As filed with the Securities and Exchange Commission on September 3, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
JV CAPITAL TRUST
(Exact name of Registrant as specified in its charter)
---------------- Applied For
Delaware (I.R.S. Employer Identification No.)
(State of Organization)
c/o Wilmington Trust Company
1100 North Market Street
Rodney Square North
Wilmington, DE 19890
Attention: Corporate Trust Administration
(302) 651-1000
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
Michael M. Forester
c/o Household Finance Corporation
2700 Sanders Road
Prospect Heights, IL 60070
847-564-7907
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------
Copies to:
Jordan M. Schwartz, Esq. A. Bradley Ives, Esq.
Cadwalader, Wickersham & Taft Kennedy Covington Lobdell & Hickman,
100 Maiden Lane L.L.P.
New York, New York 10038 100 North Tryon Street, 42nd Floor
Charlotte, North Carolina 28202
----------------
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective.
----------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Title of each class of Amount being Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per unit(1) aggregate offering price(1) registration fee
- -----------------------------------------------------------------------------------------------------------------
Residential Mortgage-
Backed Certificates
(the "Certificates")
issued in Series..... $1,000,000 100% $1,000,000 $278
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purposes of calculating the registration fee on
the basis of the proposed maximum aggregate offering price.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement is not complete and may be +
+changed. The Depositor may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This prospectus supplement is not an offer to sell these securities and is +
+not soliciting an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 3, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus Dated , 19 )
$ (Approximate)
JV CAPITAL Series 19 - Trust Fund
Issuer
JV CAPITAL TRUST
Depositor
HOUSEHOLD FINANCE CORPORATION
Master Servicer
Residential Mortgage Pass-Through Certificates, Series 19 - , Class A
Principal And Interest Payable Monthly, Beginning In 19
- ---------------
You should The JV Capital Series 199 - Trust Fund will offer the
carefully following Certificates by this prospectus supplement and
consider the accompanying prospectus:
"Risk
Factors" . One class of senior Class A Certificates.
beginning on
page S-11 of A summary chart of the initial certificate balances, pass-
this through rates, payment characteristics and ratings of all
prospectus Certificates issued by the Trust Fund is set forth on page S-
supplement. 4.
Neither the The assets of the Trust Fund will consist primarily of:
Class A
Certificates . Fixed-rate, conventional, fully-amortizing mortgage loans
nor the secured by first liens and second liens on one- to four-
mortgage family properties having original terms to maturity not
loans are exceeding 30 years.
insured or
guaranteed . Additional credit enhancement for the Class A Certificates
by any in the form of an irrevocable financial guaranty insurance
governmental policy issued by which will cover shortfalls in
agency or amounts due to be distributed on the Class A Certificates.
instrumentality.
The Class A
Certificates
represent
interests in
the Trust
Fund only
and will not
be
obligations
of JV
Capital
Trust or any
other
entity.
This
prospectus
supplement
may be used
to offer and
sell the
Class A
Certificates
only if it
is
accompanied
by the
prospectus.
- ---------------
The Class A Certificates are mortgage-backed securities whose yields to
maturity will be affected by the principal payment rates on the underlying
mortgage loans.
Please read this prospectus supplement and the accompanying prospectus
carefully to understand the risks associated with these investments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Class A Certificates or determined that this
Prospectus Supplement or the Prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Class A Certificates will be offered by [First Union Capital Markets Corp.]
[Other Underwriter], as underwriter, at varying prices to be determined at the
time of the sale to investors.
[First Union Capital Markets Corp.] [Other Underwriter]
The date of this Prospectus Supplement is , 19 .
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
Information is provided to you about the Class A Certificates in two separate
documents that progressively provide more detail: (a) the Prospectus, which
provides general information, some of which may not apply to your Certificates
and (b) this Prospectus Supplement, which describes the specific terms of your
Certificates.
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 further related
discussions. The following Table of Contents and the Table of Contents included
in the Prospectus provide the pages on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
Prospectus Supplement and the accompanying Prospectus are defined under the
caption "Index of Defined Terms" beginning on page S-39 in this Prospectus
Supplement and under the caption "Index of Defined Terms" beginning on page 107
in the Prospectus. Any capitalized terms used but not defined in this
Prospectus Supplement are defined in the Prospectus.
----------------
This Prospectus Supplement and the accompanying Prospectus contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended. Forward-looking statements, together with related qualifying
language and assumptions, are found in the material, including each of the
tables, set forth under "Risk Factors" and "Prepayment and Yield
Considerations." Forward-looking statements are also found elsewhere in this
Prospectus Supplement and the Prospectus, and may be identified by, among other
things, accompanying language including the words "expects," "intends,"
"anticipates," "estimates," or analogous expressions, or by qualifying language
or assumptions. Those statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results or performance
to differ materially from those forward-looking statements. Those 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 government 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 will not update or revise any
forward-looking statements to reflect any change in the Depositor's
expectations with regard to the subject of those statements or any change in
events, conditions or circumstances on which those statements are based.
S-2
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.............................. S-2
THE SERIES 199 - CERTIFICATES........................................... S-4
SUMMARY OF TERMS OF THE CERTIFICATES..................................... S-5
The Mortgage Loans...................................................... S-6
The Certificates........................................................ S-6
Priority of Distribution................................................ S-6
Interest Distributions.................................................. S-7
Principal Distributions................................................. S-7
Credit Support.......................................................... S-7
Optional Termination.................................................... S-8
Prepayment and Yield Considerations..................................... S-9
Federal Income Tax Consequences......................................... S-9
ERISA Considerations.................................................... S-9
Legal Investment Considerations......................................... S-10
Certificate Ratings..................................................... S-10
RISK FACTORS............................................................. S-11
Limited Liquidity for Certificates...................................... S-11
Rate of Prepayments May Adversely Affect Yield on Certificates.......... S-11
Rights of Beneficial Owners May Be Limited by Book-Entry System......... S-12
Limited Nature of Certificate Ratings................................... S-12
Realization Upon Nonperforming Loans; Delays and Expenses Associated
With Legal Actions..................................................... S-12
Risk of Loss is Greater on Second Lien Mortgage Loan.................... S-12
Geographic Concentration May Increase Risk of Loss...................... S-13
Consumer Protection Laws May Limit Remedies............................. S-13
Page
----
Year 2000 Readiness Disclosure............................................ S-13
THE MORTGAGE POOL.......................................................... S-14
Mortgage Loan Characteristics............................................. S-14
Underwriting.............................................................. S-18
DELINQUENCY AND LOAN LOSS EXPERIENCE OF MASTER SERVICER.................... S-19
PREPAYMENT AND YIELD CONSIDERATIONS........................................ S-20
Weighted Average Life of the Class A Certificates......................... S-21
DESCRIPTION OF THE CERTIFICATES............................................ S-23
General................................................................... S-23
Distributions on the Certificates......................................... S-23
Subordinated Certificates................................................. S-28
Certificate Insurance Policy.............................................. S-29
Master Servicing Compensation and Payment of Expenses..................... S-29
Optional Purchase of Defaulted Mortgage Loans............................. S-30
Advances.................................................................. S-30
Optional Termination...................................................... S-30
Miscellaneous............................................................. S-30
The Trustee............................................................... S-32
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER............... S-32
FEDERAL INCOME TAX CONSEQUENCES............................................ S-34
LEGAL INVESTMENT........................................................... S-35
ERISA CONSIDERATIONS....................................................... S-35
UNDERWRITING............................................................... S-37
EXPERTS.................................................................... S-37
LEGAL OPINIONS............................................................. S-37
RATINGS.................................................................... S-38
INDEX OF DEFINED TERMS..................................................... S-39
S-3
THE SERIES 199 - CERTIFICATES
Initial Rating
of Offered
Certificates(3)
---------------
Initial
Certificate Pass-Through
Class Balance(1) Rate Principal Types(2) Interest Types(2) [ ] [ ]
----- ----------- ------------ ---------------------- ----------------- ------- -------
Offered Certificates
Class A................. $ % Senior, Sequential Pay Fixed Rate
Non-Offered Certificates
Class B................. $ % Subordinated Fixed Rate N/A N/A
Class R................. (4) (4) Subordinated (4) N/A N/A
- --------
(1) Approximate. The initial certificate balances are subject to adjustment as
described herein.
(2) See "Description of the Certificates--Categories of Classes of
Certificates" in the Prospectus for a description of the principal and
interest categories listed.
(3) A description of the ratings of the offered certificates is set forth under
the heading "Certificate Ratings" on page S-10 of the summary information
and under "Ratings" in the main text of this Prospectus Supplement.
(4) The Class R Certificates have no certificate balance and are not entitled
to interest distributions.
S-4
SUMMARY OF TERMS OF THE CERTIFICATES
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:
JV Capital Trust Residential Mortgage Pass-Through
Certificates, Series 199 - (the "Certificates")
Depositor: JV Capital Trust
Issuer: JV Capital Series 199 - Trust Fund (the "Trust Fund")
Master Servicer:Household Finance Corporation
Trustee:
Certificate
Insurer:
Distribution Date:
The 25th day of each month (or, if not a business day, the next
business day) beginning 25, 199
Closing Date: On or about , 199
Cut-Off Date: 1, 199
Record Date:
The last business day of the month preceding a Distribution
Date
S-5
The Mortgage Loans
The mortgage loans will consist of first lien and second lien, fixed-rate,
one- to four-family residential mortgage loans having original terms to stated
maturity not exceeding 30 years (the "Mortgage Loans").
The Depositor expects the Mortgage Loans to have the following
characteristics:
Summary Of Mortgage Loans
Characteristics as of the Cut-Off Date
(Approximate)
Aggregate Outstanding Principal Balance.............. $
Number of Mortgage Loans.............................
Weighted Average Mortgage Rate....................... %
Range of Mortgage Rates.............................. % to %
Weighted Average Loan-to-Value Ratio at Origination.. %
Weighted Average Remaining Term to Stated Maturity... months
Range of Remaining Terms to Stated Maturity.......... months to months
Range of Outstanding Principal Balances of Mortgage
Loans............................................... $ to $
Average Outstanding Principal Balance of Mortgage
Loans............................................... $
Latest Maturity Date................................. 20
Percent of Mortgage Loans with Loan-to-Value Ratios:
Less Than or Equal to 70%.......................... %
Greater Than 70% and Less Than or Equal to 80%..... %
Greater Than 80%................................... %
Percent of Mortgage Loans which are Second Lien...... %
The Certificates
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date, among the Depositor, the Master
Servicer and the Trustee (the "Pooling and Servicing Agreement"). The
Certificates will have the approximate Certificate Balance as of the Closing
Date set forth on page S-4 of this Prospectus Supplement. Any difference
between the Certificate Balance of the Class A Certificates as of the Closing
Date and the approximate Certificate Balance of the Class A Certificates as of
the date of this Prospectus Supplement will not exceed 5% of the initial
Certificate Balance of the Class A Certificates. The Class A Certificates will
evidence approximately % undivided interest in the Certificate Balance of the
Mortgage Loans and the Class B Certificates will evidence the remaining
approximate %. The Class R Certificates have no Certificate Balance and do
not represent any interest in the principal balance of the Mortgage Loans. The
Class B and Class R Certificates are subordinated in certain respects to the
Class A Certificates. See "Description of the Certificates" in this Prospectus
Supplement.
Priority of Distribution
On each Distribution Date, the amount available for distribution on the
Certificates will be distributed in the following amounts and order of
priority:
. First, to the Class A Certificates, interest, including any previously
undistributed shortfalls in distributions of interest due on the Class A
Certificates.
. Second, to the Class A Certificates, the amount of principal required to
be distributed.
S-6
.Third, to the Certificate Insurer, the monthly premium due on the
Certificate Insurance Policy.
. Fourth, to the Certificate Insurer, an amount equal to any previously
unreimbursed payments made under the Certificate Insurance Policy and any
fees and expenses owed to it under the related insurance agreement,
together with interest on such amounts.
.Fifth, to the Reserve Fund, the amount required to be deposited in the
Reserve Fund.
. Sixth, to the Class B Certificates, interest, including any previously
undistributed shortfalls in required distributions of interest on the
Class B Certificates.
. Seventh, to the Class A Certificates an amount equal to the principal
losses, if any, for the Mortgage Loans for such Distribution Date and all
prior Distribution Dates that have not previously been distributed
pursuant to this clause.
.Eighth, to the Class B Certificates, the amount of principal required to
be distributed.
. Ninth, to the Class B Certificates, certain additional amounts in respect
of principal not previously distributed to them pursuant to this clause;
and
.Tenth, any remaining funds to the Class R Certificates.
All of the distributions described above are subject to the limitations set
forth in this Prospectus Supplement under "Description of the Certificates--
Distributions on the Certificates."
As a result of delinquencies, losses or shortfalls on the Mortgage Loans,
distributions that would otherwise be made on the Class B and Class R
Certificates may be made on the Class A Certificates instead. See "Description
of the Certificates--Subordinated Certificates" in this Prospectus Supplement.
Interest Distributions
The amount of interest that will accrue on your Class A Certificates each
month is equal to:
. one-twelfth of the pass-through rate for your class set forth on page S-4
multiplied by the Certificate 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 certain interest losses allocated
to your class, as described under "Description of the Certificates --
Distributions on the Certificates" in this Prospectus Supplement.
Principal Distributions
The calculation of the amount of principal that the Class A and Class B
Certificates are entitled to receive on each Distribution Date is described
under "Description of the Certificates--Distributions on the Certificates" in
this Prospectus Supplement.
Credit Support
Credit support for the Class A Certificates is provided by:
. The subordination of the Class B and Class R Certificates to the Class A
Certificates.
. The Reserve Fund.
. An irrevocable financial guaranty insurance policy (the "Certificate
Insurance Policy") issued by the Certificate Insurer.
S-7
Subordination
If you own a Class A Certificate, the credit support for your Certificates is
provided as follows:
. On each Distribution Date, you will receive with respect to your Class A
Certificates all amounts of interest and principal you are entitled to
before the Class B and Class R Certificates receive any amounts. If there
are not sufficient funds on a Distribution Date to pay you all amounts of
interest and principal you are entitled to, an amount equal to this
shortfall will carry over to future Distribution Dates. On future
Distribution Dates you not only will be entitled to receive the required
amount of principal and interest for those Distribution Dates but also
the amount of any shortfalls from prior Distribution Dates before the
Class B and Class R Certificates receive any amounts.
. If the amount available for distributions on the Certificates is not
sufficient to pay the Class A Certificates an amount equal to the
principal portion of losses on the Mortgage Loans, the Class B
Certificates will bear such losses through a reduction of their
Certificate Balance.
Additional credit support is provided by the allocation of all principal
prepayments to the Class A Certificates for the first years and
disproportionately greater allocations of prepayments to the Class A
Certificates than to the Class B Certificates over the following years. The
disproportionate allocation of prepayments will accelerate the amortization of
the Class A Certificates relative to the Class B Certificates while, in the
absence of principal losses that decrease the certificate balance of the Class
B Certificates, increasing the percentage interest in the principal balance of
the Mortgage Loans represented by the Class B Certificates.
Reserve Fund
On the Closing Date, a reserve fund (the "Reserve Fund") will be established
and will be funded over time from the amount available for distributions on the
Certificates. The amount in the Reserve Fund will be used to make required
payments of principal and interest on the Class A Certificates to the extent
necessary.
You should be aware however that:
. The amount in the Reserve Fund at any time will not exceed $ .
. The amount from the Reserve Fund that can be used to cover shortfalls to
the Class A Certificates over the life of the Certificates cannot exceed
$ .
Certificate Insurance Policy
The Certificate Insurance Policy will cover:
. Shortfalls in the required distributions of interest and principal to the
Class A Certificates not covered by amounts from the Reserve Fund.
The Certificate Insurance Policy will not cover:
. Certain shortfalls in interest arising from the timing of prepayments on
the Mortgage Loans and certain interest losses on the Class A
Certificates.
The Certificate Insurance Policy will not protect you against a lower yield
on your Class A Certificates than you expected based on your assumed rate of
prepayments on the Mortgage Loans.
See "Description of the Certificates--Certificate Insurance Policy" in this
Prospectus Supplement.
Optional Termination
The Master Servicer may repurchase from the Trust Fund all Mortgage Loans
remaining outstanding on any Distribution Date when the aggregate unpaid
principal balance of such Mortgage Loans is less than 10% of the aggregate
unpaid principal balance of the Mortgage Loans on the Cut-off Date.
S-8
If the Master Servicer 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 "Description of the Certificates--Optional
Termination" and "Prepayment and Yield Considerations" in this Prospectus
Supplement.
Prepayment and Yield Considerations
The yield to maturity on your Class A 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 Class A Certificates 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 Class A Certificates at discount and
principal distributions occur at a rate slower than you assumed, your
actual yield to maturity will be lower than anticipated.
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 change from time to time, you may not be able to
reinvest your distributions at yields equaling or exceeding the yields on the
Class A Certificates. Yields on any reinvestments may be lower, and could be
significantly lower, than the yields on your Class A Certificates.
See "Prepayments and Yield Considerations" in this Prospectus Supplement and
"Yield and Prepayment Considerations" in the Prospectus.
Weighted Average Lives (in years)*
SPA
-------------------
Class % % % % %
- ----- --- --- --- --- ---
A
- --------
* Determined as described under "Prepayment and Yield Considerations--Weighted
Average Life of the Class A 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 the Class A Certificates are
likely to differ from those shown, perhaps significantly.
Federal Income Tax Consequences
An election will be made to treat the assets of the Trust Fund as a REMIC for
federal income tax purposes. The Class A Certificates and Class B Certificates
will constitute regular interests in the Trust Fund and generally will be
treated as debt instruments issued by the Trust Fund. The Class R Certificates
will be the residual interest in the Trust Fund.
The Class A Certificates will be treated as newly-originated debt instruments
for most federal income tax purposes. You must report income received on your
Class A Certificates as it accrues from Distribution Date to Distribution Date,
which will be before such income is distributed in cash to you.
See "Federal Income Tax Consequences" in this Prospectus Supplement and in
the Prospectus.
ERISA Considerations
The United States Department of Labor has granted to First Union Corporation,
the ultimate parent of First Union Capital Markets Corp., an administrative
exemption (the "Exemption") that generally exempts from
S-9
certain of the prohibited transaction provisions of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the excise taxes imposed
on such prohibited transactions by Section 4975 of the Code, transactions
relating to the purchase, sale and holding by certain employee benefit plans of
pass-through certificates underwritten by First Union Capital Markets Corp.,
such as the Class A Certificates, provided that certain conditions are
satisfied.
If you are a fiduciary or other person acting on behalf of an employee
benefit plan or other retirement plan or arrangement subject to ERISA, or
Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), or
a governmental plan, as defined in Section 3(32) of ERISA, subject to any
federal, state or local law ("Similar Law") which is, to a material extent,
similar to the foregoing provisions of ERISA or the Code, you should carefully
review with your legal advisors whether the purchase or holding of Class A
Certificates could give rise to a transaction prohibited or not otherwise
permissible under ERISA, the Code or Similar Law.
See "ERISA Considerations" in this Prospectus Supplement and in the
Prospectus.
Legal Investment Considerations
The Class A Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
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 Class
A Certificates. You should consult with your legal, tax and accounting advisors
for assistance in determining the suitability of and consequences to you of the
purchase, ownership and sale of the Class A Certificates.
See "Legal Investment" in this Prospectus Supplement and in the Prospectus.
Certificate Ratings
It is a condition to the issuance of the Class A Certificates that they be
rated " " by and " " by .
.A rating is not a recommendation to buy, sell or hold the Class A
Certificates and may be subject to revision or withdrawal at any time by
the assigning rating organization.
.A rating does not address the possibility that, as a result of principal
prepayments, holders of such Certificates may receive a lower than
anticipated yield.
See "Ratings" in this Prospectus Supplement.
S-10
RISK FACTORS
Limited Liquidity for Certificates
The Underwriter intends to make a market for purchase and sale of the Class A
Certificates after their initial issuance, but the Underwriter has no
obligation to do so. There is no assurance that a secondary market will develop
or, if a secondary market does develop, that it will provide you with liquidity
of investment or that it will continue for the life of the Class A
Certificates. As a result, you may not be able to sell your Class A Certificate
or you may not be able to sell your Class A Certificate at a high enough price
to produce your anticipated return on investment.
The Certificates will not be listed on any securities exchange.
Rate of Prepayments May Adversely Affect Yield on Certificates
The rate of distributions of principal and the yield to maturity on your
Certificates will be directly related to the rate of payments of principal on
the Mortgage Loans and the amount and timing of mortgagor defaults resulting in
realized losses. The rate of principal payments on the Mortgage Loans will be
affected by, among other things:
. the amortization schedules of the Mortgage Loans;
. the rate of principal prepayments (including partial prepayments and
those resulting from refinancing) thereon by mortgagors;
. liquidations of defaulted Mortgage Loans;
. the presence and enforceability of due-on-sale clauses;
. repurchases of Mortgage Loans by the Depositor as a result of defective
documentation or breaches of representations and warranties and optional
purchase by the Depositor of defaulted Mortgage Loans; and
. the optional purchase by the Master Servicer of all the Mortgage Loans
in connection with the termination of the Trust Fund.
See "Prepayment and Yield Considerations" and "Description of the
Certificates--Optional Termination" and "--Optional Purchase of Defaulted
Mortgage Loans" in this Prospectus Supplement and "The Pooling and Servicing
Agreement--Assignment of Mortgage Loans" and "--Termination; Optional
Termination" in the Prospectus.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors.
. If prevailing rates for similar mortgage loans fall below the interest
rates on the Mortgage Loans, the rate of prepayment would generally be
expected to increase.
. Conversely, if interest rates on similar mortgage loans rise above the
interest rates on the Mortgage Loans, the rate of prepayment would
generally be expected to decrease.
The rate of prepayment on the Mortgage Loans may also be influenced by
programs offered by mortgage originators and servicers (including the Master
Servicer), on a general or targeted basis, to encourage refinancing. Any such
solicited refinancings may result in a rate of prepayment that is higher than
you might otherwise expect.
If you are purchasing the Class A 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 may 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 "Prepayment and Yield Considerations" in this Prospectus Supplement.
S-11
Rights of Beneficial Owners May Be Limited by Book-Entry System
The Class A Certificates will be held through the book-entry system of The
Depository Trust Company ("DTC") and transactions in the Class A Certificates
generally can be effected only through DTC and DTC Participants. As a result:
. your ability to pledge Class A Certificates to entities that do not
participate in the DTC system, or to otherwise act with respect to Class
A 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; and
For a more detailed discussion of book-entry certificates, see "Description
of the Certificates--Miscellaneous" in this Prospectus Supplement.
Limited Nature of Certificate Ratings
The ratings of the Class A Certificates depend primarily on an assessment by
the Rating Agencies of the underlying Mortgage Loans and the Certificate
Insurance Policy. The rating by the Rating Agencies of the Class A Certificates
. is not a recommendation to purchase, hold or sell the Class A
Certificates; and
. does not comment as to the market price or suitability of the Class A
Certificates for a particular investor.
There is no assurance that the ratings will remain for any given period of
time or that the ratings will not be reduced, suspended or withdrawn by the
Rating Agencies.
Realization Upon Nonperforming Loans; Delays and Expenses Associated With Legal
Actions
Foreclosure actions and actions to obtain deficiency judgments:
. are regulated by state laws and judicial rules;
. may be subject to delays; and
. may be expensive.
Because of these factors, if a borrower defaults, the Master Servicer may
have trouble foreclosing on a Mortgage Loan or obtaining a deficiency judgment.
If the Certificate Insurer does not make a required payment or if the Class B
Certificates are no longer outstanding, a delay or inability of the Master
Servicer to foreclose or obtain a deficiency judgment may delay distributions
on your Class A Certificates or result in a loss on your Class A Certificates.
Risk of Loss is Greater on Second Lien Mortgage Loans
Approximately % of the Mortgage Loans (by aggregate outstanding principal
balance as of the Cut-off Date) are secured by second liens on the related
Mortgaged Properties. Mortgage Loans secured by second mortgages will be
entitled to proceeds that remain from the sale of the related Mortgaged
Property:
. after any related senior mortgage loans and prior statutory liens have
been satisfied; and,
. if any senior liens were satisfied by the Master Servicer, after the
Master Servicer has been reimbursed.
S-12
If such proceeds are insufficient to satisfy such loans and prior liens in
the aggregate and the Certificate Insurer is unable to perform its obligations
under the Certificate Insurance Policy, your Class A Certificates may bear (i)
the risk of delay in distributions while a deficiency judgment against the
borrower is obtained and (ii) the risk of loss if the deficiency judgment is
not obtained or enforceable. See "Risk Factors--Increased Risk of Losses on
Foreclosure of Junior Mortgage Loans" in the Prospectus. In addition, the rate
of default of second mortgage loans may be greater than that of mortgage loans
secured by first liens on comparable properties.
Geographic Concentration May Increase Risk of Loss
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 regions have experienced natural disasters, including
earthquakes, fires, floods and hurricanes, which may adversely affect property
values. See the chart on page S-16 for a listing of the locations and
concentrations of Mortgaged Properties.
Any deterioration in housing prices in the states in which there is a
significant concentration of Mortgaged Properties, as well as the other states
in which the Mortgaged Properties are located, and any deterioration of
economic conditions in such states which adversely affects the ability of
borrowers to make payments on the Mortgage Loans and may increase the
likelihood of losses on the Mortgage Loans. Such losses, if they occur, may
have an adverse effect on the yield to maturity of the Class A Certificates.
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;
. prohibit unfair and deceptive practices;
. regulate the use of consumer credit information; and
. regulate debt collection practices.
Violations of certain provisions of these laws may limit the ability of the
Master Servicer to collect all or part of the principal of or interest on the
Mortgage Loans, may entitle the mortgagor to a refund of amounts previously
paid and may subject the Depositor, the Master Servicer or the Trust Fund to
damages and administrative enforcement. The Depositor will be required to
repurchase any Mortgage Loans which, at the time of origination, did not comply
with such federal laws or regulations. See "Certain Legal Aspects of the
Mortgage Loans" in the Prospectus.
Year 2000 Readiness Disclosure
The Depositor is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000 problem" is pervasive and complex; virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data, fail or cause another
system to fail. "Systems" include all hardware, networks, systems and
application software, commercial "off-the-shelf" software, data and voice
communication devices, and embedded technology such as date-impacted
S-13
processors in automated systems such as elevators, telephone systems, security
systems, vault systems, heating and cooling systems and others.
The Depositor has been advised by the Master Servicer and the Trustee that
they are committed to either (i) implementing modifications to their respective
existing systems to the extent required to cause them to be year 2000 compliant
or (ii) acquiring computer systems that are year 2000 compliant, in each case
prior to January 1, 2000. However, neither the Depositor nor any affiliate of
the Depositor has made any independent investigation of the computer systems of
the Trustee. If computer problems arise out of a failure of such efforts to be
completed on time, or if the computer systems of the Trustee or the Master
Servicer are not fully year 2000 compliant, the resulting disruptions in the
collection or distribution of receipts on the Mortgage Loans could materially
adversely affect your Certificates.
DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to:
(i) impress upon them the importance of such services being year 2000
compliant; and (ii) determine the extent of their efforts for year 2000
remediation (and, as appropriate, testing) of their services. In addition, DTC
is in the process of developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
In the event that computer problems arise out of a failure of the efforts
described above to be completed on time, or in the event that the Systems of
the Trustee, the Master Servicer or DTC are not fully year 2000 compliant, any
resulting disruptions in the collection and distribution of receipts on or in
respect of the Mortgage Loans could materially adversely affect your
Certificates.
See "Risk Factors" in the Prospectus for a description of certain other risks
and special considerations applicable to the Offered Certificates.
THE MORTGAGE POOL
Mortgage Loan Characteristics
The mortgage pool with respect to the Certificates (the "Mortgage Pool") will
consist of approximately conventional mortgage loans evidenced by fixed-rate
promissory notes (each, a "Mortgage Note") having an aggregate principal
balance as of the Cut-off Date of approximately $ (the "Cut-Off Date
Principal Balance"). The Mortgage Notes are secured by mortgages or deeds of
trust or other similar security instruments creating first liens or second
liens on one- to four-family residential properties (the "Mortgaged
Properties"). For any Distribution Date, the "Due Date" will be the date in
each month on which monthly payments of principal and interest (the "Monthly
Payments") are due.
S-14
The Mortgaged Properties will consist of detached individual dwelling units,
individual condominiums, townhouses, duplexes, individual units in planned unit
developments and other attached dwelling units. Based upon representations
obtained from the mortgagors at the time of origination of the Mortgage Loans,
approximately % (by Cut-off Date Principal Balance) of the related Mortgaged
Properties are owner-occupied. At the date of issuance of the Certificates,
none of the Mortgage Loans will be delinquent more than 30 days. The Trust Fund
will include, in addition to the Mortgage Pool, (i) the amounts held from time
to time in one or more accounts (collectively, the "Collection Account")
maintained in the name of the Trustee, pursuant to the Pooling and Servicing
Agreement, (ii) the amounts held from time to time in the Distribution Account
(the "Distribution Account") maintained in the name of the Trustee pursuant to
the Pooling and Servicing Agreement, (iii) any property which initially secured
a Mortgage Loan and which is acquired by foreclosure or deed in lieu of
foreclosure, (iv) all insurance policies and the proceeds thereof described
below, (v) any right to require the Depositor to repurchase or substitute for
the Mortgage Loans on account of certain breaches of representation and
warranty as set forth in the Agreement, (vi) the Reserve Fund and (vii) the
Certificate Insurance Policy and the proceeds thereof.
The Mortgage Loans will be sold to the Depositor by JV Mortgage Capital, L.P.
("JVMC") on the Closing Date pursuant to a mortgage loan purchase agreement
between JVMC and the Depositor (the "Mortgage Loan Purchase Agreement"). JVMC
will have acquired the Mortgage Loans from one or more originators or sellers
that may be affiliates of the Depositor or of the partners of the Depositor
(the "Originators").
The Depositor will cause such Mortgage Loans purchased pursuant to the
Mortgage Loan Purchase Agreement to be assigned to the Trustee. The Master
Servicer will service the Mortgage Loans, pursuant to the Pooling and Servicing
Agreement.
The Depositor will make to the Trustee the representations and warranties
with respect to the Mortgage Loans as described in the Prospectus under
"Mortgage Loan Program--Representations and Warranties; Repurchases." The
Depositor will have a responsibility to repurchase a Mortgage Loan as to which
there is a breach of such representations and warranties that materially and
adversely affects the value of that Mortgage Loan and is not timely cured. The
only remedy available to Certificateholders for a breach of these
representations and warranties will be the repurchase obligation of the
Depositor in the Pooling and Servicing Agreement as described in the sections
of the Prospectus referred to above. The Trustee will enforce the Depositor's
repurchase obligation. In lieu of such repurchase obligation, the Depositor
may, within two years after the date of initial delivery of the Certificates,
substitute for the affected Mortgage Loan a substitute Mortgage Loan, as
described under "Mortgage Loan Program--Representations and Warranties;
Repurchases" in the Prospectus. The Mortgage Loan Purchase Agreement will
provide the Depositor with remedies against JVMC for breaches of
representations and warranties made by the Depositor with respect to the
Mortgage Loans in the Pooling and Servicing Agreement and for the failure to
deliver documentation with respect to the Mortgage Loans under the Pooling and
Servicing Agreement.
Certain data with respect to the Mortgage Loans is set forth below.
References herein to percentages of Mortgage Loans refer in each case to the
percentage of the Cut-off Date Principal Balance of the Mortgage Loans.
The Mortgage Loans were originated between , 199 , and , 199 . No more
than % of the Mortgaged Properties securing the Mortgage Loans are located in
any one zip code area. At origination, all of the Mortgage Loans had terms to
stated maturity of to years. The latest month and year in which any
Mortgage Loan matures is 202 . The Mortgage Loans had remaining terms to
stated maturity, calculated as of the Cut-off Date, of between approximately
and months and a weighted average remaining term to stated maturity as of the
Cut-off Date of approximately months. The interest rates (the "Mortgage
Rates") borne by the Mortgage Loans as of the Cut-off Date ranged from % per
annum to % per annum and the weighted average Mortgage Rate as of the Cut-off
Date was approximately % per annum.
S-15
Each Mortgage Loan had an original principal balance of not less than $
nor more than $ . The average outstanding principal balance of the Mortgage
Loans as of the Cut-off Date was approximately $ .
Set forth below is a description of certain additional characteristics of the
Mortgage Loans.
Geographical Distribution of Mortgaged Properties
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Mortgage Principal Principal
State or Territory Loans Balance Balance
------------------ -------- --------- --------------
.......................................... $ %
..........................................
..........................................
..........................................
..........................................
Other(1)......................................
---- ---- ---
Total....................................... $ %
==== ==== ===
- --------
(1) Other includes other states [ ] the District of Columbia with under %
concentrations individually.
Range of Cut-Off Date Principal Balances(1)
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Range of Cut-off Date Mortgage Principal Principal
Principal Balances Loans Balance Balance
--------------------- -------- --------- --------------
$ 0.01--$ 25,000.00 ................. $ %
$ 25,000.01--$ 50,000.00..................
$ 50,000.01--$ 75,000.00..................
$ 75,000.01--$ 100,000.00..................
$ 100,000.01--$ 200,000.00..................
$ 200,000.01--$ 300,000.00..................
$ 300,000.01--$ 400,000.00..................
$ 400,000.01--$ 500,000.00..................
$ 500,000.01--$ 600,000.00..................
$ 600,000.01--$ 700,000.00..................
$ 700,000.01--$ 800,000.00..................
$ 800,000.01--$ 900,000.00..................
$ 900,000.01--$1,000,000.00..................
$1,000,000.01--$1,500,000.00..................
$1,500,000.01--$2,000,000.00..................
$2,000,000.00--$2,500,000.00..................
$2,500,000.01--$3,000,000.00..................
$3,000,000.00--$3,500,000.00..................
$3,500,000.00--$4,000,000.00..................
--- ---- ---
Total....................................... $ %
=== ==== ===
- --------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans was approximately $ .
S-16
Range of Original Loan-to-Value Ratios(1)
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Range of Original Mortgage Principal Principal
Loan-to-Value Ratios Loans Balance Balance
- -------------------- -------- --------- --------------
0.01% - 50.00%................................ $ %
..........................................
..........................................
..........................................
..........................................
..........................................
95.01% - 99.99%...............................
100%..........................................
----- -------- ------
Total....................................... $ 100.00%
===== ======== ======
- --------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination was approximately %.
Occupancy Status
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Mortgage Principal Principal
Status Loans Balance Balance
- ------ -------- --------- --------------
Owner-Occupied................................ $ %
Second Home...................................
Investor......................................
----- -------- ------
Total....................................... $ 100.00%
===== ======== ======
Loan Purpose
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Mortgage Principal Principal
Loan Purpose Loans Balance Balance
- ------------ -------- --------- --------------
Purchase...................................... $ %
Rate and Term Refinance.......................
Equity Take-out...............................
----- -------- ------
Total....................................... $ 100.00%
===== ======== ======
Mortgaged Properties
Percent of
Mortgage Loans
Number Cut-off by Cut-
of Date off Date
Mortgage Principal Principal
Property Type Loans Balance Balance
- ------------- -------- --------- --------------
Single Family............................... $ %
De minimus Planned Unit Development
Condominium................................
Planned Unit Development....................
2-4 Family Residence........................
----- -------- ------
Total..................................... $ 100.00%
===== ======== ======
S-17
Range of Mortgage Rates(1)
Percent of
Mortgage Loans
Range of Number Cut-off by Cut-
Current of Date off Date
Mortgage Mortgage Principal Principal
Rates Loans Balance Balance
-------- -------- --------- --------------
6.50% - 6.74%................................ $ %
6.75% - 6.99%................................
7.00% - 7.24%................................
7.75% - 7.99%................................
8.00% - 8.24%................................
8.25% - 8.49%................................
8.50% - 8.74%................................
9.00% - 9.24%................................
9.25% - 9.49%................................
9.50% - 9.74%................................
9.75% - 9.99%................................
--- ---- ------
Total...................................... $ 100.00%
=== ==== ======
- --------
(1) As of the Cut-off Date, the weighted average current Mortgage Rate was %.
Range of Remaining Terms to Stated Maturity(1)
Percent of
Mortgage Loans
Remaining Number Cut-off by Cut-
Terms to of Date off Date
Stated Mortgage Principal Principal
Maturity Loans Balance Balance
--------- -------- --------- --------------
169 - 180.................................... $ %
253 - 264....................................
265 - 276....................................
277 - 288....................................
289 - 300....................................
--- ---- ------
Total...................................... $ 100.00%
=== ==== ======
- --------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity was months.
Underwriting
[All of the Mortgage Loans were underwritten in accordance with the
underwriting standards set forth under "Mortgage Loan Program--Underwriting
Standards" in the Prospectus.] [Describe any material elements of underwriting
criteria for the Mortgage Loans which vary from the underwriting standards in
the Prospectus.]
S-18
The following table sets forth the distribution of the Mortgage Loans among
the credit grades assigned by JVMC under the underwriting standards as of the
date of their origination.
Percent of Mortgage
Number of Loans by Cut-off Date
Company Credit Grade* Loans Principal Balance Principal Balance
--------------------- --------- ----------------- ---------------------
Grade A....................... $ %
Grade B.......................
Grade C.......................
--- ----- ---
Total..................... $ %
=== ===== ===
- --------
* Grade A refers collectively to the Grade A and Grade A- credit grades, Grade
B refers collectively to the Grade B and Grade B- credit grades and Grade C
refers collectively to the Grade C and Grade C- credit grades.
DELINQUENCY AND LOAN LOSS EXPERIENCE OF MASTER SERVICER
The following tables set forth the delinquency, foreclosure and loan loss
experience of residential mortgage loans acquired by Household Finance
Corporations ("HFC") through its correspondent business and serviced by HFC.
HFC's portfolio of mortgage loans may differ significantly from the Mortgage
Loans included in the Mortgage Pool in terms of interest rates, principal
balances, geographic distribution, Loan-to-Value Ratios and other relevant
characteristics. There can be no assurance, and no representation is made, that
the delinquency, foreclosure or loan loss experience with respect to the
Mortgage Loans in the Mortgage Pool will be similar to that reflected in the
tables below. The actual loss and delinquency experience on the Mortgage Loans
will depend, among other things, upon the value of the real estate securing
such Mortgage Loans and the ability of borrowers to make required payments.
Loan Delinquency and Foreclosure Experience(1)
Number of Principal Number of Principal Number of Principal Number of Principal
Loans Balance Loans Balance Loans Balance Loans Balance
--------- --------- --------- --------- --------- --------- --------- ---------
As of As of December 31, As of As of
December 31, 19 19 December 31, 19 June 30, 19
------------------- ------------------- ------------------- -------------------
Loans outstanding............ $ $ $ $ $ $
30-59 days.................
60-89 days.................
90 days or more............
---- ----- ---- ----- ----- ----- ----- -----
Total delinquencies(3)....... $ $ $ $ $ $
==== ===== ==== ===== ===== ===== ===== =====
Delinquencies as a percent of
number of mortgage loans and
principal amount
outstanding................. %
Foreclosures/bankruptcies..
Foreclosures as a percentage
of number of mortgage loans
and principal amount
outstanding................. %
- --------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the dated indicated. All
dollar amounts are in millions.
(2) No mortgage loan is included in this table as delinquent until it is 30
days past due.
(3)Entries may not add up to total due to rounding.
S-19
The following table presents, for HFC's portfolio of mortgage loans, the net
losses on the disposition of properties acquired in foreclosure or by deed-in-
lieu of foreclosure during the periods indicated.
Loan Loss Experience
Fiscal Year Ended Six Month Period
December 31, Ended June 30,
------------------- ----------------
19 19 19 19
----- ----- ----- ----------------
Average principal balance outstanding... $ $ $ $
Net losses(1)........................... $( ) $( ) $( ) $( )
Net losses as a percent of average
principal balance outstanding.......... % % % %
- --------
(1) Net losses are defined for purposes of this table as proceeds from sale
less outstanding principal balance less certain capitalized costs related
to disposition of the related property (inclusive of accrued interest).
No assurance can be given that values of the Mortgaged Properties as of the
dates of origination of the related Mortgage Loans have remained or will remain
constant. In certain regions of the country, including regions in which
Mortgaged Properties are located, real estate values have recently declined. If
the residential real estate market should experience an overall decline in
property values such that the outstanding balances of the Mortgage Loans equal
or exceed the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those currently
experienced in the mortgage lending industry in general. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by borrowers of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Pool. To
the extent that such losses are not covered by the subordination feature
described under "Description of the Certificates--Subordinated Certificates" or
the Reserve Fund, subject to the effect of the Certificate Insurance Policy as
described in this Prospectus Supplement under "Description of the
Certificates--Distributions on the Certificates," they will be borne by holders
of the related Class A Certificates.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of each interest payment on such Certificates and the yields to maturity
of such Certificates are related to and affected by the rate and timing of
payments of principal on the underlying Mortgage Loans. The principal payments
on the Mortgage Loans may be in the form of scheduled principal payments or
prepayments, repurchases or liquidation proceeds due to default, casualty,
condemnation and the like. Any such payments will result in distributions to
the Certificateholders of amounts attributable to principal which would
otherwise be distributed over the remaining term of the Mortgage Loans. In
addition, because the Class A Certificates will be entitled to receive all or a
disproportionate percentage of unscheduled principal payments on the Mortgage
Loans (including liquidations due to default) on each Distribution Date until
the Class A Certificate Balance is reduced to zero, rather than the portion
thereof proportionate to their interest in the Mortgage Loans, the rate of
principal payments on the Mortgage Loans will, unless offset by cash flow
insufficiencies due to delinquencies and liquidation losses, have a greater
effect on the rate of principal payments and the amount of interest payments
on, and the yields to maturity of, the Class A Certificates than if the Class A
Certificates were entitled only to their proportionate interest in the Formula
Principal Distribution Amounts for the Mortgage Loans. See "Description of the
Certificates--Distributions on the Certificates." In general, the prepayment
rate may be influenced by a number of factors, including general economic
conditions, homeowner mobility and the level of mortgage market interest rates.
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 by the Master Servicer as described
herein. See "The Mortgage Pool" and "Description of the Certificates--Optional
Termination" in this Prospectus Supplement. In such event, the repurchase price
will be passed through to the applicable Certificateholders as a prepayment of
principal in the month following the month of such repurchase.
S-20
Mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, mortgage loans could be subject to higher prepayment rates
than if prevailing interest rates remain constant. No prediction can be made as
to the rate of prepayments on the Mortgage Loans in stable or changing interest
rate environments.
In the case of any Class A Certificates purchased at a discount to their
original principal amounts, a slower than anticipated rate of principal
payments is likely to result in a lower than anticipated yield. In the case of
Class A Certificates purchased at a premium to their original principal
amounts, a faster than anticipated rate of principal payments is likely to
result in a lower than anticipated yield.
In the event of the acceleration of Mortgage Loans as a result of enforcement
of "due-on-sale" provisions in connection with transfers of the related
Mortgaged Properties, the level of prepayments on the Mortgage Loans will be
affected, thereby shortening the weighted average life of the Class A
Certificates. See "Yield and Prepayment Considerations" in the Prospectus.
If a Mortgage Loan is prepaid in full, interest thereon will cease to accrue
on the date of the prepayment. Consequently, the timing of prepayments in full
on Mortgage Loans will affect the amount of the Available Distribution Amount
available to make distributions of interest on the Certificates and will
therefore affect the ability of the Trust Fund to make a full distribution of
interest on the Class A Certificates and the Formula Principal Distribution
Amount. The Master Servicer's Master Servicing Fee in respect of the month of
prepayment will be applied to make up for any reduced amount of interest
collections on account of the timing of the receipt of principal prepayments,
but no assurance can be given that the amount of the Master Servicing Fee will
be sufficient for such purpose. Net Interest Shortfalls will be borne by the
Certificateholders as described in this Prospectus Supplement under
"Description of the Certificates--Distributions on the Certificates" and will
result in a lower than anticipated yield.
Weighted Average Life of the Class A Certificates
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the weighted average life of the Class A
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Mortgage Loans.
"Weighted average life" refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average lives of the Class A Certificates
will be affected by the rate at which principal on the Mortgage Loans is paid.
Principal payments on Mortgage Loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments and liquidations due to default or other dispositions of Mortgage
Loans).
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Standard
Prepayment Assumption ("SPA"), represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life
of the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per
annum each month. As used in the table below, "0% SPA" assumes prepayment rates
equal to 0% of SPA, i.e., no prepayments. Correspondingly, " % SPA" assumes
prepayment rates equal to % of SPA, and so forth. SPA 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.
S-21
The following table has been prepared assuming that the Mortgage Loans have
the following characteristics (dollar amounts are approximate):
Remaining Term Original Term
Principal to Maturity to Maturity
Balance Mortgage Rate (in months) (in months)
- --------- ------------- -------------- -------------
----- ----- -----
===== ===== =====
In addition, the following table has been prepared assuming that the Mortgage
Loans have the following characteristics: (i) all calculations for the Mortgage
Loans are done on the basis of a 360-day year consisting of twelve 30-day
months; (ii) with respect to the Class A Certificates, all weighted average
lives are calculated on the basis of a 360-day year and a 30-day month; (iii)
Due Dates on each Mortgage Loan are the first day of the month; (iv) all
scheduled monthly payments on the Mortgage Loans are made in a timely fashion
on the first day of each month, commencing in , and prepayments are assumed
to be received on the last day of each month, commencing in ; (v)
distributions on the Class A Certificates are made on the [25th] day of each
month, commencing in ; (vi) the Closing Date is ; (vii) the Mortgage
Loans will prepay at the indicated assumed percentages of SPA; and (viii) with
regard to the weighted average lives, the Master Servicer does not exercise its
option to terminate the Trust Fund.
Based upon the foregoing assumptions, certain of which may not reflect actual
experience, the following tables indicate the projected weighted average life
of the Class A Certificates and the percentages of the initial Class A
Certificate Balance of such Class that would be outstanding after each of the
dates shown at various percentages of SPA.
Percentage of Initial Certificate Balance
Outstanding at the Following Percentages of SPA
Class A Certificates
Distribution Date % % % % % % % %
- ----------------- --- --- --- --- --- --- --- ---
Weighted Average Lives in Years(1).............
- --------
(1) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the certificate
balance by the number of years from the date of issuance of such
certificate to the related distribution date, (ii) adding the results and
(iii) dividing the sum by the initial certificate balance of the Class A
Certificate.
S-22
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement among the Depositor, the Master Servicer and the Trustee. A copy of
the Pooling and Servicing Agreement (exclusive of the list of Mortgage Loans)
will be attached as an exhibit to the Current Report on Form 8-K to be filed
with the Securities and Exchange Commission after the date of delivery of the
Certificates. Reference is made to the Prospectus for additional information
regarding the terms and conditions of the Agreement to the extent not revised
by the following description. To the extent that the statements in this
Prospectus Supplement modify statements in the Prospectus, the statements in
this Prospectus Supplement control.
The following summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the Pooling
and Servicing Agreement. When particular provisions or terms used in the
Pooling and Servicing Agreement are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
General
Exclusive of the interest of the Class R Certificates, the Class A
Certificates will initially evidence in the aggregate a beneficial interest of
approximately % in the pool of Mortgage Loans, and the Class B Certificates
will initially evidence the remaining approximate %. The Class R Certificates
do not have a principal balance. The pass-through rate (the "Pass-Through
Rate") for the Class A and Class B Certificates will be the percentage set
forth on page S-4 of this Prospectus Supplement.
The Class A Certificates will be issued in fully registered form only, in
denominations of $ and integral multiples of $ in excess thereof. The
Percentage Interest of a Class A Certificate is the percentage obtained from
dividing its denomination by the Original Class A Certificate Balance.
Definitive Certificates, if issued, will be transferable and exchangeable at
the corporate trust office of the Trustee at its Corporate Trust Department in
[ ] or, if it so elects, at the office of an agent in New York City. No
service charge will be made for any registration of exchange or transfer, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
Distributions of principal and interest on the Class A Certificates will be
made on the [25th] day of each month, or, if such day is not a business day,
the next succeeding business day (each, a "Distribution Date") beginning in
19 , to the persons in whose names the Class A Certificates are registered
at the close of business on the last business day of the month preceding the
month of the Distribution Date (the "Record Date"). The Class A Certificates
will initially be represented by certificates registered in the name of Cede &
Co. ("Cede") as the nominee of The Depository Trust Company ("DTC"). See "--
Miscellaneous" below. If Definitive Certificates are issued, distributions will
be made by check mailed to the address of the person entitled thereto as it
appears on the Certificate Register, except that a Certificateholder who holds
Class A Certificates with original denominations aggregating at least $5
million may request payment by wire transfer of funds pursuant to written
instructions delivered to the Trustee at least ten business days prior to the
Record Date. The final distribution in retirement of Class A Certificates will
be made only upon presentation and surrender of the Class A Certificates at the
office or agency of the Trustee specified in the final distribution notice to
Class A Certificateholders.
The Collection Account will be established by the Master Servicer in the name
of and on behalf of the Trustee.
Distributions on the Certificates
Distributions of interest and principal to each holder of a Class A
Certificate will be made on each Distribution Date, commencing in 19 , in
an amount equal to each such holder's respective Percentage Interest multiplied
by the amount distributed in respect of Class A Certificates. Certain
calculations
S-23
with respect to the Certificates will be made by the Master Servicer on the [ ]
day of the month (or if such [ ] day is not a business day, then on the next
preceding business day) (the "Determination Date"). Distributions on the Class
A Certificates will be applied first to interest and then to principal. All
calculations of interest on the Certificates will be made on the basis of a
360-day year consisting of twelve 30-day months. Interest will accrue with
respect to each Distribution Date during the one-month period beginning on the
first day of the month preceding the month of such Distribution Date and ending
on the last day of the month preceding the month of such Distribution Date
(each, an "Accrual Period").
With respect to each Distribution Date, the "Available Distribution Amount"
will be the amount received in respect of the Mortgage Loans that is on deposit
in the Collection Account as of the close of business on the related
Determination Date plus the Advances deposited in the Distribution Account
(described below) for such Distribution Date, less the following amounts:
(a) amounts received on particular Mortgage Loans as late payments or
other recoveries of interest or principal (including Liquidation Proceeds,
Insurance Proceeds and condemnation awards) and respecting which the Master
Servicer previously made an unreimbursed Advance of such amounts;
(b) amounts representing the reimbursement for Non-recoverable Advances
and other amounts (including the Master Servicing Fee) permitted to be
withdrawn by the Master Servicer from, or not required to be deposited in,
the Collection Account;
(c) amounts representing all or part of a Monthly Payment due after the
immediately preceding Due Date;
(d) all proceeds from the repurchase of a Mortgage Loan, Principal
Prepayments, Liquidation Proceeds, Insurance Proceeds and condemnation
awards with respect to Mortgage Loans received after the related Principal
Prepayment Period, and all related payments of interest representing
interest for any period of time after the related Due Date; and
(e) all income from Eligible Investments held in the Collection Account
for the account of the Master Servicer.
On each Distribution Date the Available Distribution Amount will be deposited
into the Distribution Account. In addition, on or before each Distribution
Date, the Trustee will deposit into the Distribution Account (i) the payments,
if any, it has received under the Certificate Insurance Policy and (ii) any
Reserve Fund draw amounts, in each case for distribution on such Distribution
Date.
On each Distribution Date the Available Distribution Amount will be
distributed in the following amounts and order of priority (the "Available
Distribution Amount Allocation")
(i) to the Class A Certificateholders, interest for the related Accrual
Period at the Pass-Through Rate for the Class A Certificates on the Class A
Certificate Balance, together with any previously undistributed shortfalls
in required distributions of interest on the Class A Certificates (the
"Class A Unpaid Interest Shortfall"). Interest distributions are reduced as
a result of Net Interest Shortfalls as described below;
(ii) the Class A Formula Principal Distribution Amount to the Class A
Certificateholders on account of principal until the Class A Certificate
Balance is reduced to zero;
(iii) to the Certificate Insurer, the monthly premium due on the
Certificate Insurance Policy;
(iv) to the Certificate Insurer, an amount equal to any previously
unreimbursed payments made under the Certificate Insurance Policy and any
fees and expenses owed to it under the related insurance agreement,
together with interest thereon (collectively, the "Unreimbursed Insurer
Amounts");
(v) to the Reserve Fund, the amount (but not in excess of the Formula
Excess Interest Amount) required to be deposited in the Reserve Fund;
(vi) to the Class B Certificateholders, interest for the related Accrual
Period at the Pass-Through Rate for the Class B Certificates on the Class B
Certificate Balance, together with any previously undistributed shortfalls
in required distributions of interest on the Class B Certificates;
S-24
(vii) on account of principal, to the Class A Certificateholders, the
Unrecovered Principal Amounts, if any, for the Mortgage Loans for such
Distribution Date and all prior Distribution Dates that have not previously
been distributed pursuant to this clause until the Class A Certificate
Balance is reduced to zero;
(viii) to the Class B Certificateholders on account of principal the
Class B Formula Principal Distribution Amount until the Class B Certificate
Balance is reduced to zero;
(ix) to the Class B Certificateholders, the Class B Loss Amounts not
previously distributed to them pursuant to this clause; and
(x) any remaining balance to the Class R Certificateholders.
As to any Distribution Date, the "Formula Principal Distribution Amount" is
the sum of:
(a) the principal portion of all Monthly Payments, whether or not
received, which were due on the related Due Date on Outstanding Mortgage
Loans as of the related Due Date;
(b) with respect to each Mortgage Loan, all Principal Prepayments made by
the Mortgagor during the month (the "Principal Prepayment Period")
preceding the month of such Distribution Date;
(c) with respect to each Mortgage Loan not described in (e) below, all
Insurance Proceeds, condemnation awards and any other cash proceeds from a
source other than the Mortgagor, to the extent required to be deposited in
the Collection Account pursuant to the Agreement, which are allocable to
principal and were received during the related Principal Prepayment Period,
net of related unreimbursed servicing advances;
(d) with respect to each Mortgage Loan that has been repurchased pursuant
to the Pooling and Servicing Agreement during the related Principal
Prepayment Period, an amount equal to the Principal Balance of the Mortgage
Loan as of the date of repurchase;
(e) with respect to each Mortgage Loan that became a Liquidated Mortgage
Loan during the related Principal Prepayment Period, the amount allocable
to the principal of such Liquidated Mortgage Loan that was recovered out of
the net liquidation proceeds in respect of such Liquidated Mortgage Loan in
such Principal Prepayment Period;
(f) with respect to each Mortgage Loan repurchased during the related
Principal Prepayment Period by the Depositor on account of a breach of a
representation or warranty that materially adversely affects the interests
of the Certificateholders or the Certificate Insurer, an amount equal to
the principal portion of the Purchase Price (exclusive of any portion
thereof included in clause (a) above); and
(g) any previously undistributed shortfall in the distribution of amounts
in clauses (a) through (f) of the Formula Principal Distribution Amount for
a prior Distribution Date.
The "Scheduled Formula Principal Distribution Amount" for a Distribution Date
is the amount specified in clause (a) of the preceding paragraph for such
Distribution Date. The "Unscheduled Formula Principal Distribution Amount" for
a Distribution Date is the sum of the amounts in clauses (b), (c), (d), (e) and
(f) of the preceding paragraph for such Distribution Date.
The "Unrecovered Principal Amount" in respect of a Liquidated Mortgage Loan
is the portion, if any, of the principal of such Liquidated Mortgage Loan that
was not recovered upon its liquidation. An Unrecovered Principal Amount in
respect of a Distribution Date is one that was incurred in the immediately
preceding Principal Prepayment Period.
An "Outstanding Mortgage Loan" in respect of a Due Date is a Mortgage Loan
which was not the subject of a Principal Prepayment in full prior to such Due
Date, which did not become a Liquidated Mortgage Loan prior to such Due Date
and which was not repurchased on account of certain breaches of a
representation or warranty or conversion prior to such Due Date.
The "Principal Balance" of a Mortgage Loan is its principal balance remaining
to be paid at the close of business on the Cut-off Date (after deduction of all
principal payments due on or before the Cut-off Date
S-25
whether or not paid, but without deducting Monthly Payments due after the Cut-
off Date and received on or before the Cut-off Date) reduced by all amounts
(including Advances, if any) distributed to Certificateholders relating to
principal of such Mortgage Loan.
The interest entitlement above for the Class A and Class B Certificates with
respect to each Distribution Date will be reduced by the amount of Net Interest
Shortfall allocable to each such Class. The Net Interest Shortfall on any
Distribution Date will be allocated pro rata among the Class A and Class B
Certificates based on the amount of interest each such Class of Certificates
would otherwise be entitled to receive on such Distribution Date.
The "Net Interest Shortfall" in respect of a Distribution Date is equal to
the sum of (i) the amount of interest which would otherwise have been received
with respect to any Mortgage Loan that was the subject of a Relief Act
Reduction and (ii) any Net Prepayment Interest Shortfall. The "Net Prepayment
Interest Shortfall" in respect of a Distribution Date is the aggregate of the
Prepayment Interest Shortfalls incurred on the Mortgage Loans in the preceding
Principal Prepayment Period that were not made up by the application of the
Master Servicing Fees collected by the Master Servicer in respect of such
Principal Prepayment Period. A "Relief Act Reduction" is a reduction in the
amount of monthly interest on a Mortgage Loan pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended.
In no event will the aggregate distributions of principal to the holders of
the Class A or Class B Certificates (whether out of Available Distribution
Amounts, Reserve Fund draw amounts or payments under the Certificate Insurance
Policy) exceed the initial Certificate Balance of such Class.
The "Formula Excess Interest Amount" in respect of a Distribution Date is the
amount, if any, by which (i) one month's interest at the Weighted Average Net
Mortgage Rate of the Mortgage Loans on the aggregate Principal Balance of the
Mortgage Loans as of the beginning of the preceding month (giving effect to the
scheduled principal payments due on such Due Date and unscheduled principal
payments received prior to such Due Date) exceeds (ii) interest for the related
Accrual Period at the Pass-Through Rate for such Distribution Date on the
aggregate Certificate Balance of the Class A and Class B Certificates.
The "Class A Certificate Balance" is the initial Class A Certificate Balance
less all prior distributions to Class A Certificateholders, on account of
principal.
The "Class B Certificate Balance", which shall not be less than zero, is the
initial Class B Certificate Balance less the sum of (i) all prior distributions
to the Class B Certificateholders on account of principal and (ii) the sum of
all Class B Loss Amounts for prior Distribution Dates. A "Class B Loss Amount"
for a Distribution Date is the amount, if any, by which (a) the sum of (x) the
Formula Principal Distribution Amount (exclusive of the amount in clause (g) of
the definition thereof) and (y) the aggregate of the Unrecovered Principal
Amounts, if any, for such Distribution Date exceeds (b) the amount distributed
on account of principal to the holders of the Certificates on such Distribution
Date. Class B Loss Amounts will not bear interest.
The term "Certificate Balance" when used in respect of a the Class A or Class
B Certificates, refers to the principal balance thereof as calculated in the
preceding two paragraphs.
The "Class A Formula Principal Distribution Amount" for a Distribution Date
is equal to the sum of (i) the Class A Percentage of the Scheduled Formula
Principal Distribution Amount and (ii) the Class A Prepayment Percentage of the
Unscheduled Formula Principal Distribution Amount.
The "Class A Percentage" for a Distribution Date is equal to the percentage
(which shall in no event be greater than 100%) derived from dividing the Class
A Certificate Balance by the Pool Scheduled Principal Balance (before giving
effect to the Formula Principal Distribution Amount for such Distribution
Date). The "Class A Prepayment Percentage" for a Distribution Date on or before
the Distribution Date in
S-26
20 will be 100%. The "Class A Prepayment Percentage" for a Distribution Date
after the Distribution Date in 20 will be as follows: for any
Distribution Date subsequent to 20 to and including the Distribution Date
in 20 , the Class A Percentage for such Distribution Date plus 70% of the
Subordinated Percentage for such Distribution Date; for any Distribution Date
subsequent to 20 to and including the Distribution Date in 20 , the
Class A Percentage for such Distribution Date plus 60% of the Subordinated
Percentage for such Distribution Date; for any Distribution Date subsequent to
20 to and including the Distribution Date in 20 , the Class A
Percentage for such Distribution Date plus 40% of the Subordinated Percentage
for such Distribution Date; for any Distribution Date subsequent to 20 to
and including the Distribution Date in 20 , the Class A Percentage for such
Distribution Date plus 20% of the Subordinated Percentage for such Distribution
Date; and for any Distribution Date thereafter, the Class A Percentage for such
Distribution Date (unless on any of the foregoing Distribution Dates the Class
A Percentage exceeds the initial Class A Percentage, in which case the Class A
Prepayment Percentage for such Distribution Date will once again be 100%).
Reduction of the Class A Prepayment Percentage in accordance with the preceding
sentence is subject to the satisfaction of certain criteria regarding
delinquency and loss experience of the Mortgage Loans.
In order for the reductions described above to be applicable with respect to
any Distribution Date, (i) cumulative Realized Principal Losses with respect to
the Mortgage Loans will not exceed % of the initial Class B Certificate
Balance, and (ii) the average aggregate outstanding principal balance on such
Distribution Date and for the preceding five Distribution Dates on the Mortgage
Loans delinquent 60 days or more (including for this purpose any Mortgage Loans
in foreclosure and Mortgage Loans with respect to which the related Mortgage
Property has been acquired by the Trust Fund) will not exceed % of the then-
outstanding Certificate Balance of the Class B Certificates.
The "Class B Formula Principal Distribution Amount" for a Distribution Date
is the sum of (i) the Subordinated Percentage of the Scheduled Formula
Principal Distribution Amount and (ii) the Subordinated Prepayment Percentage
of the Unscheduled Formula Principal Distribution Amount. The "Subordinated
Percentage" is equal to 100% less the Class A Percentage. The "Subordinated
Prepayment Percentage" is equal to 100% less the Class A Prepayment Percentage.
With respect to any Distribution Date, a "Distribution Account Shortfall" is
the sum of (a) the amount, if any, by which (x) the aggregate of the full
amounts due to be distributed pursuant to clauses (i) and (ii) of the Available
Distribution Amount Allocation exceeds (y) the amount of funds (exclusive of
funds representing the Insured Payment in respect of such Distribution Date)
that will be on deposit in the Distribution Account in respect of such
Distribution Date and available to be distributed on the Class A Certificates,
after taking into account all deposits to be made to the Distribution Account
on or prior to such Distribution Date, including without limitation all
Advances, all funds to be transferred from the Reserve Fund and (b) on the
Distribution Date that follows the month in which there occurs the latest
original scheduled maturity date of any Mortgage Loan that was an Outstanding
Mortgage Loan at any time during such month, the amount necessary to reduce the
Class A Certificate Balance to zero (after giving effect to all other
distributions of principal to be made on such Distribution Date in respect of
the Class A Certificates). Subject to the terms and conditions of the
Certificate Insurance Policy, the Insured Amount for a Distribution Date will
include the Distribution Account Shortfall, if any, for such Distribution Date.
See "The Certificate Insurance Policy and the Certificate Insurer" herein.
The "Net Mortgage Rate" of a Mortgage Loan is its Mortgage Rate less the sum
of (i) the Master Servicing Fee Rate of % and (ii) the Certificate Insurance
Policy annual premium rate (which, together with the Master Servicing Fee Rate,
will not exceed %). The "Weighted Average Net Mortgage Rate" is the weighted
average of the Net Mortgage Rates for the Mortgage Loans.
The Reserve Fund will be an account established with the Trustee and will
initially be funded up to $ from the application in the aggregate of the
Available Distribution Amount Allocation pursuant to clause (v). On each
Distribution Date, funds, if any, in the Reserve Fund will be applied in the
following order
S-27
of priority: (i) to make any required Advance that the Master Servicer fails to
make, (ii) to distribute any shortfall in the amount required to be distributed
to the Class A Certificateholders on such Distribution Date, (iii) to pay to
the Certificate Insurer the premium on the Certificate Insurance Policy for
such Distribution Date to the extent not paid under "--Distributions on the
Certificates" above and (iv) to pay to the Certificate Insurer any Unreimbursed
Insurer Amounts for such Distribution Date to the extent not paid under "--
Distributions on the Certificates" above. Collections of late Monthly Payments
covered by any Advance from the Reserve Fund will be applied to reinstate the
amount in the Reserve Fund up to $ . Similarly, the application of the
Available Distribution Amount Allocation pursuant to clause (v) may reinstate
the amount in the Reserve Fund up to $ . If the amount available in the
Reserve Fund on a Distribution Date is not sufficient to pay the entire amount
of shortfalls referred to in clauses (i) and (ii) in this paragraph, the amount
of such deficiency shall be allocated pro rata among the Class A Certificates
on the basis of their respective Certificate Balances prior to such
Distribution Date. Notwithstanding the foregoing, the aggregate amount
distributed from the Reserve Fund pursuant to clause (ii) of this paragraph
over the life of the Trust Fund shall not exceed $ . If an aggregate of $
has been applied pursuant to clause (ii) of this paragraph, then the Reserve
Fund may be reinstated one time up to $ from the application of the
Available Distribution Amount pursuant to clause (v) above, and funds, if any,
in the Reserve Fund may thereafter be applied only pursuant to clause (i) of
this paragraph.
Subordinated Certificates
The rights of the Class B Certificateholders and the Class R
Certificateholders to receive distributions with respect to the Mortgage Loans
will be subordinated to the rights of the holders of Class A Certificates to
the extent described herein. This subordination is intended to enhance the
likelihood of regular receipt by the holders of the Class A Certificates of the
full amount of monthly distributions due them and to protect the holders of the
Class A Certificates against losses.
The protection afforded to the holders of the Class A Certificates by means
of the subordination, to the extent provided herein, of the Class B and Class R
Certificates as described above will be accomplished (i) by the application of
the Available Distribution Amount in the order specified under "--Distributions
on the Certificates" above and (ii) if the Available Distribution Amount on
such Distribution Date is not sufficient to permit the distribution of the
entire Class A Formula Principal Distribution Amount and all previously
undistributed Unrecovered Principal Amounts to the holders of Class A
Certificates, by the right of the holders of such Class A Certificates to
receive any such shortfall out of future distributions of Available
Distribution Amounts that would otherwise have been payable to the holders of
the related Class B Certificates and the Class R Certificates, as applicable.
This subordination feature is effected for the Class A Certificates by
allocating principal among the Certificates on a shifting-interest payment
basis as described herein.
As described above, the distribution of principal to the holders of Class A
Certificates is intended to include the principal balance of each Mortgage Loan
that became a Liquidated Mortgage Loan during the related Principal Prepayment
Period. A "Liquidated Mortgage Loan" is, generally, a defaulted Mortgage Loan
as to which all amounts that the Master Servicer believes can be recovered with
respect to such Mortgage Loan or the property acquired in respect thereof have
been recovered. If the Liquidation Proceeds, net of related Liquidation
Expenses and any Advances in respect thereof, from such Liquidated Mortgage
Loan are less than the principal balance of such Liquidated Mortgage Loan, the
deficiency may, in effect, be absorbed by the holders of the Class B
Certificates since a portion of future Available Distribution Amounts funded by
future principal collections on the Mortgage Loans, up to the aggregate amount
of such deficiencies, that would otherwise have been distributable to them may
be paid to the holders of the Class A Certificates or to the Certificate
Insurer. No assurance can be given that the Class A Certificates will not
experience any losses.
If, due to losses and delinquencies, the Available Distribution Amount for
any Distribution Date is not sufficient to cover, in addition to interest
distributable to the holders of the Class A Certificates, the entire Formula
Principal Distribution Amount and any Unrecovered Principal Amounts
distributable to the holders of such Class A Certificates on such Distribution
Date, then the aggregate of the Pool Scheduled Principal
S-28
Balance will have become less than the outstanding Certificate Balance of the
Certificates. Such disproportionate reduction reduces the protection afforded
by the subordination of the Class B Certificates. Consequently, but for the
effect of the Certificate Insurance Policy, the holders of Class A Certificates
will bear all losses and delinquencies on the Mortgage Loans, and could incur
losses on their investment, if the Pool Scheduled Principal Balance becomes
equal to or less than the aggregate outstanding Certificate Balance of such
Class A Certificates.
Certificate Insurance Policy
The Depositor will obtain an irrevocable financial guaranty insurance policy
(the "Certificate Insurance Policy"), which will be issued by the Certificate
Insurer in favor of the Trustee and will provide for payment of Insured Amounts
(as defined herein) in accordance with the terms of the Certificate Insurance
Policy solely for the benefit of the holders of the Class A Certificates. The
Certificate Insurance Policy is non-cancelable. See "The Certificate Insurance
Policy and the Certificate Insurer" in this Prospectus Supplement.
The Certificate Insurer is required to pay Insured Amounts to the Trustee as
paying agent on the later of the applicable Distribution Date or the Business
Day next following the Business Day on which the Certificate Insurer receives a
notice of Nonpayment (as defined herein) in accordance with and subject to the
terms of the Certificate Insurance Policy. The Certificate Insurer is not
responsible for the application of any Insured Amount subsequent to the receipt
thereof by the Trustee.
The Certificate Insurance Policy does not cover shortfalls, if any,
attributable to the liability of the Trust Fund, the REMIC or the Trustee for
withholding taxes, if any (including interest and penalties in respect of any
such liability). In addition, the Certificate Insurance Policy does not protect
against the adverse consequences of, and does not guarantee, any specified rate
of prepayments nor protect against any risk other than Nonpayment, including
failure of the Trustee to make any Insured Payment due to holders of the Class
A Certificates. In addition, the Certificate Insurance Policy does not cover
any Net Interest Shortfalls in respect of the Class A Certificates.
Master Servicing Compensation and Payment of Expenses
The Master Servicer will be paid a monthly Master Servicing Fee with respect
to each Mortgage Loan in an amount equal to approximately one-twelfth of % of
the principal balance of each Mortgage Loan (the "Master Servicing Fee"). The
Master Servicer will not receive excess interest or excess proceeds as
additional servicing compensation. See "Federal Income Tax Consequences" in
this Prospectus Supplement and in the Prospectus.
The Master Servicer is obligated to pay certain ongoing expenses associated
with the Mortgage Pool and incurred by the Master Servicer in connection with
its responsibilities under the Agreement. See "The Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" in the
Prospectus for information regarding other possible compensation to the Master
Servicer and for information regarding expenses payable by the Master Servicer.
The Master Servicing Fee in respect of a month will be applied to make up any
Prepayment Interest Shortfall experienced on any prepayment of a Mortgage Loan
in such month in respect of which less than one month's interest is collected
in respect of such month. A "Prepayment Interest Shortfall" in respect of a
Mortgage Loan is the amount by which interest paid by the Mortgagor in
connection with a principal prepayment of such Mortgage Loan is less than one
month's interest at the related Mortgage Rate on the amount prepaid. See
"Prepayment and Yield Considerations" in this Prospectus Supplement. No
assurance can be given that the amount of the Master Servicing Fee will be
sufficient for such purpose.
S-29
Optional Purchase of Defaulted Mortgage Loans
The Depositor may, in its sole discretion, purchase from the Trust Fund (i)
any defaulted Mortgage Loan or any Mortgage Loan as to which default is
reasonably foreseeable and (ii) any Mortgage Loan as to which the Originator
has breached a representation or warranty to JVMC regarding the characteristic
of such Mortgage Loan. Any such purchase will be at a price equal to 100% of
the Principal Balance of such Mortgage Loan, plus any unreimbursed Advances in
respect thereof, together with accrued interest thereon at the Mortgage Rate
from the date through which interest was last paid by the related borrower or
advanced by the Servicer to the end of the Principal Prepayment Period
preceding the Distribution Date on which the proceeds of such purchase are
required to be distributed.
Advances
The Master Servicer is obligated to make Advances of cash each month, which
will be part of the Available Distribution Amount, equal to the amount of the
delinquent Monthly Payments due on the immediately preceding Due Date and not
paid. The Master Servicer is under no obligation to make an Advance with
respect to any Mortgage Loan if the Master Servicer determines, in its sole
discretion, that such Advance will not be recoverable from future payments and
collections on such Mortgage Loans based upon its general experience in
servicing mortgage loans, its assessment of the likelihood of ultimate payment
by the related Mortgagors and its estimate of Liquidation Proceeds. The Master
Servicer will be reimbursed for Advances out of the related late collections
and Liquidation Proceeds. The Master Servicer will be reimbursed for Advances
that it determines will not be recoverable out of related late collections and
Liquidation Proceeds ("Non-recoverable Advances") from funds in the Collection
Account. Advances are intended to maintain a regular flow of scheduled interest
payments to the Class A Certificateholders, not to guarantee or insure against
losses. Accordingly, any funds so advanced are recoverable by the Master
Servicer out of amounts received on Mortgage Loans. Advances are required to be
deposited in the Collection Account by the second Business Day prior to the
related Distribution Date. The Master Servicer may make an Advance (i) out of
its own funds, (ii) out of funds in the Collection Account that are not part of
the Available Distribution Amount for the related Distribution Date or (iii) by
any combination of clauses (i) and (ii). Advances made pursuant to clause (ii)
must be restored from the Master Servicer's funds when such amounts are
required to be distributed as part of an Available Distribution Amount.
Optional Termination
The Master Servicer may, at its option, on any Distribution Date, repurchase
from the Mortgage Pool all Mortgage Loans remaining outstanding at such time as
the Pool Scheduled Principal Balance is less than 10% of the Pool Scheduled
Principal Balance as of the Cut-off Date. The repurchase price to be
distributed to Certificateholders will equal the greater of (i) the aggregate
Principal Balances of the Mortgage Loans plus accrued interest thereon at the
related Net Mortgage Rate, plus the appraised value of any property acquired in
respect of a Mortgage Loan, (ii) the fair market value of the Mortgage Loans
and any property acquired in respect of a Mortgage Loan (as determined by the
Master Servicer) and (iii) the sum of (a) the aggregate of the Class A
Certificate Balance together with one month's interest at the Pass-Through Rate
and any Class A Unpaid Interest Shortfall and (b) the sum of the Class B
Principal Balance together with one month's interest at the Class B Pass-
Through Rate and any previously undistributed shortfall in interest due on the
Class B Certificates on prior Distribution Dates. The repurchase price will be
distributed to Certificateholders in the month following the month of
repurchase, first to the Class A Certificateholders to the extent of the amount
in clause (iii)(a) and then in accordance with the Pooling and Servicing
Agreement.
Miscellaneous
In determining the percentage of the Trust Fund evidenced by a Certificate
for purposes of determining the consent of Certificateholders or other action
by Certificateholders as discussed under "The Pooling and Servicing Agreement--
Amendments" in the Prospectus, such percentage shall be based upon the relative
outstanding
S-30
Balances of the Certificates. Amendments to the Pooling and Servicing Agreement
requiring the consent of Certificateholders shall require only the consent of
the holders of Certificates of each Class affected thereby, evidencing, as to
such Class, Percentage Interests aggregating at least 66%. Amendments to the
Pooling and Servicing Agreement may be made only with the prior written consent
of the Certificate Insurer. Certain other actions under the Agreement also
require the prior written consent of the Certificate Insurer. The Certificate
Insurer may direct the Trustee to waive any default by the Master Servicer
under the Agreement, except that a default in making any required distribution
on any Certificate may only be waived by the affected Certificateholder. Upon
an Event of Default, the Trustee may terminate the rights of the Master
Servicer only with the consent of the Certificate Insurer, and shall terminate
the Master Servicer at the direction of the Certificate Insurer.
The Class A Certificates will initially be registered in the name of Cede,
the nominee of DTC. DTC is a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the 1934 Act. DTC accepts securities for deposit from its participating
organizations ("Participants") and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and
may include certain other organizations. Indirect access to the DTC system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly.
Certificate Owners who are not Participants but desire to purchase, sell or
otherwise transfer ownership of Class A Certificates may do so only through
Participants (unless and until Definitive Class A Certificates, as defined
below, are issued). In addition, Certificate Owners will receive all
distributions of principal of and interest on the Class A Certificates from the
Trustee through DTC and Participants. Certificate Owners will not receive or be
entitled to receive certificates representing their respective interests in the
Class A Certificates, except under the limited circumstances described below.
Unless and until Definitive Class A Certificates (as defined below) are
issued, it is anticipated that the only "Certificateholder" of the Class A
Certificates will be Cede, as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners
are only permitted to exercise the rights of Certificateholders indirectly
through Participants and DTC.
While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations, DTC is required to make book-
entry transfers among Participants on whose behalf it acts with respect to the
Class A Certificates and is required to receive and transmit distributions of
principal of, and interest on, the Class A Certificates. Unless and until
Definitive Class A Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants by instructing such Participants to transfer Class A Certificates,
by book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Class A Certificates will be executed through DTC and the accounts
of the respective Participants at DTC will be debited and credited.
Class A Certificates will be issued in registered form to Certificate Owners,
or their nominees, rather than to DTC (such Certificates being referred to
herein as "Definitive Certificates"), only if (i) DTC or the Depositor advises
the Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as nominee and depository with respect to the
Class A Certificates and the Depositor or the Trustee is unable to locate a
qualified successor, (ii) the Depositor, at its sole option and with the
consent of the Trustee, elects to terminate the book-entry system through DTC
or (iii) after the occurrence of an Event of Default, DTC, at the direction of
Certificate Owners having a majority in Percentage Interests of the Class A
S-31
Certificates together, advises the Trustee in writing that the continuation of
a book-entry system through DTC (or a successor thereto) to the exclusion of
any physical certificates being issued to Certificate Owners is no longer in
the best interest of Certificate Owners. Upon issuance of Definitive
Certificates to Certificate Owners, such Certificates will be transferable
directly (and not exclusively on a book-entry basis) and registered holders
will deal directly with the Trustee with respect to transfers, notices and
distributions.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by a holder of Class A Certificates under the Agreement only at the
direction of one or more Participants to whose DTC account the Class A
Certificates are credited. DTC has advised the Depositor that DTC will take
such action with respect to any Percentage Interests of the Class A
Certificates only at the direction of and on behalf of such Participants with
respect to such Percentage Interests of the Class A Certificates. DTC may take
actions, at the direction of the related Participants, with respect to some
Class A Certificates which conflict with actions taken with respect to other
Class A Certificates.
Issuance of the Class A Certificates in book-entry form rather than as
physical certificates may adversely affect the liquidity of the Class A
Certificates in the secondary market and the ability of Certificate Owners to
pledge them. In addition, since distributions on the Class A Certificates will
be made by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants, which will further credit them to the accounts of
indirect participants of Certificate Owners, Certificate Owners may experience
delays in the receipt of such distributions.
The Trustee
will act as Trustee of the Trust Fund. The mailing address of the
Trustee's corporate trust office is and its telephone number is .
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, unconditionally and
irrevocably guarantees that an amount equal to each full and complete Insured
Amount (as defined below) will be received by the Trustee for distribution to
holders of the Class A Certificates in accordance with the terms of the
Agreement (as defined below). The Certificate Insurer's obligations under the
Certificate Insurance Policy with respect to a particular Insured Amount shall
be finally and completely discharged to the extent funds equal to the
applicable Insured Amount are received from the Certificate Insurer by the
Trustee. The Certificate Insurer is not responsible for the application of any
Insured Amount subsequent to the receipt thereof by the Trustee. Insured
Amounts shall be paid only at the time set forth in the Certificate Insurance
Policy.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust
Fund, the REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability). The Certificate
Insurance Policy does not protect against the adverse consequences of, and does
not guarantee, any specified rate of prepayments nor protect against any risk
other than Nonpayment, including failure of the Trustee to make any Insured
Payment due to holders of the Class A Certificates. In addition, the
Certificate Insurance Policy does not cover any Net Interest Shortfalls in
respect of the Class A Certificates.
In the event the Trustee has notice that any payment of principal or interest
which has been made to a holder of the Class A Certificates by or on behalf of
the Trustee has been deemed a preferential transfer and theretofore recovered
from its registered owner pursuant to the United States Bankruptcy Code in
accordance
S-32
with a final, nonappealable order of a court of competent jurisdiction, the
Certificate Insurer will make payment to the Trustee in respect thereof.
The Certificate Insurer will pay any amount payable under the Certificate
Insurance Policy from its own funds on the later of (a) the Business Day next
following the Business Day on which the Certificate Insurer receives a notice
of Nonpayment or (b) the Business Day prior to the applicable Distribution
Date. Such payments shall be made only upon presentation of an instrument in
form and substance satisfactory to the Certificate Insurer who shall be
subrogated to all rights of the holders of the Class A Certificates to payment
on the Class A Certificates to the extent of the insurance disbursements so
made. Once payments of the Insured Amounts have been made to the Trustee, the
Certificate Insurer shall have no further obligation in respect of such Insured
Amounts.
As used in the Certificate Insurance Policy, the following terms have the
following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of ,
19 , by and among the Depositor, the Master Servicer and the Trustee
without regard to any amendment or supplement thereto without the prior
consent of the Certificate Insurer.
"Insured Amount" and "Nonpayment" mean with respect to any Distribution
Date the sum of (i) the Distribution Account Shortfall for such
Distribution Date and (ii) any Preference Amount.
"Insured Payment" means with respect to any Distribution Date the Insured
Amounts paid to the Trustee by the Certificate Insurer.
"Preference Amount" means any payment of principal or interest which has
been made to a holder of the Class A Certificates by or on behalf of the
Trustee which has been deemed a preferential transfer and theretofore
recovered from its registered owner pursuant to the United States
Bankruptcy Code in accordance with a final, nonappealable order of a court
of competent jurisdiction.
The Certificate Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not covered by
the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premiums on the Certificate Insurance Policy are not refundable for any reason
including payment, or provision being made for payment, prior to the maturity
of the Class A Certificates.
The following table sets forth selected financial information on the basis of
generally accepted accounting principles.
[Selected Financial Information]
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the Prospectus, the consolidated financial
statements of the Certificate Insurer included as exhibits to the following
documents, which have been filed with the Securities and Exchange Commission by
the Certificate Insurer, are hereby incorporated by reference in the
Registration Statement to which the Prospectus and this Prospectus Supplement
form a part:
(a) Annual Report on Form 10-K of the Certificate Insurer for the year
ended December 31, 19 , which Report included as an exhibit the Certificate
Insurer and subsidiaries' audited consolidated financial statements for the
year ended December 31, 19 .
(b) Quarterly report on form 10-Q for the period ended , 19 , which
report includes as an exhibit the Certificate Insurer unaudited financial
statements for the month period ended , 19 .
S-33
All financial statements of the Certificate Insurer and subsidiaries included
in documents filed pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Class A Certificates shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
The Certificate Insurer makes no representation regarding Certificates or the
advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, the Prospectus or
this Prospectus Supplement other than the information supplied by the
Certificate Insurer and presented herein under the heading "The Certificate
Insurance Policy and the Certificate Insurer."
FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft, special tax counsel to the Depositor. Assuming compliance with all
provisions of the Pooling and Servicing Agreement, for federal income tax
purposes, the Trust Fund will qualify as a REMIC under the Code.
For federal income tax purposes, the Class A and Class B Certificates will
represent ownership of "regular interests" in the REMIC and will generally be
treated as debt instruments issued by the REMIC, and the Class R Certificates
will constitute the sole class of "residual interests" in the REMIC. Holders of
the Class A Certificates must report income on the Class A Certificates on the
accrual method of accounting. See "Federal Income Tax Consequences--REMICs" in
the Prospectus.
For federal income tax reporting purposes, the Class A Certificates will
[not] be treated as having been issued with original issue discount. The
prepayment assumption that will be used with respect to the Class A
Certificates in determining the rate of accrual of original issue discount,
market discount and premium, if any, for federal income tax purposes will be
based on the assumption that, subsequent to the date of any determination the
Mortgage Loans will prepay at a rate equal to a % SPA. No representation is
made that the Mortgage Loans will prepay at this rate or at any other rate. See
"Federal Income Tax Consequences--REMICs--Taxation of Owners of Regular
Certificates--Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers
of the Class A Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A Certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC Regular
Certificates that provide for payments based on an adjustable rate. Because of
the uncertainty concerning the application of the OID Regulations in ways that
could preclude their application to such Certificates even in the absence of
Section 1272(a)(6) of the Code, the IRS could assert that the Class A
Certificates are issued with original issue discount or should be governed by
the rules applicable to debt instruments having contingent payments or by some
other method not yet set forth in regulations. Prospective purchasers of the
Class A Certificates are advised to consult their tax advisors concerning the
tax treatment of such Certificates.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used in preparing reports to the
Certificateholders and the IRS.
The Class A Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Class A Certificate
will be treated as holding a Certificate with amortizable bond premium will
depend on such Certificateholders' purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of the Class A
S-34
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of Regular Certificates" and "--
Amortizable Premium" in the Prospectus.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code generally to the extent that such Class
A Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. See "Description of the Certificates--Optional
Termination" in this Prospectus Supplement and "Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"). Investors should consult with their own legal advisors in
determining whether and to what extent the Class A Certificates constitute
legal investments for such investors. See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
As described in the Prospectus under "ERISA Considerations," Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
Section 4975 of the Code impose certain duties and restrictions on employee
benefit plans and certain other retirement plans and arrangements subject
thereto (collectively, "Plan") and on persons who have certain specified
relationships to Plans, including fiduciaries and service providers. Comparable
duties and restrictions may exist with respect to any "governmental plan" (as
defined in Section 3(32) of ERISA) subject to a federal, state or local law
("Similar Law") which is, to a material extent, similar to the foregoing
provisions of ERISA or the Code. There are certain exemptions issued by the
United States Department of Labor (the "DOL") that may be applicable to an
investment by a Plan in the Class A Certificates, including the individual
administrative exemption described below and Prohibited Transaction Class
Exemption 83-1 ("PTE 83-1"). For a further discussion of the individual
administrative exemption and PTE 83-1, including the necessary conditions to
their applicability, and other important factors to be considered by a Plan
contemplating investing in the Class A Certificates, see "ERISA Considerations"
in the Prospectus.
The DOL has issued to First Union Corporation, the ultimate parent of First
Union Capital Markets Corp. an administrative exemption (the "Exemption"), from
certain of the prohibited transaction provisions of Sections 406(a) and (b) and
407(a) of ERISA, and the excise taxes imposed on such prohibited transactions
pursuant to Sections 4975(a) and (b) of the Code with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates
representing interests in asset-backed pass-through trusts that consist of
certain receivables, loans, and other obligations that meet the conditions and
requirements of the Exemption. The receivables covered by the Exemption apply
to mortgage loans such as the Mortgage Loans in the Trust Fund. The Exemption
will apply to the acquisition, holding and resale of the Class A Certificates,
underwritten by an "Underwriter," as hereinafter defined, provided that certain
conditions set forth in the Exemption application are satisfied. For purposes
of this discussion, the term "Underwriter" shall include (a) First Union
Capital Markets Corp. and [ ], (b) any person directly or indirectly, through
one or more intermediaries, controlling, controlled by, or under common control
with First Union Capital Markets Corp. or [ ] and (c) any member of the
underwriting syndicate or selling group of which First Union Capital Markets
Corp. or [ ] or a person described in (b) is a manager or co-manager with
respect to the Class A Certificates.
S-35
The Exemption sets forth six general conditions which must be satisfied for a
transaction involving the purchase, sale, and holding of Class A Certificates
to be eligible for exemptive relief under the Exemption. First, the acquisition
of Class A Certificates by a Plan must be on terms that are at least as
favorable to the Plan as they would be in an arm's length transaction with an
unrelated party. Second, the rights and interests evidenced by the Class A
Certificates must not be subordinated to the rights and interests evidenced by
the other certificates of the same trust. Third, the Class A Certificates at
the time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by Standard & Poor's, Moody's Investors Service,
Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. Fourth, the Trustee
cannot be an affiliate of any other member of the "restricted group," which
consists of any Underwriter, the Depositor, the Master Servicer, any
subservicer, the Trustee, the provider of any credit enhancement, any borrower
with respect to Mortgage Loans constituting more than 5% of the Cut-Off Date
Principal Balance and their affiliates. Fifth, the sum of all payments made to
and retained by the Underwriter must represent not more than reasonable
compensation for underwriting or placing the Class A Certificates; the sum of
all payments made to and retained by the Depositor pursuant to the assignment
of the Mortgage Loans to the Trust Fund must represent not more than the fair
market value of such Mortgage Loans; and the sum of all payments made to and
retained by the Master Servicer and any subservicer must represent 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. Sixth, the investing Plan must be an accredited investor
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act").
Because the Class A Certificates are not subordinated to any other class of
Certificates, the second general condition set forth above is satisfied with
respect to the Class A Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated not lower than "[ ]" and "[ ]" by
[ ] and [ ], respectively; thus, the third general condition set forth
above is satisfied with respect to the Class A Certificates as of the Closing
Date. In addition, the fourth general condition set forth above concerning the
Trustee not being an affiliate of any other member of the restricted group is
also satisfied as of the Closing Date. A fiduciary of a Plan contemplating
purchasing a Class A Certificate in the secondary market must make its own
determination that, at the time of such purchase, the Class A Certificates
continue to satisfy the third and fourth general conditions set forth above. A
fiduciary of a Plan contemplating any purchase of a Class A Certificate must
make its own determination that the first, fifth and sixth general conditions
set forth above will be satisfied with respect to such Class A Certificates as
of the date of such purchase.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and church plans (as defined in Section 3(33) of ERISA,
provided no election has been made under Section 410(b) of the Code) are not
subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Class A Certificates without regard to the ERISA restrictions
described above, subject to applicable provisions of other federal and state
laws.
Before purchasing a Class A Certificate, a fiduciary of a Plan should make
its own determination as to the availability of the exemptive relief provided
in the Exemption or the availability of any other prohibited transaction
exemptions (including PTE 83-1), and whether the conditions of any such
exemption will be applicable to the Class A Certificates, and fiduciary of a
governmental plan should make its own determination as to the need for an
availability of any exemptive relief under Similar Law. Any fiduciary of a Plan
or governmental plan considering whether to purchase a Class A Certificate
should also carefully review with its own legal advisors the applicability of
the fiduciary duty and prohibited transaction provisions ERISA, the Code or
Similar Law to such investment. See "ERISA Considerations" in the Prospectus.
INVESTMENTS BY PLANS ARE SUBJECT TO ERISA'S GENERAL FIDUCIARY REQUIREMENTS.
ACCORDINGLY, BEFORE INVESTING IN A CLASS A CERTIFICATE, A PLAN FIDUCIARY SHOULD
DETERMINE WHETHER SUCH AN INVESTMENT IS PERMITTED IN ACCORDANCE WITH THE
DOCUMENTS GOVERNING THE PLAN AND IS PRUDENT FOR THE
S-36
PLAN IN VIEW OF ITS OVERALL INVESTMENT POLICY AND THE COMPOSITION AND
DIVERSIFICATION OF ITS PORTFOLIO.
The sale of Class A Certificates to a Plan is in no respect a representation
by the Depositor or Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
UNDERWRITING
[First Union Capital Markets Corp.] [and] [ ], the [sole] underwriter
(the "Underwriter"), has agreed, on the terms and conditions of the
Underwriting Agreement (the "Underwriting Agreement") relating to the Class A
Certificates, to purchase the entire principal amount of the Class A
Certificates offered hereby.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Class A
Certificates offered hereby if any Class A Certificates are purchased.
The aggregate proceeds to the Depositor from the sale of the Class A
Certificates will be approximately $ , plus accrued interest, before
deducting expenses payable by the Depositor, estimated to be $ .
The distribution of the Class A Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of
sale. This Prospectus Supplement and the Prospectus may be used by the
Underwriter in connection with offers and sales related to market-making
transactions in the Class A Certificates. The Underwriter may act as principal
or agent in such transactions.
The Underwriter may effect such transactions by selling the Class A
Certificates to or through dealers, and such dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
Underwriter. In connection with the sale of the Class A Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Class A
Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A Certificates positioned by
them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or contribute to payments the Underwriter may be required to
make in respect thereof.
EXPERTS
The consolidated balance sheets of [the Certificate Insurer] and subsidiaries
as of December 31, 199 and December 31, 199 , and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 199 , incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of , independent accountants, given on the authority
of that firm as experts in accounting and auditing.
LEGAL OPINIONS
The validity of the Class A Certificates and certain tax matters with respect
thereto will be passed upon for the Depositor by Cadwalader, Wickersham & Taft
and for the Underwriter by Kennedy Covington Lobdell & Hickman, L.L.P.
S-37
RATINGS
It is a condition of the issuance of the Class A Certificates that they be
rated " " by and " " by (the "Rating Agencies").
The ratings assigned by to mortgage loan asset backed pass-through
certificates address the likelihood of the receipt by Certificateholders of
payments required under the Pooling and Servicing Agreement. 's ratings
take into consideration the credit quality of the mortgage pool, structural and
legal aspects associated with the Certificates, and the extent to which the
payment stream in the mortgage pool is adequate to make payments required under
the Certificates. 's rating on the Certificates does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
"Prepayment and Yield Considerations" in this Prospectus Supplement.
The ratings assigned by to mortgage loan asset backed pass-through
certificates also address the likelihood of the receipt by Certificateholders
of all distributions to which such Certificateholders are entitled. The rating
process addresses the structural and legal aspects associated with the
Certificates, including the nature of the underlying mortgage loans. The
ratings assigned to mortgage loan asset backed pass-through certificates do not
represent any assessment of the likelihood or rate of principal prepayments.
The ratings do not address the possibility that Certificateholders might suffer
a lower than anticipated yield.
The Depositor has not requested a rating on the Class A Certificates by any
rating agency other than and . However, there can be no assurance as
to whether any other rating agency will rate the Class A Certificates, or, if
it does, what rating would be assigned by any such other rating agency. A
rating on the Certificates by another rating agency, if assigned at all, may be
lower than the ratings assigned to the Class A Certificates by and .
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
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Class A Certificates are subsequently lowered for any reason, no person or
entity is obligated to provide any additional support or credit enhancement
with respect to the Class A Certificates.
S-38
INDEX OF DEFINED TERMS
A
Accrual Period............................................................. S-24
Agreement.................................................................. S-33
Available Distribution Amount.............................................. S-24
Available Distribution Amount Allocation................................... S-24
C
Cede....................................................................... S-23
Certificate Balance........................................................ S-26
Certificate Insurance Policy............................................... S-7
Certificate Insurer........................................................ S-5
Certificates............................................................... S-5
Class A Certificate Balance................................................ S-26
Class A Formula Principal Distribution Amount.............................. S-26
Class A Percentage......................................................... S-26
Class A Prepayment Percentage.............................................. S-26
Class A Unpaid Interest Shortfall.......................................... S-24
Class B Certificate Balance................................................ S-26
Class B Formula Principal Distribution Amount.............................. S-27
Class B Loss Amount........................................................ S-26
Closing Date............................................................... S-5
Code....................................................................... S-10
Collection Account......................................................... S-15
Cut-Off Date............................................................... S-5
Cut-Off Date Principal Balance............................................. S-14
D
Definitive Certificates.................................................... S-31
Depositor.................................................................. S-5
Determination Date......................................................... S-24
Distribution Account....................................................... S-15
Distribution Account Shortfall............................................. S-27
Distribution Date.......................................................... S-5
DOL........................................................................ S-35
DTC........................................................................ S-12
Due Date................................................................... S-14
E
ERISA...................................................................... S-10
Exchange Act............................................................... S-34
Exemption.................................................................. S-9
F
Formula Excess Interest Amount............................................. S-26
Formula Principal Distribution Amount...................................... S-25
H
HFC........................................................................ S-19
I
Industry................................................................... S-14
Insured Amount............................................................. S-33
Insured Payment............................................................ S-33
IRS........................................................................ S-34
Issuer..................................................................... S-5
J
JVMC....................................................................... S-15
L
Liquidated Mortgage Loan................................................... S-28
M
Master Servicing Fee....................................................... S-29
Master Servicer............................................................ S-5
Monthly Payments........................................................... S-14
Mortgage Loan Purchase Agreement........................................... S-15
Mortgage Loans............................................................. S-6
Mortgage Note.............................................................. S-14
Mortgage Pool.............................................................. S-14
Mortgage Rates............................................................. S-15
Mortgaged Properties....................................................... S-14
N
Net Interest Shortfall..................................................... S-26
Net Mortgage Rate.......................................................... S-27
Net Prepayment Interest Shortfall.......................................... S-26
Non-offered Certificates................................................... S-4
Nonpayment................................................................. S-33
Non-recoverable Advances................................................... S-30
O
Offered Certificates....................................................... S-4
OID Regulations............................................................ S-34
Originators................................................................ S-15
Outstanding Mortgage Loan.................................................. S-25
P
Participants............................................................... S-31
Pass-Through Rate.......................................................... S-23
Plan....................................................................... S-35
Pooling and Servicing Agreement............................................ S-6
Preference Amount.......................................................... S-33
Prepayment Interest Shortfall.............................................. S-29
Principal Balance.......................................................... S-25
Principal Prepayment Period................................................ S-25
PTE 83-1................................................................... S-35
R
Rating Agencies............................................................ S-38
Record Date................................................................ S-5
Relief Act Reduction....................................................... S-26
Reserve Fund............................................................... S-8
S
Scheduled Formula Principal Distribution Amount............................ S-25
Securities Act............................................................. S-36
Similar Law................................................................ S-10
SMMEA...................................................................... S-35
SPA........................................................................ S-21
Subordinated Percentage.................................................... S-27
Subordinated Prepayment Percentage......................................... S-27
Systems.................................................................... S-13
T
Trust Fund.................................................................. S-5
Trustee..................................................................... S-5
S-39
U
Underwriter................................................................ S-37
Underwriting Agreement..................................................... S-37
Unrecovered Principal Amount............................................... S-25
Unreimbursed Insurer Amounts............................................... S-24
Unscheduled Formula Principal Distribution Amount.......................... S-25
W
Weighted average life...................................................... S-21
Weighted Average Net Mortgage Rate......................................... S-27
S-40
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. The +
+Depositor may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This prospec- +
+tus is not an offer to sell these securities and is not soliciting an offer +
+to buy these securities in any state where the offer or sale is not permit- +
+ted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS, SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1999
Prospectus
JV CAPITAL TRUST
Depositor
Residential Mortgage Pass-Through Certificates
(Issuable in Series by Separate Trust Funds)
- -------------- Each Trust Fund--
You should . will issue a series of residential mortgage pass-through
carefully certificates, which will consist of one or more classes of
consider the certificates; and
risk factors
beginning on
page 10 of
this
prospectus.
Neither the . will own--
certificates
of any . a pool or pools of fixed or adjustable interest rate,
series nor conventional mortgage loans which are secured by a
the related first, second or more junior lien on a one- to four-
underlying family residential property and all or a portion of
mortgage which may consist of sub-prime mortgage loans; and
loans will
be insured . other assets described in this prospectus and the
or accompanying prospectus supplement.
guaranteed
by any Each Pool of Mortgage Loans--
governmental
agency or . will be sold to the related Trust Fund by the Depositor,
instrumentality. who will have in turn purchased them from JV Mortgage
Capital, L.P., one of its affiliates;
The
certificates . will be underwritten to JV Mortgage Capital, L.P.'s
of each standards or such other standards as described in this
series will prospectus and the accompanying prospectus supplement; an
represent
interests in . will be master serviced by Household Finance Corporation.
the related
trust only Each Series of Certificates--
and will not
represent . will represent interests in the related Trust Fund;
interests in
or . may provide credit support for certain classes by
obligations "subordinating" certain classes to other classes of
of JV certificates; any subordinated classes will be entitled to
Capital payment subject to the payment of more senior classes and
Trust or any may bear losses before more senior classes;
JV Capital
Trust . may be entitled to one or more of the other types of
affiliate. credit support described in this prospectus; and
This . will be paid only from the assets of the related Trust
prospectus Fund.
may be used
to offer and
sell any
series of
certificates
only if
accompanied
by the
prospectus
supplement
for that
series.
- -------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved these 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 , 19 .
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING 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 Defined Terms" beginning on
page 107 in this Prospectus.
The Depositor's principal executive offices is located at 1100 North Market
Street, Rodney Square North, Wilmington, DE 19890 and the Depositor's telephone
number is (302) 651-1000.
----------------
2
TABLE OF CONTENTS
Page
----
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT...................................... 2
SUMMARY OF TERMS......................................................... 5
RISK FACTORS............................................................. 10
Limited Liquidity for Certificates..................................... 10
Real Estate Market Conditions Affect Mortgage Loan Performance......... 10
Geographic Concentration May Increase Rates of Loss and Delinquency.... 10
Rate of Prepayments on Assets May Adversely Affect Average Lives and
Yields of Certificates................................................ 11
Limited Assets for Payment of Certificates............................. 11
Limitations, Reduction and Substitution of Credit Enhancement.......... 12
Realization Upon Nonperforming Loans; Delays and Expenses Associated
with Legal Actions.................................................... 12
Increased Risk of Losses on Foreclosure of Junior Mortgage Loans....... 12
Increased Risk of Delinquencies and Foreclosures on Sub-prime Mortgage
Loans................................................................. 13
Increased Risk of Loss if Mortgage Loans are Delinquent................ 13
Effects of Failure to Comply with Consumer Protection Laws; Other Legal
Considerations........................................................ 13
Increased Risk of Loss as a Result of Subordination of Subordinate
Securities............................................................ 15
Limited Nature of Ratings.............................................. 15
Lowering of Rating on Certificates..................................... 15
Risks of Loss on Balloon Payment Loans if Obligor is Unable to
Refinance or Sell Related Property.................................... 15
Special Federal Tax Considerations Regarding Residual Certificates and
FASIT Certificates.................................................... 16
Owners of Book-Entry Certificates Not Entitled to Exercise Rights of
Holders of Certificates............................................... 16
Cash Flow Agreements are Subject to Counterparty Risk.................. 16
Page
----
THE TRUST FUND............................................................. 17
The Mortgage Loans....................................................... 17
General................................................................ 17
Payment Provisions of the Mortgage Loans............................... 18
Mortgage Loan Information in Prospectus Supplements.................... 19
Loan-to-Value Ratios................................................... 19
Single Family and Cooperative Loans.................................... 19
Home Equity Loans...................................................... 20
Substitution of Mortgage Loans........................................... 20
Cash Flow Agreements..................................................... 20
USE OF PROCEEDS............................................................ 21
THE DEPOSITOR.............................................................. 21
THE MASTER SERVICER........................................................ 21
MORTGAGE LOAN PROGRAM...................................................... 22
Underwriting Standards................................................... 22
Summaries of the Underwriting Programs................................... 24
Qualifications of Originators............................................ 27
Representations and Warranties; Repurchases.............................. 27
DESCRIPTION OF THE CERTIFICATES............................................ 28
General.................................................................. 28
Distributions on Certificates............................................ 30
General................................................................ 30
Available Distribution Amount.......................................... 30
Distributions of Interest.............................................. 31
Distributions of Principal............................................. 31
Unscheduled Distributions.............................................. 32
Categories of Classes of Certificates.................................... 32
Advances................................................................. 35
Reports to Certificateholders............................................ 36
Book-Entry Registration.................................................. 36
CREDIT ENHANCEMENT......................................................... 40
General.................................................................. 40
Subordination............................................................ 40
Mortgage Pool Insurance Policies......................................... 41
Special Hazard Insurance Policies........................................ 41
Bankruptcy Bonds......................................................... 42
Reserve Funds............................................................ 42
Cross Support............................................................ 43
Limited Guarantee........................................................ 43
Letter of Credit......................................................... 43
Surety Bonds............................................................. 43
Overcollateralization.................................................... 43
YIELD AND PREPAYMENT CONSIDERATIONS........................................ 44
THE POOLING AND SERVICING AGREEMENT........................................ 45
3
Page
----
Assignment of Mortgage Loans.............................................. 45
Payments on Mortgage Loans; Deposits to Collection Account................ 47
Pre-Funding Account....................................................... 49
Collection Procedures..................................................... 49
Hazard Insurance.......................................................... 50
Realization Upon Defaulted Mortgage Loans................................. 51
Primary Mortgage Insurance Policies..................................... 51
Junior Mortgages........................................................ 52
FHA Insurance; VA Guarantees............................................ 53
Servicing and Other Compensation and Payment of Expenses.................. 54
Evidence as to Compliance................................................. 55
Certain Matters Regarding the Master Servicer and The Depositor........... 55
Special Servicers......................................................... 56
Events of Default......................................................... 56
Rights upon Event of Default.............................................. 57
Amendment................................................................. 57
Termination; Optional Termination......................................... 58
The Trustee............................................................... 58
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS................................. 58
General................................................................... 59
Home Ownership and Equity Protection Act of 1994.......................... 59
Prepayment Charges........................................................ 59
Cooperatives.............................................................. 60
Foreclosure/Repossession.................................................. 61
Deed of Trust........................................................... 61
Mortgages............................................................... 61
Junior Mortgages........................................................ 62
Cooperative Loans....................................................... 62
Rights of Redemption...................................................... 63
Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders.................................................................. 64
Texas Home Equity Loans................................................... 66
Environmental Risks....................................................... 66
Due-On-Sale Clauses....................................................... 68
Prepayment Charges........................................................ 69
Subordinate Financing..................................................... 69
Applicability of Usury Laws............................................... 69
Soldiers' and Sailors' Civil Relief Act................................... 70
FEDERAL INCOME TAX CONSEQUENCES............................................. 70
General................................................................... 70
Taxable Mortgage Pools.................................................. 71
REMICs.................................................................... 71
Classification of REMICs................................................ 71
Characterization of Investments in REMIC Certificates................... 73
Tiered REMIC Structures................................................. 74
Page
----
Taxation of Owners of Regular Certificates............................. 74
Taxation of Owners of Residual Certificates............................ 81
Taxes That May Be Imposed on the REMIC Pool............................ 88
Taxation of Certain Foreign Investors.................................. 89
Grantor Trust Funds...................................................... 92
Classification of Grantor Trust Funds.................................. 91
Standard Certificates.................................................. 91
Stripped Certificates.................................................. 94
Reporting Requirements and Backup Withholding.......................... 97
Taxation of Certain Foreign Investors.................................. 97
STATE, LOCAL AND OTHER TAX CONSIDERATIONS.................................. 98
ERISA CONSIDERATIONS....................................................... 98
General.................................................................. 98
Certain Requirements under ERISA and the Code............................ 98
General................................................................ 98
Parties in Interest/Disqualified Persons............................... 99
Delegation of Fiduciary Duty........................................... 99
Applicability to Non-ERISA Plans....................................... 99
Administrative Exemptions................................................ 100
Individual Administrative Exemptions................................... 100
PTE 83-1............................................................... 101
Non-ERISA Plans and Exempt Plans......................................... 102
Unrelated Business Taxable
Income--Residual Certificates........................................... 102
LEGAL INVESTMENT........................................................... 102
METHOD OF DISTRIBUTION..................................................... 104
LEGAL MATTERS.............................................................. 105
FINANCIAL INFORMATION...................................................... 105
RATING..................................................................... 105
REPORTS TO CERTIFICATEHOLDERS.............................................. 105
WHERE YOU CAN FIND MORE INFORMATION........................................ 106
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... 106
INDEX OF DEFINED TERMS..................................................... 107
ANNEX I.................................................................... A-1
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES.............. A-1
Initial Settlement....................................................... A-1
Secondary Market Trading................................................. A-1
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS................. A-3
4
SUMMARY OF TERMS
. This summary highlights selected information from this document, but does not
contain all of the information that you should consider in making your
investment decision. To understand all of the terms of a Series of
Certificates, please read this entire document and the accompanying
Prospectus Supplement carefully.
. This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the Certificates
and is qualified by the full description of these calculations, cash flows
and other information in this Prospectus and the accompanying Prospectus
Supplement.
RELEVANT PARTIES FOR EACH SERIES OF CERTIFICATES
Issuer
Each series (each, a "Series") of Residential Mortgage Pass-Through
Certificates (the "Certificates") will be issued by a separate trust fund (a
"Trust Fund"). Each Series will be issued under a separate Pooling and
Servicing Agreement (each, a "Pooling and Servicing Agreement") to be entered
into with respect to such Series.
Depositor
JV Capital Trust, a business trust formed under the laws of the State of
Delaware. See "The Depositor."
Trustee
The trustee (the "Trustee") for each Series of Certificates will be specified
in the related Prospectus Supplement. See "The Pooling and Servicing Agreement"
herein for a description of the Trustee's rights and obligations.
Originators
The Depositor will acquire the Mortgage Loans for each Trust Fund from JV
Mortgage Capital, L.P. ("JVMC"). JVMC will acquire the Mortgage Loans from
originators or sellers that may be affiliates of the Depositor (the
"Originators"). The Originators may have originated the Mortgage Loans or
acquired them from other originators or entities.
Master Servicer
Household Finance Corporation ("HFC" and, in such capacity, the "Master
Servicer"), an affiliate of the Depositor, will service the Mortgage Loans
contained in each Trust Fund. The Master Servicer will perform or cause to be
performed the servicing functions with respect to the Mortgage Loans pursuant
to the related Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement."
TRUST FUND ASSETS
Each Trust Fund will own the related Mortgage Loans and certain other
accounts, obligations or agreements, in each case as described in the related
Prospectus Supplement.
If specified in the related Prospectus Supplement, a cash deposit will be
made into the Trust Fund on the date a Series is issued which will be used
within three months to purchase additional Mortgage Loans for the Trust Fund.
5
The Mortgage Loans in each Trust Fund:
. will be secured by first, second or more junior liens on fee simple or
leasehold interests in one- to four-family properties;
. may include cooperative apartment loans secured by shares issued by
private, nonprofit cooperative housing corporations;
. may be conventional loans not insured or guaranteed by any governmental
agency or may be loans insured by the Federal Housing Authority or
partially guaranteed by the Veterans' Administration;
. may include closed end and/or revolving home equity loans; and
. will be secured by real property located in one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the
United States.
See "The Trust Fund--The Mortgage Loans."
The payment terms on the Mortgage Loans may include one or more of the
following:
. interest may be paid at a fixed or adjustable rate;
. payment of interest may be deferred and the amount deferred added to the
principal balance of the loan;
. part of the interest payable may be paid by a party other than the
borrower;
. principal may be paid to fully amortize the loan over its life;
. principal may be amortized over a longer period than the life of the loan
so that a substantial payment is due at maturity; and
. monthly payments of principal and interest may be fixed for the life of
the loan or change over time.
See "The Trust Fund--The Mortgage Loans--Payment Provisions of the Mortgage
Loans."
DISTRIBUTIONS ON THE CERTIFICATES
Each Series of Certificates will include one or more classes. A class of
Certificates will be entitled, to the extent of funds available, to either:
. principal and interest payments in respect of the related Mortgage Loans;
. principal distributions, with no interest distributions;
. interest distributions, with no principal distributions; or
. 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 on Certificates--Distributions of Interest."
Except as otherwise specified in the applicable Prospectus Supplement,
interest on each class of Certificates of each Series will accrue at the pass-
through rate for each class indicated in the applicable Prospectus Supplement
(each, a "Pass-Through Rate") on its outstanding certificate balance or
notional amount. See "Description of the Certificates--Distributions on
Certificates--Distributions of Interest."
6
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 on
Certificates--Distributions of Principal."
Distribution Dates
Distributions on the Certificates will be made on the dates specified in the
related Prospectus Supplement (each, a "Distribution Date").
Distributions on Certificates may be made monthly, quarterly or semi-
annually, as 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.
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 the rights of the holders of the Senior Certificates of the
same Series to the extent and in the manner specified in the applicable
Prospectus Supplement.
Subordination is intended to enhance the likelihood of the timely receipt by
the Senior Certificateholders of their proportionate share of scheduled monthly
principal and interest payments on the related Mortgage Loans and to protect
them from losses. This protection will be effected by:
. the preferential right of the Senior Certificateholders to receive, prior
to any distribution being made in respect of the related Subordinated
Certificates on each Distribution Date, current distributions on the
related Mortgage Loans of principal and interest due them on each
Distribution Date out of the funds available for distributions on 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;
. the prior allocation to the Subordinated Certificates of all or a portion
of losses realized on the underlying Mortgage Loans; and/or
. such other method specified in the related Prospectus Supplement.
However, subordination does not provide full assurance that there will be no
losses on the Senior Certificates.
7
Other Types of Credit Enhancement
If so specified in the applicable Prospectus Supplement, the Certificates of
any Series, or any one or more classes of a Series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
. special hazard insurance policy . over-collateralization
. FHA insurance or a VA guarantee . bankruptcy bond
. mortgage pool insurance policy . limited guarantee
. reserve fund . financial guaranty insurance policy
. letter of credit . surety bond
. cross-support
Any credit support will be described in the applicable Prospectus Supplement.
See "Credit Enhancement."
ADVANCES OF DELINQUENT PAYMENTS
If specified in the related Prospectus Supplement, the Master Servicer will
be obligated to advance amounts (each, an "Advance") corresponding to
delinquent principal and interest payments (or, in the case of Home Equity
Loans, interest payments only) on the Mortgage Loans until the first day of the
month following the date on which the related Mortgaged Property is sold at a
foreclosure sale or the related Mortgage Loan is otherwise liquidated, or until
such other time as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, the Trustee or another
entity will be required to make Advances to the extent the Master Servicer
fails to do so. Any obligation to make Advances may be subject to limitations
described in the related Prospectus Supplement. Advances will be reimbursable
to the extent described in this Prospectus and in the related Prospectus
Supplement.
FORMS OF CERTIFICATES
The Certificates will be issued either:
. in book-entry form ("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 your Certificates, except
under extraordinary circumstances. 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
Certificates. 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 Registration."
OPTIONAL PURCHASE OF ALL MORTGAGE LOANS
If so specified in the Prospectus Supplement with respect to a Series, to
effect as early termination of the related Trust Fund, all, but not less than
all, of the Mortgage Loans in that Trust Fund and any property acquired with
respect to the Mortgage Loans may be purchased by the Master Servicer, the
Depositor or another person identified in the related Prospectus Supplement.
Any such purchase must be made at the time, in the manner and at the price
specified in such Prospectus Supplement.
8
Exercise of the right of purchase will result in the early retirement of the
Certificates of that Series. See "Yield and Prepayment Considerations."
ERISA LIMITATIONS
If you are a fiduciary of any employee benefit plan subject to the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), you should carefully review with your own legal
advisors whether the purchase or holding of Certificates could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Code. See
"ERISA Considerations."
TAX STATUS
The treatment of the Certificates for federal income tax purposes will depend
on:
. whether a REMIC election is made with respect to a Series of
Certificates;
. if a REMIC election is made, whether the Certificates are regular
interests or residual interests;
. whether a FASIT election is made with respect to a Series of
Certificates;
. if a FASIT election is made, whether the Certificates are regular
interests or ownership interests; and
. whether the Certificates are interests in a Trust Fund treated as a
grantor trust.
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"
herein and in the applicable Prospectus Supplement.
RATING
Certificates of any Series will not be offered pursuant to this Prospectus
and a Prospectus Supplement unless each class offered is rated in one of the
four highest rating categories by at least one nationally recognized
statistical rating organization (a "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.
9
RISK FACTORS
You should consider, among other things, the following factors in connection
with a purchase of Certificates.
Limited Liquidity for Certificates
The liquidity of your Certificates may be limited. You should consider that:
. the Prospectus Supplement for a Series of Certificates may indicate that
the underwriter intends to make a market in such Certificates, but no
underwriter is obligated to do so;
. a secondary market for a Series of Certificates may not develop or, if a
secondary market does develop, it may not provide you with liquidity of
investment or it may not continue for the life of your Certificates; and
. the Certificates will not be listed on any securities exchange.
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 mortgagors' 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 Fund 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 the Master 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 Trust Fund--The
Mortgage Loans" and "Mortgage Loan Program--Underwriting Standards."
Geographic Concentration May Increase Rates of Loss and Delinquency
In addition to risk factors related to the residential real estate market
generally, certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing markets or be
directly or indirectly affected by natural disasters or civil disturbances such
as earthquakes, hurricanes, floods, eruptions or riots. Mortgage loans in
affected areas will experience higher rates of loss and delinquency than on
mortgage loans generally. Although Mortgaged Properties located in certain
identified flood zones will be required to be covered, to the maximum extent
available, by flood insurance, as described under "The Pooling and Servicing
Agreement--Hazard Insurance," no Mortgaged Properties will otherwise be
required to be insured against earthquake damage or any other loss not covered
by standard hazard insurance policies, as described under "The Pooling and
Servicing Agreement--Hazard Insurance."
The ability of mortgagors to make payments on the Mortgage Loans may also be
affected by factors which do not necessarily affect property values, such as
adverse economic conditions generally, in particular geographic areas or
industries, or affecting particular segments of the borrowing community (such
as mortgagors relying on commission income and self-employed mortgagors). Such
occurrences may accordingly affect the actual rates of delinquencies,
foreclosures and losses with respect to any Trust Fund.
10
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. See "Yield and Prepayment
Considerations."
Rate of Prepayments on Assets May Adversely Affect Average Lives and Yields of
Certificates
The yield of 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 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 Fund are allocated to your
Certificates and may be adversely affected to the extent of unadvanced
delinquencies on the Mortgage Loans in the related Trust Fund. Classes of
Certificates identified in the applicable Prospectus Supplement as Subordinated
Certificates are more likely to be affected by delinquencies and losses than
other classes of Certificates.
See "Yield and Prepayment Considerations."
Limited Assets for Payment of Certificates
Except for any related credit enhancement described in the applicable
Prospectus Supplement,
. the Mortgage Loans included in the related Trust Fund will be the sole
source of payments on the Certificates of a Series;
. the Certificates of any Series will not represent an interest in or
obligation of the Depositor, any Originator, the Master Servicer, the
Trustee or any of their affiliates; and
. the Certificates of any Series will not be guaranteed or insured by any
governmental agency or instrumentality, the Depositor, the Master
Servicer, the Trustee, any of their affiliates or, except to the extent
specified in the related Prospectus Supplement, any other person.
Consequently, in the event that payments on the Mortgage Loans are
insufficient or otherwise unavailable to make all payments required on the
Certificates, there will be no recourse to the Depositor, the Master Servicer,
the Trustee or, except as specified in the applicable Prospectus Supplement,
any other entity.
11
Limitations, Reduction and Substitution of Credit Enhancement
With respect to each Series of Certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the underlying
Mortgage Loans. Under certain circumstances, the credit enhancement provided
may be limited to one or more classes of Certificates.
Credit enhancement will be provided in one or more of the forms referred to
herein, including, but not limited to: subordination of other classes of
Certificates of the same Series; a Limited Guarantee; a Letter of Credit; a
Mortgage Pool Insurance Policy; a Special Hazard Insurance Policy; a Bankruptcy
Bond; a Reserve Fund; cross support; FHA Insurance and VA Guarantee; a Surety
Bond; and any combination thereof. See "Credit Enhancement."
Regardless of the form of credit enhancement provided:
. the amount of coverage will be limited in amount and in most cases will
be subject to periodic reduction in accordance with a schedule or
formula;
. the credit enhancement may provide only very limited coverage as to
certain types of losses, and may provide no coverage as to certain other
types of losses; and
. all or a portion of the credit enhancement for any Series of Certificates
will generally be permitted to be reduced, terminated or substituted for,
if each applicable Rating Agency confirms that the then current rating of
the Certificates of such Series will not be adversely affected.
In the event 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).
See "Credit Enhancement."
Realization Upon Nonperforming Loans; Delays and Expenses Associated with Legal
Actions
Foreclosure action and actions to obtain deficiency judgment:
. are regulated by statutes and laws;
. may be subject to delays; and
. may be expensive.
If a borrower defaults, the Master Servicer, because of these factors, may
have trouble obtaining a deficiency judgment or foreclosing on a Mortgage Loan.
If the Certificate Insurer does not make a required payment or if the
Subordinated Certificates that provide credit enhancement for your certificates
are no longer outstanding, a delay or inability of the Master Servicer to
foreclose or obtain a deficiency judgment may delay distributions to your
Certificates or result in a loss on your Certificates.
Increased Risk of Losses on Foreclosure of Junior Mortgage Loans
Certain of the Mortgage Loans may be secured by junior liens and the related
first and other senior liens, if any (collectively, the "senior lien"), may not
be included in the Trust Fund. The primary risk to holders of Mortgage Loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related senior lien to satisfy
fully both the senior lien and the Mortgage Loan.
If a holder of the senior lien forecloses on a Mortgaged Property, the
proceeds of the foreclosure or similar sale will be applied first to the
payment of court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and owing to the
holder of the senior lien. The claims of the holder of
12
the senior lien will be satisfied in full out of proceeds of the liquidation of
the Mortgaged Property, if such proceeds are sufficient, before the Trust Fund
as holder of the junior lien receives any payments in respect of the Mortgage
Loan.
If the Master Servicer were to foreclose on any Mortgaged Property, it would
do so subject to any related senior lien. For the debt related to the Mortgaged
Property to be paid in full at such sale, a bidder at the foreclosure sale of
such Mortgage Loan would have to bid an amount sufficient to pay off all sums
due under the Mortgage Loan and the senior lien or purchase the Mortgaged
Property subject to the senior lien. If such proceeds from a foreclosure or
similar sale of the related Mortgaged Property were insufficient to satisfy
both loans in the aggregate, the Trust Fund, as the holder of the junior lien,
and, accordingly, you as an owner of the related Certificates, would bear the
risk of delay in distributions while a deficiency judgment against the borrower
was being obtained and the risk of loss if the deficiency judgment were not
realized upon. Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the
property securing a junior mortgage unless it forecloses subject to the senior
mortgage.
Increased Risk of Delinquencies and Foreclosures on Sub-prime Mortgage Loans
All or a portion of the Mortgage Loans may consist of mortgage loans
underwritten in accordance with the underwriting for "Sub-prime Mortgage
Loans". A Sub-prime Mortgage Loan is a mortgage loan that is ineligible for
purchase by Fannie Mae ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac") due to borrower credit characteristics, property
characteristics, loan documentation guidelines or other credit characteristics
that do not meet Fannie Mae or Freddie Mac underwriting guidelines. These may
include a loan made to a borrower whose creditworthiness and repayment ability
do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines and a
borrower who may have a record of major derogatory credit items such as default
on a prior mortgage loan, credit write-offs, outstanding judgments or prior
bankruptcies.
As a consequence, delinquencies and foreclosures can be expected to be more
prevalent with respect to Sub-prime Mortgage Loans than with respect to
mortgage loans originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines, and changes in the values of the Mortgaged Properties
may have a greater effect on the loss experience of Sub-prime Mortgage Loans
than on mortgage loans originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines.
Increased Risk of Loss if Mortgage Loans are Delinquent
A portion of the Mortgage Loans may be delinquent upon the issuance of the
related Certificates. Credit enhancement provided with respect to a particular
Series of Certificates may not cover all losses related thereto. You should
consider the risk that the inclusion of such Mortgage Loans in the Trust Fund
for a Series may cause the rate of defaults and prepayments on the Mortgage
Loans to increase. This may cause losses to exceed the available credit
enhancement for such Series and affect the yield on your Certificates.
Effects of Failure to Comply with Consumer Protection Laws; Other Legal
Considerations
There are various state laws, public policies and principles of equity that
protect consumers. These laws, policies and principles:
. regulate interest rates and other charges;
. require certain disclosure; and
. require the licensing of mortgage loan originators and servicers.
Violation of these laws, policies and principles:
. may limit the ability of the Master Servicer to collect all or part of
the principal of or interest on the Mortgage Loans;
13
. may entitle the borrower to a refund of amounts previously paid; and
. could subject the Master Servicer to damages and administrative
sanctions.
See "Certain Legal Aspects of Mortgage Loans."
The Mortgage Loans may also be subject to federal laws, including:
. the Federal Truth in Lending Act and Regulation Z promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of
the Mortgage Loans;
. the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in
the extension of credit;
. the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience; and
. the National Housing Act of 1934 (the "Housing Act") with respect to
Mortgage Loans insured thereunder.
The Mortgage Loans may be subject to the Home Ownership and Equity Protection
Act of 1994 (the "Home Ownership Act"), which amended the Federal Truth in
Lending Act as it applies to mortgages subject to the Home Ownership Act. The
Home Ownership Act requires:
. certain additional disclosures;
. specifies the timing of such disclosures;
. limits or prohibits the inclusion of certain provisions in mortgages
subject to the Home Ownership Act; and
. provides that any purchaser or assignee of a mortgage covered by the Home
Ownership Act is subject to all of the claims and defenses which the
borrower could assert against the original lender.
The maximum damages that may be recovered in an action under the Home
Ownership Act from an assignee is the remaining amount of indebtedness plus the
total amount paid by the borrower in connection with the mortgage loan. Any
Trust Fund for which the Mortgage Loans include Mortgage Loans subject to the
Home Ownership Act would be subject to all of the claims and defenses that the
borrower could assert against the original lender. Any violation of the Home
Ownership Act that would result in such liability would be a breach of the
applicable Warranting Party's representations and warranties, and the
Warranting Party would be obligated to cure, repurchase or, if permitted by the
related Agreement, substitute for the Mortgage Loan in question.
Certain of the Mortgage Loans may be home equity loans secured by mortgaged
properties located in Texas ("Texas Home Equity Loans"). The Texas Constitution
permits Texas Home Equity Loans, but significant limitations were imposed on
permitted terms, conditions and practices incident to their creation. For
example, Texas Home Equity Loans must be made without recourse for personal
liability against the homestead owner(s) or their spouse(s) (except in the case
of actual fraud on their part in obtaining the loan) and may be foreclosed upon
only by court order. Further, holders of Texas Home Equity Loans face unique
legal risks and uncertainties that they do not customarily confront with equity
take-out mortgages in other states. For example, if any of the requirements
that are addressed in the amendment to the Texas Constitution (such as
limitations on fees charged to the borrower, disclosures to the borrower or
matters to be provided for in the closing documents) are not met, the lien may
be invalid. There are also similar risks involved in servicing Texas Home
Equity 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.
14
Increased Risk of Loss as a Result of Subordination of Subordinate Securities
A Series of Certificates may consist of one or more classes of Senior
Certificates and one or more classes of Subordinated Certificates. The rights
of the holders of Subordinated Certificates to receive distributions from the
related Trust Fund will be subordinated to the rights of the holders of Senior
Certificates of the same Series to receive such distributions. The effect of
such subordination generally is that holders of Subordinated Certificates may
experience losses on the underlying Mortgage Loans before or to a greater
extent than holders of Senior Certificates. The Prospectus Supplement for each
Series will specify the rights of holders of Subordinated Certificates in
relation to the holders of Senior Certificates as well as the extent and
circumstances of any such subordination. See "Credit Enhancement--
Subordination."
Limited Nature of Ratings
Any rating assigned by a Rating Agency to a class of Certificates will
reflect such Rating Agency's assessment solely of the likelihood that holders
of Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Agreement. Such rating will
not constitute an assessment of:
. the likelihood that principal prepayments (including those caused by
defaults) on the related Mortgage Loans will be made;
. the degree to which the rate of such prepayments might differ from that
originally anticipated or;
. the likelihood of early optional termination or redemption of the Series
of Certificates.
Such rating will not address the possibility that prepayment at higher or
lower rates than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor purchasing a
Certificate at a significant premium might fail to recoup its initial
investment under certain prepayment scenarios. Each Prospectus Supplement will
specify whether any payment to which holders of offered Certificates are
entitled is not covered by the applicable rating.
Lowering of Rating on Certificates
The rating of any Series of Certificates by any applicable Rating Agency may
be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable credit support provider, as a
result of losses on the related Mortgage Loans substantially in excess of the
levels contemplated by such Rating Agency at the time of its initial rating
analysis, or otherwise as a result of the judgment of the applicable Rating
Agency.
If a rating on a Series or class of Certificates is lowered, the market value
of such Certificates and the liquidity of such Certificates may be adversely
affected.
None of the Depositor, the Master Servicer, the Trustee or any of their
affiliates will have any obligation to replace or supplement any credit support
or to take any other action to maintain any rating of any Series of
Certificates.
Risks of Loss on Balloon Payment Loans if Obligor is Unable to Refinance or
Sell Related Property
Certain of the Mortgage Loans (the "Balloon Loans") as of the Cut-off Date
may not be fully amortizing over their terms to maturity and, thus, will
require substantial principal payments (i.e., balloon payments) at their stated
maturity. Mortgage Loans with balloon payments involve a greater degree of risk
because the ability of an obligor to make a balloon payment typically will
depend upon its ability either to timely refinance the loan or to timely sell
the related property.
The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage
interest rates at the time of sale or refinancing, the obligor's equity in the
related property, the financial condition of the obligor, the value of the
property, tax laws, prevailing
15
general economic conditions and the availability of credit for single family or
multifamily real properties generally.
Special Federal Tax Considerations Regarding Residual Certificates and FASIT
Certificates
If you hold Residual Certificates you will be required to report on your
federal income tax return as ordinary income your pro rata share of the taxable
income of the related REMIC, regardless of the amount or timing of your receipt
of cash payments, as described in "Federal Income Tax Consequences--REMICs."
Under certain circumstances, you may have taxable income and tax liabilities
arising from such investment during a taxable year in excess of the cash
received during such period.
As a holder of Residual Certificates you may be limited in your ability to
deduct servicing fees and other expenses of the REMIC. In addition, you will
have to comply with certain transfer restrictions before transferring your
Residual Certificates.
Because of the special tax treatment of Residual Certificates, the taxable
income arising in a given year on a Residual Certificates will not be equal to
the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Residual Certificates may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics. If you are thinking of purchasing Residual
Certificates you should also be aware that applicable regulations prevent the
ability to mark-to-market REMIC residual interests. See "Federal Income Tax
Consequences-- REMICs." Special tax considerations relating to FASIT
Certificates will be discussed in the related Prospectus Supplement.
Owners of Book-Entry Certificates Not Entitled to Exercise Rights of Holders of
Certificates
If so provided in the Prospectus Supplement, one or more classes of the
Certificates offered hereby will be initially represented by one or more
certificates registered in the name of Cede, the nominee for DTC, and will not
be registered in the names of the owners or their nominees. Because of this,
unless and until Certificates are issued as Definitive Certificates, owners
will not be recognized by the Trustee as "Certificateholders" (as that term is
to be used in the related Pooling and Servicing Agreement). If you own
Certificates in book-entry form you will not be able to exercise the rights of
a Certificateholder directly, but only indirectly through DTC and its
participating organizations. See "Description of the Certificates--Book-Entry
Registration."
Cash Flow Agreements are Subject to Counterparty Risk
The assets of a Trust Fund may, if specified in the related Prospectus
Supplement, include agreements, such as interest rate swap, cap, floor or
similar agreements (each, a "Cash Flow Agreement" ), which will require the
provider of such instrument (the "Counterparty") to make payments to the Trust
Fund under the circumstances described in the Prospectus Supplement. If
payments on the Certificates of the related Series depend in part on payments
to be received under a Cash Flow Agreement, the ability of the Trust Fund 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.
16
THE TRUST FUND
The Trust Fund for each Series will be held by the Trustee for the benefit of
the related Certificateholders. Each Trust Fund will consist of a mortgage pool
(a "Mortgage Pool") comprised of mortgage loans (the "Mortgage Loans"),
together with payments in respect of such Mortgage Loans and certain other
accounts, obligations or agreements, in each case as specified in the related
Prospectus Supplement.
The Certificates will be entitled to payment from the assets of the related
Trust Fund or other assets pledged for the benefit of the Certificateholders as
specified in the related Prospectus Supplement and will not be entitled to
payments in respect of the assets of any other trust fund established by the
Depositor.
The Mortgage Loans may be acquired by the Depositor, from JVMC pursuant to a
Mortgage Loan Purchase Agreement between the Depositor and JVMC (the "Mortgage
Loan Purchase Agreement") for the related Series. JVMC will in turn have
acquired such Mortgage Loans from one or more originators or sellers (the
"Originators") that may be affiliates of the Depositor (the "Originators"). The
Mortgage Loans will be conveyed by the Depositor to the related Trust Fund. The
Originators may have originated the Mortgage Assets or acquired the Mortgage
Assets from originators or other entities. See "Mortgage Loan Program--
Underwriting Standards."
The following is a brief description of the Mortgage Loans expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Loans is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be
provided in the related Prospectus Supplement, and final specific information
will be set forth in a Current Report on Form 8-K to be available to investors
on the date of issuance thereof and to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Certificates (the "Detailed Description"). A schedule of the Mortgage Loans
relating to such Series will be attached to the Agreement delivered to the
Trustee upon delivery of the Certificates.
Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates relating to a
single Trust Fund consisting primarily of the Mortgage Loans in such Mortgage
Pool. Similarly, the term "Pass-Through Rate" will refer to the Pass-Through
Rate borne by the Certificates of one specific Series and the term "Trust Fund"
will refer to one specific Trust Fund.
The Mortgage Loans
General
For purposes hereof, the real property that secures repayment of the Mortgage
Loans are collectively referred to as "Mortgaged Properties." The Mortgaged
Properties may be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States.
Mortgage Loans with certain Loan-to-Value Ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Mortgage Insurance Policy"). The
existence, extent and duration of any such coverage will be described in the
applicable Prospectus Supplement. No Primary Mortgage Insurance Policy will be
required for any Home Equity Loan.
The Depositor will cause the Mortgage Loans comprising each Mortgage Pool to
be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series.
HFC, as Master Servicer, will service or cause to be serviced the Mortgage
Loans, pursuant to a Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement"). The Master Servicer will receive a fee for such
services. See "Mortgage Loan Program" and "The Pooling and Servicing
Agreement." The obligations of the Master Servicer with respect to the Mortgage
Loans will consist principally of its contractual servicing obligations under
the related Pooling and Servicing Agreement and its obligation to make certain
cash
17
advances in the event of delinquencies in payments on or with respect to the
Mortgage Loans in the amounts described herein under "Description of the
Certificates--Advances." The obligations of the Master Servicer to make
advances may be subject to limitations, to the extent provided herein and in
the related Prospectus Supplement.
The Master Servicer may perform any of its obligations under the Pooling and
Servicing Agreement through one or more subservicers, which may include the
Originators of the Mortgage Loans. Despite the existence of subservicing
arrangements, the Master Servicer will be liable for its servicing duties and
obligations under the Pooling and Servicing Agreement as if the Master Servicer
alone were servicing the Mortgage Loans.
Payment Provisions of the Mortgage Loans
The Mortgage Loans in a Mortgage Pool will have monthly payment dates as set
forth in the related Prospectus Supplement. The payment terms of the Mortgage
Loans to be included in a Trust Fund will be described in the related
Prospectus Supplement and may include any of the following features or
combination thereof or other features described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index (which will be specified in the related
Prospectus Supplement), a rate that is fixed for a period of time or under
certain circumstances and is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
interest rate borne by such Mortgage Loan for a period of time or for the
life of the loan, and the amount of any difference may be contributed from
funds supplied by the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all or a
portion of the original term. Payment of all or a substantial portion of
the principal may be due on maturity ("balloon payments"). Principal may
include interest that has been deferred and added to the principal balance
of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the life
of the loan, may increase over a specified period of time or may change
from period to period. Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) The Mortgage Loans generally may be prepaid at any time. To the
extent specified in the related Prospectus Supplement prepayments of
principal will be subject to a prepayment fee, which may be fixed for the
life of any such Mortgage Loan or may decline over time, and may be
prohibited for the life of any such Mortgage Loan or for certain periods
("lockout periods" ). Certain Mortgage Loans may permit prepayments after
expiration of the applicable lockout period and may require the payment of
a prepayment fee in connection with any such subsequent prepayment. Other
Mortgage Loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods.
(e) The loans may include "due-on-sale" clauses which permit the
mortgagee to demand payment of the entire mortgage loan in connection with
the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the then applicable
underwriting standards.
A Trust Fund may contain certain Mortgage Loans, which include provisions
whereby a third party partially subsidizes the borrower's monthly payments
during the early years of the Mortgage Loan ("Buydown Loans"), the difference
to be made up from a fund (a "Buydown Fund") contributed by such third party at
18
the time of origination of the Mortgage Loan. A Buydown Fund will be in an
amount equal either to the discounted value or full aggregate amount of future
payment subsidies. The underlying assumption of buydown plans is that the
income of the borrower will increase during the buydown period as a result of
normal increases in compensation and of inflation, so that the borrower will be
able to meet the full mortgage payments at the end of the buydown period. To
the extent that this assumption as to increased income is not fulfilled, the
possibility of defaults on Buydown Loans is increased. The related Prospectus
Supplement will contain information with respect to any Buydown Loan concerning
limitations on the interest rate paid by the borrower initially, on annual
increases in the interest rate and on the length of the buydown period.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-
off Date, (ii) the type of property securing the Mortgage Loans (e.g., separate
residential properties, individual units in condominiums in buildings owned by
cooperative housing corporations, vacation and second homes, or other similar
real property), (iii) the original terms to maturity of the Mortgage Loans,
(iv) the largest principal balance and the smallest principal balance of any of
the Mortgage Loans, (v) the earliest origination date and latest maturity date
of any of the Mortgage Loans, (vi) the aggregate principal balance of Mortgage
Loans having Loan-to-Value Ratios or Combined Loan-to-Value Ratios at
origination exceeding 80%, (vii) the maximum and minimum per annum rates at
which the related Mortgage Notes accrue interest (the "Mortgage Rate"), and
(viii) the geographical distribution of the Mortgage Loans.
Loan-to-Value Ratios
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
fraction, expressed as a percentage, the numerator of which is the original
principal balance of the related Mortgage Loan and the denominator of which is
the Collateral Value of the related Mortgaged Property. Unless otherwise
specified in the related Prospectus Supplement, the "Collateral Value" of a
Mortgaged Property is the lesser of (a) the appraised value determined in an
appraisal obtained by the originator at origination of such Mortgage Loan and
(b) the sales price for such property.
The "Combined Loan-to-Value Ratio" of any Home Equity Loan is the ratio
(expressed as a percentage) of (i) the sum of (a) the original principal
balance of such Mortgage Loan at the date of origination (which for purposes of
the related Prospectus Supplement includes certain financed fees and insurance
premiums) plus (b) the outstanding balance of the senior liens, if any, divided
by (ii) the lesser of (a) the value of the related Mortgaged Property, based
upon the appraisal, if any, or drive-by evaluation made at the time of
origination of the Mortgage Loan and (b) the purchase price of the Mortgaged
Property if the Mortgage Loan proceeds were used to purchase the Mortgaged
Property. For Mortgage Loans having low original principal balances, the
Combined Loan-to-Value Ratios of the Mortgage Loans will reflect certain
judgments of the lender's underwriters with respect to the value of the
Mortgaged Property made at the time the Mortgage Loans were originated or
acquired. See "Mortgage Loan Program--Underwriting Standards."
Single Family and Cooperative Loans
Mortgage Loans will consist of mortgage loans, deeds of trust or
participations or other beneficial interests therein, secured by first, second
or more junior liens on single family (i.e., one- to four-family) residential
properties or such other Mortgage Loans specified in the related Prospectus
Supplement. If so specified, the Mortgage Loans may include cooperative
apartment loans ("Cooperative Loans") secured by security interests in shares
issued by private, non-profit, cooperative housing corporations
("Cooperatives") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. Such loans may be conventional loans (i.e., loans that
are not insured or
19
guaranteed by any governmental agency) or loans insured by the FHA or partially
guaranteed by the VA, as specified in the related Prospectus Supplement.
The Mortgaged Properties relating to single family Mortgage Loans will
consist of detached or semi-detached one-family dwelling units, two- to four-
family dwelling units, townhouses, rowhouses, individual condominium units,
individual units in planned unit developments, and certain other dwelling
units. Such Mortgaged Properties may include vacation and second homes,
investment properties and leasehold interests. In the case of leasehold
interests, the term of the leasehold will exceed the scheduled maturity of the
Mortgage Loan by at least five years, or such other term specified in the
related Prospectus Supplement. Certain Mortgage Loans may be originated or
acquired in connection with corporate programs, including employee relocation
programs. In limited instances, a borrower who uses the dwelling unit as a
primary residence may also make some business use of the property.
Home Equity Loans
As described more fully in the related Prospectus Supplement, the Mortgage
Loans constituting a Trust Fund may comprise a pool of closed-end and/or
revolving home equity loans or certain balances thereof ("Home Equity Loans").
Home Equity Loans are mortgage loans made for purposes that include: purchase
money transactions, refinancings (both cash-out and no-cash-out), home
improvements and construction-to-permanent financing. The Mortgaged Properties
securing the Home Equity Loans may constitute single-family dwellings, mobile
and manufactured housing and, in limited cases, other types of residential
property as described in the related Prospectus Supplement.
As more fully described in the related Prospectus Supplement, the Mortgage
Loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("Revolving Credit Line Loans"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related Prospectus
Supplement) or repaid. If specified in the related Prospectus Supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust Fund described in such Prospectus Supplement. As a
result, the aggregate balance of the Revolving Credit Line Loans will fluctuate
from day to day as new draws by borrowers are added to the Trust Fund and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related Prospectus
Supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
Substitution of Mortgage Loans
Substitution of Mortgage Loans will be permitted in the event of breaches of
representations and warranties with respect to any original Mortgage Loan or in
the event the documentation with respect to any Mortgage Loan is determined by
the Trustee or a custodian appointed by the Trustee to be incomplete. The
period during which such substitution will be permitted generally will be
indicated in the related Prospectus Supplement. The related Prospectus
Supplement will describe any other conditions upon which Mortgage Loans may be
substituted for Mortgage Loans initially included in the Trust Fund.
Cash Flow Agreements
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related Series will be
20
invested at a specified rate. The Trust Fund may also include certain other
agreements, such as interest rate exchange agreements, interest rate cap or
floor agreements, currency exchange agreements or similar agreements provided
to reduce the effects of interest rate or currency exchange rate fluctuations
on the assets or on one or more classes of Certificates. (Currency exchange
agreements might be included in the Trust Fund if some or all of the Mortgage
Loans were denominated in a non-United States currency.) 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. In addition, the related Prospectus Supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
substantially all of 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 or to reimburse amounts
previously used to effect such a purchase, the costs of carrying the related
Mortgage Loans until the sale of the Certificates and other expenses connected
with pooling the related Mortgage Loans and issuing the Certificates. The
Depositor expects to sell Certificates in Series from time to time, but the
timing and amount of offerings of Certificates will depend on a number of
factors, including, among others, the volume of Mortgage Loans acquired by the
Depositor, prevailing interest rates, availability of funds and general market
conditions.
THE DEPOSITOR
JV Capital Trust (the "Depositor") is a business trust formed under the laws
of the State of Delaware pursuant to a trust agreement between JV Mortgage
Capital, L.P. ("JVMC"), a Delaware limited partnership, and Wilmington Trust
Company, in its sole capacity as owner trustee. The Depositor's address is c/o
Wilmington Trust Company, Rodney Square North, Wilmington, Delaware 19890. Its
telephone number is (302) 651-1000.
As described herein under "Mortgage Loan Program--Representations and
Warranties; Repurchases," the only obligations of the Depositor with respect to
a Series of Certificates will be pursuant to certain limited representations
and warranties and limited undertakings to repurchase or substitute Mortgage
Loans under certain circumstances. The Depositor will have no ongoing servicing
obligations or responsibilities with respect to any Mortgage Pool. The
Depositor does not have, nor is it expected in the future to have, any
significant assets.
Neither the Depositor nor any of its affiliates will insure or guarantee the
Certificates of any Series.
THE MASTER SERVICER
HFC was incorporated in Delaware in 1925, as successor to an enterprise which
traces its origin through the same ownership to an office established in 1878.
HFC will be responsible for acting as the Master Servicer for the Mortgage
Loans. HFC is a subsidiary of Household International, Inc. The address of its
principal executive office is 2700 Sanders Road, Prospect Heights, Illinois
60070. Its telephone number is (847) 564-5000.
HFC and its subsidiaries offer a diversified range of financial services. The
principal products of HFC's consumer financial services business is the making
or purchasing of cash loans, including home equity loans, auto finance loans,
tax refund anticipation loans and unsecured credit advances (including
revolving and closed-
21
end personal loans). HFC also offers MasterCard,* VISA* and private label
credit cards to consumers in the United States. Loans are made through branch
office lending, direct marketing and telemarketing as well as through dealer
networks and retail stores.
In conjunction with its consumer finance operations and where applicable laws
permit, HFC makes available to customers credit life, credit accident, health
and disability insurance. Such insurance is generally directly written by or
reinsured with its affiliates.
As of March 31, 1999, HFC had approximately $43.8 billion in total assets,
approximately $38.1 billion in total liabilities and approximately $5.7 billion
in shareholder's equity.
MORTGAGE LOAN PROGRAM
The Mortgage Loans for a Series will have been purchased by the Depositor
from JVMC, which in turn will have acquired such Mortgage Loans from one or
more Originators, which may be affiliates of the Depositor. Unless otherwise
specified in the related Prospectus Supplement, the Mortgage Loans so acquired
by the Depositor will have been originated in accordance with the underwriting
criteria specified below under "--Underwriting Standards."
Underwriting Standards
JVMC's origination volume is generated primarily from partners and
correspondents selling loans to JVMC through bulk sale. Generally, JVMC only
chooses to purchase loans that meet its underwriting guidelines. Under a
service contract, HFC provides underwriting review services to JVMC. HFC
reviews loans prior to purchase by JVMC to verify the loans meet JVMC's
underwriting guidelines. On larger bulk sales, HFC may employ sampling.
JVMC's underwriting guidelines are primarily intended to assess borrower's
ability to repay the loan, the value of the mortgaged property, and the
adequacy of such property as collateral for the mortgage loan. In underwriting
a mortgage loan, JVMC considers, among other things, a mortgagor's credit
history, debt service-to-income ratio ("Debt Ratio") as well as the type and
use of the mortgaged property.
Each prospective borrower completes an application that includes information
with respect to the applicant's liabilities, income, credit history, employment
history, and personal information. JVMC requires a credit report on each
applicant from a credit reporting company. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments, and any record of defaults,
bankruptcies, repossessions, or judgments. In addition, an employment
verification may be requested from an independent source (typically the
borrower's employer) or, in lieu thereof, verbal verification is obtained if
the applicant has supplied a copy of a current pay stub along with personal tax
returns. Self-employed applicants typically submit the last two years'
employment history and business tax returns. Under certain loan programs, the
borrower's income is not verified. Such programs generally have lower loan-to-
value requirements.
Upon receipt of the application package, a lender usually conducts its own
review of the application package and may, in some instances, obtain additional
information concerning the prospective borrower prior to approving the loan.
Along with obtaining a credit report, such lender may solicit a written
verification of the applicant's existing first mortgage balance, if any, and
payment history from the first mortgage lender, if appropriate. If such lender
does not respond in writing, verbal verification is attempted and the applicant
- --------
* VISA and MasterCard are registered trademarks of VISA USA, Inc. and
MasterCard International Incorporated, respectively.
22
generally is required to submit the prior year's mortgage statements which
generally reflect a monthly payment history.
Properties are limited to one- to four-family and are appraised or reviewed
by qualified independent appraisers. Such appraisers inspect the interior
and/or exterior and appraise the subject of property and report the property
condition. Following each inspection, the appraiser prepares a report which
includes a market value analysis based on recent sales of comparable homes in
the area and, when deemed appropriate, replacement cost analysis based on the
current cost of constructing a similar home. All appraisals are required to
conform to the Uniform Standards of Professional Appraisal Practice adopted by
the Appraised Standards Board of the Appraisal Foundation and are generally on
forms acceptable to Fannie Mae and Freddie Mac.
Unless otherwise specified in the related Prospectus Supplement, the Mortgage
Loans are secured by a mortgage on property located in any of the 50 states,
the District of Columbia, Guam, Puerto Rico or any other territory of the
United States. Mortgage Loans may be secured by leases on real property.
Generally, a loan will be secured by a lease only if the use of leasehold
estates as security for mortgage loans is common and customary in the area, the
lease is not subject to any prior lien that could result in termination of the
lease and the term of the lease ends five years beyond the maturity date of the
related Mortgage Loan.
Unless otherwise provided in the applicable Prospectus Supplement, all
Mortgage Loans will be covered by an appropriate standard form American Land
Title Association ("ALTA") title insurance policy, or a substantially similar
policy or an attorney's title opinion.
If so specified in the applicable Prospectus Supplement, Mortgage Loans may
be 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. Unless otherwise
specified in the applicable Prospectus Supplement, Subsidy Payments will be
placed in a custodial account ("Subsidy Account") by the Master 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.
If so specified in the applicable Prospectus Supplement, the Trust Fund may
contain Buydown 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
related Prospectus Supplement, placed in a Buydown Fund by the Master Servicer.
If so specified in the applicable Prospectus Supplement, the Trust Fund may
include Mortgage Loans which are amortized over 30 years but which have shorter
terms to maturity (each such Mortgage Loan, a "Balloon Loan") 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"). Unless
otherwise specified in the applicable Prospectus Supplement, 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.
Certain of the types of Mortgage Loans that may be included in a Trust Fund
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the mortgagor or obligor. These
types of Mortgage Loans are underwritten on the basis of a judgment that
mortgagors or obligors will have the ability to make monthly payments required
initially. In some instances, however, a mortgagor's or obligor's income may
not be sufficient to permit continued loan payments as such payments increase.
These types of Mortgage Loans may also be underwritten primarily upon the basis
of Loan-to-Value Ratios or other favorable credit factors.
23
Summaries of the Underwriting Programs
The following is a summary of the underwriting programs of JVMC. The related
Prospectus Supplement will set forth the distribution of the Mortgage Loans
among the underwriting programs as of the related Cut-off Date.
Grade A
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 36 months is acceptable if
there are compensating factors, evidence of a good re-establishment of credit
and the Debt Ratio is no greater than 40% for loans with greater than 90% Loan-
to-Value Ratio/Combined Loan-to-Value Ratio ("LTV/CLTV"). No unpaid
collections, chargeoffs or judgments in the previous 24 months are acceptable
under this underwriting program. Mortgage payment history may reflect that
there are no 30-day delinquencies during the most recent 12-month period. In
addition, if the LTV/CLTV is less than or equal to 90%, then (i) no more than
two major consumer credit delinquencies of 30 days and some minor consumer
credit delinquencies of 30 days may have occurred in the most recent 12-month
period or (ii) the borrower must have a Credit Score of at least 650. If the
LTV/CLTV is greater than 90%, then (i) no major consumer credit delinquencies
of 30 days and some minor consumer credit delinquencies of 30 days may have
occurred in the most recent 12-month period or (ii) the borrower must have a
Credit Score of at least 650. "Credit Score" is a statistical credit bureau
score designed to assess a borrower's creditworthiness and likelihood of
default on a consumer obligation over a two-year period. Credit Scores were not
developed to predict the likelihood of default on mortgage loans and,
accordingly, may not be indicative of the ability of a mortgagor to repay its
Mortgage Loan. Credit Scores generally range from approximately 400 to
approximately 800, with a higher score indicating an individual with a more
favorable credit history than an individual with a lower score.
2. LTV/CLTV generally conforms to the following criteria:
Maximum
LTV Maximum
for CLTV
First for Second
Underwriting Criteria Liens Liens
--------------------- ------- ----------
Fully Documented........................................ 100% 100%
Non-Income Qualification or Alternate Documentation..... 85% N/A
Non-Income Verification................................. 80% N/A
Non-Owner Occupancy..................................... 80% 85%
Non-Owner Occupancy and Non-Income Qualification or Non-
Owner Occupancy and Alternate Documentation............ 75% N/A
Non-Owner Occupancy and Non-Income Verification......... 70% N/A
Second Homes............................................ 85% 90%
Double Wide Mobile Homes................................ 80% 80%
3. The maximum Debt Ratio is (i) 45% for borrowers with an annual income less
than or equal to $100,000 and (ii) 50% for borrowers with an income greater
than $100,000.
Grade A-
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 36 months is acceptable if
there are compensating factors, evidence of a good reestablishment of credit
and the Debt Ratio is no greater than 40% for loans with greater than 90%
LTV/CLTV. Unpaid collections, chargeoffs or judgments up to $500 in the
previous 24 months are acceptable under this underwriting program. Mortgage
payment history may reflect that there is no more than one 30-day delinquency
during the most recent 12-month period. In addition, if the LTV/CLTV is less
than or equal to 90%, then (i) no more than five major consumer credit
24
delinquencies of 30 days and some minor consumer credit delinquencies of 30
days may have occurred in the most recent 12-month period or (ii) the borrower
must have a Credit Score of at least 635. If the LTV/CLTV is greater than 90%,
then (i) no more than two major consumer credit delinquencies of 30 days and
some minor consumer credit delinquencies of 30 days may have occurred in the
most recent 12-month period or (ii) the borrower must have a Credit Score of at
least 650.
2. LTV/CLTV generally conforms to the following criteria:
Maximum Maximum
LTV CLTV
for First for Second
Underwriting Criteria Liens Liens
--------------------- --------- ----------
Fully Documented...................................... 100% 100%
Non-Income Qualification or Alternate Documentation... 85% N/A
Non-Income Verification............................... 75% N/A
Non-Owner Occupancy................................... 75% 85%
Non-Owner Occupancy and Non-Income Qualification or
Non-Owner Occupancy and Alternate Documentation...... 75% N/A
Non-Owner Occupancy and Non-Income Verification....... 65% N/A
Second Homes.......................................... 80% 90%
Double Wide Mobile Homes.............................. 80% 80%
3. The maximum Debt Ratio is (i) 45% for borrowers with an annual income less
than or equal to $100,000 and (ii) 50% for borrowers with an income greater
than $100,000.
Grade B
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 24 months is acceptable if
there are compensating factors and evidence of a good re-establishment of
credit. Unpaid collections, chargeoffs or judgments up to $1,000 in the
previous 12 months are acceptable under this underwriting program. Mortgage
payment history may reflect that there are no more than two 30-day
delinquencies during the most recent 12-month period. In addition, (i) no more
than (a) five major consumer credit delinquencies of 30 days, (b) two major
consumer credit delinquencies of 60 days, and (c) some minor consumer credit
delinquencies of 60 days, may have occurred in the most recent 12-month period
or (ii) the borrower must have a Credit Score of at least 615.
2. LTV/CLTV generally conforms to the following criteria:
Maximum
LTV Maximum
for LTV
First for Second
Underwriting Criteria Liens Liens
--------------------- ------- ----------
Fully Documented........................................ 85% 90%
Non-Income Qualification or Alternate Documentation..... 75% N/A
Non-Income Verification................................. 70% N/A
Non-Owner Occupancy..................................... 70% 75%
Non-Owner Occupancy and Non-Income Qualification or Non-
Owner Occupancy and Alternate Documentation............ 65% N/A
Non-Owner Occupancy and Non-Income Verification......... 60% N/A
Second Homes............................................ 75% 80%
Double Wide Mobile Homes................................ 75% 75%
3. The maximum Debt Ratio is (i) 45% for borrowers with an annual income less
than or equal to $100,000 and (ii) 50% for borrowers with an income greater
than $100,000.
25
Grade B-
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 24 months is acceptable if
there are compensating factors and evidence of a good re-establishment of
credit. Unpaid collections, chargeoffs or judgments up to $1,500 in the
previous 12 months are acceptable under this underwriting program. Mortgage
payment history may reflect that there are no more than four 30-day
delinquencies and one 60-day delinquency during the most recent 12-month
period. In addition, (i) (a) no more than three major consumer credit
delinquencies of 60 days, (b) no more than one major consumer credit
delinquency of 90 days, and (c) some minor consumer credit delinquencies of 90
days, may have occurred in the most recent 12-month period or (ii) the borrower
must have a Credit Score of at least 585.
2. LTV/CLTV generally conforms to the following criteria:
Maximum Maximum
LTV CLTV
for First for Second
Underwriting Criteria Liens Liens
--------------------- --------- ----------
Fully Documented...................................... 80% 80%
Non-Income Qualification or Alternate Documentation... 70% N/A
Non-Income Verification............................... 65% N/A
Non-Owner Occupancy................................... 65% 65%
Non-Owner Occupancy and Non-Income Qualification or
Non-Owner Occupancy and Alternate Documentation...... 60% N/A
Non-Owner Occupancy and Non-Income Verification....... 55% N/A
Second Homes.......................................... 70% 70%
Double Wide Mobile Homes.............................. 70% 70%
3. The maximum Debt Ratio is 50% for all borrowers.
Grade C
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 24 months is acceptable if
there are compensating factors and evidence of a good re-establishment of
credit. Unpaid collections, chargeoffs or judgments up to $2,000 in the
previous 12 months are acceptable under this underwriting program. Mortgage
payment history may reflect that there are no more than two 60-day
delinquencies during the most recent 12-month period. In addition, (i) no more
than two major consumer credit delinquencies of 90 days and some minor consumer
credit delinquencies of 120 days, may have occurred in the most recent 12-month
period or (ii) the borrower must have a Credit Score of at least 570.
2. LTV/CLTV generally conforms to the following criteria:
Maximum Maximum
LTV CLTV
for First for Second
Underwriting Criteria Liens Liens
--------------------- --------- ----------
Fully Documented...................................... 75% 70%
Non-Income Qualification or Alternate Documentation... 65% N/A
Non-Income Verification............................... N/A N/A
Non-Owner Occupancy................................... 60% 55%
Non-Owner Occupancy and Non-Income Qualification or
Non-Owner Occupancy and Alternate Documentation...... N/A N/A
Non-Owner Occupancy and Non-Income Verification....... N/A N/A
Second Homes.......................................... 65% 60%
Double Wide Mobile Homes.............................. 65% 60%
26
3. The maximum Debt Ratio is 50% for all borrowers.
Grade C-
1. JVMC requires a credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history. A
bankruptcy that has been discharged for a minimum of 12 months with some or no
re-establishment of credit is acceptable. Unpaid collections, chargeoffs or
judgments up to $2,500 in the previous 12 months are acceptable under this
underwriting program. Mortgage payment history may reflect that there is no
more than one 90-day delinquency during the most recent 12-month period. In
addition, (i) no major consumer credit delinquencies of 120 days and some minor
consumer credit delinquencies of 120 days may have occurred in the most recent
12-month period or (ii) the borrower must have a Credit Score of at least 555.
2. Loan-to-Value ("LTV") generally conforms to the following criteria:
Maximum
LTV for
First
Underwriting Criteria Liens
--------------------- -------
Fully Documented................................................... 70%
Non-Income Qualification or Alternate Documentation................ 60%
Non-Income Verification............................................ N/A
Non-Owner Occupancy................................................ 55%
Non-Owner Occupancy and Non-Income Qualification or Non-Owner
Occupancy and Alternate Documentation............................. N/A
Non-Owner Occupancy and Non-Income Verification.................... N/A
Second Homes....................................................... 60%
Double Wide Mobile Homes........................................... 60%
3. The maximum Debt Ratio is 50% for all borrowers.
Qualifications of Originators
Unless otherwise specified in the related Prospectus Supplement, each
Originator must be an institution experienced in originating Mortgage Loans of
the type contained in the related Mortgage Pool in accordance with accepted
practices and prudent guidelines, and must maintain satisfactory facilities to
originate those Mortgage Loans.
Representations and Warranties; Repurchases
The Depositor will, with respect to each Mortgage Loan, make certain
representations and warranties, as of a specified date to the Trustee on behalf
of the Certificateholders. Such representations and warranties generally
include, among other things, that (i) immediately prior to the transfer and
assignment of the Mortgage Loans, the seller had good title to, and was the
sole owner of, each Mortgage Loan and there had been no other sale or
assignment thereof, (ii) to the best knowledge of the Depositor, as of the date
of such transfer, the Mortgage Loans are subject to no offsets, defenses or
counterclaims, (iii) each Mortgage Loan at the time it was made complied in all
material respects with applicable state and federal laws, including usury,
equal credit opportunity and disclosure laws, (iv) a lender's policy of title
insurance or an attorney's title opinion was issued on the date of the
origination of each Mortgage Loan and each such policy is valid and remains in
full force and effect, (v) as of the date of such transfer, each Mortgage
subject to the Agreement is a valid lien on the related Mortgaged Property
(subject only to (a) permitted senior liens on such Mortgaged Property and (b)
the exceptions to title set forth in the related title insurance policy or
attorney's opinion, which exceptions are generally acceptable to mortgage
lending companies, and such other exceptions to which similar properties are
commonly subject and which do not individually, or in the aggregate, materially
and adversely affect the benefits of the security intended to be provided by
such Mortgage), and to the best knowledge of the Depositor, such property is
free of material damage and is in good repair, (vi) the payment status of the
Mortgage Loan,
27
and (vii) with respect to each Mortgage Loan, if the Mortgaged Property is
located in an area identified by the Federal Emergency Management Agency as
having special flood hazards and subject in certain circumstances to the
availability of flood insurance under the National Flood Insurance Act of 1968,
as amended, such Mortgaged Property is covered by flood insurance.
The Master Servicer or the Trustee will promptly notify the Depositor of any
breach of any representation or warranty made by it in respect of a Mortgage
Loan, without regard to any qualification as to the Depositor's knowledge,
which materially and adversely affects the interests of the Certificateholders
in such Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, if the Depositor cannot cure such breach within a specified period
following the date it was notified of such breach, then the Depositor will be
obligated to repurchase such Mortgage Loan from the Trust Fund at a price (the
"Purchase Price") equal to 100% of the principal balance thereof as of the date
of the repurchase plus accrued interest thereon at the Mortgage Rate to the
first day of the month in which the Purchase Price is to be distributed. If so
provided in the Prospectus Supplement for a Series, the Depositor, rather than
repurchase a Mortgage Loan as to which a breach has occurred, will have the
option, within a specified period after initial issuance of such Series of
Certificates, to cause the removal of such Mortgage Loan from the Trust Fund
and substitute in its place one or more other Mortgage Loans, as applicable, in
accordance with the standards described in the related Prospectus Supplement.
Repurchase or substitution of the Mortgage Loan by the Depositor are the sole
remedies available to the Trustee and the Certificateholders upon the breach of
a representation or warranty in respect of a Mortgage Loan.
The Mortgage Loan Purchase Agreement will provide the Depositor with remedies
against JVMC for breaches of representations and warranties made by the
Depositor with respect to the Mortgage Loans under the Pooling and Servicing
Agreement.
The Master Servicer will not be obligated to purchase a Mortgage Loan if the
Depositor defaults on its obligation to do so, and no assurance can be given
that the Depositor will carry out its repurchase obligations with respect to
the Mortgage Loans. The failure of the Depositor to repurchase a Mortgage Loan
as to which a breach of a representation or warranty relates to the status of
such Mortgage Loan as a "qualified mortgage" within the meaning of Code Section
860G(a)(3) may cause the related Trust Fund to be disqualified as a REMIC.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement among the Depositor, the Master Servicer and the Trustee
for the benefit of the holders of the Certificates of such Series. The
following summaries describe the material provisions that may appear in each
Pooling and Servicing Agreement. The Prospectus Supplement for a Series of
Certificates will describe any provision of the Pooling and Servicing Agreement
relating to such Series that materially differs from the description thereof
contained in this Prospectus. The provisions of each Pooling and Servicing
Agreement will vary depending upon the nature of the Certificates to be issued
thereunder and the nature of the related Trust Fund. A form of the Pooling and
Servicing Agreement is an exhibit to the Registration Statement of which this
Prospectus is a part. The summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for each Series of
Certificates and the applicable Prospectus Supplement. The Depositor will
provide a copy of the Pooling and Servicing Agreement (without exhibits)
relating to any Series without charge upon written request of a holder of
record of a Certificate of such Series addressed to JV Capital Trust, c/o
Wilmington Trust Company, 1100 North Market Street, Rodney Square North,
Wilmington, DE 19890.
General
Unless otherwise specified in the Prospectus Supplement, the Certificates of
each Series will be issued in either fully-registered or book-entry form, in
the authorized denominations specified in the related Prospectus
28
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Pooling and Servicing Agreement and
will not be entitled to payments in respect of the assets included in any other
Trust Fund established by the Depositor. The Certificates will not represent
obligations of the Depositor, Master Servicer, Trustee or any affiliate of any
such party. The Mortgage Loans will not be insured or guaranteed by any
governmental entity or other person, unless otherwise specified in the related
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Pooling and Servicing Agreement, (i) the Mortgage Loans, that from time
to time are subject to the related Pooling and Servicing Agreement (exclusive
of any amounts specified in the related Prospectus Supplement ("Retained
Interest")); (ii) such assets as from time to time are required to be deposited
in the related Collection Account, as defined below under "The Pooling and
Servicing Agreement--Payments on Mortgage Loans; Deposits to Collection
Account"; (iii) property which secured a Mortgage Loan and which is acquired on
behalf of the Certificateholders by foreclosure or deed in lieu of foreclosure;
and (iv) any Primary Mortgage Insurance Policies, FHA Insurance and VA
Guarantees, and any other insurance policies or other forms of credit
enhancement required to be maintained pursuant to the Pooling and Servicing
Agreement. If so specified in the related Prospectus Supplement, a Trust Fund
may also include one or more of the following: reinvestment income on payments
received on the Mortgage Loans, a Reserve Fund, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a Bankruptcy Bond, one or more
Letters of Credit, a Surety Bond, Limited Guarantees or similar instruments or
other agreements.
Each Series of Certificates will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the Mortgage Loans in the related Trust Fund. A Series of Certificates may
include one or more classes that are senior or subordinate in right to payment
to one or more other classes of Certificates of such Series. Certain Series or
classes of Certificates may be covered by insurance policies, Surety Bonds or
other forms of credit enhancement, in each case as described herein and in the
related Prospectus Supplement. One or more classes of Certificates of a Series
may be entitled to receive principal distributions, with disproportionate,
nominal or no interest distributions or to interest distributions, with
disproportionate, nominal or no principal distributions or any combination
thereof. Distributions on one or more classes of a Series of Certificates may
be made prior to one or more other classes, after the occurrence of specified
events, in accordance with a schedule or formula, on the basis of collections
from designated portions of the Mortgage Loans in the related Trust Fund, or on
a different basis, in each case as specified in the related Prospectus
Supplement. The timing, amounts, sequential order and priority of payment of
such distributions may vary among classes or over time as specified in the
related Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related Certificates will be made by the Trustee
on each Distribution Date (i.e., monthly, quarterly, semi-annually or at such
other intervals and on the dates as are specified in the Prospectus Supplement)
in proportion to the percentages specified in the related Prospectus Supplement
or in such other manner as is specified in the related Prospectus Supplement.
Distributions will be made to the persons (the "Certificateholders") in whose
names the Certificates are registered at the close of business on the dates
specified in the related Prospectus Supplement (each, a "Record Date").
Distributions will be made by check or money order mailed to the persons
entitled thereto at the address appearing in the register maintained for
holders of Certificates (the "Certificate Register") or, if specified in the
related Prospectus Supplement, in the case of Certificates that are of a
certain minimum denomination, upon written request by the Certificateholder, by
wire transfer or by such other means as are described therein; provided,
however, that the final distribution in retirement of the Certificates will be
made only upon presentation and surrender of the Certificates at the office or
agency of the Trustee or other person specified in the notice to
Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
corporate trust office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
29
Distributions on Certificates
General
In general, the method of determining the amount of distributions on a
particular Series of Certificates will depend on the type of credit support, if
any, that is used with respect to such Series. See "Credit Enhancement." Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the Certificates of a particular Series. The
Prospectus Supplement for each Series of Certificates will describe the method
to be used in determining the amount of distributions on the Certificates of
such Series. Distributions allocable to principal of and interest on the
Certificates will be made by the Trustee out of, and only to the extent of,
funds in the related Collection Account, including any funds transferred from
any Reserve Fund. As between Certificates of different classes and as between
distributions of principal (and, if applicable, between distributions of
Principal Prepayments, as defined below, and scheduled payments of principal)
and interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. Distributions to any class of
Certificates will be made pro rata to all Certificateholders of that class or
such other manner as is described in the related Prospectus Supplement.
Available Distribution Amount
All distributions on the Certificates of each Series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Pooling and Servicing Agreement. Generally, the "Available
Distribution Amount" for each Distribution Date will equal the sum of the
following amounts:
(i) the aggregate of all previously undistributed payments on account of
principal (including Principal Prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus Supplement) and
interest on the Mortgage Loans in the related Trust Fund (including
Liquidation Proceeds and Insurance Proceeds and amounts drawn under Letters
of Credit or other credit enhancement instruments as permitted thereunder
and as specified in the related Pooling and Servicing Agreement) received
by the Master Servicer after the Cut-off Date and on or prior to the day of
the month of the related Distribution Date specified in the related
Prospectus Supplement (the "Determination Date") except:
(a) all payments that were due on or before the Cut-off Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments, all amounts deposited in the Collection Account
by the Depositor in connection with a substitution of a Mortgage Loan
and all other proceeds of any Mortgage Loan purchased by the Depositor
pursuant to the Pooling and Servicing Agreement that were received
after the prepayment period specified in the related Prospectus
Supplement and all related payments of interest representing interest
for any period after such prepayment period;
(c) all scheduled payments of principal and interest due on a date or
dates subsequent to the first day of the month of distribution;
(d) amounts received on particular Mortgage Loans as late payments of
principal or interest or other amounts required to be paid by
Mortgagors, but only to the extent of any unreimbursed advance in
respect thereof made by the Master Servicer;
(e) amounts representing reimbursement, to the extent permitted by
the Agreement and as described under "--Advances" below, for Advances
made by the Master Servicer that were deposited into the Collection
Account, and amounts representing reimbursement for certain other
losses and expenses incurred by the Master Servicer or the Depositor
and described below;
(f) that portion of each collection of interest on a particular
Mortgage Loan in such Trust Fund that represents credit enhancement
fees or servicing compensation payable to the Master Servicer or
Retained Interest that is to be retained from such collection or is
permitted to be retained from related Insurance Proceeds, Liquidation
Proceeds or proceeds of Mortgage Loans purchased pursuant to the
Agreement;
30
(ii) the amount of any Advance made by the Master Servicer as described
under "--Advances" below and deposited by it in the Collection Account; and
(iii) if applicable, amounts withdrawn from a Reserve Fund.
Distributions of Interest
Interest will accrue on the aggregate Certificate Balance (or, in the case of
Certificates entitled only to distributions allocable to interest, the
aggregate notional amount) of each class of Certificates entitled to interest
at the Pass-Through Rate (which may be a fixed rate or rate adjustable as
specified in such Prospectus Supplement) or as otherwise described in the
Prospectus Supplement from the date, and for the periods, specified in such
Prospectus Supplement. To the extent funds are available therefor, interest
accrued during each such specified period on each class of Certificates
entitled to interest (other than a class of Certificates that provides for
interest that accrues, but is not currently payable, referred to hereafter as
"Accrual Certificates") will be distributable on the Distribution Dates
specified in the related Prospectus Supplement until the aggregate Certificate
Balance of the Certificates of such class has been distributed in full or, in
the case of Certificates entitled only to distributions allocable to interest,
until the aggregate notional amount of such Certificates is reduced to zero or
for the period of time designated in the related Prospectus Supplement. The
Certificate Balance of each Certificate outstanding from time to time
represents the maximum amount that the holder thereof is entitled to receive in
respect of principal from future cash flow on the assets in the related Trust
Fund. Distributions allocable to interest on each Certificate that is not
entitled to distributions allocable to principal will be calculated based on
the notional amount of such Certificate or as otherwise described in the
Prospectus Supplement. The notional amount of a Certificate will not evidence
an interest in or entitlement to distributions allocable to principal but will
be used solely for convenience in expressing the calculation of interest and
for certain other purposes.
With respect to any class of Accrual Certificates, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Certificate Balance of
such class of Certificates on that Distribution Date. Distributions of interest
on each class of Accrual Certificates will commence only at such time or after
the occurrence of certain events specified in the related Prospectus
Supplement. Prior to such time, the beneficial ownership interest of such class
of Accrual Certificates in the Trust Fund, as reflected in the aggregate
Certificate Balance of such class of Accrual Certificates, will increase on
each Distribution Date by the amount of interest that accrued on such class of
Accrual Certificates 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 Certificate Balance as so adjusted.
Distributions of Principal
The aggregate "Certificate Balance" of any class of Certificates entitled to
distributions of principal will be the aggregate original Certificate Balance
of such class of Certificates specified in such Prospectus Supplement, reduced
by all distributions reported to the holders of such Certificates as allocable
to principal and (i) in the case of Accrual Certificates increased by all
interest accrued but not then distributable on such Accrual Certificates and
(ii) in the case of adjustable rate Certificates, if so specified in the
related Prospectus Supplement, subject to the effect of negative amortization
or such other amount as is specified in the related Prospectus Supplement. The
related Prospectus Supplement will specify the method by which the amount of
principal to be distributed on the Certificates on each Distribution Date will
be calculated and the manner in which such amount will be allocated among the
classes of Certificates entitled to distributions of principal. A class of
interest-only Certificates will not be entitled to distributions of principal
and will have a notional amount on which interest will accrue.
If so provided in the related 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
31
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or for
the periods specified in such Prospectus Supplement. Any such allocation of
Principal Prepayments to such class or classes of Certificateholders will have
the effect of accelerating the amortization of such Senior Certificates while
increasing the relative interests evidenced by the Subordinated Certificates in
the Trust Fund. 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.
See "Credit Enhancement--Subordination."
Unscheduled Distributions
To the extent specified in the related Prospectus Supplement relating to a
Series of Certificates which have less frequent than monthly Distribution
Dates, the Certificates will be subject to receipt of distributions before the
next scheduled Distribution Date under the circumstances and in the manner
described below and in such Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the Mortgage Loans,
the Trustee or the Master Servicer determines that the funds available or
anticipated to be available from the Collection Account and, if applicable, any
Reserve Fund, may be insufficient to make required distributions on the
Certificates on such Distribution Date. The amount of any such unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
Certificates on the next Distribution Date except to the extent specified in
the related Prospectus Supplement. All unscheduled distributions will include
interest at the applicable Pass-Through Rate (if any) on the amount of the
unscheduled distribution allocable to principal for the period and to the date
specified in such Prospectus Supplement except to the extent specified in the
related Prospectus Supplement. See "Yield and Prepayment Considerations."
All distributions allocable to principal in any unscheduled distribution will
be made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis or in such other manner as is
specified in the related Prospectus Supplement.
Notice of any unscheduled distribution will be given by the Trustee prior to
the date of such distribution.
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 applicable Prospectus Supplement.
PRINCIPAL TYPES
Categories Of Classes Definition
--------------------- ----------
Accretion Directed Class.......... A class that receives principal payments
from amounts that would otherwise be
distributed as interest on specified
Accrual Classes. Such principal payments
may be in lieu of or in addition to
principal payments from principal receipts
on the Mortgage Loans for the related
Series.
Companion Class (also sometimes
referred to as a "Support A class that is entitled to receive
Class").......................... principal payments on any Distribution
Date only if scheduled payments have been
made on specified Planned Amortization
Classes, Targeted Amortization Classes
and/or Scheduled Amortization Classes.
32
Categories Of Classes Definition
--------------------- ----------
Component Class................... A class consisting of two or more
specified components (each, a "Component")
as described in the applicable Prospectus
Supplement. The Components of a Component
Class 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 Component Class may be
identified as falling into one or more
categories in this chart.
Lockout Class..................... A senior class 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 senior classes
of such Series as a group pursuant to a
"shifting interest" structure and/or (2)
scheduled principal payments on the
Mortgage Loans that are allocated to the
senior classes as a group. A Lockout Class
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 payments, as applicable, for a
period of several years, during which time
all or a portion of such principal
payments that it would otherwise be
entitled to receive in the absence of a
"lockout" structure will be distributed in
reduction of the Certificate Balances of
other senior classes. Lockout Classes are
designed to minimize weighted average life
volatility during the lockout period.
Notional Amount Class............. A class having no Certificate Balance and
bearing interest on the related notional
amount. The notional amount is used for
purposes of the determination of interest
distributions.
Pass Through...................... A Senior Class that is entitled to receive
a specified percentage of the principal
payments that are distributable to the
Senior Classes or applicable group of
Senior Classes (other than any Ratio Strip
Class) in the aggregate on a Distribution
Date and that is not designated as a
Sequential Pay Class.
Planned Amortization Class (also
sometimes referred to as a A class that is designed to receive
"PAC")........................... principal payments using a predetermined
Certificate 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 the Planned
Amortization Class. The Planned
Amortization Classes in any Series of
Certificates may be subdivided into
different categories (e.g., Planned
Amortization Class I ("PAC I") Planned
Amortization Class II ("PAC II") and so
forth) derived using different structuring
ranges. A PAC is designed to provide
protection against volatility of weighted
average life if prepayments occur at a
constant rate within the structuring
range.
Ratio Strip Class................. A class that is entitled to receive a
constant proportion, or "ratio strip," of
the principal payments on the underlying
Mortgage Loans.
Scheduled Amortization Class (also
sometimes referred to as a
"Scheduled Class")............... A class that is designed to receive
principal payments using a predetermined
Certificate Balance schedule but is not
designated
33
Categories Of Classes Definition
--------------------- ----------
as a Planned Amortization Class or
Targeted Amortization Class. The schedule
is generally derived by assuming either
two constant prepayment rates or a single
constant prepayment rate for the
underlying Mortgage Loans but may be
derived using a different methodology. In
the case of two constant rates, the two
rates are the endpoints for the
"structuring range" for the Scheduled
Amortization Class and such range
generally is narrower than that for a
Planned Amortization Class. Typically, the
Support Class(es) for the applicable
Series of Certificates generally will
represent a smaller percentage of the
Scheduled Amortization Class than a
Support Class generally would represent in
relation to a Planned Amortization Class
or a Targeted Amortization Class. A
Scheduled Amortization Class is generally
less sensitive to weighted average life
volatility as a result of prepayments than
a Support Class but more sensitive than a
Planned Amortization Class or a Targeted
Amortization Class.
Senior Class...................... A class that is entitled to receive
payments of principal and interest on each
Distribution Date prior to the classes of
Subordinated Certificates.
Sequential Pay Class.............. A class that is entitled to receive
principal payments in a prescribed
sequence, that does not have a
predetermined Certificate Balance schedule
and that, in most cases, is entitled to
receive payments of principal continuously
from the first Distribution Date on which
it receives principal until it is retired.
Sequential Pay Classes may receive
principal payments concurrently with one
or more other Sequential Pay Classes. 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 Sequential Pay
Class.
Subordinated Class................ A class that is entitled to receive
payments of principal and interest on each
Distribution Date only after the Senior
Certificates and certain classes of
Subordination Certificates with higher
priority of distributions have received
their full principal and interest
entitlements.
Super Senior Class................ A Senior Class 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 Class........ A Senior Class that bears certain losses
allocated to one or more Super Senior
Classes.
Targeted Amortization Class (also
sometimes referred to as a A class that is designed to receive
"TAC")........................... principal payments using a predetermined
Certificate Balance schedule derived by
assuming a single constant prepayment rate
for the underlying Mortgage Loans. A TAC
is designed to provide some protection
against shortening of weighted average
life if prepayments occur at a rate
exceeding the assumed constant prepayment
rate used to derive the Certificate
Balance schedule of such class.
34
INTEREST TYPES
Accrual Class..................... A class that accretes the amount of
accrued interest otherwise distributable
on such class, which amount will be added
as principal to the Certificate Balance of
such class on each applicable Distribution
Date. Such accretion may continue until
some specified event has occurred or until
such Accrual Class is retired.
Fixed Rate Class.................. A class with an interest rate that is
fixed throughout the life of the classes.
Floating Rate Class............... A class with an interest rate that resets
periodically based upon a designated index
and that varies directly with changes in
such index.
Interest Only Class............... A class that is entitled to receive some
or all of the interest payments made on
the Mortgage Loans and little or no
principal. Interest Only Classes have
either a nominal principal balance or a
notional amount. A nominal principal
balance represents actual principal that
will be paid on 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
an Interest Only Class that is not
entitled to any distributions in respect
to principal.
Inverse Floating Rate Class....... A class 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
Floating Rate Class.
Principal Only Class.............. A class that does not bear interest and is
entitled to receive only distributions in
respect of principal.
Step Coupon Class................. A class with a fixed 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 Class............... A class with an interest rate that resets
periodically and is calculated by
reference to the rate or rates of interest
applicable to the Mortgage Loans.
Advances
Generally, the Master Servicer, will be required to advance on or before each
Distribution Date (from its own funds or funds held in the Collection Account
for future distributions to the holders of such Certificates), an amount (each,
an "Advance") equal to the aggregate of payments of principal and interest (or,
in the case of Home Equity Loans, payments of interest only) that were
delinquent on the related Determination Date, subject to the Master Servicer's
determination that such Advances will be recoverable out of late payments by
Mortgagors, Liquidation Proceeds, Insurance Proceeds or otherwise, and net of
applicable servicing compensation. In the case of Cooperative Loans, the Master
Servicer also will be required to advance any unpaid maintenance fees and other
charges under the related proprietary leases as specified in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, the
Trustee or another entity so specified will be required to make such Advances
to the extent the Master Servicer fails to do so. The Prospectus Supplement for
a Series of Certificates will specify the nature and timing of amounts to be
advanced to the holders of such Certificates and the manner in which Advances
may be recovered. Funds so advanced are reimbursable to the Master Servicer to
the extent permitted by the related Agreement. The Master Servicer's or other
entity's obligation to make Advances will not guarantee or insure against
losses to holders of the Certificates.
35
Reports to Certificateholders
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in an applicable Prospectus Supplement, the
Master Servicer or the Trustee will furnish to each Certificateholder of record
of the related Series a statement setting forth, to the extent applicable to
such Series of Certificates, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, prepayment penalties
included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the outstanding Certificate Balance or notional amount of each class
of the related Series after giving effect to the distribution of principal
on such Distribution Date;
(v) the related amount of the servicing compensation retained or
withdrawn from the Collection Account by the Master Servicer;
(vi) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) and (B) in
foreclosure as of the close of business on the last day of the calendar
month preceding such Distribution Date;
(vii) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(viii) if applicable, the amount remaining in any Reserve Fund at the
close of business on the Distribution Date;
(ix) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date; and
(x) any amounts remaining under letters of credit, pool policies or other
forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Certificateholders for any Series of Certificates may include additional or
other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other customary information as may be deemed necessary or
desirable for Certificateholders to prepare their tax returns.
Book-Entry Registration
If so specified in the related Prospectus Supplement, a class of Certificates
may be book-entry Certificates (the "Book-Entry Certificates"). Persons
acquiring beneficial ownership interests in such Certificates ("Certificate
Owners") will hold their Certificates through the Depository Trust Company
("DTC") in the United States, or Cedel Bank, societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear") in Europe if they are participants of such
systems, or indirectly through organizations which are participants in such
systems (each, a "Participant"). The Book-Entry Certificates will be issued in
one or more certificates which equal the aggregate principal balance of such
class of Certificates and will initially be registered in the name of Cede &
Co. ("Cede"), the nominee of DTC. CEDEL and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities
accounts in CEDEL's and Euroclear's names on the books of their respective
depositaries, which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank N.A. will act
as depositary for CEDEL, and Morgan
36
Guaranty Trust Company of New York ("Morgan") will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively, the "European Depositaries"). Except as described below, no
person acquiring a Book-Entry Certificate will be entitled to receive a
physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of such Certificates will be
Cede, as nominee of DTC. Certificate Owners will not be Certificateholders as
that term is used in the Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary" ) that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant, and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners of a class of Book-Entry Certificates will receive all
distributions of principal of, and interest on, such Certificates from the
Trustee through DTC and DTC participants. While such Certificates are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among participants on
whose behalf it acts with respect to such class of Certificates and is required
to receive
and transmit distributions of principal of, and interest on, such Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to such Certificates are similarly required to make book-
entry transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in such Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of such Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer such
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of a class of Book-Entry Certificates will
be executed through DTC, and the accounts of the respective Participants at DTC
will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Federal Income Tax
Consequences--REMICs--Taxation of Certain Foreign Investors" herein and "Global
Clearance, Settlement and Tax Documentation Procedures" and "Certain U.S.
Federal Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in
37
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the Relevant Depositary; however, such cross-
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time).
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to the Relevant
Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book--Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium, office of
Morgan (the "Euroclear Operator"), under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation (the "Belgium Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Belgium Cooperative. The Belgium Cooperative
establishes policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and
38
applicable Belgian law (collectively, the "Terms and Conditions"). The Terms
and Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the Book-
Entry Certificates that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to cash accounts
of CEDEL Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Federal Income Tax
Consequences--REMICs--Taxation of Certain Foreign Investors," "--Backup
Withholding" and "--Reporting Requirements." Because DTC can only act on behalf
of Financial Intermediaries, the ability of a beneficial owner to pledge Book-
Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates
in book-entry form may reduce the liquidity of such Certificates in the
secondary market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
With respect to each class of Book-Entry Certificates, DTC will advise the
Trustee that, unless and until Definitive Certificates are issued, DTC will
take any action permitted to be taken by the holders of such Book-Entry
Certificates under the related Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. CEDEL or
the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under such Agreement on behalf of
a CEDEL Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Certificates of a class of Book-Entry Certificates which conflict with actions
taken with respect to other Certificates of such class.
Definitive Certificates will be issued to beneficial owners of Book-Entry
Certificates, or their nominees, rather than to DTC, only if (a) DTC or the
Depositor advises the related Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to such Book-Entry Certificates and the Depositor or
such Trustee is unable to locate a qualified successor, (b) the Depositor, at
its sole option, with the consent of such Trustee, elects to terminate a book-
entry system through DTC, or (c) in accordance with such other provisions
described in the related Prospectus Supplement.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee for such a Series will be required to notify
all beneficial owners of the occurrence of such event and the
39
availability through DTC 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 Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders of such Series under the related
Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time.
Neither the Depositor, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of any class of Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes of a
Series of Certificates or with respect to the Mortgage Loans in the related
Trust Fund. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related Prospectus Supplement,
the subordination of one or more classes of the Certificates of such Series,
the establishment of one or more reserve funds, the use of a cross-support
feature, use of a Mortgage Pool Insurance Policy, Bankruptcy Bond, Special
Hazard Insurance Policy, Surety Bond or Letters of Credit described herein and
in the related Prospectus Supplement, overcollateralization of one or more
classes of the Certificates of such Series, or any combination of the
foregoing. If so provided in the related Prospectus Supplement, any form of
credit enhancement may be structured so as to be drawn upon by more than one
Series to the extent described therein. The coverage provided by any credit
enhancement will be described in the related Prospectus Supplement. Generally,
any credit enhancement will not provide protection against all risks of loss
and will not guarantee repayment of the entire principal balance of the
Certificates and interest thereon. If losses occur which exceed the amount
covered by credit enhancement or which are not covered by the credit
enhancement, Certificateholders will bear their allocable share of
deficiencies. Moreover, if a form of credit enhancement covers more than one
Series of Certificates (each, a "Covered Trust"), Certificateholders evidencing
interests in any of such Covered Trusts will be subject to the risk that such
credit enhancement will be exhausted by the claims of other Covered Trusts
prior to such Covered Trust receiving any of its intended share of such
coverage.
If credit enhancement is provided with respect to one or more classes of
Certificates of a Series, or the related Mortgage Loans, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such credit enhancement, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such credit enhancement may be reduced and under which such
credit enhancement may be terminated or replaced and (d) the material
provisions relating to such credit enhancement. Additionally, the related
Prospectus Supplement will set forth certain information with respect to the
obligor under any instrument of credit enhancement, including (i) a brief
description of its principal business activities, (ii) its principal place of
business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of its
business and (iv) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the Prospectus Supplement.
See "Risk Factors--Limitations, Reduction and Substitution of Credit
Enhancement."
Subordination
If so specified in the related Prospectus Supplement, protection afforded to
holders of one or more classes of Certificates of a Series (the "Subordinated
Certificates") by means of the subordination feature will be
40
accomplished by the preferential right of holders of one or more other classes
of such Series (the "Senior Certificates") to distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination thereof
that otherwise would have been payable to holders of Subordinated Certificates
under the circumstances and to the extent specified in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, delays in
receipt of scheduled payments on the Mortgage Loans and losses on defaulted
Mortgage Loans will be borne first by the various classes of Subordinated
Certificates and thereafter by the various classes of Senior Certificates, in
each case under the circumstances and subject to the limitations specified in
such related Prospectus Supplement. The aggregate distributions in respect of
delinquent payments on the Mortgage Loans over the lives of the Certificates or
at any time, the aggregate losses in respect of defaulted Mortgage Loans which
must be borne by the Subordinated Certificates by virtue of subordination and
the amount of the distributions otherwise distributable to the Subordinated
Certificateholders that will be distributable to Senior Certificateholders on
any Distribution Date may be limited as specified in the related Prospectus
Supplement. If aggregate distributions in respect of delinquent payments on the
Mortgage Loans or aggregate losses in respect of such Mortgage Loans were to
exceed an amount specified in the related Prospectus Supplement, holders of
Senior Certificates would experience losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may instead be
deposited into one or more Reserve Funds established with the Trustee. If so
specified in the related Prospectus Supplement, such deposits may be made on
each Distribution Date, for specified periods or until the balance in the
Reserve Funds has reached a specified amount and, following payments from the
Reserve Fund to holders of Senior Certificates or otherwise, thereafter to the
extent necessary to restore the balance in the Reserve Fund to required levels,
in each case as specified in the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, amounts on deposit in the Reserve Fund
may be released to the holders of the class of Certificates specified in such
Prospectus Supplement at the times and under the circumstances specified in
such Prospectus Supplement.
If specified in the related Prospectus Supplement, various classes of Senior
Certificates and Subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the related Prospectus
Supplement. As between classes of Subordinated Certificates, payments to
holders of Senior Certificates on account of delinquencies or losses and
payments to any Reserve Fund will be allocated as specified in the related
Prospectus Supplement.
Mortgage Pool Insurance Policies
If specified in the related Prospectus Supplement relating to a Mortgage
Pool, a separate mortgage pool insurance policy (a "Mortgage Pool Insurance
Policy") will be obtained for the Mortgage Pool and issued by the insurer (the
"Pool Insurer") named in such Prospectus Supplement. Each Mortgage Pool
Insurance Policy will, subject to the limitations described in the related
Prospectus Supplement, cover loss by reason of default in payment on Mortgage
Loans in the Mortgage Pool in an amount specified in such Prospectus Supplement
which are not covered as to their entire outstanding principal balances by
Primary Mortgage Insurance Policies. The amount and principal terms of any such
coverage will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policies
If specified in the related Prospectus Supplement, a separate special hazard
insurance policy (the "Special Hazard Insurance Policy") will be obtained for
the Mortgage Pool and will be issued by the insurer (the
41
"Special Hazard Insurer") named in such Prospectus Supplement. Each Special
Hazard Insurance Policy will, subject to limitations described in the related
Prospectus Supplement, protect holders of the related Certificates from (i)
loss by reason of damage to Mortgaged Properties caused by certain hazards
(including earthquakes and, to a limited extent, tidal waves and related water
damage or as otherwise specified in the related Prospectus Supplement) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a
flood insurance policy if the Mortgaged Property is located in a federally
designated flood area, and (ii) loss caused by reason of the application of the
coinsurance clause contained in hazard insurance policies. See "The Pooling and
Servicing Agreement--Hazard Insurance." Each Special Hazard Insurance Policy
will not cover losses occasioned by fraud or conversion by the Trustee or the
Master Servicer, war, insurrection, civil war, certain governmental action,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear or chemical reaction, flood (if the Mortgaged Property
is located in a federally designated flood area), nuclear or chemical
contamination and certain other risks. The amount and principal terms of
coverage under any Special Hazard Insurance Policy will be specified in the
related Prospectus Supplement. Each Special Hazard Insurance Policy will
provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the property securing the Mortgage Loan have been kept in force
and other protection and preservation expenses have been paid.
Bankruptcy Bonds
If specified in the related Prospectus Supplement, a bankruptcy bond
("Bankruptcy Bond") for proceedings under the federal Bankruptcy Code will be
issued by an insurer named in such Prospectus Supplement. Each Bankruptcy Bond
will cover, to the extent specified in the related Prospectus Supplement,
certain losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal and interest on a Mortgage Loan or a reduction by such
court of the principal amount of a Mortgage Loan and will cover certain unpaid
interest on the amount of such a principal reduction from the date of the
filing of a bankruptcy petition. The required amount of coverage under each
Bankruptcy Bond will be set forth in the related Prospectus Supplement.
Coverage under a Bankruptcy Bond may be canceled or reduced if such
cancellation or reduction would not adversely affect the then current rating or
ratings of the related Certificates. See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations
on Lenders." The amount and principal terms of any such coverage will be set
forth in the Prospectus Supplement.
Reserve Funds
If so specified in the related Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of one
or more reserve funds for such Series (each, a "Reserve Fund"). The related
Prospectus Supplement will specify whether or not such Reserve Funds will be
included in the Trust Fund for such Series.
The Reserve Fund for a Series will be funded (i) by the deposit therein of
cash, U.S. Treasury securities, instruments evidencing ownership of principal
or interest payments thereon, letters of credit, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
related Prospectus Supplement, (ii) by the deposit therein from time to time of
certain amounts, as specified in the related Prospectus Supplement to which the
Subordinated Certificateholders, if any, would otherwise be entitled or (iii)
in such other manner as may be specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in Permitted
Investments which, unless otherwise specified in the related Prospectus
Supplement, will include obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks and certain repurchase
agreements of United States government securities with eligible commercial
banks. If a
42
letter of credit is deposited with the Trustee, such letter of credit will be
irrevocable. Unless otherwise specified in the related Prospectus Supplement,
any instrument deposited therein will name the Trustee, in its capacity as
trustee for the holders of the Certificates, as beneficiary and will be issued
by an entity acceptable to each rating agency that rates the Certificates.
Additional information with respect to such instruments deposited in the
Reserve Funds will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
Cross Support
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Certificates. In such case, credit
support may be provided by a cross support feature which requires that
distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The
related Prospectus Supplement for a Series which includes a cross support
feature will describe the manner and conditions for applying such cross support
feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related Trust Funds. If applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit support relates and the manner of
determining the amount of the coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
Limited Guarantee
If specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a limited
financial guarantee (a "Limited Guarantee") issued by a guarantor named
therein. If specified in the related Prospectus Supplement, a Limited Guarantee
may be provided by an affiliate or affiliates of the Depositor.
Letter of Credit
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a letter of credit (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 related Prospectus Supplement.
Surety Bonds
If specified in the Prospectus Supplement relating to a Series of
Certificates, credit support with respect to one or more Classes of
Certificates of a Series may be provided by the issuance of a financial
guaranty insurance policy or surety bond (a "Surety Bond") issued by a
financial guarantee insurance company specified in the applicable Prospectus
Supplement. The coverage, amount and frequency of any reduction in coverage
provided by a Surety Bond will be set forth in the related Prospectus
Supplement.
Overcollateralization
If specified in the related Prospectus Supplement, credit support may consist
of overcollateralization whereby the aggregate principal amount of the Mortgage
Loans, including any Subsequent Mortgage Loans, exceeds the aggregate
Certificate Balance of the Certificates. Such overcollateralization may exist
at the time
43
the Certficates are issued or develop thereafter as a result of the application
of certain interest collections, in excess of amounts necessary to pay the
Pass-Through Rate on the Certificates, received in connection with the Mortgage
Loans, including any Subsequent Mortgage Loans. The existence of any
overcollateralization and the manner, if any, by which it increases or
decreases, will be set forth in the related Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates will be
affected primarily by the amount and timing of principal payments received on
or in respect of the Mortgage Loans included in the related Trust Fund. The
original terms to maturity of the Mortgage Loans in a given Mortgage Pool will
vary depending upon the type of Mortgage Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Mortgage Loans in the related Mortgage Pool. Mortgage Loans
may be prepaid without penalty in full or in part at any time except as
specified in the Prospectus Supplement. The prepayment experience on the
Mortgage Loans in a Mortgage Pool will affect the life of the related Series of
Certificates.
A number of factors, including, but not limited to, homeowner mobility,
economic conditions, the presence and enforceability of due-on-sale clauses,
mortgage market interest rates and the availability of mortgage funds, may
affect prepayment experience of Mortgage Loans.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Mortgage Loans will contain due-on-sale provisions permitting the
mortgagee to accelerate the maturity of the loan upon sale or certain transfers
by the mortgagor of the underlying Mortgaged Property. Mortgage Loans insured
by the FHA, and Mortgage Loans partially guaranteed by the VA, are assumable
with the consent of the FHA and the VA, respectively. Thus, the rate of
prepayments on such Mortgage Loans may be lower than that of conventional
Mortgage Loans bearing comparable interest rates. The Master Servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it has
knowledge of the conveyance or further encumbrance or the proposed conveyance
or proposed further encumbrance of the Mortgaged Property and reasonably
believes that it is entitled to do so under applicable law; provided, however,
the Master Servicer will not take any enforcement action that would impair or
threaten to impair any recovery under any related insurance policy. See "The
Pooling and Servicing Agreements--Collection Procedures" and "Certain Legal
Aspects of the Mortgage Loans" 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.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely,
if prevailing interest rates rise appreciably above the Mortgage Rates borne by
the Mortgage Loans, such Mortgage Loans are likely to experience a lower
prepayment rate than if prevailing rates remain at or below such Mortgage
Rates. However, there can be no assurance that such will be the case.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage Loan so prepaid only for the
number of days in the month actually elapsed up to the date of the prepayment
rather than for a full month. If so specified in the related Prospectus
Supplement, the effect of prepayments in full will be to reduce the amount of
interest passed through in the following month to holders of Certificates
because interest on the principal amount of any Mortgage Loan so prepaid will
be paid only to the date of prepayment. Partial prepayments in a given month
may be applied to the outstanding principal balances of the Mortgage Loans so
prepaid on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through in such month. Both full and partial prepayments will
not be passed through until the month following receipt or at such other time
as is specified in the related Prospectus Supplement.
44
The effective yield to Certificateholders will be slightly lower than the
yield otherwise produced by the applicable Pass-Through Rate and purchase price
because while interest will accrue on each Mortgage Loan from the first day of
the month (or such other date provided in the related Prospectus Supplement),
the distribution of such interest will not be made earlier than the
Distribution Date in the month following the month of accrual.
Under certain circumstances, the Master Servicer, the Depositor or such other
party specified in the related Prospectus Supplement may have the option to
purchase the assets of a Trust Fund thereby effecting earlier retirement of the
related Series of Certificates. See "The Pooling and Servicing Agreement--
Termination; Optional Termination."
If so specified in the related Prospectus Supplement, upon notification from
a Mortgagor of such Mortgagor's intent to convert from an adjustable interest
rate to a fixed interest rate, and prior to the conversion of such Mortgage
Loan, the Master Servicer or other entity specified in the related Prospectus
Supplement will be obligated to purchase such related Mortgage Loan. Any such
purchase of a Mortgage Loan would have the effect of a prepayment in full of
the Mortgage Loan.
From time to time, the Master Servicer or its affiliates may solicit the
refinancing of loans (including the Mortgage Loans) by offering a new loan to
the borrower. Any such refinancing of a Mortgage Loan would have the effect of
a prepayment in full of the Mortgage Loan.
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and
over the lives of the Certificates. The relative contribution of the various
factors affecting prepayment may also vary from time to time. There can be no
assurance as to the rate of payment of principal of the Mortgage Loans at any
time or over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted
average lives and maturities of such Certificates.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Pooling and
Servicing Agreement which are not described elsewhere in this Prospectus. Where
particular provisions or terms used in the Pooling and Servicing Agreements are
referred to, such provisions or terms are as specified in the Pooling and
Servicing Agreements.
Assignment of Mortgage Loans
At the time of issuance of the Certificates of a Series, the Depositor will
cause the Mortgage Loans comprising the related Trust Fund to be assigned to
the Trustee, together with all principal and interest received by or on behalf
of the Depositor on or with respect to such Mortgage Loans after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest specified in the related Prospectus
Supplement. The Trustee will, concurrently with such assignment, deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the related
Pooling and Servicing Agreement. Such schedule will include information as to
the outstanding principal balance of each Mortgage Loan after application of
payments due on the Cut-off Date, as well as information regarding the Mortgage
Rate, the current scheduled monthly payment of principal and interest, the
maturity of the loan, the Loan-to-Value Ratio (or, in the case of Home Equity
Loans, the Combined Loan-to-Value Ratio) at origination and certain other
information. If specified in the related Prospectus Supplement, the Depositor
will deliver or cause to be delivered to the Trustee loans at a predetermined
price for inclusion in the Trust Fund within three months after the issuance of
the Certificates. The related Prospectus Supplement for the Trust Fund will
specify whether, and the terms, conditions and manner under which, Subsequent
Mortgage Assets will be sold to the Trust Fund within such three month period.
45
In addition, the Depositor will deliver or cause to be delivered to the
Trustee (or to the custodian hereinafter referred to) as to each Mortgage Loan,
among other things, (i) the mortgage note (the "Mortgage Note") endorsed
without recourse in blank or to the order of the Trustee, (ii) the mortgage,
deed of trust or similar instrument (a "Mortgage") with evidence of recording
indicated thereon (except for any Mortgage not returned from the public
recording office, in which case the Depositor will unless otherwise specified
in the related Prospectus Supplement, deliver or cause to be delivered a copy
of such Mortgage together with a certificate that the original of such Mortgage
was delivered to such recording office), (iii) an assignment of the Mortgage to
the Trustee, which assignment will be in recordable form, and (iv) such other
security documents as may be specified in the related Prospectus Supplement or
the related Pooling and Servicing Agreement. Notwithstanding the foregoing, a
Trust Fund may include Mortgage Loans where the original Mortgage Note is not
delivered to the Trustee if the Depositor delivers to the Trustee or the
custodian a copy or a duplicate original of the Mortgage Note, together with an
affidavit certifying that the original thereof has been lost or destroyed. With
respect to such Mortgage Loans, the Trustee (or its nominee) may not be able to
enforce the Mortgage Note against the related borrower. The Depositor will be
required to agree to repurchase, or substitute for, each such Mortgage Loan
that is subsequently in default if the enforcement thereof or of the related
Mortgage is materially adversely affected by the absence of the original
Mortgage Note. The related Pooling and Servicing Agreement will generally
require the Depositor or another party specified in the related Prospectus
Supplement to promptly cause the assignments of the related loans to be
recorded in the appropriate public office for real property records, except in
states in which, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interest in such loans
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the originator of such loans.
Notwithstanding the preceding paragraph, with respect to any Mortgage which
has been recorded in the name of Mortgage Electronic Registration Systems, Inc.
("MERS") or its designee, no mortgage assignment in favor of the Trustee will
be required to be prepared or delivered. Instead, the Master Servicer will be
required to take all actions as are necessary to cause the applicable Trust
Fund to be shown as the owner of the related Mortgage Loan on the records of
MERS for purposes of the system of recording transfers of beneficial ownership
of mortgages maintained by MERS.
With respect to any Mortgage Loans which are Cooperative Loans, the Depositor
will cause to be delivered to the Trustee, the related original cooperative
note endorsed without recourse in blank or to the order of the Trustee, the
original security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate, related blank stock powers and any other document specified in the
related Prospectus Supplement. The Depositor will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within a specified period of days after receipt
thereof, and the Trustee will hold such documents in trust for the benefit of
the Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) will notify the Master
Servicer and the Depositor. If the Depositor cannot cure the omission or defect
within a specified period of days after receipt of such notice, the Depositor
will be obligated to purchase the related Mortgage Loan from the Trustee at the
Purchase Price or, if so specified in the related Prospectus Supplement,
replace such Mortgage Loan with another mortgage loan that meets certain
requirements set forth therein. There can be no assurance that the Depositor
will fulfill this purchase obligation. Although the Master Servicer may be
obligated to enforce such obligation to the extent described above under
"Mortgage Loan Program--Representations and Warranties; Repurchases," the
Master Servicer will not be obligated to purchase such Mortgage Loan if the
Depositor defaults on its purchase obligation. Unless otherwise specified in
the related Prospectus Supplement, this purchase obligation constitutes the
sole remedy available to the Certificateholders or the Trustee for omission of,
or a material defect in, a constituent document.
46
The Mortgage Loan Purchase Agreement will provide the Depositor with remedies
against JVMC for the failure to deliver documentation with respect to the
Mortgage Loans required under the Pooling and Servicing Agreement.
A custodian may maintain possession of, and, if applicable, review the
documents relating to, the Mortgage Loans as agent of the Trustee pursuant
either to the terms of the Pooling and Servicing Agreement or a separate
custodial agreement.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, unless the related Prospectus Supplement
otherwise provides, no purchase of a Mortgage Loan will be made if such
purchase would result in a prohibited transaction tax under the Code.
Payments on Mortgage Loans; Deposits to Collection Account
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Mortgage Assets in the
Trust Fund (the "Collection Account"), which unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution the short-term debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of which) are rated in the highest short-term
rating category by the nationally recognized statistical rating organization(s)
that rated one or more classes of the related Series of Certificates (each, a
"Rating Agency"), (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund or the Savings Association Insurance
Fund, (iii) an account or accounts the deposits in which are insured by the
Bank Insurance Fund or the Savings Association Insurance Fund (to the limits
established by the Federal Deposit Insurance Corporation), and the uninsured
deposits in which are otherwise secured such that, as evidenced by an opinion
of counsel, the Certificateholders have a claim with respect to the funds in
the Collection Account or a perfected first priority security interest against
any collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Collection Account is maintained, (iv) a trust account or accounts maintained
with the trust department of a federal or a state chartered depository
institution or trust company, acting in a fiduciary capacity or (v) an account
or accounts otherwise acceptable to each Rating Agency. The Collection Account
may be maintained at First Union National Bank, an affiliate of the Depositor,
so long as it maintains a long-term unsecured rating of at least A by Standard
& Poor's Ratings Services ("S&P") and A2 by Moody's Investors Service, Inc.
("Moody's"), and a short-term rating of at least A-1 by S&P and P-1 by Moody's.
Investments in which amounts in the Collection Account may be invested are
limited to United States government securities, other high-quality investments
or such other investments that are acceptable to each Rating Agency ("Eligible
Investments"). A Collection Account may be maintained as an interest bearing
account or the funds held therein may be invested pending each succeeding
Distribution Date in Eligible Investments. The Master Servicer or its designee
or such other entity set forth in the related Prospectus Supplement will be
entitled to receive any such interest or other income earned on funds in the
Collection Account as additional compensation and will be obligated to deposit
in the Collection Account the amount of any loss immediately as realized. The
Collection Account may be maintained with the Master Servicer or with a
depository institution that is an affiliate of the Master Servicer, provided it
meets the standards set forth above.
The Master Servicer will deposit or cause to be deposited in the Collection
Account for each Trust Fund on a daily basis or such other period provided in
the related Pooling and Servicing Agreement, to the extent applicable, the
following payments and collections received or advances made by or on behalf of
it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date and exclusive of any amounts representing Retained Interest) or
such other amounts at such times as are specified in the related Prospectus
Supplement and provided in the Pooling and Servicing Agreement:
(i) all payments on account of principal, including Principal Prepayments
and, if specified in the related Prospectus Supplement, prepayment
penalties, on the Mortgage Loans;
47
(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) (a) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed advances made, if any, by the Master Servicer) of the hazard
insurance policies and any Primary Mortgage Insurance Policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and (b) "Net
Liquidation Proceeds" consisting of all other cash amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans, by
foreclosure or otherwise ("Liquidation Proceeds") net of unreimbursed
expenses incurred in connection with liquidation or foreclosure
("Liquidation Expenses") and unreimbursed advances made, if any, by the
Master Servicer, and (c) any net proceeds received on a monthly basis with
respect to any properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Depositor as described under "Mortgage Loan Program--
Representations and Warranties; Repurchases" or "--Assignment of Mortgage
Loans" above and all proceeds of any Mortgage Loan repurchased as described
under "--Termination; Optional Termination" below;
(v) all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy described
under "--Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Collection Account and, to the extent
specified in the related Prospectus Supplement, any payments required to be
made by the Master Servicer in connection with prepayment interest
shortfalls; and
(vii) all other amounts required to be deposited in the Collection
Account pursuant to the Pooling and Servicing Agreement.
The Master Servicer may from time to time direct the institution which
maintains the Collection Account, to withdraw funds from the Collection Account
for the following purposes or such other purposes set forth in the related
Prospectus Supplement:
(i) to pay to the Master Servicer the servicing fees described in the
related Prospectus Supplement, the Master Servicing Fee and, as additional
servicing compensation, earnings on or investment income with respect to
funds in the amounts in the Collection Account credited thereto;
(ii) to reimburse the Master Servicer for Advances;
(iii) to reimburse the Master Servicer for any Advances previously made
which the Master Servicer has determined to be nonrecoverable;
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid Master Servicing Fees and
unreimbursed out-of-pocket costs and expenses incurred by the Master
Servicer in the performance of its servicing obligations, such right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which such advances were made;
(vi) to pay to the Master Servicer, with respect to each Mortgage Loan or
property acquired in respect thereof that has been purchased by the Master
Servicer pursuant to the Pooling and Servicing Agreement, all amounts
received thereon and not taken into account in determining the related
Principal Balance of such repurchased Mortgage Loan;
(vii) to reimburse the Master Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Pooling and Servicing Agreement;
48
(viii) to withdraw any amount deposited in the Collection Account and not
required to be deposited therein; and
(ix) to clear and terminate the Collection Account upon termination of
the Pooling and Servicing Agreement.
In addition, on or prior to the Business Day immediately preceding each
Distribution Date or such other date specified in the related Prospectus
Supplement, the Master Servicer shall withdraw from the Collection Account the
amount of Available Distribution Amount, to the extent on deposit, for deposit
in an account maintained by the Trustee for the related Series of Certificates.
Notwithstanding the foregoing, for as long as HFC remains the Master Servicer
under the Pooling and Servicing Agreement and maintains a rating of P-1 from
Moody's and A-1 from S&P, which is currently the case, the Master Servicer need
not deposit collections into the Collection Account on the day indicated above
but may use for its own benefit all such collections until the related
Distribution Date at which time the Master Servicer will make such deposits in
an amount equal to the net amount of such deposits and withdrawals which would
have been made had the conditions of this sentence not applied.
Pre-Funding Account
If so specified in the Prospectus Supplement, the related Pooling and
Servicing Agreement may provide for the transfer by the Depositor of additional
Mortgage Loans (the "Subsequent Mortgage Loans") to the related Trust Fund
after the Closing Date for the related Certificates. Such Subsequent Mortgage
Loans will be required to conform to the requirements set forth in the related
Agreement providing for such transfer. As specified in the related Prospectus
Supplement, such transfer may be funded by the establishment of a Pre-Funding
Account (a "Pre-Funding Account"). If a Pre-Funding Account is established, all
or a portion of the proceeds of the sale of one or more classes of Certificates
of the related Series will be deposited in such account (the "Pre-Funded
Amount") to be released as additional Mortgage Loans are transferred to the
Trust Fund. The related Pooling and Servicing Agreement will establish a period
of time (which will be no longer than three months following the related
Closing Date) within which such transfers must be made (the "Funding Period").
Unless otherwise specified in the related Prospectus Supplement, amounts set
aside to fund such transfers (whether in a Pre-Funding Account or otherwise)
and not so applied within the Funding Period will be deemed to be principal
prepayments and applied in the manner set forth in the Prospectus Supplement.
Collection Procedures
The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with each Agreement
and any Mortgage Pool Insurance Policy, Primary Mortgage Insurance Policy, FHA
Insurance, VA Guarantee and Bankruptcy Bond or alternative arrangements, follow
such collection procedures as are customary with respect to mortgage loans that
are comparable to the Mortgage Loans. Consistent with the above, the Master
Servicer may, in its discretion, (i) waive any assumption fee, late payment or
other charge in connection with a Mortgage Loan and (ii) to the extent not
inconsistent with the coverage of such Mortgage Loan by a Mortgage Pool
Insurance Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty
or Bankruptcy Bond or alternative arrangements, if applicable, arrange with a
Mortgagor a schedule for the liquidation of delinquencies in a manner that is
determined by the Master Servicer to be customary with respect to comparable
mortgage loans. To the extent the Master Servicer is obligated to make or to
cause to be made Advances, such obligation will remain during the period of any
such arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any case
in which property securing a Mortgage Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause
to be exercised its rights to accelerate the maturity of such Mortgage Loan
under any due-on-sale clause applicable thereto, but
49
only if the exercise of such rights is permitted by applicable law; provided,
however, the Master Servicer will not take any enforcement action that would
impair or threaten to impair any recovery under any related insurance policy.
If these conditions are not met or if the Master Servicer reasonably believes
it is unable under applicable law to enforce such due-on-sale clause, or if
such Mortgage Loan is insured by the FHA or partially guaranteed by the VA, the
Master Servicer will enter into or cause to be entered into an assumption
agreement or a substitution agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
for repayment of the Mortgage Loan.
Any fee collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer as
additional servicing compensation. See "Certain Legal Aspects of the Mortgage
Loans--Due-on-Sale Clauses." In connection with any such assumption, the terms
of the related Mortgage Loan may not be changed.
Hazard Insurance
The Master Servicer will require the mortgagor or obligor on each Mortgage
Loan to maintain a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary for the type of Mortgaged Property in the state in which such
Mortgaged Property is located. Such coverage will be in an amount not less than
the replacement value of the improvements securing such Mortgage Loan or the
principal balance owing on such Mortgage Loan, whichever is less. All amounts
collected by the Master Servicer under any hazard policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released
to the mortgagor or obligor in accordance with the Master Servicer's normal
servicing procedures) will be deposited in the related Collection Account. In
the event that, at its option, the Master Servicer maintains a blanket policy
insuring against hazard losses on all the Mortgage Loans comprising part of a
Trust Fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. Such blanket policy may
contain a deductible clause, in which case the Master Servicer will be required
to deposit from its own funds into the related Collection Account the amounts
which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Mortgage Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Mortgage Loans may have been
underwritten by different insurers under different state laws in accordance
with different applicable forms and therefore may not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most such policies typically do 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 mud
flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in certain cases, vandalism. The foregoing list is merely
indicative of certain kinds of uninsured risks and is not intended to be all
inclusive. If the Mortgaged Property securing a Mortgage Loan is located in a
federally designated special flood area, the Master Servicer will require the
mortgagor or obligor to obtain and maintain flood insurance, to the extent such
insurance is available.
The hazard insurance policies covering properties securing the Mortgage Loans
typically contain a clause which in effect requires the insured at all times to
carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the insured property in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as
replacement cost at the time and place of loss, less physical depreciation) of
the improvements damaged or destroyed or (ii) such proportion of the loss as
the amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since the amount of hazard insurance the
Master Servicer may cause to be maintained on the improvements securing the
Mortgage Loans declines as the principal balances owing thereon decrease, and
since improved real estate generally has appreciated in value over time in the
past, the
50
effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged property.
If specified in the related Prospectus Supplement, a Special Hazard Insurance
Policy will be obtained to insure against certain of the uninsured risks
described above. See "Credit Enhancement--Special Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
Realization Upon Defaulted Mortgage Loans
Primary Mortgage Insurance Policies
Generally, the Master Servicer will not maintain or cause to be maintained a
Primary Mortgage Insurance Policy with regard to any Mortgage Loan. However, to
the extent specified in the related Prospectus Supplement, the Master Servicer
will be required to maintain or cause to be maintained, as the case may be, in
full force and effect, Primary Mortgage Insurance Policies with regard to
specified Mortgage Loans in the related Trust Fund. Primary Mortgage Insurance
Policies are not required for Home Equity Loans. The Master Servicer will not
cancel or refuse to renew any such Primary Mortgage Insurance Policy in effect
at the time of the initial issuance of a Series of Certificates that is
required to be kept in force under the applicable Pooling and Servicing
Agreement unless the replacement Primary Mortgage Insurance Policy for such
canceled or nonrenewed policy is maintained with an insurer whose claims-paying
ability is sufficient to maintain the current rating of the classes of
Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment
of the Mortgage Loan, (iii) amounts expended but not approved by the issuer of
the related Primary Mortgage Insurance Policy (the "Primary Insurer"), (iv)
claim payments previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained
by reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the Mortgage Loans,
including misrepresentation by the originator, borrower or other persons
involved in the origination of the Mortgage Loan; (ii) failure to construct the
Mortgaged Property subject to the Mortgage Loan in accordance with specified
plans; (iii) physical damage to the Mortgaged Property; and (iv) the related
Master Servicer not being approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions precedent
to the filing of or payment of a claim under a Primary Mortgage Insurance
Policy covering a Mortgage Loan, the insured will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Mortgage
Insurance Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales
expenses, (4) any outstanding liens (as defined in such Primary Mortgage
Insurance Policy) on the Mortgaged Property and
51
(5) foreclosure costs, including court costs and reasonable attorneys' fees;
(ii) in the event of any physical loss or damage to the Mortgaged Property,
have the Mortgaged Property restored and repaired to at least as good a
condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted; and (iii) tender to the Primary
Insurer good and merchantable title to and possession of the Mortgaged
Property.
The Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the insurer under each Primary
Mortgage Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Mortgage Insurance Policy and, when the
Mortgaged Property has not been restored, the hazard insurance policy, are to
be deposited in the Collection Account, subject to withdrawal as heretofore
described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Mortgage Insurance Policy, if any, the
Master Servicer is not required to expend its own funds to restore the damaged
Mortgaged Property unless it determines (i) that such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Mortgage Insurance Policy, the Master Servicer will be obligated to follow or
cause to be followed such normal practices and procedures as it deems necessary
or advisable to realize upon the defaulted Mortgage Loan. If the proceeds of
any liquidation of the Mortgaged Property securing the defaulted Mortgage Loan
are less than the principal balance of such Mortgage Loan plus interest accrued
thereon that is payable to Certificateholders, the Trust Fund will realize a
loss in the amount of such difference plus the aggregate of any unpaid
servicing compensation and expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the Pooling
and Servicing Agreement. In the unlikely event that any such proceedings result
in a total recovery which is, after reimbursement to the Master Servicer of its
expenses and any unpaid servicing compensation, in excess of the principal
balance of such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Collection Account, unless otherwise specified in the related
Prospectus Supplement, amounts representing the balance of such excess,
exclusive of any amount required by law to be forwarded to the related
Mortgagor, as additional servicing compensation.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Collection Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Collection Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. Since Insurance Proceeds cannot exceed deficiency claims
and certain expenses incurred by the Master Servicer, no such payment or
recovery will result in a recovery to the Trust Fund which exceeds the
principal balance of the defaulted Mortgage Loan together with accrued interest
thereon. See "Credit Enhancement."
Junior Mortgages
The Mortgage Loans underlying the Certificates of a Series will be secured by
mortgages or deeds of trust which may be second or more junior mortgages to
other mortgages held by other lenders or institutional
52
investors. The rights of the Trust Fund (and therefore the holders of the
related Certificates), as mortgagee under a junior mortgage, are subordinate to
those of the mortgagee under the senior mortgage, including the prior rights of
the senior mortgagee to receive hazard insurance and condemnation proceeds and
to cause the property securing the mortgage loan to be sold upon default of the
mortgagor. If the property is sold, the junior mortgagee's lien will be
extinguished unless the junior mortgagee asserts its subordinate interest in
the property in foreclosure litigation and, possibly, satisfies the defaulted
senior mortgage. A junior mortgagee may satisfy a defaulted senior loan in full
and, in some states, may cure such default and bring the senior loan current,
in either event adding the amounts expended to the balance due on the junior
loan. In most states, absent a provision in the mortgage or deed of trust, no
notice of default is required to be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders confers
on the mortgagee the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
FHA Insurance; VA Guarantees
Mortgage Loans designated in the related Prospectus Supplement as insured by
the Federal Housing Administration ("FHA") will be insured by the FHA as
authorized under the United States Housing Act of 1937, as amended ("FHA
Insurance"). Such Mortgage Loans will be insured under various FHA programs
including the standard FHA 203(b) program to finance the acquisition of one- to
four-family housing units and the FHA 245 graduated payment mortgage program.
These programs generally limit the principal amount and interest rates of the
mortgage loans insured. Mortgage Loans insured by the FHA generally require a
minimum down payment of approximately 5% of the original principal amount of
the loan. No FHA-insured Mortgage Loans relating to a Series may have an
interest rate or original principal amount exceeding the applicable FHA limits
at the time of origination of such loan.
The insurance premiums for Mortgage Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") or
by the Master Servicer and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
Mortgage Loan to HUD. With respect to a defaulted FHA-insured Mortgage Loan,
the Master Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Master Servicer or HUD, that
default was caused by circumstances beyond the mortgagor's control, the Master
Servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of regular
mortgage payments for a specified period, with such payments to be made up on
or before the maturity date of the mortgage, or the recasting of payments due
under the mortgage up to or beyond the maturity date. In addition, when a
default caused by such circumstances is accompanied by certain other criteria,
HUD may provide relief by making payments to the Master Servicer in partial or
full satisfaction of amounts due under the Mortgage Loan (which payments are to
be repaid by the mortgagor to HUD) or by accepting assignment of the loan from
the Master Servicer. With certain exceptions, at least three full monthly
installments must be due and unpaid under the Mortgage Loan, and HUD must have
rejected any request for relief from the mortgagor before the Master Servicer
may initiate foreclosure proceedings.
53
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer for certain costs and expenses and to deduct
certain amounts received or retained by the Master Servicer after default. When
entitlement to insurance benefits results from foreclosure (or other
acquisition of possession) and conveyance to HUD, the Master Servicer is
compensated for no more than two-thirds of its foreclosure costs, and is
compensated for interest accrued and unpaid prior to such date but in general
only to the extent it was allowed pursuant to a forbearance plan approved by
HUD. When entitlement to insurance benefits results from assignment of the
Mortgage Loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA-insured Mortgage Loan, bears interest from a
date 30 days after the mortgagor's first uncorrected failure to perform any
obligation to make any payment due under the Mortgage and, upon assignment,
from the date of assignment to the date of payment of the claim, in each case
at the same interest rate as the applicable HUD debenture interest rate as
described above.
Mortgage Loans designated in the related Prospectus Supplement as guaranteed
by the Veterans Administration ("VA") will be partially guaranteed by the VA
under the Serviceman's Readjustment Act of 1944, as amended (a "VA Guarantee").
The Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no
mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 3703(a), as amended. As
of January 1, 1996, the maximum guarantee that may be issued by the VA under a
VA guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $50,750. The liability on
the guarantee is reduced or increased pro rata with any reduction or increase
in the amount of indebtedness, but in no event will the amount payable on the
guarantee exceed the amount of the original guarantee. The VA may, at its
option and without regard to the guarantee, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Mortgage Loan, the Master Servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the VA-
insured Mortgage Loan originally guaranteed applied to indebtedness outstanding
as of the applicable date of computation specified in the VA regulations.
Payments under the guarantee will be equal to the unpaid principal amount of
the loan, interest accrued on the unpaid balance of the loan to the appropriate
date of computation and limited expenses of the mortgagee, but in each case
only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the Master Servicer in
respect of its activities for each Series of Certificates will be equal to the
percentage per annum described in the related Prospectus Supplement (which may
vary under certain circumstances) of the outstanding principal balance of each
Mortgage Loan, and such compensation will be retained by it from collections of
interest on such Mortgage Loan in the related
54
Trust Fund (the "Master Servicing Fee"). In addition, the Master Servicer will
retain all prepayment charges, assumption fees and late payment charges, to the
extent collected from Mortgagors, and any benefit which may accrue as a result
of the investment of funds in the applicable Collection Account (unless
otherwise specified in the related Prospectus Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Pooling and Servicing Agreement, including,
without limitation, payment of any fee or other amount payable in respect of
any credit enhancement arrangements, payment of the fees and disbursements of
the Trustee, any custodian appointed by the Trustee, the Certificate Registrar
and any paying agent, and payment of expenses incurred in enforcing the
obligations of the Master Servicer. The Master Servicer will be entitled to
reimbursement of certain of these expenses. In addition, as indicated in the
preceding section, the Master Servicer will be entitled to reimbursements for
certain expenses incurred by it in connection with Liquidated Mortgage Loans
and in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Liquidation Proceeds (including Insurance Proceeds).
Evidence as to Compliance
Each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, a firm of independent public accountants will
furnish a statement to the Trustee to the effect that, on the basis of the
examination by such firm conducted substantially in compliance with the audit
program applicable to the Master Servicer, the servicing by or on behalf of the
Master Servicer of mortgage loans, private mortgage-backed securities or agency
securities, under pooling and servicing agreements substantially similar to
each other (including the related Pooling and Servicing Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, such audit
program requires it to report.
Each Pooling and Servicing Agreement will also provide for delivery to the
Trustee, on or before a specified date in each year, of an annual statement
signed by an officer or officers of the Master Servicer to the effect that the
Master Servicer has fulfilled its obligations under the Pooling and Servicing
Agreement in all material respects throughout the preceding year or specifying
any known failure to do so.
Copies of the annual accountants' statement and the statement of officers of
the Master Servicer may be obtained by Certificateholders of the related Series
without charge upon written request to the Master Servicer or the Trustee at
the address set forth in the related Prospectus Supplement.
Certain Matters Regarding the Master Servicer and the Depositor
Each Pooling and Servicing Agreement will provide that, subject to the Master
Servicer's right to assign its rights and delegate its duties as described
below, the Master Servicer may not resign from its obligations and duties under
the Pooling and Servicing Agreement unless its duties thereunder are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it, except in connection with a permitted transfer of servicing. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Pooling and
Servicing Agreement.
Each Pooling and Servicing Agreement will further provide that neither the
Master Servicer, the Depositor nor any director, officer, employee, or agent of
the Master Servicer or the Depositor will be under any liability to the related
Trust Fund or Certificateholders for any action taken or for refraining from
the taking of any action in good faith pursuant to the Agreement, or for errors
in judgment; provided, however, neither the Master Servicer, the Depositor nor
any such person will be protected against any liability which would otherwise
be imposed by reason of any such breach of the terms and conditions of the
Pooling and Servicing Agreement. Each Pooling and Servicing Agreement will
further provide that the Master Servicer, the Depositor
55
and any director, officer, employee or agent of the Master Servicer or the
Depositor will be entitled to indemnification by the related Trust Fund and
will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Pooling and Servicing
Agreement or the Certificates, other than any loss, liability or expense
related to any specific Mortgage Loan or Mortgage Loans (except any such loss,
liability or expense otherwise reimbursable pursuant to the Pooling and
Servicing Agreement) and any loss, liability or expense incurred by reason of
any willful breach of the terms and conditions of the Pooling and Servicing
Agreement. In addition, each Pooling and Servicing Agreement will provide that
neither the Master Servicer nor the Depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Pooling and Servicing Agreement and which
in its opinion may involve it in any expense or liability. The Master Servicer
or the Depositor may, however, in its discretion undertake any such action
which it may deem 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 Fund and the Master Servicer or
the Depositor, as the case may be, will be entitled to be reimbursed therefor
out of funds otherwise distributable to Certificateholders. The right of
reimbursement will survive termination of the Pooling and Servicing Agreement
or resignation of the Master Servicer or the Depositor.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Pooling and
Servicing Agreement. In addition, the Master Servicer may assign its rights,
and delegate its duties, pursuant to the terms of the Pooling and Servicing
Agreement; provided, however that the Master Servicer will remain liable for
any such delegated duties.
Special Servicers
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the related Pooling
and Servicing Agreement or may be appointed by the Master Servicer or another
specified party to perform certain specified duties in respect of servicing the
related Mortgage Loans that would otherwise be performed by the Master Servicer
(for example, the workout and/or foreclosure of defaulted Mortgage Loans). The
rights and obligations of any Special Servicer will be specified in the related
Prospectus Supplement, and the Master Servicer will be liable for the
performance of a Special Servicer only if, and to the extent, set forth in such
Prospectus Supplement.
Events of Default
Events of Default under each Pooling and Servicing Agreement will generally
consist of (i) any failure by the Master Servicer to distribute or cause to be
distributed to Certificateholders of any class any required payment (other than
an Advance) which continues unremedied for five business days after the giving
of written notice of such failure to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer, the Depositor and the Trustee by the
holders of Certificates of such class evidencing not less than 25% of such
class (based on the outstanding principal balances of the Certificates); (ii)
any failure by the Master Servicer to make an Advance as required under the
Agreement, unless cured as specified therein; (iii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or agreements in the Agreement which continues unremedied for sixty
days after the giving of written notice of such failure to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Certificates evidencing not less than 50% of the
related Trust Fund (based on the outstanding principal balances of the
Certificates); and (iv) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceeding and certain actions
by or on behalf of the Master Servicer indicating its insolvency,
reorganization or inability to pay its obligations. Material variations to the
foregoing events of
56
default (other than to shorter cure periods or eliminate notice requirements)
will be specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, the Pooling and Servicing
Agreement will permit the Trustee to sell the Mortgage Loans and the other
assets of the Trust Fund in the event that payments in respect thereto are
insufficient to make payments required in the Agreement. The assets of the
Trust Fund will be sold only under the circumstances and in the manner
specified in the related Prospectus Supplement.
Rights upon Event of Default
So long as an Event of Default under the related Pooling and Servicing
Agreement remains unremedied, the Trustee may, and at the direction of holders
of Certificates having not less than 50% of the related Trust Fund (based on
the outstanding principal balances of the Certificates) and under such other
circumstances as may be specified in such Pooling and Servicing Agreement, the
Trustee shall, terminate all of the rights and obligations of the Master
Servicer under the Pooling and Servicing Agreement relating to such Trust Fund
and in and to the Mortgage Loans, whereupon the Trustee will succeed to all of
the responsibilities, duties and liabilities of the Master Servicer under the
Pooling and Servicing Agreement, including, if specified in the related
Prospectus Supplement, the obligation to make advances, and will be entitled to
similar compensation arrangements. In the event that the Trustee is unwilling
or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a Mortgage Loan servicing institution with
a net worth of at least $50,000,000 to act as successor to the Master Servicer
under the Pooling and Servicing Agreement. Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer under
the Pooling and Servicing Agreement.
No Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates of any class of such Series evidencing not less than 50% of the
related Trust Fund (based on the outstanding principal balances of the
Certificates) have made written request upon the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity, and the Trustee for 60 days has neglected or
refused to institute any such proceeding.
Amendment
Unless otherwise specified in the related Prospectus Supplement, each Pooling
and Servicing Agreement may be amended by the Depositor, the Master Servicer
and the Trustee, without the consent of any of the Certificateholders, (i) to
cure any ambiguity or mistake; (ii) to correct or supplement any provision
therein which may be defective or inconsistent with any other provision therein
or with the related Prospectus Supplement or Prospectus or to correct any error
or mistake; (iii) to obtain, maintain or improve the rating of any class of
Certificates (it being understood that after obtaining any rating required at
the initial issuance of the related Series, none of the Depositor, Master
Servicer or Trustee is obligated to obtain, maintain or improve the rating of
any class of Certificates of such Series); or (iv) to make any other revisions
with respect to matters or questions arising under the Pooling and Servicing
Agreement which are not materially inconsistent with the provisions thereof,
provided that, in the case of clause (iv), such action will not adversely
affect in any material respect the interests of any Certificateholder. An
amendment will be deemed not to adversely affect in any material respect the
interests of the Certificateholders if the person requesting such amendment
obtains a letter from each rating agency requested to rate the class or classes
of Certificates of such Series stating that such amendment will not result in
the downgrading or withdrawal of the respective ratings then assigned to such
Certificates. In addition, to the extent provided in the related Pooling and
Servicing Agreement, the Pooling and Servicing Agreement may be amended without
the consent of any of the Certificateholders, to change the manner in which the
Collection Account is maintained, provided that any such change does not
adversely affect
57
the then current rating on the class or classes of Certificates of such Series
that have been rated. In addition, if a REMIC election or FASIT election is
made with respect to a Trust Fund, the related Pooling and Servicing Agreement
may be amended to modify, eliminate or add to any of its provisions to such
extent as may be necessary to maintain the qualification of the related Trust
Fund as a REMIC or FASIT, provided that the Trustee has received an opinion of
counsel to the effect that such action is necessary or helpful to maintain such
qualification.
Unless otherwise specified in the related Prospectus Supplement, each Pooling
and Servicing Agreement may also be amended by the Depositor, the Master
Servicer and the Trustee with consent of holders of Certificates of such Series
evidencing not less than 51% of the aggregate percentage interests 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 the related Pooling and
Servicing Agreement or of modifying in any manner the rights of the holders of
the related Certificates; provided, however, no such amendment may (i) reduce
in any manner the amount of or delay the timing of, payments received on
Mortgage Loans which are required to be distributed on any Certificate without
the consent of the holder of such Certificate, or (ii) reduce the aforesaid
percentage of Certificates of any class of holders which are required to
consent to any such amendment without the consent of the holders of all
Certificates of such class covered by such Pooling and Servicing Agreement then
outstanding. If a REMIC election or FASIT election is made with respect to a
Trust Fund, the Trustee will not be entitled to consent to an amendment to the
related Pooling and Servicing Agreement without having first received an
opinion of counsel to the effect that such amendment will not cause such Trust
Fund to fail to qualify as a REMIC or FASIT, as the case may be, at any time
the related Certificates are outstanding.
Termination; Optional Termination
The obligations created by each Pooling and Servicing Agreement for each
Series of Certificates will terminate upon the payment to the related
Certificateholders of all amounts held in the Collection Account or by the
Master Servicer or the Trustee and required to be paid to them pursuant to such
Pooling and Servicing Agreement following the later of (i) the final payment or
other liquidation of the last of the Mortgage Loans subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage
Loans remaining in the Trust Fund and (ii) the purchase from the related Trust
Fund of all of the remaining Mortgage Loans and all property acquired in
respect of such Mortgage Loans by the party named in the applicable Prospectus
Supplement.
Subject to the provisions of the applicable Pooling and Servicing Agreement,
the Depositor, the Master Servicer or such other party specified in the related
Prospectus Supplement 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, the Master Servicer's or such other party's judgment, the
related default is not likely to be cured by the borrower or default is not
likely to be averted, and (ii) any Mortgage Loan as to which the Originator of
such Mortgage Loan breached a representation or warranty to JVMC as to the
characteristics of the Mortgage Loans, 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.
The Trustee
The Trustee under each Pooling and Servicing Agreement 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, the Master
Servicer and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature, of
certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws
58
may differ substantially), the summaries do not purport to be complete nor to
reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Mortgage Loans is situated. The summaries
are qualified in their entirety by reference to the appropriate laws of the
states in which Mortgage Loans may be originated.
General
The Mortgage Loans will be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates
a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of
recording with a state or county office. There are two parties to a mortgage,
the mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the grantor/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 obligation. A security deed
and a deed to secure debt are special types of deeds which indicate on their
face that they are granted to secure an underlying debt. By executing a
security deed or deed to secure debt, the grantor conveys title to, as opposed
to merely creating a lien upon, the subject property to the grantee until such
time as the underlying debt is repaid. The trustee's authority under a deed of
trust, the mortgagee's authority under a mortgage and the grantee's authority
under a security deed or deed to secure debt are governed by law and, with
respect to some deeds of trust, the directions of the beneficiary.
Home Ownership and Equity Protection Act of 1994
The Mortgage Loans may be subject to the Home Ownership and Equity Protection
Act of 1994 ("Act") which amended the Truth-in-Lending Act as it applies to
mortgages subject to the Act. The Act requires certain additional disclosures,
specifies the timing of such disclosures and limits or prohibits inclusion of
certain provisions in mortgages subject to the Act. In addition, it is possible
that some of the Mortgage Loans will be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act") which
incorporates the Act. The Riegle Act adds certain additional provisions to
Regulation Z, the implementing regulation of the Truth-In-Lending Act. These
provisions impose additional disclosure and other requirements on creditors
with respect to non-purchase money mortgage loans with high interest rates or
high upfront fees and charges. In general, mortgage loans within the purview of
the Riegle Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. The provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. The Act and the Riegle Act also provide that any
purchaser or assignee of a mortgage covered by the such laws is subject to all
of the claims and defenses which the borrower could assert against the original
lender. If the Trust Fund includes Mortgage Loans subject to the Act or the
Riegle Act, it will be subject to all of the claims and defenses which the
borrower could assert against an Originator. Any violation of the Act or the
Riegle Act which would result in such liability would be a breach of the
Depositor's representations and warranties, and the Depositor would be
obligated to cure, repurchase or, if permitted by the Pooling and Servicing
Agreement, substitute for the Mortgage Loan in question.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of Mortgage Loans with respect
to prepayments on certain loans. It is anticipated that
59
prepayment charges may not be imposed with respect to many of the Mortgage
Loans. The absence of such a restraint on prepayment, particularly with respect
to fixed rate Mortgage Loans having higher Mortgage Rates or APRs, may increase
the likelihood of refinancing or other early retirement of such loans or
contracts.
Cooperatives
Certain of the Mortgage Loans may be Cooperative Loans. The Cooperative owns
all the real property that comprises the project, including the land, separate
dwelling units and all common areas. The Cooperative is directly responsible
for project management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that Cooperative is a party are generally subordinate to
the interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of a Trust Fund
including Cooperative Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-
stockholder's pro rata share of the Cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a Cooperative and accompanying
rights is financed through a Cooperative share loan evidenced by a promissory
note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related Cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the Cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the tenant-
stockholder, the lender may sue for judgment on the promissory note, dispose of
the collateral at a public or private sale or otherwise proceed against the
collateral or tenant-stockholder as an individual as provided in the security
agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. This approval is usually based on the
purchaser's income and net worth and numerous other factors. Although the
Cooperative's approval is unlikely to be unreasonably withheld or delayed, the
necessity of acquiring such approval could limit the number of potential
purchasers for those shares and otherwise limit the Trust Fund's ability to
sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)(2)) of
a corporation that qualifies as a "cooperative housing corporation" within the
meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the
60
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in which such items
are allowable as a deduction to the corporation, such Section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders (as defined in Code Section 216(b)(2)). By
virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance of
the tax benefits accorded tenant-stockholders of a corporation that qualifies
under Code Section 216(b)(1), the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
Foreclosure/Repossession
Deed of Trust
Foreclosure of a deed of trust is generally accomplished by a non-judicial
sale under a specific provision in the deed of trust which authorizes the
trustee to sell the property at public auction 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, such as California, the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any 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 lienholder. 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, including California, published for a specified period of
time in one or more newspapers. In addition, these notice provisions 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 California, the entire
process from recording a notice of default to a non-judicial sale usually takes
four to five months.
In some states, including California, 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 attorney's fees, which may be
recoverable by a lender.
Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having
an interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings sometimes are not contested by any of the parties. When
the mortgagee's right to foreclosure is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of a
judicial foreclosure proceeding, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale
of the property. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specific period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest in
the real property.
61
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the absence of
equity in the property, the difficulty of determining the exact status of title
to the property, the possible deterioration of the property during the
foreclosure proceedings and a requirement that the purchaser pay to bid for the
property. Thus the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the principal amount outstanding
under the loan, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, the lender will assume the burden 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 will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative 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 that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing adequately to maintain the property or
the borrower executing a second security instrument affecting the property.
Some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for fair notice
require that borrowers under deeds of trust receive notice longer than that
prescribed by statute. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust does not involve sufficient state action to afford constitutional
protection to the borrower.
Junior Mortgages
Some of the Mortgages may be junior liens subordinate to the rights of the
mortgagee under the related senior mortgage or mortgages, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of such junior mortgage only to the extent that the
claims of such senior mortgagees have been satisfied in full, including any
related foreclosure costs. In addition, a junior mortgagee may not foreclose on
the property securing a junior mortgage unless it forecloses subject to the
senior mortgages, in which case it must either pay the entire amount due on the
senior mortgages to the senior mortgagees at or prior to the foreclosure sale
or undertake the obligation to make payments on the senior mortgages in the
event the mortgagor is in default thereunder. The Trust Fund will not have any
source of funds to satisfy the senior mortgages to make payments due to the
senior mortgagees.
Cooperative Loans
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 Bylaws, as well as
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.
62
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code ("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 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.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Rights of Redemption
In some states after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale, or
of any purchaser from the lender subsequent to judicial foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run.
63
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 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 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.
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 lien holder (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/Repossession." 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 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,
64
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 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 being considered by the Senate would amend 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 most
recently 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 does not include a comparable
provision as of the date hereof. 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
65
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 Mortgage Loans are also subject to federal laws, including:
(i) the federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) the Home Ownership and Equity Protection Act of 1994.
These and other federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination,
servicing and enforcement of Mortgage Loans. Violations of certain provisions
of these laws may limit the ability of the Master Servicer to collect all or
part of the principal of or interest on the Mortgage Loans, may subject the
Master Servicer to damages and administrative enforcement and in addition could
be raised by borrowers as a recoupment or setoff in a collection or foreclosure
action. The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party.
Texas Home Equity Loans
Generally, any "cash-out" refinance or other non-purchase money transaction
(except for 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.
Environmental Risks
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
66
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 such liens
("Superliens"). In the latter states, the security interest of the Trustee in a
property that is subject to such Superlien could be adversely affected.
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 the 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 be
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. 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
facility or participated in decisions relating to hazardous waste to be liable
under CERCLA; rather, liability could attach to a lender if
67
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.
However, the Asset Conservation Lender Liability and Deposit Insurance
Protection Act of 1996 (the "Asset Conservation Act"), which was adopted in
1996, was intended to clarify the scope of the secured creditor exemption under
both CERCLA and RCRA. The Asset Conservation Act more explicitly 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
Fund and occasion a loss to the Trust Fund and to Certificateholders in certain
circumstances. The new secured creditor amendments to CERCLA, also, would not
necessarily affect the potential for liability in actions by either a state or
a private party under other federal or state laws which may impose liability on
"owners or operators" but do not incorporate the secured-creditor exemption.
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. Neither the
Depositor, any Originator or the Master Servicer makes any representations or
warranties or assumes any liability with respect to: environmental conditions
of such Mortgaged Property; the absence, presence or effect of hazardous wastes
or hazardous substances on, near or emanating from such Mortgaged Property; the
impact on Certificateholders of any environmental condition or presence of any
substance on or near such Mortgaged Property; or the compliance of any
Mortgaged Property with any environmental laws. In addition, no agent, person
or entity otherwise affiliated with the Depositor is authorized or able to make
any such representation, warranty or assumption of liability relative to any
such Mortgaged Property.
Due-On-Sale Clauses
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan may be accelerated by the mortgagee. In recent
years, court decisions and legislative actions placed substantial restriction
on the right of lenders to enforce such clauses in many states. For instance,
the California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain
68
Act"), subject to certain exceptions, preempts state constitutional, statutory
and case law prohibiting the enforcement of due-on-sale clauses. Regulations
promulgated under the Garn-St Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. As to loans secured by an owner-occupied residence, the Garn-St Germain
Act sets forth nine specific instances in which a mortgagee covered by the Act
may not exercise its rights under a due-on-sale clause, notwithstanding the
fact that a transfer of the property may have occurred. The inability to
enforce a due-on-sale clause may result in transfer of the related Mortgaged
Property to an uncreditworthy person, which could increase the likelihood of
default or may result in a mortgage bearing an interest rate below the current
market rate being assumed by a new home buyer, which may affect the average
life of the Mortgage Loans and the number of Mortgage Loans which may extend to
maturity.
Prepayment Charges
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of Mortgage Loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. The absence of such a restraint on prepayment, particularly with
respect to fixed-rate Mortgage Loans having higher Mortgage Rates, may increase
the likelihood of refinancing or other early retirement of such loans or
contracts.
Subordinate Financing
Where a mortgagor encumbers mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk. First, the mortgagor may
have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender or impair the junior lender's security
may create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions
taken by junior lenders can impair the security available to the senior lender
and can interfere with or delay the taking of action by the senior lender.
Moreover, the bankruptcy of a junior lender may operate to stay foreclosure or
similar proceedings by the senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of
such mortgage loans, any such limitation under such state's usury law would not
apply to such mortgage loans.
In any state in which application of Title V has been expressly rejected or a
provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be
69
eligible for inclusion in a Trust Fund unless (i) such mortgage loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such mortgage loan provides that the terms thereof shall be
construed in accordance with the laws of another state under which such
interest rate, discount points and charges would not be usurious and the
mortgagor's counsel has rendered an opinion that such choice of law provision
would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only
for the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage
or deed of trust without any payment or prohibiting the lender from
foreclosing.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Mortgage Loan and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
Any shortfall in interest collections resulting from the application of the
Relief Act could result in losses to the holders of the Certificates. In
addition, the Relief Act imposes limitations which would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the mortgaged property in a timely fashion.
FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft as to the anticipated material federal income tax consequences of the
purchase, ownership and disposition of the Certificates offered hereunder. This
discussion is directed solely to Certificateholders that hold the Certificates
as capital assets within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code"), and does not purport to discuss all
federal income tax consequences that may be applicable to particular categories
of investors, some of which (such as banks, insurance companies and foreign
investors) may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below, are based are subject to
change or differing interpretations, which could apply retroactively. In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the Certificates. See "State, Local and
Other Tax Considerations." Certificateholders are advised to consult their own
tax advisors concerning the federal, state, local or other tax consequences to
them of the purchase, ownership and disposition of the Certificates offered
hereunder.
The following discussion addresses securities of two general types: (i)
securities ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 860G (the
"REMIC Provisions") of the Code and (ii) securities ("Grantor Trust
Certificates") representing interests in a Trust Fund ("Grantor Trust Fund") as
to which no such election will be made. The Prospectus Supplement for
70
each series of Certificates will indicate which of the foregoing treatments
will apply to such Series and, if a REMIC election (or elections) will be made
for the related Trust Fund, will identify all "regular interests" and "residual
interests" in the REMIC. For purposes of this tax discussion, (i) references to
a "Certificateholder" or a "holder" are to the beneficial owner of a
Certificate and (ii) references to "REMIC Pool" are to an entity or portion
thereof as to which a REMIC election will be made. The discussion below assumes
that no election will be made to treat the Trust Fund, or any portion thereof,
as a financial asset securitization investment trust (a "FASIT") under Sections
860H through 860L of the Code. If a FASIT election is made for a particular
series, the Prospectus Supplement for that series will address the material
federal income tax consequences of such election.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code
and in the Treasury regulations issued thereunder (the "OID Regulations"), and
in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Certificates.
Taxable Mortgage Pools
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC or a FASIT will be considered a
Taxable Mortgage Pool if (i) substantially all of the assets of the entity
consist of debt obligations and more than 50% of such obligations consist of
"real estate mortgages," (ii) such entity is the obligor under debt obligations
with two or more maturities, and (iii) under the terms of the debt obligations
on which the entity is the obligor, payments on such obligations bear a
relationship to payments on the obligations held by the entity. Furthermore, a
group of assets held by an entity can be treated as a separate Taxable Mortgage
Pool if the assets are expected to produce significant cash flow that will
support one or more of the entity's issues of debt obligations. The Depositor
generally will structure offerings of non-REMIC Certificates to avoid the
application of the Taxable Mortgage Pool rules.
REMICs
Classification of REMICs
With respect to each Series of REMIC Certificates, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related
Trust Fund (or each applicable portion thereof) will qualify as a REMIC and the
REMIC Certificates offered with respect thereto will be considered to evidence
ownership of "regular interests" ("Regular Certificates") or "residual
interests" ("Residual Certificates") in that REMIC within the meaning of the
REMIC Provisions.
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. The Pooling
and Servicing Agreement with respect to each Series of REMIC Certificates will
contain provisions meeting these requirements. See "--Taxation of Owners of
Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates."
71
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 and regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as a
"single family residence" under Code Section 25(e)(10) 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 may not be held beyond the third
calendar year following the year of acquisition unless extensions are granted
by the Secretary of the Treasury.
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 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
72
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 with respect to each REMIC
Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief
in the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC Pool
will include provisions designed to maintain the Trust Fund's status as a REMIC
under the REMIC Provisions. It is not anticipated that the status of any Trust
Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of
the REMIC Pool underlying such Certificates would be so treated. Moreover, if
95% or more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Certificates will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Loans, it is possible that the
percentage of such assets constituting "loans . . . secured by an interest in
real property which is . . . residential real property" for purposes of Code
Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of the
related Buydown Funds. Interest (including original issue discount) on the
Regular Certificates and income allocated to the class of Residual Certificates
will be interest described in Section 856(c)(3)(B) of the Code to the extent
that such Certificates are treated as "real estate assets" within the meaning
of Section 856(c)(4)(A) of the Code. In addition, the Regular Certificates
generally will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its Startup Day in
exchange for regular or residual interests therein. Regular Certificates held
by a FASIT will qualify for treatment as "permitted assets" within the meaning
of Section 860L(c)(1)(G) of the Code. The determination as to the percentage of
the REMIC Pool's assets that constitute assets described in the foregoing
sections of the Code will be made with respect to each calendar quarter based
on the average adjusted basis of each category of the assets held by the REMIC
Pool during such calendar quarter. The REMIC will report those determinations
to Certificateholders in the manner and at the times required by applicable
Treasury regulations. The Small Business Job Protection Act of 1996 (the "SBJPA
of 1996") repealed the reserve method of 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 requirements 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.
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure
held pending sale and amounts in reserve accounts would be considered to be
part of the Mortgage Loans, or whether such assets (to the extent not invested
in assets described in the foregoing sections) otherwise would receive the same
treatment as the Mortgage Loans for purposes of all of the foregoing sections.
The REMIC
73
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property generally will
qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any
such series of REMIC Certificates, Cadwalader, Wickersham & Taft will deliver
its opinion generally to the effect that, assuming compliance with all
provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Certificates issued by the Tiered
REMICs will be considered to evidence ownership of Regular Certificates or
Residual Certificates in the related REMIC within the meaning of the REMIC
Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners 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. 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 Certificateholder.
Original Issue Discount. Accrual Certificates will be, and other classes of
Regular Certificates may be, issued with "original issue discount" within the
meaning of Code Section 1273(a). Holders of any class of Regular Certificates
having original issue discount generally must include original issue discount
in ordinary income for federal income tax purposes as it accrues, in accordance
with a constant yield method that takes into account the compounding of
interest, in advance of the 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 Section 1271 through 1273 and 1275 and in part on the
provisions of the Tax Reform Act of 1986 ("1986 Act"). Regular
Certificateholders should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as
the Regular Certificates. To the extent such issues are not addressed in such
regulations, the Depositor intends to 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 therein 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 Security")) 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
74
Regular Certificates offered pursuant to this Prospectus generally is the first
price at which a substantial amount of such class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the Trustee will treat the issue price
of a class as to which there is no substantial sale as of the issue date or
that is retained by the Depositor as the fair market value of the 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 an Accrual Certificate, or on other Regular
Certificates with respect to which deferred interest will accrue, will not
constitute qualified stated interest, in which case the stated redemption price
at maturity of such Regular Certificates includes all distributions of interest
as well as principal thereon. Likewise, it is anticipated that the Trustee will
treat an interest-only class or a class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Certificate is shorter than the
interval between subsequent Distribution Dates, the interest attributable to
the additional days will be included in the stated redemption price at
maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of full
years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Regular
Certificate and the denominator of which is the stated redemption price at
maturity of the Regular Certificate. The Conference Committee Report to the
1986 Act provides that the schedule of such distributions should be determined
in accordance with the assumed rate of prepayment of the Mortgage Loans (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
75
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.
The original issue discount accruing in a full accrual period would be the
excess, if any, of (i) the sum of (a) the present value of all of the remaining
distributions to be made on the Regular Certificate as of the end of that
accrual period, and (b) the distributions made on the Regular Certificate
during the accrual period that are included in the Regular Certificate's stated
redemption price at maturity, over (ii) the adjusted issue price of the Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence is calculated
based on (i) the yield to maturity of the Regular Certificate at the issue
date, (ii) events (including actual prepayments) that have occurred prior to
the end of the accrual period, and (iii) the Prepayment Assumption. For these
purposes, the adjusted issue price of a Regular Certificate at the beginning of
any accrual period equals the issue price of the Regular Certificate, increased
by the aggregate amount of original issue discount with respect to the Regular
Certificate that accrued in all prior accrual periods and reduced by the amount
of distributions included in the Regular Certificate's stated redemption price
at maturity that were made on the Regular Certificate in such prior periods.
The original issue discount accruing during any accrual period (as determined
in this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Non-Pro Rata Certificate, it is anticipated that the Trustee
will determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on each
Non-Pro Rata Certificate in a full accrual period would be its allocable share
of the original issue discount with respect to the entire class, as determined
in accordance with the preceding paragraph. However, in the case of a
distribution in retirement of the entire unpaid principal balance of any Non-
Pro Rata Certificate (or portion of such unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to such Certificate (or
to such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Certificate of
such class 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 having original
issue discount 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."
76
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 can
reasonably be expected to measure contemporaneous variations in the cost of
newly borrowed funds. A multiple of a qualified floating rate is considered a
qualified floating rate only if the rate is equal to either (a) the product of
a qualified floating rate and a fixed multiple that is greater than 0.65 but
not more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater that 0.65 but not more than 1.35, increased or
decreased by a fixed rate. Such rate may also be subject to a fixed cap or
floor, or a cap or floor that is not reasonably expected as of the issue date
to affect the yield of the instrument significantly. An objective rate is any
rate (other than a qualified floating rate) that is determined using a single
fixed formula and that is based on objective financial or economic information,
provided that such information is not (i) within the control of the issuer or a
related party or (ii) unique to the circumstances of the issuer or a related
party. A qualified inverse floating rate is a rate equal to a fixed rate minus
a qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds; an inverse floating rate that is not a
qualified inverse floating rate may nevertheless be an objective rate. A class
of Regular Certificates may be issued under this Prospectus that does not have
a variable rate under the foregoing rules, for example, a class that bears
different rates at different times during the period it is outstanding such
that it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that such a class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Certificates. However,
if final regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations. 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 interest at 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 or as specified in the applicable Prospectus
Supplement, 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.
77
Market Discount. A subsequent 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
remaining outstanding principal payments and interest payments other than
qualified stated interest payments due on a Regular Certificate, or (ii) in the
case of a Regular Certificate having original issue discount, is exceeded by
the adjusted issue price of such Regular Certificate at the time of purchase.
Such purchaser generally will be required to recognize ordinary income to the
extent of accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received, in
an amount not exceeding any such distribution. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount would
accrue either (i) on the basis of a constant interest rate, or (ii) in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for such period plus the remaining interest as of the end of such
period, or in the case of a Regular Certificate issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for such period plus
the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Certificate as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense
in any taxable year generally will not exceed the accrued market discount on
the Regular Certificate for such year. Any such deferred interest expense is,
in general, allowed as a deduction not later than the year in which the related
market discount 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. A person
who purchases a Regular Certificate at a price lower than the remaining amounts
includible in the stated redemption price at maturity of the security, but
higher than its adjusted issue price, does not acquire the Regular Certificate
with market discount, but will be required to report original issue discount,
appropriately adjusted to reflect the excess of the price paid over the
adjusted issue price.
Market discount with respect to a Regular Certificate will be considered to
be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Certificate (or, in the case of a
Regular Certificate having original issue discount, the adjusted issue price 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.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Certificate that has
"contingent interest" at a discount generally would continue to accrue interest
and determine adjustments on the Regular Certificate based on the original
projected payment schedule devised by the issuer of the Security. The holder of
such a Regular Certificate would be required, however, to allocate the
difference between the adjusted issue price of the Regular Certificate and its
basis in the Regular Certificate as positive adjustments to the accruals or
projected payments on the Regular Certificate over the remaining term of the
Regular Certificate in a manner that is reasonable (e.g., based on a constant
yield to maturity).
78
Treasury regulations implementing the market discount rules have not yet been
issued, and uncertainty exists with respect to many aspects of those rules. Due
to the substantial lack of regulatory guidance with respect to the market
discount rules, it is unclear how those rules will affect any secondary market
that develops for a given class of Regular Certificates. Prospective investors
in Regular Certificates should consult their own tax advisors regarding the
application of the market discount rules to the Regular Certificates. 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.
Amortizable Premium. A Regular Certificate purchased at a cost greater than
its remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificate. Such election will apply
to all taxable debt obligations (including REMIC regular interests) acquired by
the Regular Certificateholder at a premium held in that taxable year or
thereafter, unless revoked with the permission of the Internal Revenue Service.
The Conference Committee Report to the 1986 Act indicates a Congressional
intent that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations such as the Regular Certificates,
although it is unclear whether the alternatives to the constant interest method
described above under "--Market Discount" are available. Amortizable bond
premium generally will be treated as an offset to interest income on a Regular
Certificate, rather than as a separate deductible 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.
Amortizable premium on a Regular Certificate that is subject to redemption at
the option of the issuer generally must be amortized as if the optional
redemption price and date were the Certificate's principal amount and maturity
date if doing so would result in a smaller amount of premium amortization
during the period ending with the optional redemption date. Thus, a holder of a
Regular Certificate would not be able to amortize any premium on a Regular
Certificate that is subject to optional redemption at a price equal to or
greater than the Certificateholder's acquisition price unless and until the
redemption option expires. A Regular Certificate subject to redemption at the
option of the issuer described in the preceding sentence will be treated as
having matured on the redemption date for the redemption price and then as
having been reissued on that date for that price. Any premium remaining on the
Regular Certificate at the time of the deemed reissuance will be amortized on
the basis of (i) the original principal amount and maturity date or (ii) the
price and date of any succeeding optional redemption, under the principles
described above.
Election to Treat All Interest Under the Constant Yield Method. A holder of a
debt instrument such as a Regular Certificate may elect to treat all interest
that accrues on the instrument using the constant yield method, with none of
the interest being treated as qualified stated interest. For purposes of
applying the constant yield method to a debt instrument subject to such an
election, (i) "interest" includes stated interest, original issue discount, de
minimis original issue discount, market discount and de minimis market
discount, as adjusted by any amortizable bond premium or acquisition premium
and (ii) the debt instrument is treated as if the instrument were issued on the
holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or
with market discount, the holder is deemed to have made elections to amortize
bond premium or to report market discount income currently as it accrues under
the constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt
79
instrument is acquired and is irrevocable except with the approval of the
Internal Revenue Service. Investors should consult their own tax advisors
regarding the advisability of making such an election.
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 losses are uncollectible. Accordingly,
the holder of a Regular Certificate, particularly a Subordinate Certificate,
may have income, or may incur a diminution in cash flow as a result of a
default or delinquency, but may not be able to take a deduction (subject to the
discussion below) for the corresponding loss until a subsequent taxable year.
In this regard, investors are cautioned that while they may generally cease to
accrue interest income if it reasonably appears that the interest will be
uncollectible, the Internal Revenue Service may take the position that original
issue discount must continue to be accrued in spite of its uncollectibility
until the debt instrument is disposed of in a taxable transaction or becomes
worthless in accordance with the rules of Code Section 166. Under Code Section
166, it appears that Regular Certificateholders that are corporations or that
otherwise hold the Regular Certificates in connection with a trade or business
should in general be allowed to deduct as an ordinary loss such loss with
respect to principal sustained during the taxable year on account of any such
Regular Certificates becoming wholly or partially worthless, and that, in
general, Regular Certificateholders that are not corporations and do not hold
the Regular Certificates in connection with a trade or business should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any such Regular Certificates becoming
wholly worthless. Although the matter is not free from doubt, such non-
corporate Regular Certificateholders should be allowed a bad debt deduction at
such time as the principal balance of such Regular Certificates is reduced to
reflect losses resulting from any liquidated Mortgage Loans. The Internal
Revenue Service, however, could take the position that non-corporate holders
will be allowed a bad debt deduction to reflect such losses only after all the
Mortgage Loans remaining in the Trust Fund have been liquidated or the
applicable class of Regular Certificates has been otherwise retired. The
Internal Revenue Service could also assert that losses on the Regular
Certificates are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cashflow 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 original 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 long-
term capital gain holding period (currently, more than one year). Such gain
will be treated as ordinary income (i) if a Regular Certificate is held as part
of a
80
"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 in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any
prior disposition of property that was held as part of such transaction, (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if its yield on such Regular
Certificate were 110% of the applicable Federal rate as of the date of
purchase, over (b) the amount of income actually includible in the gross income
of such holder with respect to such Regular Certificate. In addition, gain or
loss recognized from the sale of a Regular Certificate by certain banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c). Long-term capital gains of certain 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%). Currently, the maximum tax
rate for corporations is the same with respect to both ordinary income and
capital gains.
Taxation of Owners 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 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, 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 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
81
general, losses would be allowed in later years as distributions on the later
maturing classes of Regular Certificates are made. Taxable income may also be
greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a Series of Regular Certificates, may increase over
time as distributions in reduction of principal are made on the lower yielding
classes of Regular Certificates, whereas, to the extent the REMIC Pool consists
of fixed rate Mortgage Loans, interest income with respect to any given
Mortgage Loan will remain constant over time as a percentage of the outstanding
principal amount of that loan. Consequently, Residual Holders must have
sufficient other sources of cash to pay any federal, state, or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "--Limitations on Offset or Exemption of REMIC Income." The timing of
such mismatching of income and deductions described in this paragraph, if
present with respect to a Series of Certificates, may have a significant
adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Certificateholder may be treated
unfavorably in three contexts: (i) it may not be offset by current or net
operating loss deductions; (ii) it will be considered unrelated business
taxable income to tax-exempt entities; and (iii) it is ineligible for any
statutory or treaty reduction in the 30% withholding tax otherwise available to
a foreign Residual Certificateholder. See "--Limitations on Offset or Exemption
of REMIC Income" below. In addition, a Residual Holder's taxable income during
certain periods may exceed the income reflected by such Residual Holders 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, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, such recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of
the Residual Certificates over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--
Taxation of REMIC Income," the period of time over which such issue price is
effectively amortized may be longer than the economic life of the Residual
Certificates.
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless
82
future Treasury regulations provide for periodic adjustments to the REMIC
income otherwise reportable by such holder. The REMIC Regulations currently in
effect do not so provide. See "--Treatment of Certain Items of REMIC Income and
Expense--Market Discount" below regarding the basis of Mortgage Loans to the
REMIC Pool and "--Sale or Exchange of a Residual Certificate" below regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
Treatment of Certain Items of REMIC Income and Expense. Although it is
anticipated that the Trustee will compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The Depositor makes no representation as to the
specific method that will be used 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 or 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 premium will be
determined in the same manner as original issue discount income on Regular
Certificates as described above under "--Taxation of Owners of Regular
Certificates--Original Issue Discount" and "--Taxation of Owners of Regular
Certificates--Variable Rate Regular Certificates," without regard to the de
minimis rule described therein, and "--Taxation of Owners of Regular
Certificates--Amortizable 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 Owners of
Regular Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate of
the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "--Taxation of Owners of Regular Certificates--
Amortizable Premium," a person that holds a Mortgage Loan as a capital asset
under Code Section 1221 may elect under Code Section 171 to amortize premium on
Mortgage Loans originated after September 27, 1985 under the constant yield
method. Amortizable bond premium will be treated as an offset to interest
income on the Mortgage Loans, rather than as a separate deduction item. Because
substantially all of the mortgagors on the Mortgage Loans are expected to be
individuals, Code Section 171 will not be available for premium on Mortgage
Loans originated on or prior to September 27, 1985. Premium with respect to
such Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the Internal Revenue Service may argue that such premium should be
allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
Limitations on Offset or Exemption of REMIC Income. A portion (or all) of the
REMIC taxable income includible in determining the federal income tax liability
of a Residual Holder will be subject to special treatment. That portion,
referred to as the "excess inclusion," is equal to the excess of REMIC taxable
income for the calendar quarter allocable to a Residual Certificate over the
daily accruals for such quarterly period of (i) 120% of the long-term
applicable Federal rate that would have applied to the Residual Certificate (if
it were a debt instrument) on the Startup Day under Code Section 1274(d),
multiplied by (ii) the adjusted issue price of
83
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 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 furnished
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
84
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
in not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or 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 531) 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, and (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. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a Pass-
Through Entity.
The Pooling 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 furnished to the
transferor 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 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 Master Servicer 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.
85
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
to all federal income tax purposes if a significant purpose of the transfer 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 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 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."
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 citizens or resident of the United States, a corporation,
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 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
86
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 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 Holder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Certificate by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations. On December 24, 1996, the Internal Revenue
Service 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 transaction 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 mortgages
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), it is not a prohibited transaction
to sell a qualified mortgage or cash flow investment held by a REMIC Pool 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 termination
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 Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage
87
Loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day. In general, the REMIC
Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided
for cash contributions to the REMIC Pool (i) during the three months following
the Startup Day, (ii) made to a qualified reserve fund by a Residual Holder,
(iii) in the nature of a guarantee, (iv) made to facilitate a qualified
liquidation or clean-up call, and (v) as otherwise permitted in Treasury
regulations yet to be issued. It is not anticipated that there will be any
contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property. The REMIC Pool will be subject of
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" until the close of the
third calender year after the year in which the REMIC Pool acquired such
property, with possible extensions. Net income from foreclosure property
generally means gain from the sale of a foreclosure property that is inventory
property and gross income from foreclosure property other than qualifying rents
and other qualifying income for a real estate investment trust. It is not
anticipated that the REMIC Pool will have any taxable net income from
foreclosure property.
Liquidation of the REMIC Pool. If a REMIC Pool adopts a plan of complete
liquidation, within the meaning of Code Section 860F(a)(4)(A)(i), which may be
accomplished by designating in the REMIC Pool's final tax return a date on
which such adoption is deemed to occur, and sells all of its assets (other than
cash) within a 90-day period beginning on such date, the REMIC Pool will not be
subject to the prohibited transaction rules on the sale of its assets, provided
that the REMIC Pool credits or distributes in liquidation all of the sale
proceeds plus its cash (other than amounts retained to meet claims) to holders
of Regular Certificates and Residual Holders within the 90-day period.
Administrative Matters. The REMIC Pool will be required to maintain its books
on a calendar year basis and to file federal income tax returns for federal
income tax purposes in a manner similar to a partnership. The form for such
income tax return is Form 1066, U.S. Real Estate Mortgage Investment Conduit
Income Tax Return. The Trustee will be required to sign the REMIC Pool's
returns. Treasury regulations provide that, except where there is a single
Residual Holder for an entire taxable year, the REMIC Pool will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination by the Internal Revenue Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction, or credit
in a unified administrative proceeding. The Master Servicer will be obligated
to act as "tax matters person," as defined in applicable Treasury regulations,
with respect to the REMIC Pool as agent of the Residual Holder holding the
largest percentage interest in the Residual Certificates. If the Code or
applicable Treasury regulations do not permit the Master Servicer to act as tax
matters person in its capacity as agent of such Residual Holder, such Residual
Holder or such other person specified pursuant to Treasury regulations will be
required to act as tax matters person. The tax matters person generally has
responsibility for overseeing and providing notice to the other Residual
Holders of certain administrative and judicial proceedings regarding the REMIC
Pool's tax affairs, although other holders of the Residual Certificates of the
same series would be able to participate in such proceedings in appropriate
circumstances.
Treasury regulations provide that a Residual Holder is not required to treat
items on its return consistently with their treatment on the REMIC Pool's
return if the holder owns 100% of the Residual Certificates for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on
its returns consistently with their treatment on the REMIC Pool's return,
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Pool. The Internal Revenue Service may assess a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC Pool level. A REMIC Pool
typically will not register as a tax shelter pursuant to Code Section 6111
because it generally will not have a net loss for any of the first five taxable
years of its existence. Any person that holds a Residual Certificate as
88
a nominee for another person may be required to furnish the related REMIC Pool,
in a manner to be provided in Treasury regulations, with the name and address
of such person and other specified information.
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 or (i) 3% of the excess, if any, of adjusted
gross income over $100,000 ($50,000 in the case of a married individual filing
a separate return) (subject to annual adjustments for inflation after 1991), 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. With respect to a
REMIC Pool that would be classified as an investment trust in the absence of a
REMIC election or that is substantially similar to an investment trust, any
holder of a Regular Certificate that is an individual, trust, estate, or pass-
through entity also will be allocated its pro rata share of such expenses and a
corresponding amount of income and will be subject to the limitations or
deductions imposed by Code Sections 67 and 68, as described above. 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), generally
will be considered "portfolio interest" and, therefore, generally will not be
subject to 30% United States withholding tax, provided that (i) such interest
is not effectively connected with the conduct of a trade or business in the
United States of the Securityholder, (ii) such Non-U.S. Person 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 (iii)
such 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 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. 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.
89
The Internal Revenue Service recently issued final regulations (the "New
Regulations") which would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations will be effective January 1, 2001. Current withholding certificates
will remain valid until the earlier of December 31, 2000 or the date of
expiration of the certificate under the rules as currently in effect. The New
Regulations would require, in the case of Regular Certificates held by a
foreign partnership, that (x) the certification described above be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors concerning the
application of the certification requirements in the New Regulations.
Residual Certificates. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Holders who are Non-U.S. Persons
generally should be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Treasury regulations provide that
amount distributed to Residual Holders may qualify as "portfolio interest,"
subject to the conditions described in "--Regular Certificates" above, but only
to the extent that (i) the Mortgage Loans were issued after July 18, 1984 and
(ii) the Trust Fund or segregated pool of assets therein (as to which a
separate REMIC election will be made), to which the Residual Certificate
relates, consists of obligations issued in "registered form" within the meaning
of Code Section 163(f)(1). Generally, Mortgage Loans will not be, but regular
interests in another REMIC Pool will be, considered obligations issued in
registered form. Furthermore, Residual Holders 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 Owners 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 Owners 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 Holder 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 holder 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 Holder's federal income tax liability.
The New Regulations will 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 specific tax consequences to them of owning Residual
Certificates.
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,
90
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 "--
Taxes That May Be Imposed on the REMIC Pool--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 "--
Characterization of Investments in REMIC Certificates."
Grantor Trust Funds
Classification of Grantor Trust Funds
With respect to each series of Grantor Trust Certificates, assuming
compliance with all provisions of the related Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Certificate generally will
be treated as the beneficial owner of an undivided interest in the Mortgage
Loans included in the Grantor Trust Fund.
Standard Certificates
General. Where there is no Retained Interest or "excess" servicing 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 (referred to herein as "Standard
Certificates") will be treated as the owner of a pro rata undivided interest in
the ordinary income and corpus portions of the Grantor Trust Fund represented
by its Standard 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 Standard Security 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 Standard Certificate, including
interest at the coupon rate on such Mortgage Loans, original issue discount (if
any), prepayment fees, assumption fees, and late payment charges received by
the Master Servicer, in accordance with such Certificateholder's method of
accounting. A Certificateholder generally will be able to deduct its share of
the Servicing Fee and all administrative and other expenses of the Trust Fund
in accordance with its method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own Certificates,
either directly or indirectly through certain pass-through entities, will be
subject to limitations 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 Grantor Trust Fund,
to the extent that such deductions, in the aggregate, do not exceed two percent
of an investor's adjusted gross income. In addition, Code Section 68 provides
that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (in each case, as adjusted annually for
inflation after 1991), or (ii) 80% of the amount of itemized deductions
otherwise
91
allowable for such year. As a result, such investors holding Standard
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 Standard Certificates with respect to interest at the pass-through rate or
as discount income on such Standard 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 Retained Interest 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.
Holders of Standard Certificates, particularly any class of a Series which is
a Subordinate Certificate, may incur losses of interest or principal with
respect to the Mortgage Loans. Such losses would be deductible generally only
as described above under "--REMICs--Taxation of Owners of Regular
Certificates--Treatment of Losses," except that Certificateholders on the cash
method of accounting would not be required to report qualified stated interest
as income until actual receipt.
Tax Status. With respect to a series, Cadwalader, Wickersham & Taft has
advised the Depositor that:
1. A Standard 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 Standard Certificate is of the type
described in such section of the Code.
2. A Standard 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 Grantor
Trust Fund consist of qualified assets, and interest income on such assets
will be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard 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 Grantor Trust Fund consist of
"qualified mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buydown Loans may be characterized in their
entirety under the Code provisions cited in clauses 1 and 2 of the immediately
preceding paragraph or whether the amount qualifying for such treatment must be
reduced by the amount of the Buydown Funds. There is indirect authority
supporting treatment of an investment in a Buydown Loan as entirely secured by
real property if the fair market value of the real property securing the loan
exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Certificateholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Certificateholder's investment for federal income tax
purposes.
Premium and Discount. Certificateholders are advised to consult with their
tax advisors as to the federal income tax treatment of premium and discount
arising either upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "--REMICs--
Taxation of Owners of Residual Certificates--Treatment of Certain Items of
REMIC Income and Expense--Premium."
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Certificateholder's interest in those
Mortgage Loans as to which the conditions for the
92
application of those sections are met. Rules regarding periodic inclusion of
original issue discount income generally are applicable to mortgages originated
after March 2, 1984. The rules allowing for the amortization of premium are
available with respect to mortgage loans originated after September 27, 1985.
Under the OID Regulations, original issue discount could arise by the charging
of points by the originator of the mortgages in an amount greater than the
statutory de minimis exception, including a payment of points that is currently
deductible by the borrower under applicable Code provisions or, under certain
circumstances, by the presence of "teaser" rates on the Mortgage Loans. See "--
Stripped Certificates" below regarding original issue discount on Stripped
Certificates.
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 "--REMICs--Taxation of Owners of Regular Certificates--Market Discount,"
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
Mortgage Loans, unless the constant yield method is elected. Unless indicated
otherwise in the applicable Prospectus Supplement, no prepayment assumption
will be assumed for purposes of such accrual.
Recharacterization of Servicing Fees. If the servicing fees paid to the
Master Servicer were deemed to exceed reasonable servicing compensation, the
amount of such excess would represent neither income nor a deduction to
Certificateholders. In this regard, there are no authoritative guidelines for
federal income tax purposes as to either the maximum amount of servicing
compensation that may be considered reasonable in the context of this or
similar transactions or whether, in the case of Standard Certificates, 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, if the
Master Servicer receives a servicing fee in excess of such amounts then it
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 Standard Certificates, and the
original issue discount rules of the Code would apply to the holder thereof.
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of
such trust could be viewed as excluding the portion of the Mortgage Loans the
ownership of which is attributed to the Master Servicer, or as including such
portion as a second class of equitable interest. Applicable Treasury
regulations treat such an
93
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 Standard Certificates. Upon sale or exchange of a
Standard Certificates, 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 Standard Certificate, exclusive of accrued
interest, increased by the amount of any income previously reported with
respect to the Standard Certificate and decreased by the amount of any losses
previously reported with respect to the Standard Certificate and the amount of
any distributions (other than accrued interest) 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 Standard Certificate was held as a capital asset. However, gain on the
sale of a Standard Certificate will be treated as ordinary income (i) if a
Standard Certificate is held as part of a "conversion transaction" as defined
in Code Section 1258(c), up to the amount of interest that would have accrued
on the Certificateholder's net investment in the conversion transaction at 120%
of the appropriate applicable Federal rate in effect at the time the taxpayer
entered into the transaction minus any amount previously treated as ordinary
income with respect to any prior disposition of property that was held as 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 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%). The maximum tax rate for corporations currently 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 Retained Interest 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 "--Standard Certificates--Recharacterization of
Servicing Fees" above), and (iii) a class of Certificates are issued in two or
more classes 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 the Master Servicer, to the extent that such fees
represent reasonable compensation for services rendered. See the discussion
above under "--Standard Certificates--Recharacterization of Servicing Fees."
Although not free from doubt, for purposes of reporting to Stripped
Certificateholders, the servicing fees will be allocated to the classes of
Stripped Certificates in proportion to the distributions to such classes 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 "--Standard Certificates--General," subject to the
limitations on deductions imposed
94
by Code Sections 67 and 68 on an individual, trust or estate that holds a
Stripped Certificate directly or through a pass-through entity.
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, particularly
where such Stripped Certificates are issued with respect to a Mortgage Pool
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Grantor Trust Fund will be treated as a grantor trust
under subpart E, part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and
the OID Regulations. Although it is possible that computations with respect to
Stripped Certificates could be made in one of the ways described below under
"--Taxation of Stripped Certificates--Possible Alternative Characterization,"
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 original issue discount
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 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 such
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 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 "--REMICs--
Taxation of Owners of Regular Certificates--Market Discount," without regard to
the de minimis rule therein, assuming that a prepayment assumption is employed
in such computation.
The holder of a Stripped Certificate will be treated as owning an interest in
each of the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage
Loans. Accordingly, an individual, trust or estate that holds a Stripped
Certificate directly or through a pass-through entity will be subject to the
limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Certificate, particularly any class of a Series which
is a Subordinate Certificate, may deduct losses incurred with respect to the
Stripped Certificate as described above under "--Standard Certificates--
General."
Status of Stripped Certificates. No specific legal authority exists as to
whether the character of the Stripped Certificates, for federal income tax
purposes, will be the same as that of the Mortgage Loans. Although the issue is
not free from doubt, counsel has advised the Depositor that Stripped
Certificates owned by applicable holders should be considered to represent
"real estate assets" within the meaning of Code Section 856(c)(4)(A),
"obligation[s].. principally secured by an interest in real property which is...
residential real estate'' 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
95
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 Buydown Loans is uncertain. See "--
Standard Certificates--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
yield method that takes into account the compounding of interest, which may be
prior to the receipt of the cash attributable to such income. Based in part on
the 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 "--REMICs--Taxation of Owners of Regular Certificates--
Original Issue Discount" and "REMICs--Taxation of Owners of Regular
Certificates--Variable Rate Regular Certificates." However, with the apparent
exception of a Stripped Certificate qualifying as a market discount obligation
as described above under "--General," the issue price of a Stripped Certificate
will be the purchase price paid by each holder thereof, and the stated
redemption price at maturity will include the aggregate amount of the payments
to be made on the Stripped Certificate to such 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 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 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 that would be the case under the OID Regulations.
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 Certificateholder's
adjusted basis in such Stripped Certificate, as described above under "REMICs--
Taxation of Owners of Regular Certificates--Sale or Exchange of Regular
Certificates." Gain or loss from the sale or exchange of a Stripped Certificate
generally will be capital gain or loss to the Certificateholder if the Stripped
Certificate is held as a "capital asset" within the meaning of Code Section
1221, and will be long-term or short-term depending on whether the Stripped
Certificate has been held for the long-term capital gain holding period
(currently, more than one year). 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 Certificateholder
other than an original Certificateholder should be the Prepayment Assumption or
a new rate based on the circumstances at the date of subsequent purchase.
96
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 Characterization. The characterizations of the Stripped
Certificates discussed above are not the only possible interpretations of the
applicable Code provisions. For example, the Certificateholder may be treated
as the owner of (i) one installment obligation consisting of such Stripped
Certificate's pro rata share of the payments attributable to principal on each
Mortgage Loan and a second installment obligation consisting of such Stripped
Certificate's pro rata share of the payments attributable to interest on each
Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan, or (iii)
a separate installment obligation for each Mortgage Loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
classes of Stripped 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. Treasury regulations regarding original issue discount on
stripped obligations make the foregoing interpretations less likely to be
applicable. The preamble to such 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, 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 at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Certificateholder to prepare its 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. However, 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 "--
REMICs--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 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.
97
Treasury regulations provide that interest or original issue discount paid by
the Trustee or other withholding agent to a Non-U.S. 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 "--
REMICs--Taxation of Certain Foreign Investors--Regular Certificates."
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described above in
"Federal Income Tax Consequences," potential investors should consider the
state, local and other tax consequences relating to the acquisition, ownership
and disposition of the Certificates. State, local and other income tax law may
differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the tax laws other than federal
income tax law. Therefore, potential investors should consult their tax
advisors with respect to the state, local and other tax consequences to them
arising from an investment in the Certificates.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans and arrangements to which they apply and on those persons who are
fiduciaries with respect to such employee benefit plans and arrangements. The
following is a general discussion of such requirements, and certain applicable
exceptions to and administrative exemptions from such requirements. For
purposes of this discussion, employee benefit plans and arrangements to which
both ERISA and the Code apply are referred to as "ERISA Plans." An individual
retirement account established under Code Section 408 (an "IRA") is 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 "Yield and Prepayment
Considerations" herein.
98
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 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.
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, 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 Fund 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 Fund. However, it cannot be predicted in advance nor can there be any
continuing assurance whether such exceptions may be met, because of the factual
nature of certain of the rules set forth in the Regulations. For example, one
of the exceptions in the Regulations states that the underlying assets of an
entity will not be considered "plan assets" if less than 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.
99
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 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 rights and interests evidenced by Certificates acquired by the
ERISA Plan are not subordinated to the rights and interests evidenced by
other Certificates of the Trust Fund.
(3) The Certificates acquired by the ERISA Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from either S&P, Moody's, Duff & Phelps Credit Rating Co.
("DCR") or Fitch IBCA, Inc. ("Fitch").
(4) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below).
(5) 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 Fund represents not more than the fair
market value of such Mortgage Loans. The sum of all payments made to and
retained by the Master 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.
(6) The ERISA Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act of 1933, as amended (the "Securities Act").
The Trust Fund must also meet the following requirements:
(i) the assets of the Trust Fund must consist solely of assets of the
type that have been included in other investment pools in the marketplace;
(ii) certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, Fitch or DCR
for at least one year prior to the ERISA Plan's acquisition of 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
100
Certificates in a Trust Fund 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 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 Fund 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 Fund; (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 insurer with respect to the Mortgage
Loans, any obligor with respect to Mortgage Loans included in the Trust Fund
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust Fund, 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
Fund.
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 Fund or only of a specified percentage of future principal payments
on a Trust Fund, (b) Residual Certificates, (c) Certificates evidencing
ownership interests in a Trust Fund which includes Mortgage Loans secured by
multifamily residential properties or shares issued by cooperative housing
corporations, 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 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
101
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--REMICs--
Taxation of Owners 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.
LEGAL INVESTMENT
The related Prospectus Supplement will specify which classes of the
Certificates of a Series, if any, will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"). Generally, only classes of Certificates that (i) are rated
in one of the two highest rating categories by one or more Rating Agencies and
(ii) are part of a Series representing interests in a Trust Fund consisting of
Mortgage Loans originated by certain types of originators specified in SMMEA
and secured by first liens on real estate, will be "mortgage related
securities" for purposes of SMMEA. As "mortgage related securities," such
classes will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including,
but not limited to, depository
102
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 such 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(l) 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 Office of Thrift Supervision (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 of the
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 (the "FFIEC"), which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the OCC and the Office of Thrift Supervision,
effective May 26, 1998, and by the NCUA, effective October 1, 1998. The 1998
Policy Statement sets forth general guidelines which depository institutions
must follow in managing risks (including market, credit, liquidity, operational
(transaction), and legal risks) applicable to all securities (including
mortgage pass-through securities and mortgage-derivative products) used for
investment purposes.
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 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
103
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, financial
institution regulatory, 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 own legal advisors in
determining whether and to what extent the Certificates of any class constitute
legal investments for them or are subject to investment, capital or other
restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will be
offered in Series. The distribution of the Certificates may be effected 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. If so specified in the related
Prospectus Supplement, the Certificates will be distributed in a firm
commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by First Union Capital Markets Corp., an affiliate of
the Depositor, acting as underwriter with other underwriters, if any, named
therein. In such event, the Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Certificates agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Certificates
in the form of discounts, concessions or commissions. The Prospectus Supplement
will describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Certificates
will be distributed by First Union Capital Markets Corp., acting as agent or in
some cases as principal with respect to Certificates that it has previously
purchased or agreed to purchase. If First Union Capital Markets Corp., acts as
agent in the sale of Certificates, First Union Capital Markets Corp., will
receive a selling commission with respect to each Series of Certificates,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the Certificates sold hereunder as of the Cut-off Date.
The exact percentage for each Series of Certificates will be disclosed in the
related Prospectus Supplement. To the extent that First Union Capital Markets
Corp., elects to purchase Certificates as principal, First Union Capital
Markets Corp., may realize losses or profits based upon the difference between
its purchase price and the sales price. The Prospectus Supplement with respect
to any Series 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 purchasers of Certificates of such Series.
The Depositor will indemnify First Union Capital Markets Corp., and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments First Union Capital
Markets Corp., and any underwriters may be required to make in respect thereof.
In the ordinary course of business, First Union Capital Markets Corp., and
the Depositor may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the Depositor's
Mortgage Loans pending the sale of such Mortgage Loans or interests therein,
including the Certificates.
104
The Depositor anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
Underwriters or agents and their associates may be customers of (including
borrowers from), engage in transactions with and/or perform services for
affiliates of the Depositor, including First Union National Bank and HFC and
the Trustee in the ordinary course of business.
LEGAL MATTERS
Certain legal matters relating to the Certificates, including certain federal
income tax consequences with respect thereto, will be passed upon for the
Depositor by Cadwalader, Wickersham & Taft, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies specified in the related Prospectus Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
A 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
organization. Each security rating should be evaluated independently of any
other security rating.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or Trustee will forward to the Certificateholders of each
Series, statements containing information with respect to principal and
interest payments and the related Trust Fund, as described herein and in the
applicable Prospectus Supplement for such Series (the "Monthly Report"). No
information contained in the Monthly Reports will have been examined or
reported upon by an independent public accountant. See "Description of the
Certificates--Reports to Certificateholders."
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
105
the rules and regulations of the Commission thereunder, as interpreted by the
staff of the Commission thereunder. The Depositor does not intend to file
periodic reports under the Exchange Act following the expiration of the
reporting period prescribed by Rule 15d-1 of Regulation 15D under the Exchange
Act.
WHERE YOU CAN FIND MORE INFORMATION
The Depositor filed a registration statement relating to the Certificates
with the Securities and Exchange Commission (the "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 field
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 the Depositor at JV Capital Trust, c/o
Wilmington Trust Company, 1100 North Market Street, Rodney Square North,
Wilmington, DE 19890, Attention: Corporate Trust Administration, telephone
number (302) 651-1000.
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 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 Depositor
incorporates by reference any future annual, monthly and special SEC reports
filed by or on behalf of the Trust Fund until the termination of the offering
of the Certificates.
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 JV Capital Trust, c/o Wilmington Trust
Company, 1100 North Market Street, Rodney Square North, Wilmington, DE 19890,
Attention: Corporate Trust Administration, telephone number (302) 651-1000.
106
INDEX OF DEFINED TERMS
1996 Act.................................................................... 74
1998 Policy Statement....................................................... 103
A
Accrual Certificates........................................................ 31
Act......................................................................... 59
Advance..................................................................... 8
ALTA........................................................................ 23
Asset Conservation Act...................................................... 68
Available Distribution Amount............................................... 30
B
Balloon Loan................................................................ 23
balloon payments............................................................ 18
Ballon Period............................................................... 23
Bankruptcy Bond............................................................. 42
Bankruptcy Code............................................................. 64
Belgium Cooperative......................................................... 38
Benefit Plan................................................................ 98
Book-Entry Certificates..................................................... 8
Buydown Fund................................................................ 18
Buydown Loans............................................................... 18
C
Cash Flow Agreement......................................................... 16
Cede........................................................................ 36
CEDEL....................................................................... 36
CEDEL Participants.......................................................... 38
CERCLA...................................................................... 67
Certificate Balance......................................................... 31
Certificate Owners.......................................................... 36
Certificate Register........................................................ 29
Certificateholders.......................................................... 29
Certificates................................................................ 5
Cleanup Costs............................................................... 67
Code........................................................................ 70
Collateral Value............................................................ 19
Collection Account.......................................................... 47
Combined Loan-to-Value Ratio................................................ 19
Commission.................................................................. 106
Component................................................................... 33
Cooperative Loans........................................................... 19
Cooperatives................................................................ 19
Counterparty................................................................ 16
Covered Trust............................................................... 40
Credit Score................................................................ 24
D
DCR......................................................................... 100
Debt Ratio.................................................................. 22
Definitive Certificates..................................................... 8
Department.................................................................. 99
Depositor................................................................... 21
Detailed Description........................................................ 17
Determination Date.......................................................... 30
Disqualified Organization................................................... 85
Distribution Date........................................................... 7
DTC......................................................................... 8
E
EDGAR....................................................................... 106
Eligible Investments........................................................ 47
ERISA....................................................................... 9
ERISA Plans................................................................. 98
Euroclear................................................................... 36
Euroclear Operator.......................................................... 38
Euroclear Participants...................................................... 38
European Depositaries....................................................... 37
Exchange Act................................................................ 105
Exempt Plans................................................................ 98
F
Fannie Mae.................................................................. 13
FASIT....................................................................... 71
FFIEC....................................................................... 103
FHA......................................................................... 53
FHA Insurance............................................................... 53
Financial Intermediary...................................................... 37
Fitch....................................................................... 100
Freddie Mac................................................................. 13
Funding Period.............................................................. 49
G
Garn-St Germain Act......................................................... 68
Global Securities........................................................... A-1
Grantor Trust Certificates.................................................. 70
Grantor Trust Fund.......................................................... 70
H
HFC......................................................................... 5
Home Equity Loans........................................................... 20
Home Ownership Act.......................................................... 14
Housing Act................................................................. 14
HUD......................................................................... 53
107
I
Insurance Proceeds.......................................................... 48
Insured Expenses............................................................ 48
IRA......................................................................... 98
J
JVMC........................................................................ 5
L
Letter of Credit............................................................ 43
Limited Guarantee........................................................... 43
Liquidation Expenses........................................................ 48
Liquidation Proceeds........................................................ 48
Loan-to-Value Ratio......................................................... 19
lockout periods............................................................. 18
LTV......................................................................... 27
LTV/CLTV.................................................................... 24
M
Mark to Market Regulations.................................................. 87
Master Servicer............................................................. 5
Master Servicing Fee........................................................ 55
MERS........................................................................ 46
Monthly Reports............................................................. 105
Moody's..................................................................... 47
Morgan...................................................................... 37
Mortgage.................................................................... 46
Mortgage Loan............................................................... 17
Mortgage Loan Purchase Agreement............................................ 17
Mortgage Note............................................................... 46
Mortgage Pool............................................................... 17
Mortgage Pool Insurance Policy.............................................. 41
Mortgage Rate............................................................... 19
Mortgaged Properties........................................................ 17
N
NCUA........................................................................ 103
Net Liquidation Proceeds.................................................... 48
New Regulations............................................................. 90
Non-ERISA Plans............................................................. 98
Non-Pro Rata Security....................................................... 74
Non-U.S. Person............................................................. 89
O
OCC......................................................................... 103
OID Regulations............................................................. 71
Originators................................................................. 5
OTS......................................................................... 103
P
PAC......................................................................... 33
PAC I....................................................................... 33
PAC II...................................................................... 33
Participant................................................................. 36
Pass-Through Entity......................................................... 85
Pass-Through Rate........................................................... 6
PCBs........................................................................ 67
Pool Insurer................................................................ 41
Pooling and Servicing Agreement............................................. 5
Pre-Funded Amount........................................................... 49
Pre-Funding Account......................................................... 49
Prepayment Assumption....................................................... 75
Primary Insurer............................................................. 51
Primary Mortgage Insurance Policy........................................... 17
Principal Prepayments....................................................... 32
PTE 83-1.................................................................... 101
Purchase Price.............................................................. 28
R
Rating Agency............................................................... 9
RCRA........................................................................ 67
Record Date................................................................. 29
Regular Certificateholder................................................... 74
Regular Certificates........................................................ 71
Regulations................................................................. 99
Relevant Depositary......................................................... 37
Relief Act.................................................................. 70
REMIC....................................................................... 70
REMIC Certificates.......................................................... 70
REMIC Pool.................................................................. 71
REMIC Provisions............................................................ 70
REMIC Regulations........................................................... 71
Reserve Fund................................................................ 42
Residual Certificates....................................................... 71
Residual Holders............................................................ 81
Restricted Group............................................................ 101
Retained Interest........................................................... 29
Revolving Credit Line Loans................................................. 20
Riegle Act.................................................................. 59
Rules....................................................................... 37
S
S&P......................................................................... 47
SBJPA of 1996............................................................... 73
Scheduled Class............................................................. 33
SEC......................................................................... 106
secured-creditor exemption.................................................. 67
Securities Act.............................................................. 100
Senior Certificates......................................................... 7
108
senior lien................................................................. 12
Series...................................................................... 5
SMMEA....................................................................... 102
Special Hazard Insurance Policy............................................. 41
Special Hazard Insurer...................................................... 42
Special Servicer............................................................ 56
Standard Certificates....................................................... 91
Startup Day................................................................. 71
Stripped Certificateholder.................................................. 96
Stripped Certificates....................................................... 91
Subordinated Certificates................................................... 7
Sub-prime Mortgage Loans.................................................... 13
Subsequent Mortgage Loans................................................... 49
Subsidy Account............................................................. 23
Subsidy Loans............................................................... 23
Subsidy Payments............................................................ 23
Superliens.................................................................. 67
Support Class............................................................... 32
Surety Bond................................................................. 43
T
TAC......................................................................... 34
Taxable Mortgage Pools...................................................... 71
Terms and Conditions........................................................ 39
Texas Home Equity Laws...................................................... 14
thrift institutions......................................................... 84
Tiered REMICs............................................................... 74
TILA Amendment.............................................................. 65
Title V..................................................................... 69
Trust Fund.................................................................. 5
Trustee..................................................................... 5
U
UCC......................................................................... 63
U.S. Person................................................................. 86
Underwriter's Exemption..................................................... 100
UST......................................................................... 67
V
VA.......................................................................... 54
VA Guarantee................................................................ 54
109
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, a class of Book-Entry Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities through
CEDEL and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities through
DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations and prior Residential Mortgage Pass-Through
Certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and Participants
holding Certificates will be effected on a delivery-against-payment basis
through the respective Depositaries of CEDEL and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. Holders (as described below) of Global Securities will be subject to
U.S. withholding taxes unless such Holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their Participants through their respective
Depositaries, which in turn will hold such positions in accounts as
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Residential Mortgage Pass-Through
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no "lock-
up" or restricted period. Global Securities will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading Between Participants. Secondary market trading between Participants
will be settled using the procedures applicable to prior Residential Mortgage
Pass-Through Certificates issues in same-day funds.
A-1
Trading Between Cedel and/or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
Trading Between DTC Seller and CEDEL or Euroclear Purchaser. When Global
Securities are to be transferred from the account of a Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment
date to and excluding the settlement date, on the basis of the actual number of
days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the respective Depositary of the Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading Between CEDEL or Euroclear Seller and DTC Purchaser. Due to time zone
differences in their favor, CEDEL Participants and Euroclear Participants may
employ their customary procedures for transactions in which Global Securities
are to be transferred by the respective clearing system, through the respective
Depositary, to a Participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at least one
business day prior to settlement. In these cases CEDEL or Euroclear will
instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360
days. For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following
A-2
day, and receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account will be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the CEDEL
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a Participant no
later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons with Effectively Connected Income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or Reduced Rate for Non-U.S. Persons Resident in Treaty Countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owner
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
A-3
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Except as noted below, Form W-8 and Form 1001 are
effective for three calendar years and Form 4224 is effective for one calendar
year.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") which would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations will be effective January 1, 2001. Current withholding certificates
will remain valid until the earlier of December 31, 2000 or the date of
expiration of the certificate under the rules as currently in effect. The New
Regulations would require, in the case of Regular Certificates held by a
foreign partnership, that (x) the certification described above be provided by
the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors concerning the
application of the certification requirements in the New Regulations.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
A-4
JV CAPITAL TRUST 19 - TRUST
(Issuer)
JV CAPITAL TRUST
(Depositor)
Residential Mortgage Pass-Through
Certificates, Series 19 -
$
(Approximate)
----------------
PROSPECTUS SUPPLEMENT
----------------
[First Union Capital Markets Corp.]
[Other Underwriter]
, 19
You should rely only on the information contained or
incorporated by reference in this Prospectus Supplement and
the accompanying Prospectus. We have not authorized anyone to
provide different information to you.
The Offered Certificates are not offered in any state where
their offer is impermissible.
Dealers will deliver a Prospectus Supplement and Prospectus
when acting as underwriters of the Offered Certificates and
with respect to their unsold allotments or subscriptions. In
addition, all dealers selling Offered Certificates will
deliver a Prospectus Supplement and Prospectus for ninety days
from the date of this Prospectus Supplement.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
SEC Registration Fee................................................... *
Printing and Engraving Fees............................................ *
Legal Fees and Expenses................................................ *
Accounting Fees and Expenses........................................... *
Trustee Fees and Expenses.............................................. *
Rating Agency Fees..................................................... *
Miscellaneous.......................................................... *
Total................................................................ *
- --------
* To be provided by amendment.
Item 15. Indemnification of Trustees.
The Registrant is a business trust formed under the laws of the State of
Delaware. Section 3817 of Chapter 38 of Title 12 of the Delaware Code provides
that a Delaware business trust may indemnify any persons, including trustees
and beneficial owners, from and against any and all claims and demands
whatsoever. The Trust Agreement (the "Trust Agreement") provides that to the
extent available trust property is insufficient, JV Mortgage Capital, L.P., as
depositor to the Registrant (in such capacity, the "Depositor") or its
successors and assigns (the "Owners"), will indemnify Wilmington Trust Company,
as owner trustee, and any of its officers, trustees, employees or agents and
each co-trustee against any and all liabilities, obligations, losses, damages,
taxes, claims, actions, suits, costs, expenses and disbursements of any kind
and nature whatsoever incurred or arising out of or in connection with the
administration of the Registrant.
Item 16. Exhibits.
1.1 -- Form of Underwriting Agreement.
3.1 -- Trust Agreement of the Registrant.
4.1 -- Form of Pooling and Servicing Agreement.
5.1 -- Opinion of Cadwalader, Wickersham & Taft.
8.1 -- Opinion of Cadwalader, Wickersham & Taft with respect to certain tax matters.
24.1 -- Consent of Cadwalader, Wickersham & Taft (included as part of Exhibits 5.1 and 8.1).
25.1 -- Powers of Attorney (contained on page II-4 of this Registration Statement).
Item 17. Undertakings.
A. Undertaking pursuant to Rule 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information in the
Registration Statement;
II-1
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the Registrant pursuant to Section
13 or Section l5(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
B. Undertaking in connection with incorporation by reference of certain
filings under the Securities Exchange Act of 1934.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
C.Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, co-trustees, officers and
controlling persons of the Registrant pursuant to the provisions described in
Item 15 above, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
co-trustee, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted against the Registrant
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issues.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Prospect Heights, State of Illinois, on the 3rd
day of September, 1999.
JV Capital Trust
/s/ Michael M. Forester
By: _________________________________
Name: Michael M. Forester
Title: Co-Trustee
II-3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglas A. Friedrich, Christine M. Korte,
Michael M. Forester, Richard Boruta, Steve Hires and Christopher Oddleifson,
and each of them, his true and lawful attorneys-in-fact and agents for him and
in his name, place and stead, in any and all capacities, to sign any and all
post-effective amendments to this Registration Statement and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as they might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agents may lawfully do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated.
/s/ Douglas A. Friedrich Co-Trustee and Chief September 3,
- ------------------------------------- Executive Officer 1999
Douglas A. Friedrich
/s/ Christine M. Korte Co-Trustee, Chief September 3,
- ------------------------------------- Accounting Officer 1999
Christine M. Korte and Chief Financial
Officer
/s/ Michael M. Forester Co-Trustee September 3,
- ------------------------------------- 1999
Michael M. Forester
/s/ Richard Boruta Co-Trustee September 3,
- ------------------------------------- 1999
Richard Boruta
/s/ Steve Hires Co-Trustee September 3,
- ------------------------------------- 1999
Steve Hires
/s/ Christopher Oddleifson Co-Trustee September 3,
- ------------------------------------- 1999
Christopher Oddleifson
II-4