, and the
net proceeds to the Depositor from such sale.
The Certificates will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular Series of Certificates may be made
through a combination of two or more of these methods:
1. By negotiated firm commitment underwriting and public re-offering by
underwriters specified in the applicable Prospectus Supplement;
2. By placements by the Depositor with investors through dealers; and
3. By direct placements by the Depositor with investors.
107
If underwriters are used in a sale of any Certificates, such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, with respect to the
offer and sale of a particular Series of Certificates will be set forth on the
cover of the Prospectus Supplement applicable to such Series and the members of
the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. The underwriters
with respect to a sale of any Class of Certificates will be obligated to
purchase all such Certificates if any are purchased. The Depositor, and, if
specified in the applicable Prospectus Supplement, an affiliate of the
Depositor, will indemnify the applicable underwriters against certain civil
liabilities, including liabilities under the Securities Act.
Banc of America Securities LLC ("Banc of America Securities") is an
affiliate of the Depositor. This Prospectus may be used by Banc of America
Securities, to the extent required, in connection with market making
transactions in Certificates. Banc of America Securities may act as a principal
or agent in such transactions.
The Prospectus Supplement with respect to any Series of Certificates offered
other than through underwriters will contain information regarding the nature
of such offering and any agreements to be entered into between the Depositor
and dealers and/or the Depositor and purchasers of Certificates of such Series.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer or sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor or any affiliate thereof may purchase some or all
of one or more Classes of Certificates of such Series from the underwriter or
underwriters at a price specified or described in such Prospectus Supplement.
Such purchaser may thereafter from time to time offer and sell, pursuant to
this Prospectus, some or all of such Certificates so purchased directly,
through one or more underwriters to be designated at the time of the offering
of such Certificates or through dealers acting as agent and/or principal. Such
offering may be restricted in the matter specified in such Prospectus
Supplement. Such transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices. The underwriters and
dealers participating in such purchaser's offering of such Certificates may
receive compensation in the form of underwriting discounts or commissions from
such purchaser and such dealers may receive commissions from the investors
purchasing such Certificates for whom they may act as agent (which discounts or
commissions will not exceed those customary in those types of transactions
involved). Any dealer that participates in the distribution of such
Certificates may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any commissions and discounts received by such dealer and
any profit on the resale of such Certificates by such dealer might be deemed to
be underwriting discounts and commissions under the Securities Act.
108
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USE OF PROCEEDS
- --------------------------------------------------------------------------------
The net proceeds from the sale of each Series of Certificates will be used
by the Depositor for the purchase of the Mortgage Loans represented by the
Certificates of such Series.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
Certain legal matters, including the federal income tax consequences to
Certificateholders of an investment in the Certificates of a Series, will be
passed upon for the Depositor by Cadwalader, Wickersham & Taft, New York, New
York.
- --------------------------------------------------------------------------------
RATING
- --------------------------------------------------------------------------------
It is a condition to the issuance of the Certificates of any Series offered
pursuant to this Prospectus and a Prospectus Supplement that they be rated in
one of the four highest categories by at least one Rating Agency.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. Each securities rating should be evaluated independently of any
other rating.
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REPORTS TO CERTIFICATEHOLDERS
- --------------------------------------------------------------------------------
The Trustee will prepare and forward to the Certificateholders of each
Series statements containing information with respect to principal and interest
payments and the related Trust Estate, as described herein and in the
applicable Prospectus Supplement for such Series. No information contained in
such reports will have been examined or reported upon by an independent public
accountant. See "The Pooling and Servicing Agreement-- Reports to
Certificateholders." In addition, each Servicer for each Series will furnish to
the Trustee an annual statement from a firm of independent public accountants
with respect to the examination of certain documents and records relating to a
random sample of mortgage loans serviced by such Servicer pursuant to the
related Underlying Servicing Agreement and/or other similar agreements. See
"Servicing of the Mortgage Loans--Evidence as to Compliance." Copies of the
statements provided to the Trustee will be furnished to Certificateholders of
each Series upon request addressed to the Trustee.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
- --------------------------------------------------------------------------------
The SEC allows the Depositor to "incorporate by reference" information it
files with the SEC, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this Prospectus.
Information that the Depositor files later with the SEC will automatically
update the information in this
109
Prospectus. In all cases, you should rely on the later information rather than
on any different information included in this Prospectus or the accompanying
Prospectus Supplement. The Seller incorporates by reference any future annual,
monthly and special SEC reports filed by or on behalf of the Trust until the
termination of the offering of the related Series of Certificates offered
hereby (including market making transactions by Banc of America Securities, an
affiliate of the Depositor and the Servicer, with respect to such Series of
Certificates, unless such transactions are exempt from the registration
provisions of the Securities Act).
As a recipient of this Prospectus, you may request a copy of any document
the Depositor incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference), at no cost,
by writing or calling the Depositor at 201 North Tryon Street, Charlotte, North
Carolina 28255, Attention: Senior Vice President, telephone number (704) 388-
4503.
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WHERE YOU CAN FIND MORE INFORMATION
- --------------------------------------------------------------------------------
The Depositor filed a registration statement relating to the Certificates
with the Securities and Exchange Commission ("SEC" or the "Commission"). This
Prospectus is part of the registration statement, but the registration
statement includes additional information.
Copies of the registration statement may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 upon payment of the
prescribed charges, or may be examined free of charge at the Commission's
offices, 450 Fifth Street N.W., Washington, D.C. 20549 or at the regional
offices of the Commission located at Suite 1300, 7 World Trade Center, New
York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. The Commission also maintains a site on the World
Wide Web at "http://www.sec.gov" at which you can view and download copies of
reports, proxy and information statements and other information filed
electronically through the Electronic Data Gathering, Analysis and Retrieval
("EDGAR") system. The Depositor has filed the registration statement, including
all exhibits, through the EDGAR system and therefore such materials should be
available by logging onto the Commission's Web site. The Commission maintains
computer terminals providing access to the EDGAR system at each of the offices
referred to above. Copies of any documents incorporated to this Prospectus by
reference will be provided to each person to whom a Prospectus is delivered
upon written or oral request directed to Bank of America Mortgage Securities,
Inc., 201 North Tryon Street, Charlotte, North Carolina 28255, Attention:
Senior Vice President, telephone number (704) 388-4503.
110
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INDEX OF SIGNIFICANT DEFINITIONS
- --------------------------------------------------------------------------------
PROSPECTUS
1
1986 Act.................................................................... 74
1998 Policy Statement....................................................... 106
A
Accretion Directed Certificates............................................. 33
Accrual Certificates........................................................ 30
Accrual Certificates........................................................ 35
Actuarial Mortgage Loan..................................................... 17
Additional Collateral....................................................... 21
Advances.................................................................... 45
Asset Conservation Act...................................................... 68
B
Balloon Loans............................................................... 21
Balloon Period.............................................................. 21
Banc of America Securities.................................................. 108
Bankruptcy Code............................................................. 63
Bankruptcy Loss............................................................. 31
Bankruptcy Loss Amount...................................................... 32
Beneficial Owner............................................................ 26
Benefit Plans............................................................... 101
Book-Entry Certificates..................................................... 9
Buy-Down Fund............................................................... 20
Buy-Down Loans.............................................................. 20
C
Cash Flow Agreement......................................................... 38
Cede........................................................................ 26
CERCLA...................................................................... 67
Certificate Account......................................................... 42
Certificateholders.......................................................... 25
Certificates................................................................ 6
Class....................................................................... 7
Cleanup Costs............................................................... 67
Closing Date................................................................ 25
Code........................................................................ 9
Commission.................................................................. 110
Companion Certificates...................................................... 33
Component................................................................... 33
Component Certificates...................................................... 33
cooperatives................................................................ 16
Counterparty................................................................ 15
Cut-Off Date................................................................ 8
D
Deferred Interest........................................................... 19
Definitive Certificates..................................................... 26
Department.................................................................. 102
Depositor................................................................... 21
Depository.................................................................. 42
Disqualified Organization................................................... 86
Distribution Date........................................................... 8
DTC......................................................................... 9
DTC Participants............................................................ 27
Due Date.................................................................... 18
Due-on-sale................................................................. 69
E
EDGAR....................................................................... 110
electing large partnership.................................................. 86
Eligible Custodial Account.................................................. 43
Eligible Investments........................................................ 44
ERISA....................................................................... 101
ERISA Plans................................................................. 101
Escrow Account.............................................................. 47
Excess Bankruptcy Losses.................................................... 32
Excess Fraud Losses......................................................... 31
Excess Special Hazard Losses................................................ 31
Exempt Plans................................................................ 101
F
FASIT....................................................................... 73
FDIC........................................................................ 43
FFIEC....................................................................... 106
FHLBB....................................................................... 69
FHLMC....................................................................... 42
Fitch....................................................................... 103
Fixed Rate Certificates..................................................... 36
Fixed Retained Yield........................................................ 30
Floating Rate Certificates.................................................. 36
FNMA........................................................................ 42
Foreclosure Profits......................................................... 29
foreign persons............................................................. 100
Fraud Loss.................................................................. 31
Fraud Loss Amount........................................................... 31
G
Garn Act.................................................................... 69
Graduated Pay Mortgage Loans................................................ 19
Growing Equity Mortgage Loans............................................... 19
H
HOPA........................................................................ 65
111
I
Indirect DTC Participants................................................... 27
Insolvency Laws............................................................. 14
Interest Only Certificates.................................................. 36
Inverse Floating Rate Certificates.......................................... 36
IRA......................................................................... 101
L
Limited or Reduced Documentation Guidelines................................. 22
Liquidation Proceeds........................................................ 43
Loan-to-Value Ratio......................................................... 23
Lockout Certificates........................................................ 33
M
Mark to Market Regulations.................................................. 89
Master Servicer............................................................. 6
Master Servicer Custodial Account........................................... 43
Master Servicing Fee........................................................ 30
MERS........................................................................ 54
Moody's..................................................................... 103
Mortgage Interest Rate...................................................... 30
Mortgage Loans.............................................................. 16
Mortgage Notes.............................................................. 16
Mortgaged Properties........................................................ 16
Mortgages................................................................... 16
N
NCUA........................................................................ 106
Net 5 Loans................................................................. 19
Net Mortgage Interest Rate.................................................. 30
New Regulations............................................................. 91
Non-ERISA Plans............................................................. 101
Non-Pro Rata Certificate.................................................... 74
Non-U.S. Person............................................................. 91
Note Margin................................................................. 18
Notional Amount Certificates................................................ 33
O
OCC......................................................................... 106
OID Regulations............................................................. 74
original issue discount..................................................... 74
Other Advances.............................................................. 45
OTS......................................................................... 69
P
PAC Certificates............................................................ 34
PAC I Certificates.......................................................... 34
PAC II Certificates......................................................... 34
Partial Liquidation Proceeds................................................ 29
Pass-Through Certificates................................................... 34
Pass-Through Entity......................................................... 86
Pass-Through Rate........................................................... 7
Paying Agent................................................................ 45
PCBs........................................................................ 66
Percentage Interest......................................................... 28
Periodic Advances........................................................... 9
Planned Amortization Certificates........................................... 34
Pledged Asset Mortgage Loans................................................ 21
PMI......................................................................... 65
Pool Distribution Amount.................................................... 28
Pooling and Servicing Agreement............................................. 25
Prepayment Assumption....................................................... 76
Principal Only Certificates................................................. 36
PTE 83-1.................................................................... 104
R
Rating Agency............................................................... 10
Ratio Strip Certificates.................................................... 34
RCRA........................................................................ 67
Record Date................................................................. 8
Regular Certificateholder................................................... 74
Regular Certificates........................................................ 26
Regulations................................................................. 102
Relief Act.................................................................. 66
REMIC....................................................................... 71
REMIC Certificates.......................................................... 71
REMIC Pool.................................................................. 71
REMIC Regulations........................................................... 71
Remittance Date............................................................. 43
Removed Mortgage Loan....................................................... 54
Reserve Fund................................................................ 37
Residual Certificates....................................................... 26
Residual Holders............................................................ 82
Restricted Group............................................................ 104
Rules....................................................................... 27
S
S&P......................................................................... 103
Sale Agreement.............................................................. 53
SBJPA of 1996............................................................... 72
Scheduled Amortization Certificates......................................... 34
Scheduled Principal Balance................................................. 54
SEC......................................................................... 110
Securities Act.............................................................. 103
Seller...................................................................... 16
Senior Certificates......................................................... 35
Sequential Pay Certificates................................................. 35
Series...................................................................... 6
Servicer.................................................................... 6
Servicer Custodial Account.................................................. 43
112
Servicing Fee............................................................... 30
Simple Interest Mortgage Loan............................................... 17
SMMEA....................................................................... 106
Special Hazard Loss......................................................... 31
Special Hazard Loss Amount.................................................. 31
Standard Hazard Insurance Policy............................................ 49
Startup Day................................................................. 72
Step Coupon Certificates.................................................... 36
Stripped Certificateholder.................................................. 98
Stripped Certificates....................................................... 97
Subordinated Certificates................................................... 35
Subsidy Account............................................................. 19
Subsidy Loans............................................................... 19
Subsidy Payments............................................................ 19
Superliens.................................................................. 67
Super Senior Certificates................................................... 35
Super Senior Support Certificates........................................... 35
Support Certificates........................................................ 33
T
TAC Certificates............................................................ 35
Targeted Amortization Certificates.......................................... 35
Texas Home Equity Laws...................................................... 66
Tiered Payment Mortgage Loans............................................... 19
TILA Amendment.............................................................. 65
Title V..................................................................... 70
Treasury Regulations........................................................ 54
Trust....................................................................... 6
Trust Estate................................................................ 6
Trustee..................................................................... 59
Trustee Fee................................................................. 30
U
UCC......................................................................... 62
Underlying Servicing Agreement.............................................. 6
Underwriter's Exemption..................................................... 102
U.S. Person................................................................. 88
UST......................................................................... 67
V
Variable Rate Certificates.................................................. 36
Voting Interests............................................................ 56
W
Window Period............................................................... 69
Window Period Loans......................................................... 69
Window Period States........................................................ 69
113
[BANK OF AMERICA LOGO]
Bank of America Mortgage Securities, Inc.
Depositor
Bank of America, N.A.
Seller and Servicer
$273,267,100
(Approximate)
Mortgage Pass-Through
Certificates, Series 2001-A
------------------
PROSPECTUS SUPPLEMENT
------------------
You should rely only on the information contained or
incorporated by reference in this Prospectus Supplement and
the accompanying Prospectus. No one has been authorized to
provide you with different information.
The Offered Certificates are not being offered in any state
where the offer is not permitted.
The Depositor does not claim the accuracy of the information
in this Prospectus Supplement and the accompanying Prospectus
as of any date other than the dates stated on their respective
covers.
Dealers will deliver a Prospectus Supplement and Prospectus
when acting as underwriters of the Offered Certificates and
with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the Offered Certificates will
deliver a Prospectus Supplement and Prospectus until ninety
days following the date of this Prospectus Supplement.
Banc of America Securities LLC
April 20, 2001