As filed with the Securities and Exchange Commission on June 25, 1996
Registration No. 333-3574
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------------
FIRST UNION RESIDENTIAL
SECURITIZATION TRANSACTIONS, INC.
(Depositor)
(Exact name of Registrant as specified in its charter)
North Carolina 301 South College Street 56-1967773
(jurisdiction) Charlotte, North Carolina 28202-6001 (I.R.S. Employee
(Address, including zip code, and Identification No.)
telephone number, including area code,
of principal executive offices)
MARION A. COWELL, JR., ESQ.
Executive Vice President, Secretary and General Counsel
First Union Corporation
One First Union Center, 301 South College Street
Charlotte, North Carolina 28202
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------
With Copies to:
R. Michael Durrer, Esq. Robert J. Hahn, Esq.
Petree Stockton, L.L.P. Moore & Van Allen, PLLC
3500 One First Union Center 100 North Tryon Street Floor 47
Charlotte, North Carolina 28202-6001 Charlotte, North Carolina 28202-4003
----------------------
Approximate date of commencement of proposed sale to the public: From time to
time on or after the effective date of the registration statement, as determined
by market conditions.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, 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
=============================================================================================================
Proposed Proposed Maximum Amount of
Title of Securities Amount to be Maximum Aggregate Offering Registration Fee
to be Registered Registered (1) Offering Price Price
Per Unit
- -------------------------------------------------------------------------------------------------------------
Residential Mortgage Pass-Through $2,000,000,000 100% $2,000,000,000(2) $689,655(3)
Certificates..........................
=============================================================================================================
(1) This Registration Statement relates to the initial offering from time to
time of $2,000,000,000 aggregate principal amount of Residential Mortgage
Pass-Through Certificates and to any resales thereof in market-making
transactions by First Union Capital Markets Corp., an affiliate of the
Registrant.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
CROSS REFERENCE SHEET
TO FORM S-3
ITEM AND CAPTION IN FORM S-3 CAPTION OR LOCATION IN PROSPECTUS
1. Forepart of the Registration Statement and Outside Front Cover Page of Forepart of Registration Statement;
Prospectus.............................................................. Outside Front Cover Page**
2. Inside Front and Outside Back Cover Pages of Prospectus................. Inside Front and Outside Back
Cover Page**
3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Summary of Terms;**
Charges................................................................. Risk Factors**
4. Use of Proceeds ........................................................ Use of Proceeds
5. Determination of Offering Price......................................... *
6. Dilution................................................................ *
7. Selling Security Holders................................................ *
8. Plan of Distribution.................................................... Method of Distribution**
9. Description of Securities to be Registered ............................. Summary of Terms; Description of
the Certificates; Yield and
Prepayment Considerations**
10. Interests of Named Experts and Counsel.................................. *
11. Material Changes........................................................ *
12. Incorporation of Certain Information by Reference ...................... Inside Front Cover Page
13. Disclosure of Commission Position on Indemnification for Securities Act
Liabilities ............................................................ II-3
* Not applicable or answer is negative.
** To be completed from time to time by Prospectus Supplement.
PROSPECTUS Subject to Completion, dated _______________, 1996
- ----------
(A redherring appears on the left-hand side of this page, rotated 90
degrees. Text is as follows.)
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission but has not yet become
effective. Information contained herein is subject to completion or
amendment. These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes effective.
This preliminary prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities
laws of any state.
First Union Residential Securitization Transactions, Inc.,
Depositor
Residential Mortgage Pass-Through Certificates
(Issuable in Series)
This Prospectus relates to Residential Mortgage
Pass-Through Certificates (the "Certificates"), which may be sold from
time to time in one or more Series (each, a "Series") by First
Union Residential Securitization Transactions, Inc. (the "Depositor")
on terms determined at the time of sale and described in this
Prospectus and the related Prospectus Supplement. The Certificates
of a Series will evidence interests in a trust fund (a "Trust
Fund"). As specified in the related Prospectus Supplement, the Trust
Fund for a Series of Certificates will include certain mortgage
related assets (the " Mortgage Assets") consisting of (i) promissory
notes or other evidences of indebtedness secured by first, second or
more junior liens on fee simple or leasehold interests in one- to
four-family properties, including participations in any of the
foregoing (" Mortgage Loans"), (ii) mortgage pass-through
securities (the " Agency Securities") issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") or (iii) mortgage-backed securities
that are not guaranteed by GNMA, FNMA or FHLMC ("Private Mortgage-Backed
Securities"). Private Mortgage-Backed Securities will have been
previously offered and sold pursuant to an effective registration
statement under the Securities Act of 1933 . The Mortgage Assets
will be acquired by the Depositor from one or more institutions
(each, a "Seller"), which may be affiliates of the Depositor, and
conveyed by the Depositor to the related Trust Fund. A Trust Fund also
may include insurance policies, cash accounts, reserve funds,
reinvestment income, guaranties, letters of credit or other forms of
credit enhancement described herein and in the related Prospectus
Supplement, or any combination thereof. In addition, if so
specified in the related Prospectus Supplement, the property of the
Trust Fund will include monies on deposit in a trust account (the
"Pre-Funding Account") to be established with the Trustee, which
will be used to purchase at a predetermined price additional Mortgage
Assets (the "Subsequent Mortgage Assets") from the Depositor from
time to time within three months after the issuance of the
Certificates.
FOR A DISCUSSION OF CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE
CERTIFICATES, SEE "RISK FACTORS" ON PAGE 16 HEREIN.
(Continued on next page)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the
Certificates of any Series, and there can be no assurance that a
secondary market for any Certificates will develop or, if it does
develop, that it will continue. This Prospectus may not be used to
consummate sales of a Series of Certificates unless accompanied by a
Prospectus Supplement.
Offers of the Certificates may be made through one or more
different methods, including offerings through underwriters, including
First Union Capital Markets Corp., an affiliate of the Depositor, as
more fully described under "Method of Distribution" herein and in the
related Prospectus Supplement.
The date of this Prospectus is _______________, 1996.
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
Assets in the related Trust Fund. A Series of Certificates may
include one or more classes that are senior or subordinate in right of
payment to one or more other classes of Certificates of such Series.
One or more classes of Certificates of a Series may be entitled to
receive principal distributions with disproportionate, nominal
or no interest distributions or interest distributions with
disproportionate, nominal or no principal distributions or any
combination thereof prior to one or more other classes of Certificates
of such Series or after the occurrence of specified events, in each
case as specified in the related Prospectus Supplement.
Distributions among classes of Certificates in a Series may differ as to
timing, sequential order and priority.
Distributions to Certificateholders will be made monthly,
quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on
the Certificates of a Series will be made from the assets of the related
Trust Fund or Funds or other assets pledged for the benefit of the
Certificateholders as specified in the related Prospectus Supplement.
The Certificates of any Series will not represent an
obligation of or interest in the Depositor or any affiliate
thereof, including, without limitation, First Union National Bank of
North Carolina, and will not be insured or guaranteed by any
governmental agency or instrumentality or, unless otherwise specified in
the related Prospectus Supplement, by any other person. Unless
otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Certificates
will be to obtain certain representations and warranties from each
Seller and to assign to the Trustee for the related Series of
Certificates the Depositor's rights with respect to such
representations and warranties. The principal obligations of the Master
Servicer named in the related Prospectus Supplement with respect to
the related Series of Certificates will be limited to obligations
pursuant to certain representations and warranties and to its
contractual servicing obligations, including any obligation it may have
to advance delinquent payments on the Mortgage Assets in the related
Trust Fund.
The yield on each class of Certificates of a Series will be
affected by, among other things, the rate of payment of principal
(including prepayments) on the Mortgage Assets in the related Trust
Fund and the timing of receipt of such payments as described herein and
in the related Prospectus Supplement. A Trust Fund may be subject to
early termination under the circumstances described herein and in the
related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be
made to treat a Trust Fund or specified portion thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. See "Certain Federal Income Tax Consequences."
This Prospectus and the related Prospectus Supplements may be
used by First Union Capital Markets Corp. in connection with offers and
sales related to market-making transactions in any Series of the
Certificates. First Union Capital Markets Corp. may act as principal or
agent in such transactions. Such sales will be made at prices related
to prevailing market prices at the time of the sale.
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the securities covered by such
Prospectus Supplement, whether or not participating in the
distribution thereof, may be required to deliver such Prospectus
Supplement and this Prospectus. This is in addition to the obligation
of dealers to deliver a Prospectus and Prospectus Supplement when acting
as underwriters and with respect to their unsold allotments or
subscriptions.
2
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of
each Series to be offered hereunder will, among other things, set forth
with respect to such Certificates, as appropriate: (i) a description
of the class or classes of Certificates and the related Pass-Through
Rate or method of determining the amount of interest, if any, to be
passed through to each such class; (ii) the initial aggregate
Certificate Balance (which may be a notional principal amount) of each
class of Certificates included in such Series, Distribution Dates
relating to such Series and, if applicable, the initial and final
scheduled Distribution Dates for each class; (iii) information as to the
assets comprising the Trust Fund, including the general characteristics
of the Mortgage Assets included therein and, if applicable, the
insurance, surety bonds, guaranties, letters of credit or other
instruments or agreements included in the Trust Fund, and the amount and
source of any Reserve Fund; (iv) the circumstances, if any, under
which the Trust Fund may be subject to early termination; (v) the
method used to calculate the amount of principal, if any, to be
distributed with respect to each class of Certificates; (vi) the
order of application of distributions to each of the classes within
such Series, whether sequential, pro rata, or otherwise; (vii) the
Distribution Dates with respect to such Series; (viii) additional
information with respect to the plan of distribution of such
Certificates; (ix) whether one or more REMIC elections will be
made and designation of the regular interests and residual interests;
(x) the aggregate original percentage ownership interest in the Trust
Fund to be evidenced by each class of Certificates; (xi) information
as to the nature and extent of subordination with respect to any
class of Certificates that is subordinate in right of payment to any
other class; and (xii) information as to the Seller, the Master Servicer
and the Trustee.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Certificates.
This Prospectus, which forms a part of the Registration Statement, and
the Prospectus Supplement relating to each Series of Certificates
contains summaries of the material terms of the documents referred to
herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and
Regulations of the Commission. For further information, reference is
made to such Registration Statement and the exhibits thereto. Such
Registration Statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as
follows: Chicago Regional Office, Northwest Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office,
Seven World Trade Center, New York, New York 10048.
No person has been authorized to give any information or to
make any representation other than those contained in this Prospectus
and any Prospectus Supplement with respect hereto and, if given or
made, such information or representations must not be relied upon.
This Prospectus and any Prospectus Supplement with respect hereto
do not constitute an offer to sell or a solicitation of an offer
to buy any securities other than the Certificates offered hereby and
thereby nor an offer of the Certificates to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is
correct as of any time subsequent to its date.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust
Fund for a Series of Securities are required under the related Agreement
to be forwarded to Certificateholders. Unless otherwise specified in
the related Prospectus Supplement, such reports will not be examined
and reported on by an independent public accountant. See
"Description of the Certificates----Reports to
Certificateholders."
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and
reports filed or caused to be filed by the Depositor with respect
to a Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, prior to the termination of an offering of Certificates
evidencing interests therein. The Depositor will provide or cause to
be provided without charge to each person to whom this Prospectus is
delivered in connection with the offering of one or more classes of
Certificates, a list identifying all filings with respect to the
related Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, since the Depositor's latest fiscal year covered by its
annual report on Form 10-K and a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such
documents or reports relate to one or more of such classes of such
Certificates, other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such
documents). Requests to the Depositor should be directed to: First
Union Residential Securitization Transactions, Inc., 301 South
College Street, Charlotte, North Carolina 28202-0600, telephone number
(704) 383-3624.
4
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the
related Prospectus Supplement with respect to the Series offered
thereby. The Prospectus Supplement for each Series will specify the
extent (if any) to which the terms of such Series or the related Trust
Fund vary from the general description of the Certificates and Trust
Funds which is contained in this Prospectus. Capitalized terms used
herein shall have the respective meanings assigned them in the "Index to
Defined Terms."
Title of Securities ......................... Residential Mortgage Pass-Through Certificates (the
"Certificates"), issuable in series (each, a "Series"). Each
Series will be issued under a separate Pooling and Servicing
Agreement (each, an "Agreement") to be entered into with
respect to each such Series.
Depositor ................................... First Union Residential Securitization Transactions, Inc., a
North Carolina corporation. The Depositor is a wholly-owned,
limited purpose subsidiary of First Union National Bank of
North Carolina ("FUNB"), a national banking association (a
wholly-owned subsidiary of First Union Corporation, a North
Carolina corporation). Neither First Union Corporation nor any
of its affiliates, including the Depositor, has guaranteed, or is
or will be otherwise obligated with respect to, the Certificates
of any Series.
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.
Master Servicer ............................. The entity or entities named as Master Servicer (the "Master
Servicer") in the related Prospectus Supplement, one of which
may be an affiliate of the Depositor. See "The Pooling and
Servicing Agreement----Certain Matters Regarding the Master
Servicer and the Depositor."
Sub-Servicer ................................ A "Sub-Servicer" may be specified in the related Prospectus
Supplement, which may be an affiliate of the Depositor.
Closing Date ................................ The date (the "Closing Date") of initial issuance of a Series of
Certificates, as specified in the related Prospectus Supplement.
Trust Fund Assets ........................... The Trust Fund for a Series of Certificates will include certain
mortgage related assets (the "Mortgage Assets") consisting of
(a) a pool (a " Mortgage Pool") of Mortgage Loans, (b) Agency
Securities or (c) Private Mortgage-Backed Securities, together
with payments in respect of such Mortgage Assets and certain
other accounts, obligations or agreements, in each case as
specified in the related Prospectus Supplement. To the extent
provided in the related Prospectus Supplement, the Depositor
5
will be obligated (subject only
to the availability thereof) to
sell at a predetermined price,
and the Trust Fund for a Series
of Certificates will be
obligated to purchase (subject
to the satisfaction of certain
conditions described in the
applicable Agreement),
additional Mortgage Assets (the
"Subsequent Mortgage Assets")
from time to time (as
frequently as daily) within
three months after the issuance
of the Certificates having an
aggregate principal balance
approximately equal to the
amount on deposit in the
Pre-Funding Account (the
"Pre-Funded Amount") on such
Closing Date.
A. Single Family Loans ................... Unless otherwise specified in the related Prospectus
Supplement, Mortgage Loans will be secured by first, second
or more junior liens on fee simple or leasehold interests in
one-to four-family properties. If so specified, the Mortgage
Loans may include cooperative apartment loans ("Cooperative
Loans") secured by security interests in shares issued by
private, nonprofit, 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. If so
specified in the related Prospectus Supplement, the Mortgage
Assets of the related Trust Fund may include mortgage
participation certificates evidencing interests in Mortgage
Loans. Such Mortgage Loans may be conventional loans (i.e.,
loans that are not insured or guaranteed by any governmental
agency), insured by the Federal Housing Authority ("FHA") or
partially guaranteed by the Veterans' Administration ("VA") as
specified in the related Prospectus Supplement. If specified in
the related Prospectus Supplement, the Mortgage Loans may be
comprised of home equity loans ("Home Equity Loans"). Such
Home Equity Loans will be secured by first or second or more
junior liens on fee simple or leasehold interests in one- to
four-family properties. See "Mortgage Loan
Program----Underwriting Standards."
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
combinations 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 or to a different adjustable rate.
Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination
6
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
Mortgage Rate 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 a third
party.
(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. Mortgage Loans
may include limits on periodic increases or decreases in the
amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) The Mortgage Loans generally may be prepaid at any time
without payment of any prepayment fee. If so specified in the
related Prospectus Supplement, prepayments of principal may
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 Mortgage 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 of the Seller.
(f) Certain Mortgage Loans may be originated or acquired in
connection with employee relocation programs. The real
property constituting security for repayment of a Mortgage
7
Loan 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.
(g) Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans will be covered by
standard hazard insurance policies insuring against losses due
to fire and various other causes. The Mortgage Loans will be
covered by primary mortgage insurance policies to the extent
provided in the related Prospectus Supplement.
All Mortgage Loans will have been purchased by the Depositor,
either directly or through an affiliate, from one or more Sellers.
B. Agency Securities ..................... The Agency Securities evidenced by a Series of Certificates
will consist of (i) mortgage participation certificates issued and
guaranteed as to timely payment of interest and, unless
otherwise specified in the related Prospectus Supplement,
ultimate payment of principal by the Federal Home Loan
Mortgage Corporation ("FHLMC Certificates"), (ii) Guaranteed
Mortgage Pass-Through Certificates issued and guaranteed as
to timely payment of principal and interest by the Federal
National Mortgage Association ("FNMA Certificates"),
(iii) fully modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and interest by the
Government National Mortgage Association ("GNMA
Certificates"), (iv) stripped mortgage-backed securities
representing an undivided interest in all or a part of either the
principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions) or in
some specified portion of the principal and interest distributions
(but not all of such distributions) on certain FHLMC, FNMA
or GNMA Certificates and, unless otherwise specified in the
related Prospectus Supplement, guaranteed to the same extent
as the underlying securities, (v) another type of pass-through
certificate issued or guaranteed by GNMA, FNMA or FHLMC
and described in the related Prospectus Supplement, or (vi) a
combination of such Agency Securities. All GNMA
Certificates will be backed by the full faith and credit of the
United States. No FHLMC or FNMA Certificates will be
backed, directly or indirectly, by the full faith and credit of the
United States.
The Agency Securities may consist of pass-through securities
issued under FHLMC's Cash or Guarantor Program, the
GNMA I Program, the GNMA II Program or another program
specified in the related Prospectus Supplement. The payment
characteristics of the Mortgage Loans underlying the Agency
Securities will be described in the related Prospectus
Supplement.
8
C. Private Mortgage-Backed
Securities ............................ Private Mortgage-Backed Securities may include (a) mortgage
pass-through certificates representing beneficial interests in a
Mortgage Pool or (b) collateralized mortgage obligations
secured by Mortgage Loans. Private Mortgage-Backed
Securities may include stripped mortgage-backed securities
representing an undivided interest in all or a part of either the
principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions) or in
some specified portion of the principal and interest distributions
(but not all of such distributions) on certain Mortgage Loans.
Although individual Mortgage Loans underlying a Private
Mortgage-Backed Security may be insured or guaranteed by the
United States or an agency or instrumentality thereof, they need
not be, and the Private Mortgage-Backed Securities themselves
will not be so insured or guaranteed. Private Mortgage-Backed
Securities will have been previously offered and sold pursuant
to an effective registration statement under the Securities Act
of 1933, as amended, or were exempt from registration
thereunder. Unless otherwise specified in the related
Prospectus Supplement relating to a Series of Certificates,
payments on the Private Mortgage-Backed Securities will be
distributed directly to the Trustee as registered owner of such
Private Mortgage-Backed Securities. See "The Trust
Fund----Private Mortgage-Backed Securities" herein.
Description of the
Certificates ................................ Each Certificate will represent
the interest specified in the related Prospectus Supplement
===========================================================
in a Trust Fund created by the Depositor pursuant to an
Agreement among the Depositor, the Master Servicer and the
Trustee for the related Series. The Certificates of any Series
may be issued in one or more classes as specified in the related
Prospectus Supplement. A Series of Certificates may include
one or more classes of senior Certificates (collectively, the
"Senior Certificates") and one or more classes of subordinate
Certificates (collectively, the "Subordinated Certificates").
Certain Series or classes of Certificates may be covered by
insurance policies 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 each Series (i) may be
entitled to receive distributions allocable only to principal, only
to interest or to any combination thereof; (ii) may be entitled
to receive distributions only of prepayments of principal
throughout the lives of the Certificates or during specified
periods; (iii) may be subordinated in the right to receive
distributions of scheduled payments of principal, prepayments
of principal, interest or any combination thereof to one or more
other classes of Certificates of such Series throughout the lives
of the Certificates or during
specified periods; (iv) may be
9
entitled to receive such
distributions only after the
occurrence of events specified
in the related Prospectus
Supplement; (v) may be entitled
to receive distributions in
accordance with a schedule or
formula or on the basis of
collections from designated
portions of the assets in the
related Trust Fund; (vi) as to
Certificates entitled to
distributions allocable to
interest, may be entitled to
receive interest at a fixed
rate or a rate that is subject
to change from time to time;
and (vii) as to Certificates
entitled to distributions
allocable to interest, may be
entitled to distributions
allocable to interest only
after the occurrence of events
specified in the related
Prospectus Supplement and may
accrue interest until such
events occur, in each case as
specified in the related
Prospectus Supplement. The
timing, amounts, sequential
order and priority of such
distributions may vary among
classes, over time, or
otherwise as specified in the
related Prospectus Supplement.
Distributions on the
Certificates ................................ Distributions on the Certificates entitled thereto will be made
monthly, quarterly, semi-annually or at such other intervals and
on the dates specified in the related Prospectus Supplement
(each, a "Distribution Date") out of the payments received in
respect of the assets of the related Trust Fund or other assets
pledged for the benefit of the Certificates as specified in the
related Prospectus Supplement. The amount allocable to
payments of principal and interest on any Distribution Date will
be determined as specified in the related Prospectus
Supplement. Unless otherwise specified in the related
Prospectus Supplement, all distributions will be made pro rata
to Certificateholders of the class entitled thereto.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original Certificate Balance of the
Certificates will equal the aggregate distributions allocable to
principal that such Certificates will be entitled to receive. If
specified in the related Prospectus Supplement, the Certificates
will have an aggregate original Certificate Balance equal to the
aggregate unpaid principal balance of the Mortgage Assets as
of the first day of the month of creation of the Trust Fund and
will bear interest in the aggregate at a rate equal to the interest
rate borne by the underlying Mortgage Loans (the "Mortgage
Rate"), Agency Securities or Private Mortgage-Backed
Securities, net of the aggregate servicing fees and any other
amounts specified in the related Prospectus Supplement (the "
Pass-Through Rate").
The rate at which interest will be passed through to holders of
each class of Certificates entitled thereto may be a fixed rate or
a rate that is subject to change from time to time from the time
and for the periods, in each case, as specified in the related
Prospectus Supplement. Any such rate may be calculated on
10
a loan-by-loan, weighted average or other basis, in each case as
described in the related Prospectus Supplement.
Credit Enhancement .......................... The assets in a Trust Fund or the Certificates of one or more
classes in the related Series may have the benefit of one or
more types of credit enhancement described herein and in the
related Prospectus Supplement. The protection against losses
afforded by any such credit support may be limited. The type,
characteristics and amount of credit enhancement will be
determined based on the characteristics of the Mortgage Loans
underlying or comprising the Mortgage Assets and other factors
and will be established on the basis of requirements of each
Rating Agency rating the Certificates of such Series. One or
more forms of credit enhancement may be provided by an
affiliate or affiliates of the Depositor. See "Credit
Enhancement" herein.
Credit enhancement for a Series may include one or more of
the following types or such other credit enhancement specified
in the related Prospectus Supplement:
A. Subordination ......................... 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 the
============
Subordinated Certificates of a Series to receive distributions
with respect to the assets in the related Trust Fund will be
subordinated to such rights of the holders of the Senior
Certificates of the same Series to the extent described in the
related Prospectus Supplement. This subordination is intended
to enhance the likelihood of regular receipt by holders of
Senior Certificates of the full amount of their scheduled
monthly payments of principal and interest. The protection
afforded to the holders of Senior Certificates of a Series by
means of the subordination feature will be accomplished by
(i) the preferential right of such holders to receive, prior to any
distribution being made in respect of the related Subordinated
Certificates, the amounts of principal and interest due them on
each Distribution Date out of the funds available for
distribution on such date in the related Collection Account and,
to the extent described in the related Prospectus Supplement, by
the right of such holders to receive future distributions on the
assets in the related Trust Fund that would otherwise have been
payable to the holders of Subordinated Certificates;
(ii) reducing the ownership interest of the related Subordinated
Certificates; (iii) a combination of clauses (i) and (ii) above; or
(iv) as otherwise described in the related Prospectus
Supplement. If so specified in the related Prospectus
Supplement, subordination may apply only in the event of
certain types of losses not covered by other forms of credit
support, such as hazard losses not covered by standard hazard
insurance policies or losses
due to the bankruptcy or fraud
of the borrower. The related
Prospectus Supplement will
11
set forth information concerning,
among other things, the amount
of subordination of a class or
classes of Subordinated
Certificates in a Series, the
circumstances in which such
subordination will be
applicable, and the manner, if
any, in which the amount of
subordination will decrease
over time.
B. Reserve Fund .......................... One or more reserve funds (each, a " Reserve Fund") may be
established and maintained for each Series. The related
Prospectus Supplement will specify whether or not any such
Reserve Fund will be included in the corpus of the Trust Fund
for such Series and will also specify the manner of funding the
related Reserve Fund and the conditions under which the
amounts in any such Reserve Fund will be used to make
distributions to holders of Certificates of a particular class or
released from the related Trust Fund.
C. Mortgage Pool
Insurance Policy ...................... A mortgage pool insurance policy or policies ("Mortgage Pool
Insurance Policy") may be obtained and maintained for a
Series, which shall be limited in scope, covering defaults on the
related Mortgage Loans in an initial amount equal to a
specified percentage of the aggregate principal balance of all
Mortgage Loans included in the Mortgage Pool as of the first
day of the month of issuance of the related Series of
Certificates or such other date as is specified in the related
Prospectus Supplement (the " Cut-off Date").
D. Special Hazard
Insurance Policy ...................... A special hazard insurance policy or policies ("Special Hazard
Insurance Policy") may be obtained and maintained for a
Series, covering certain physical risks that are not otherwise
insured against by standard hazard insurance policies. Each
Special Hazard Insurance Policy will be limited in scope and
will cover losses pursuant to the provisions of each such
Special Hazard Insurance Policy as described in the related
Prospectus Supplement.
E. Bankruptcy Bond ....................... A bankruptcy bond or bonds (" Bankruptcy Bonds") may be
obtained covering certain losses resulting from action that may
be taken by a bankruptcy court in connection with a Mortgage
Loan. The level of coverage and the limitations in scope of
each Bankruptcy Bond will be specified in the related
Prospectus Supplement.
F. FHA Insurance and
VA Guarantee .......................... All or a portion of the Mortgage Loans in a Mortgage Pool
may be insured by FHA insurance ("FHA Insurance") and may
be partially guaranteed by the VA ("VA Insurance").
G. Cross Support ......................... If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust Fund
12
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 beneficial
ownership of one or more asset groups prior to distributions to
Subordinated Certificates evidencing a beneficial ownership
interest in other asset groups within the same Trust Fund.
H. Limited Guarantee ..................... If specified in the related Prospectus Supplement, credit
enhancement may be provided in the form of a limited
financial guarantee ("Limited Guarantee") issued by a guarantor
named therein.
I. Letter of Credit ...................... Alternative credit support with respect to a Series of
Certificates may be provided by the issuance of a letter of
credit ("Letter of Credit") by the bank or financial institution
specified in the related 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.
J. Surety Bonds .......................... If specified in the related Prospectus Supplement, credit support
with respect to one or more classes of Certificates of a Series
may be provided by the issuance of a surety bond ("Surety
Bond") issued by a financial guarantee insurance company
specified in the related 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.
K. Overcollateralization.................. If specified in the related Prospectus Supplement, credit support
may consist of overcollateralization whereby the aggregate
principal amount of the Mortgage Assets, including any
Subsequent Mortgage Assets, exceeds the aggregate Certificate
Balance of the Certificates. Such overcollateralization may
exist on the Closing Date 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 Assets,
including any Subsequent Mortgage Assets. 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.
Advances .................................... Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer and, if applicable, each
mortgage servicing institution that services a Mortgage Loan in
a Mortgage Pool on behalf of the Master Servicer (a
"Sub-Servicer") will be obligated to advance amounts
(each, an "Advance") corresponding to delinquent
principal and interest 13
payments (or, in the case of Home
Equity Loans, interest payments only)
on such Mortgage Loan
(including, in the case of
Cooperative Loans, unpaid
maintenance fees or other
charges under the related
proprietary lease) 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. Any obligation to
make Advances may be subject to
limitations as specified in the
related Prospectus Supplement.
Advances will be reimbursable
to the extent described herein
and in the related Prospectus
Supplement.
Optional Termination ........................ The Master Servicer or, if specified in the related Prospectus
Supplement, the holder of the residual interest in a REMIC
may have the option to effect early retirement of a Series of
Certificates through the purchase of the Mortgage Assets and
other assets in the related Trust Fund under the circumstances
and in the manner described in "The Pooling and Servicing
Agreement----Termination; Optional Termination" herein and
in the related Prospectus Supplement. In addition, if the related
Prospectus Supplement provides that the property of a Trust
Fund will include a Pre-Funding Account (as such term is
defined in the related Prospectus Supplement, the "Pre-Funding
Account"), a portion of a Series of Certificates will be subject
to early retirement on or immediately following the end of the
Funding Period (as such term is defined in the related
Prospectus Supplement, the "Funding Period") in an amount
and manner specified in the related Prospectus Supplement.
Legal Investment ............................ The Prospectus Supplement for each series of Certificates will
specify which, if any, of the Classes of Certificates offered
thereby will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"). Classes of Certificates that qualify as
"mortgage related securities" will be legal investments for
certain types of institutional investors to the extent provided in
SMMEA, subject, in any case, to any other regulations that
may govern investments by such institutional investors.
Institutions whose investment activities are subject to review by
federal or state authorities should consult with their counsel or
the applicable authorities to determine whether an investment
in a particular class of Certificates (whether or not such class
constitutes a "mortgage related security") complies with
applicable guidelines, policy statements or restrictions. See
"Legal Investment."
Certain Federal Income
Tax Consequences ............................ The federal income tax consequences to Certificateholders will
vary depending on whether one or more elections are made to
treat the Trust Fund or specified portions thereof as a "real
14
estate mortgage investment conduit" (" REMIC") under the
provisions of the Internal Revenue Code of 1986, as amended
(the "Code"). The Prospectus Supplement for each Series of
Certificates will specify whether such an election will be made.
See "Certain Federal Income Tax Consequences."
ERISA Considerations ........................ A fiduciary of any employee benefit plan or other retirement
plan or arrangement subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the
Code should carefully review with its legal advisors whether
the purchase or holding of Certificates could give rise to a
transaction prohibited or not otherwise permissible under
ERISA or the Code. See "ERISA Considerations." Certain
classes of Certificates may not be transferred unless the Trustee
and the Depositor are furnished with a letter of representations
or an opinion of counsel to
the effect that such transfer will not
result in a violation of the prohibited transaction provisions of
ERISA and the Code and will not subject the Trustee, the
Depositor or the Master Servicer to additional obligations. See
"Description of the Certificates----General" and "ERISA
Considerations."
Rating ...................................... It is a condition to the issuance of the Certificates of any Series
offered hereby that they be rated in one of the four highest
rating categories by at least one nationally recognized statistical
rating organization (a " Rating Agency").
15
RISK FACTORS
Limited Liquidity. Although the Prospectus Supplement for a
Series of Certificates may indicate that the underwriter intends to
make a market in such Certificates, it is under no obligation to do so.
There can be no assurance that a secondary market will develop or, if a
secondary market does develop, that it will provide holders of such
Certificates with liquidity of investment or that it will continue for
the lives of such Certificates. The Certificates will not be listed on
any securities exchange.
General Economic Conditions. General economic conditions have
an impact on the ability of borrowers to repay mortgage loans. Loss of
earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In
the event of personal bankruptcy of a borrower under a Mortgage Loan
(a "Mortgagor"), it is possible that the holders of the related
Certificates could experience a loss with respect to such
Mortgagor's Mortgage Loan. In conjunction with a Mortgagor's
bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan,
thus delaying or reducing the amount received by the holders of the
related Certificates with respect to such Mortgage Loan. Moreover,
if a bankruptcy court prevents the transfer of the related Mortgaged
Property to the related Trust Fund, any remaining balance on such
Mortgage Loan may not be recoverable. See "Mortgage Loan Program"
herein and "FUNB and Its Mortgage Program----Delinquency and Loan Loss
Experience" in the related Prospectus Supplement for further information
regarding the rates of delinquency and net losses experienced on the
mortgage loans included in FUNB's servicing portfolio.
Local Real Estate Markets. An overall decline in the
residential real estate markets in the states in which the Mortgaged
Properties are located could adversely affect the values of the
Mortgaged Properties such that the aggregate outstanding balance of
the Mortgage Loans equals or exceeds the value of the Mortgaged
Properties. The Depositor can neither predict such declines nor
quantify the impact of such declines in property values nor predict how
long and in which states such declines may occur. During a period of
such declines, the rates of delinquencies, foreclosures and losses on
the Mortgage Loans would be expected to be higher than those experienced
in the mortgage lending industry in general.
Yield and Prepayment Considerations. The yield on the
Certificates of each Series will depend on the rate of principal payment
(including prepayments, liquidations due to defaults and repurchases)
on the Mortgage Loans and the price paid by Certificateholders. Such
yield may be adversely affected by a higher or lower than anticipated
rate of prepayments on the related Mortgage Loans. In addition,
unless otherwise specified in the related Prospectus Supplement,
the yield to investors may be adversely affected by shortfalls which may
result from the timing of the receipt of partial prepayments or
liquidations as well as shortfalls not covered by the Master
Servicing Fee related to a particular Distribution Date and which
shortfalls result from the timing of the receipt of full prepayments.
The yield on Certificates entitling the holders thereof primarily or
exclusively to payments of interest on the Mortgage Loans will be
extremely sensitive to the rate of prepayments on the related Mortgage
Loans. In addition, the yield on certain other types of classes of
Certificates may be relatively more sensitive to the rate of
prepayment of the related Mortgage Loans than other classes of
Certificates. Prepayments are influenced by a number of factors,
including prevailing mortgage market interest rates, local and national
economic conditions and homeowner mobility. See "Yield and Prepayment
Considerations."
Limited Obligations. Except for any related insurance policies
and any reserve fund or credit enhancement described in the
applicable Prospectus Supplement, the Mortgage Assets 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, the Master
Servicer, the Trustee or any of their affiliates, except for the
Depositor's and the Master Servicer's limited obligations with
respect to certain breaches of their respective representations and
warranties. 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 any other
person. Consequently, in the event that payments on the Mortgage
Assets 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.
16
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. 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 pool
insurance policy; a special hazard insurance policy; a mortgagor
bankruptcy bond; a reserve fund; cross support; FHA Insurance and VA
Guarantee; a surety bond; and any combination thereof. See "Credit
Enhancement" herein. 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. Furthermore, such credit enhancements may provide
only very limited coverage as to certain types of losses, and may
provide no coverage as to certain other types of losses. 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
thereof will not be adversely affected. See "Credit Enhancement."
Realization Upon Nonperforming Loans; Delays and Expenses
Associated With Legal Actions. An action to foreclose a Mortgage Loan
is regulated by statutes and rules and is subject to a court's
equitable powers. A foreclosure action is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims
are interposed, sometimes requiring several years to complete.
Furthermore, an action to obtain a deficiency judgment also is
regulated by statutes and rules, and the amount of a deficiency
judgment may be limited by law. In the event of a default by a
borrower, these restrictions, among others, may impede the ability of
the Master Servicer to foreclose on or to sell the Mortgaged Property
or to obtain a deficiency judgment in connection therewith. If the
protection afforded the Certificateholders of a Series by the credit
enhancement, if any, for such Series is exhausted, such restrictions
may delay distributions to such Certificateholders and may
ultimately limit the amounts distributed with respect to such
defaulted Mortgage Loans and result in a loss to such Certificateholders
on their investments. See "Certain Legal Aspects of the Mortgage Loans."
Junior Liens. Mortgages securing Home Equity Loans are
often 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.
Subordinated Certificates. 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 Assets 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."
Other Legal Considerations. Applicable state laws generally
regulate interest rates and other charges, and require certain
disclosures to borrowers. In addition, many states have other laws,
such as consumer protection laws, unfair and deceptive practices acts
and debt collection practices acts which may apply to the origination or
collection of the Mortgage Loans. Depending on the provisions of the
applicable law, violations 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 borrower to a
refund of amounts previously paid and, in addition, could subject the
Master Servicer to damages and administrative enforcement. See
"Certain Legal Aspects of the Mortgage Loans."
17
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 certain mortgage-related assets (the " Mortgage
Assets") consisting of (A) a mortgage pool (a "Mortgage Pool")
comprised of Mortgage Loans, (B) Agency Securities or (C) Private
Mortgage-Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such
Mortgage Assets 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 Funds 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. Unless otherwise specified in the related Prospectus
Supplement, the Mortgage Assets of any Trust Fund will consist of
Mortgage Loans, Agency Securities or Private Mortgage-Backed Securities
but not a combination thereof.
The Mortgage Assets may be acquired by the Depositor, either
directly or through affiliates, in the open market or in
privately negotiated transactions, from originators or sellers
that may be affiliates of the Depositor (the "Sellers") and
conveyed by the Depositor to the related Trust Fund. The Sellers may
have originated the Mortgage Assets or acquired the Mortgage Assets
from the originators or other entities. See "Mortgage Loan
Program----Underwriting Standards."
The following is a brief description of the Mortgage Assets
expected to be included in the Trust Funds. If specific information
respecting the Mortgage Assets is not known at the time the related
Series of Certificates initially is offered, 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
Assets relating to such Series will be attached to the Agreement
delivered to the Trustee upon delivery of the Certificates.
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 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:
* 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 (the "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.
18
(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 without the payment of any prepayment fee. If so
specified in the related Prospectus Supplement, some
prepayments of principal may 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 of the Seller.
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 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.
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
19
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.
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 Seller'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."
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. Unless otherwise specified in the
related Prospectus Supplement, the only obligations of the Depositor
with respect to a Series of Certificates will be to obtain certain
representations and warranties from the Sellers and to assign to the
Trustee for such Series of Certificates the Depositor's rights with
respect to such representations and warranties. See "The Pooling and
Servicing Agreement----Assignment of Mortgage Assets."
The Master Servicer named in the related Prospectus
Supplement will service the Mortgage Loans, either directly or through
other mortgage servicing institutions (each, a " Sub-Servicer"),
pursuant to a Pooling and Servicing Agreement (each, an "Agreement").
The Master Servicer and any Sub-Servicers will each receive a fee for
such services. See "Mortgage Loan Program" and "The Pooling and
Servicing Agreement." With respect to Mortgage Loans serviced by the
Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related
Agreement as if the Master Servicer alone were servicing such Mortgage
Loans. The obligations of the Master Servicer with respect to the
Mortgage Loans will consist principally of its contractual servicing
obligations under the related Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Sellers, or both, as
more fully described herein under "Mortgage Loan
Program----Representations by Sellers; Repurchases" and "The Pooling and
Servicing Agreement----Assignment of Mortgage Assets") and its
obligation to make certain cash 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.
Single Family and Cooperative Loans. Unless otherwise
specified in the related Prospectus Supplement, 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. 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
20
Cooperatives' buildings. If so specified in the related Prospectus
Supplement, the Mortgage Assets of the related Trust Fund may include
mortgage participation certificates evidencing interests in Mortgage
Loans. Such loans may be conventional loans (i.e., loans that are
not insured or guaranteed by any governmental agency) or loans
insured by the FHA or partially guaranteed by the VA, as specified in
the related Prospectus Supplement.
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, unless otherwise 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 home equity loans ("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. Unless otherwise specified in the related Prospectus
Supplement, Home Equity Loans will generally be secured by a lien
on the related Mortgaged Property of a first or second priority.
Unless otherwise specified in the related Prospectus Supplement,
Home Equity Loans are generally made to Mortgagors with credit
grades (as determined by the Seller from time to time) A2 and below.
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.
Agency Securities
Government National Mortgage Association. GNMA is a
wholly-owned corporate instrumentality of the United States with the
United States Department of Housing and Urban Development. Section
306(g) of Title II of the National Housing Act of 1934, as amended
(the "Housing Act"), authorizes GNMA to guarantee the timely payment
of the principal of and interest on certificates which represent an
interest in a pool of mortgage loans insured by the Federal Housing
Authority ("FHA") under the Housing Act, or Title V of the Housing Act
of 1949 ("FHA Loans"), or partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of
Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full
faith and credit of the United States is pledged to the payment of all
amounts which may be required to be paid under any guaranty under this
subsection." In order to meet its obligations under any such guarantee,
GNMA may, under Section 306(d) of the Housing Act, borrow from the
United States Treasury in an unlimited amount which is at any time
sufficient to enable GNMA to perform its obligations under its
guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust
Fund (which may be issued under either the GNMA I program or the GNMA II
program) will be a "fully modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other
financial concern ("GNMA Issuer") approved by GNMA or approved by FNMA
as a seller-servicer of FHA Loans and/or VA Loans. The mortgage loans
underlying the GNMA Certificates will consist of FHA Loans and/or VA
Loans. Each such mortgage loan is secured by a one-to four-family
residential property. GNMA will approve the issuance of each such GNMA
Certificate in accordance with a guaranty agreement (a "Guaranty
Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own
funds in order to make timely payments of all amounts due on each such
GNMA Certificate, even if the payments received by the GNMA Issuer on
the FHA Loans or VA Loans underlying each such GNMA Certificate are
less than the amounts due on each such GNMA Certificate.
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The full and timely payment of principal of and interest on
each GNMA Certificate will be guaranteed by GNMA, which obligation is
backed by the full faith and credit of the United States. Each such
GNMA Certificate will have an original maturity of not more than 40
years (but may have original maturities of substantially less than 40
years). Each such GNMA Certificate will be based on and backed by a
pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on
behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest
equal to the registered holder's proportionate interest in the
aggregate amount of the monthly principal and interest payment on
each FHA Loan or VA Loan underlying such GNMA Certificate, less the
applicable servicing and guarantee fee which together equal the
difference between the interest on the FHA Loan or VA Loan and the
pass-through rate on the GNMA Certificate. In addition, each
payment will include proportionate pass-through payments of any
prepayments of principal on the FHA Loans or VA Loans underlying such
GNMA Certificate and liquidation proceeds in the event of a
foreclosure or other disposition of any such FHA Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA
Certificate as it becomes due, it must promptly notify GNMA and
request GNMA to make such payment. Upon notification and request, GNMA
will make such payments directly to the registered holder of such GNMA
Certificate. In the event no payment is made by a GNMA Issuer and the
GNMA Issuer fails to notify and request GNMA to make such payment,
the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the
right to proceed directly against GNMA under the terms of the
Guaranty Agreements relating to such GNMA Certificates for any amounts
that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate
must have the same interest rate (except for pools of mortgage
loans secured by manufactured homes) over the term of the loan. The
interest rate on such GNMA I Certificate will equal the interest rate
on the mortgage loans included in the pool of mortgage loans
underlying such GNMA I Certificate, less one-half percentage point
per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may
have per annum interest rates that vary from each other by up to one
percentage point. The interest rate on each GNMA II Certificate
will be between one-half percentage point and one and one-half
percentage points lower than the highest interest rate on the mortgage
loans included in the pool of mortgage loans underlying such GNMA II
Certificate (except for pools of mortgage loans secured by manufactured
homes).
Regular monthly installment payments on each GNMA Certificate
held in a Trust Fund will be comprised of interest due as
specified on such GNMA Certificate plus the scheduled principal
payments on the FHA Loans or VA Loans underlying such GNMA Certificate
due on the first day of the month in which the scheduled monthly
installments on such GNMA Certificate are due. Such regular monthly
installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the
case of a GNMA I Certificate and are required to be mailed to the
Trustee by the 20th day of each month in the case of a GNMA II
Certificate. Any principal prepayments on any FHA Loans or VA Loans
underlying a GNMA Certificate held in a Trust Fund or any other early
recovery of principal on such loan will be passed through to the Trustee
as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage
loans or by "buydown" mortgage loans for which funds will have
been provided (and deposited into escrow accounts) for application to
the payment of a portion of the borrowers' monthly payments during
the early years of such mortgage loan. Payments due the registered
holders of GNMA Certificates backed by pools containing "buydown"
mortgage loans will be computed in the same manner as payments derived
from other GNMA Certificates and will include amounts to be collected
from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than
the amount of stated interest on such mortgage loans. The interest not
so paid will be added to the principal of such graduated payment
mortgage loans and, together with interest thereon, will be paid in
subsequent years. The obligations of GNMA and
22
of a GNMA Issuer will be the same irrespective of whether the GNMA
Certificates are backed by graduated payment mortgage loans or "buydown"
mortgage loans. No statistics comparable to the FHA's prepayment
experience on level payment, non-"buydown" mortgage loans are available
in respect of graduated payment or "buydown" mortgages. GNMA
Certificates related to a Series of Certificates may be held in
book-entry form.
As described above, the GNMA Certificates included in a Trust
Fund, and the related underlying mortgage loans, may have
characteristics and terms different from those described above. Any
such different characteristics and terms will be described in the
related Prospectus Supplement.
Federal Home Loan Mortgage Corporation. FHLMC is a
corporate instrumentality of the United States created pursuant to
Title III of the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). The common stock of FHLMC is owned by the Federal Home
Loan Banks and its preferred stock is owned by stockholders of the
Federal Home Loan Banks. FHLMC was established primarily for the
purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced
degree of liquidity for residential mortgage investments primarily by
assisting in the development of secondary markets for conventional
mortgages. The principal activity of FHLMC currently consists of the
purchase of first lien conventional mortgage loans or participation
interests in such mortgage loans and the sale of the mortgage loans or
participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far
as practicable, mortgage loans that it deems to be of such quality, type
and class as to meet generally the purchase standards imposed
by private institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an
undivided interest in a pool of mortgage loans that may consist of first
lien conventional loans, FHA Loans or VA Loans (a "FHLMC Certificate
Group"). FHLMC Certificates are sold under the terms of a Mortgage
Participation Certificate Agreement. A FHLMC Certificate may be
issued under either FHLMC's Cash Program or Guarantor Program.
Mortgage loans underlying the FHLMC Certificates held by a
Trust Fund will consist of mortgage loans with original terms to
maturity of between 10 and 30 years. Each such mortgage loan must meet
the applicable standards set forth in the FHLMC Act. A FHLMC
Certificate Group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate Group. Under the
Guarantor Program, any such FHLMC Certificate Group may include only
whole loans or participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC
Certificate the timely payment of interest on the underlying mortgage
loans to the extent of the applicable Certificate rate on the
registered holder's pro rata share of the unpaid principal balance
outstanding on the underlying mortgage loans in the FHLMC Certificate
Group represented by such FHLMC Certificate, whether or not received.
FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent
specified in the related Prospectus Supplement for a Series of
Certificates, guarantee the timely payment of scheduled principal.
Under FHLMC's Gold PC Program, FHLMC guarantees the timely payment
of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the
pool factor published in such month of distribution. Pursuant to its
guarantees, FHLMC indemnifies holders of FHLMC Certificates against any
diminution in principal by reason of charges for property repairs,
maintenance and foreclosure. FHLMC may remit the amount due on account
of its guaranty of collection of principal at any time after default
on an underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer or (iii) 30 days following the expiration of any
right of redemption, whichever occurs later, but in any event no later
than one year after demand has been made upon the mortgagor for
accelerated payment of principal. In taking actions regarding the
collection of principal after default on the mortgage loans underlying
FHLMC Certificates, including the timing of demand for acceleration,
FHLMC reserves the right to exercise its judgment with respect to the
mortgage loans in the same manner as for mortgage loans that it has
purchased but not sold. The length of time necessary for FHLMC to
determine that a mortgage loan
23
should be accelerated varies with the particular circumstances of
each mortgagor, and FHLMC has not adopted standards which require that
the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States
or by any Federal Home Loan Bank and do not constitute debts or
obligations of the United States or any Federal Home Loan Bank. The
obligations of FHLMC under its guarantee are obligations solely of
FHLMC and are not backed by, or entitled to, the full faith and credit
of the United States. If FHLMC were unable to satisfy such obligations,
distributions to holders of FHLMC Certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates
would be affected by delinquent payments and defaults on such mortgage
loans.
Registered holders of FHLMC Certificates are entitled to
receive their monthly pro rata share of all principal payments on the
underlying mortgage loans received by FHLMC, including any scheduled
principal payments, full and partial repayments of principal and
principal received by FHLMC by virtue of condemnation, insurance,
liquidation or foreclosure, and repurchases of the mortgage loans by
FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal
payments on the underlying mortgage loans, interest at the FHLMC
pass-through rate and any other sums such as prepayment fees, within 60
days of the date on which such payments are deemed to have been received
by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the
amount by which interest rates on the mortgage loans underlying a FHLMC
Certificate may exceed the pass-through rate on the FHLMC Certificate.
Under such program, FHLMC purchases groups of whole mortgage loans from
sellers at specified percentages of their unpaid principal balances,
adjusted for accrued or prepaid interest, which when applied to the
interest rate of the mortgage loans and participations purchased results
in the yield (expressed as a percentage) required by FHLMC. The
required yield, which includes a minimum servicing fee retained by
the servicer, is calculated using the outstanding principal balance.
The range of interest rates on the mortgage loans and participations in
a FHLMC Certificate Group under the Cash Program will vary since
mortgage loans and participations are purchased and assigned to a
FHLMC Certificate Group based upon their yield to FHLMC rather than
on the interest rate on the underlying mortgage loans. Under FHLMC's
Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of
FHLMC's management and guaranty income as agreed upon between the
seller and FHLMC.
FHLMC Certificates duly presented for registration of
ownership on or before the last business day of a month are registered
effective as of the first day of the month. The first remittance to
a registered holder of a FHLMC Certificate will be distributed so as
to be received normally by the 15th day of the second month following
the month in which the purchaser became a registered holder of the
FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received
normally by the 15th day of each month. The Federal Reserve Bank of
New York maintains book-entry accounts with respect to FHLMC
Certificates sold by FHLMC on or after January 2, 1985, and makes
payments of principal and interest each month to the registered holders
thereof in accordance with such holders' instructions.
Federal National Mortgage Association. FNMA is a federally
chartered and privately owned corporation organized and existing
under the Federal National Mortgage Association Charter Act, as
amended (the "Charter Act"). FNMA was originally established in 1938
as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a
stockholder-owned and privately managed corporation by legislation
enacted in 1968.
FNMA provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing their
funds for additional lending. FNMA acquires funds to purchase mortgage
loans from many capital market investors that may not ordinarily invest
in mortgages, thereby expanding the total amount of funds available
for housing. Operating nationwide, FNMA helps to redistribute mortgage
funds from capital-surplus to capital-short areas.
24
FNMA Certificates. FNMA Certificates are Guaranteed
Mortgage Pass-Through Certificates representing fractional undivided
interests in a pool of mortgage loans formed by FNMA. Each mortgage
loan must meet the applicable standards of the FNMA purchase program.
Mortgage loans comprising a pool are either provided by FNMA from its
own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust
Fund will consist of conventional mortgage loans, FHA Loans or VA
Loans. Original maturities of substantially all of the conventional,
level payment mortgage loans underlying a FNMA Certificate are
expected to be between either 8 to 15 years or 20 to 30 years. The
original maturities of substantially all of the fixed rate level
payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual
interest rates that vary by as much as two percentage points from each
other. The rate of interest payable on a FNMA Certificate is equal to
the lowest interest rate of any mortgage loan in the related pool,
less a specified minimum annual percentage representing servicing
compensation and FNMA's guaranty fee. Under a regular servicing option
(pursuant to which the mortgagee or each other servicer assumes the
entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis
points and 250 basis points greater than its annual pass-through rate
and under a special servicing option (pursuant to which FNMA assumes the
entire risk for foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will generally be
between 55 basis points and 255 basis points greater than the annual
FNMA Certificate pass-through rate. If specified in the related
Prospectus Supplement, FNMA Certificates may be backed by adjustable
rate mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate
that it will distribute amounts representing such holder's
proportionate share of scheduled principal and interest payments at
the applicable pass-through rate provided for by such FNMA Certificate
on the underlying mortgage loans, whether or not received, and such
holder's proportionate share of the full principal amount of any
foreclosed or other finally liquidated mortgage loan, whether or not
such principal amount is actually recovered. The obligations of FNMA
under its guarantees are obligations solely of FNMA and are not backed
by, or entitled to, the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has
discretionary authority to lend FNMA up to $2.25 billion outstanding at
any time, neither the United States nor any agency thereof is obligated
to finance FNMA's operations or to assist FNMA in any other manner. If
FNMA were unable to satisfy its obligations, distributions to holders of
FNMA Certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by
delinquent payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of
mortgage loans formed on or after May 1, 1985 (other than FNMA
Certificates backed by pools containing graduated payment mortgage
loans or mortgage loans secured by multifamily projects) are
available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day
of each month to the persons in whose name the FNMA Certificate is
entered in the books of the Federal Reserve Banks (or registered on the
FNMA Certificate register in the case of fully registered FNMA
Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with
respect to fully registered FNMA Certificates, distributions thereon
will be made by check.
As described above, the FNMA Certificates included in a Trust
Fund, and the related underlying mortgage loans, may have
characteristics and terms different from those described above. Any
such different characteristics and terms will be described in the
related Prospectus Supplement.
Stripped Mortgage-Backed Securities. Agency Securities may
consist of one or more stripped mortgage-backed securities, each as
described herein and in the related Prospectus Supplement. Each such
Agency Security will represent an undivided interest in all or part of
either the principal distributions (but not the interest distributions)
or the interest distributions (but not the principal distributions), or
in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA
or GNMA Certificates. The underlying securities will be held under a
trust agreement by FHLMC, FNMA or GNMA, each as trustee, or by
25
another trustee named in the related Prospectus Supplement. FHLMC,
FNMA or GNMA will guaranty each stripped Agency Security to the same
extent as such entity guarantees the underlying securities backing such
stripped Agency Security, unless otherwise specified in the related
Prospectus Supplement.
Other Agency Securities. If specified in the related
Prospectus Supplement, a Trust Fund may include other mortgage
pass-through certificates issued or guaranteed by GNMA, FNMA or FHLMC.
The characteristics of any such mortgage pass-through certificates
will be described in such Prospectus Supplement. If so specified,
a combination of different types of Agency Securities may be held
in a Trust Fund.
Private Mortgage-Backed Securities
General. Private Mortgage-Backed Securities may consist of (a)
mortgage pass-through certificates or participation certificates
evidencing an undivided interest in a Mortgage Pool or (b)
collateralized mortgage obligations secured by Mortgage Loans.
Private Mortgage-Backed Securities may include stripped
mortgage-backed securities representing an undivided interest in all
or a part of either the principal distributions (but not the interest
distributions) or the interest distributions (but not the principal
distributions) or in some specified portion of the principal and
interest distributions (but not all of such distributions) on
certain Mortgage Loans. Private Mortgage-Backed Securities will
have been publicly issued pursuant to a pooling and servicing
agreement, an indenture or similar agreement (a "PMBS Agreement").
Unless otherwise specified in the related Prospectus Supplement, the
seller/servicer of the underlying Mortgage Loans will have entered into
the PMBS Agreement with the trustee under such PMBS Agreement (the "PMBS
Trustee"). The PMBS Trustee or its agent, or a custodian, will possess
the Mortgage Loans underlying such Private Mortgage-Backed Securities.
Mortgage Loans underlying a Private Mortgage-Backed Security will be
serviced by a servicer (the "PMBS Servicer") directly or by one or more
subservicers who may be subject to the supervision of the PMBS Servicer.
The issuer of the Private Mortgage-Backed Securities
(the " PMBS Issuer") will be a financial institution or other entity
engaged generally in the business of mortgage lending, a public agency
or instrumentality of a state, local or federal government, or a
limited purpose corporation organized for the purpose of, among other
things, establishing trusts and acquiring and selling housing loans to
such trusts and selling beneficial interests in such trusts. If so
specified in the related Prospectus Supplement, the PMBS Issuer may
be an affiliate of the Depositor. The obligations of the PMBS Issuer
will generally be limited to certain representations and warranties
with respect to the assets conveyed by it to the related trust. Unless
otherwise specified in the related Prospectus Supplement, the PMBS
Issuer will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the Mortgage Loans
underlying the Private Mortgage-Backed Securities may be guaranteed by
an agency or instrumentality of the United States, the Private
Mortgage-Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the
Private Mortgage-Backed Securities on the dates specified in the
related Prospectus Supplement. The Private Mortgage-Backed Securities
may be entitled to receive nominal or no principal distributions or
nominal or no interest distributions. Principal and interest
distributions will be made on the Private Mortgage-Backed Securities by
the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the
Private Mortgage-Backed Securities after a certain date or under
other circumstances specified in the related Prospectus Supplement.
Underlying Loans. The Mortgage Loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment mortgage loans, Buydown
Loans, adjustable rate mortgage loans, or loans having balloon or other
special payment features. Such Mortgage Loans may be secured by single
family property or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a
Cooperative and the related shares issued by such Cooperative.
Additional Information. The Prospectus Supplement for a
Series for which the Trust Fund includes Private Mortgage-Backed
Securities will specify, to the extent known to the Depositor, (i) the
aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii)
certain
26
characteristics of the Mortgage Loans which comprise the underlying
assets for the Private Mortgage-Backed Securities including (A) the
payment features of such Mortgage Loans, (B) the approximate
aggregate principal balance of underlying Mortgage Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range
of servicing fees with respect to the Mortgage Loans and (D) the
minimum and maximum stated maturities of the underlying Mortgage Loans
at origination, (iii) the maximum original term-to-stated maturity
of the Private Mortgage-Backed Securities, (iv) the weighted average
term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the
Private Mortgage-Backed Securities, (vi) the weighted average
pass-through or certificate rate of the Private Mortgage-Backed
Securities, (vii) the PMBS Issuer, the PMBS Servicer (if other than
the PMBS Issuer) and the PMBS Trustee for such Private Mortgage-Backed
Securities, (viii) certain characteristics of credit support, if any,
such as reserve funds, insurance policies, surety bonds, letters of
credit or guaranties relating to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or to such Private Mortgage-Backed
Securities themselves, (ix) the term on which the underlying
Mortgage Loans for such Private Mortgage-Backed Securities may, or
are required to, be purchased prior to their stated maturity or the
stated maturity of the Private Mortgage-Backed Securities and (x) the
terms on which Mortgage Loans may be substituted for those
originally underlying the Private Mortgage-Backed Securities.
Substitution of Mortgage Assets
Substitution of Mortgage Assets will be permitted in the
event of breaches of representations and warranties with respect to any
original Mortgage Asset or in the event the documentation with respect
to any Mortgage Asset 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 Assets may be
substituted for Mortgage Assets initially included in the Trust Fund.
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 Assets 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 Assets until
the sale of the Certificates and other expenses connected with pooling
the related Mortgage Assets 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
Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
THE DEPOSITOR
First Union Residential Securitization Transactions,
Inc. (the "Depositor") was incorporated in the State of North
Carolina on February 27, 1996, as a wholly-owned, limited purpose
subsidiary of First Union National Bank of North Carolina, a national
banking association (a subsidiary of First Union Corporation, a North
Carolina corporation). The Depositor maintains its principal executive
office at 301 South College Street, Charlotte, North Carolina 28202-0600.
Its telephone number is (704) 383-3624.
As described herein under "Mortgage Loan Program----
Representations by Sellers; Repurchases," the only obligations, if
any, of the Depositor with respect to a Series of Certificates may
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.
As specified in the related Prospectus Supplement, the Master
Servicer with respect to any Series of Certificates evidencing
interests in Mortgage Loans may be an affiliate of the Depositor. As
described under "The Trust Fund----The Mortgage Loans----
General," "----Agency Securities" and "----Private Mortgage-Backed
27
Securities," the Depositor anticipates that it will acquire Mortgage
Loans, Agency Securities and Private Mortgage-Backed Securities in the
open market or in privately negotiated transactions, which may be
through or from an affiliate.
Neither the Depositor nor First Union Corporation nor
any of its affiliates, including First Union Capital Markets Corp. and
First Union National Bank of North Carolina, will insure or guarantee
the Certificates of any Series.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor,
either directly or through affiliates, from one or more Sellers,
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." See the Prospectus Supplement for each Series of
Certificates for a more detailed description of the mortgage loan
program of the Sellers.
Underwriting Standards
Unless otherwise specified in the related Prospectus
Supplement, each Seller will represent and warrant that all Mortgage
Loans originated or acquired by it and sold to the Depositor will have
been underwritten in accordance with standards consistent with those
utilized by mortgage lenders generally during the period of
origination for similar types of loans. As to any Mortgage Loan
insured by the FHA or partially guaranteed by the VA, the Seller will
represent that it has complied with underwriting policies of the FHA
or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a
lender to evaluate the borrower's credit standing and repayment ability,
and the value and adequacy of the Mortgaged Property as collateral.
In general, a prospective borrower applying for a Mortgage Loan is
required to fill out a detailed application designed to provide to
the underwriting officer pertinent credit information. As part of
the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the
borrower's credit history. 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. In the case of Home Equity Loans, a pay stub is required
of the borrower and either independent employment verification, tax
returns or verbal confirmation of employment is obtained.
Self-employed applicants typically submit the last two years'
employment history and business tax returns. Upon receipt of the
application package, a Seller 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 Seller 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 generally is
required to submit the prior year's mortgage statements which generally
reflect a monthly payment history. In the case of those Home Equity
Loans which are subordinate to a first lien mortgage loan, the
Seller also obtains one of the following: (i) a credit report covering
the preceding twelve months, (ii) written or verbal verification of
the applicant's first mortgage balance, if any, (iii) written
confirmation from a first mortgagee, if any, of the prospective
borrower's most recent twelve-month payment history, (iv) canceled
mortgage payment checks for the preceding twelve months, (v) a
combination of items from clauses (i) through (iv) above that
establish a payment history on the first mortgage for the prior twelve
months, or (vi) if the first mortgage is privately held, twelve
cancelled payment checks and a copy of the executed first mortgage note.
In determining the adequacy of the Mortgaged Property as
collateral, an appraisal is made of each property considered for
financing (except in the case of low balance Home Equity Loans). The
appraiser is required to inspect the property and verify that it is in
good repair and that construction, if new, has been completed. The
appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and
the cost of replacing the home.
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Once all applicable employment, credit and property
information is received, a determination generally is made as to
whether the prospective borrower has sufficient monthly income
available (i) to meet the borrower's monthly obligations on the
proposed mortgage loan, and on any senior mortgage loan, in the case
of a proposed Home Equity Loan (generally determined on the basis of
the monthly payments due in the year of origination), and other
expenses related to the Mortgaged Property (such as property taxes
and hazard insurance) and (ii) to meet monthly housing expenses and
other financial obligations and monthly living expenses. In connection
with the origination of a Mortgage Loan, the Seller evaluates each
obligor's credit quality and assigns a credit grade of A, B, C or D to
each such borrower. Certain credit grades may have sub-grades. The
obligors of Home Equity Loans have generally been assigned credit grades
of A2 or lower. Mortgage Loans other than Home Equity Loans
generally have a credit grade of A. The underwriting standards
applied by Sellers, particularly with respect to the level of loan
documentation and the mortgagor's income and credit history, may be
varied in appropriate cases where factors such as low Loan-to-Value
Ratios or other favorable credit exist.
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 or the District of Columbia. Mortgage
Loans may be secured by leases on real property under guidelines that
a Seller determines in its discretion are acceptable to institutional
mortgage investors. 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 form of insurance
acceptable to the Federal National Mortgage Association ("FNMA") or
the Federal Home Loan Mortgage Corporation ("FHLMC"), 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 Mortgage Loans subject to temporary 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
29
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.
Qualifications of Sellers
Unless otherwise specified in the related Prospectus
Supplement, each Seller will be required to satisfy the qualifications
set forth herein. Each Seller must be an institution experienced in
originating and servicing 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 and service those Mortgage Loans. Each Seller must be a
seller/servicer approved by either FNMA or FHLMC. Each Seller
must be a mortgagee approved by the FHA or an institution the deposit
accounts in which are insured by the Federal Deposit Insurance
Corporation (the "FDIC").
Representations by Sellers; Repurchases
Each Seller will have made representations and warranties in
respect of the Mortgage Loans sold by such Seller and evidenced
by a Series of Certificates. Such representations and warranties
unless otherwise provided in the related Prospectus Supplement
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) 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 Seller, such property is
free of material damage and is in good repair, (vi) as of the date of
such transfer, no Mortgage Loan is more than 30 days delinquent in
payment and there are no delinquent tax or assessment liens against the
related Mortgaged Property, 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.
If so specified in the related Prospectus Supplement,
the representations and warranties of a Seller in respect of a Mortgage
Loan will be made not as of the Cut-off Date but as of the date on which
such Seller sold the Mortgage Loan to the Depositor or one of its
affiliates. Under such circumstances, a substantial period of time
may have elapsed between such date and the date of initial issuance of
the Series of Certificates evidencing an interest in such Mortgage
Loan. Since the representations and warranties of a Seller do not
address events that may occur following the sale of a Mortgage Loan by
such Seller, its repurchase obligation described below will not arise if
the relevant event that would otherwise have given rise to such an
obligation with respect to a Mortgage Loan occurs after the date of
sale of such Mortgage Loan by such Seller to the Depositor or its
affiliates. If the Master Servicer is also a Seller of Mortgage Loans
with respect to a particular Series, such representations will be in
addition to the representations and warranties made by the Master
Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer
is the Seller, will promptly notify the relevant Seller of any
breach of any representation or warranty made by it in respect of
a Mortgage Loan which materially and adversely affects the interests
of the Certificateholders in such Mortgage Loan. Unless otherwise
specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days after notice from the Master Servicer
or the Trustee, as the case may be, then such Seller will be obligated
to repurchase such Mortgage Loan
30
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 to the first day of the month in which the
Purchase Price is to be distributed at the Mortgage Rate (less any
unreimbursed Advances or amount payable as related servicing
compensation if the Seller is the Master Servicer with respect to such
Mortgage Loan). If a REMIC election is to be made with respect to a
Trust Fund, unless otherwise provided in the related Prospectus
Supplement, holders of Subordinated Certificates or a holder of the
related residual certificate will be obligated to pay any
prohibited transaction tax which may arise in connection with
any such repurchase. If the Master Servicer advances any such
payment, it will be entitled to reimbursement from the assets of the
related Trust Fund or from any holder of the related residual
certificate, unless otherwise specified in the related Prospectus
Supplement. See "Description of the Certificates---- General."
Except in those cases in which the Master Servicer is the Seller, the
Master Servicer will be required under the applicable Agreement to
enforce this obligation for the benefit of the Trustee and the holders
of the Certificates, following the practices it would employ in its
good faith business judgment were it the owner of such Mortgage Loan.
This repurchase obligation will constitute the sole remedy available
to holders of Certificates or the Trustee for a breach of representation
by a Seller.
Neither the Depositor nor the Master Servicer (unless
the Master Servicer is the Seller) will be obligated to purchase a
Mortgage Loan if a Seller defaults on its obligation to do so, and no
assurance can be given that Sellers will carry out their respective
repurchase obligations with respect to Mortgage Loans. See "The Trust
Fund----Substitution of Mortgage Assets."
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an
Agreement, dated as of the related Cut-off Date, among the Depositor,
the Master Servicer and the Trustee for the benefit of the holders
of the Certificates of such Series. The provisions of each Agreement
will vary depending upon the nature of the Certificates to be issued
thereunder and the nature of the related Trust Fund. Forms of
Agreements are exhibits to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain
provisions that may appear in each Agreement. The Prospectus
Supplement for a Series of Certificates will describe any provision
of the Agreement relating to such Series that materially differs from
the description thereof contained in this Prospectus. The summaries
do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all of the provisions of the
Agreement for each Series of Certificates and the applicable
Prospectus Supplement. The Depositor will provide a copy of the
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 First Union Residential Securitization Transactions,
Inc., 301 South College Street, Charlotte, North Carolina 28202-0600.
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 Supplement, will evidence
specified beneficial ownership interests in the related Trust Fund
created pursuant to each 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 or any affiliate of the Depositor. 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 Agreement, (i) the Mortgage Assets, that from time to
time are subject to the related 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 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 Assets, a
reserve fund, a mortgage pool insurance policy,
31
a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a surety bond, guaranties 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
Assets 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 Assets 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.
Unless otherwise 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. Distributions will be made to the persons 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.
Under current law the purchase and holding by or on
behalf of any employee benefit plan or other retirement arrangement
(including individual retirement accounts and annuities, Keogh plans
and collective investment funds in which such plans, accounts or
arrangements are invested) subject to provisions of ERISA or the
Code of a class of Certificates entitled only to a specified
percentage of payments of either interest or principal or a notional
amount of either interest or principal on the related Mortgage Loans or
a class of Certificates entitled to receive payments of interest and
principal on the Mortgage Loans only after payments to other classes
or after the occurrence of certain specified events may result in
"prohibited transactions" within the meaning of ERISA and the Code.
See "ERISA Considerations." Unless otherwise specified in the
related Prospectus Supplement, transfer of Certificates of such a class
will not be registered unless the transferee (i) represents that it is
not, and is not purchasing on behalf of, any such plan, account
or arrangement or (ii) provides an opinion of counsel satisfactory to
the Trustee and the Depositor that the purchase of Certificates of
such a class by or on behalf of such plan, account or arrangement is
permissible under applicable law and will not subject the Trustee, the
Master Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreement.
As to each Series, an election may be made to treat the
related Trust Fund or designated portions thereof as one or more
"real estate mortgage investment conduits" (each, a "REMIC") as
defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement
for a
32
Series may provide that a REMIC election may be made at the discretion
of the Depositor or the Seller and may be made only if certain
conditions are satisfied. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any
material federal income tax consequences to Certificateholders not
otherwise described herein, will be set forth in the related
Prospectus Supplement. If such an election is made with respect to a
Series, one of the classes will be designated as evidencing the sole
class of " residual interests" in the related REMIC, as defined in the
Code. All other classes of Certificates in such a Series will
constitute "regular interests" in the related REMIC, as defined in the
Code. As to each Series with respect to which a REMIC election is to be
made, holders of Subordinated Certificates or a holder of the related
residual certificate will be obligated to take all actions required
in order to comply with applicable laws and regulations and will be
obligated to pay any prohibited transaction taxes. The Master
Servicer, unless otherwise specified in the related Prospectus
Supplement, will be entitled to reimbursement for any such payment
from the assets of the Trust Fund or from any holder of the related
residual certificate.
Unless otherwise specified in the related Prospectus
Supplement, upon the conversion of such Mortgage Loan from an
adjustable interest rate to a fixed interest rate, the Seller or its
successor will be obligated to purchase such related Mortgage Loan from
the related Trust Fund.
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. Unless otherwise
specified in the related Prospectus Supplement, distributions to any
class of Certificates will be made pro rata to all Certificateholders of
that class.
Available Distribution Amount. Unless otherwise specified
in the related Prospectus Supplement, 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 Agreement. Unless otherwise provided in the
related Prospectus Supplement, 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 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 and all other
proceeds of any Mortgage Loan purchased by the Depositor,
any Sub-Servicer or any Seller pursuant to the Agreement
that were received after the prepayment period specified
in the related Prospectus
33
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 (including the related Sub-Servicers);
(e) amounts representing reimbursement, to
the extent permitted by the Agreement and as described under
"Advances" below, for advances made by the Master Servicer
or Sub-Servicers 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 any
Sub-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;
(ii) the amount of any advance made by the
Master Servicer or Sub-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. Unless otherwise specified in the
related Prospectus Supplement, 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) 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 original
Certificate Balance of each Certificate will equal the aggregate
distributions allocable to principal to which such Certificate is
entitled. Unless otherwise specified in the related Prospectus
Supplement, 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. 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. Unless otherwise specified in the related Prospectus
Supplement, distributions of interest on each class of Accrual
Certificates will commence only after the occurrence of the events
specified in such Prospectus Supplement. Unless otherwise
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
34
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. Unless otherwise specified in the
related Prospectus Supplement, 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,
if so specified in the related Prospectus Supplement, 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. 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 principal balance 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 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 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 Assets, 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. Unless
otherwise specified in the related Prospectus Supplement, 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. Unless otherwise 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. See "Yield
and Prepayment Considerations."
Unless otherwise specified in the related Prospectus
Supplement, 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.
Notice of any unscheduled distribution will be given by the
Trustee prior to the date of such distribution.
Advances
Generally, the Master Servicer will be required to advance on
or before each Distribution Date (from its own funds, funds advanced
by Sub-Servicers or funds held in the Collection Account for future
distributions to the holders of such Certificates), an amount 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
35
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. 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 by the Master Servicer. Funds so
advanced are reimbursable to the Master Servicer to the extent
permitted by the related Agreement. The Master Servicer's obligation to
make Advances will not guarantee or insure against losses to holders
of the Certificates.
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
36
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 Centrale de Livraison de Valeurs Mobilieres S.A.
("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 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 (each, a "beneficial owner") 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
37
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 "Certain Federal Income
Tax Consequences---- Non-U.S. Persons" and "----Information Reporting
and Backup Withholding" herein and "Global Clearance, Settlement
and Tax Documentation Procedures----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 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
38
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 "Cooperative"). All operations
are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York
banking corporation which is a member bank of the Federal Reserve
System. As such, it is regulated and examined by the Board of Governors
of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the
Euroclear Operator are governed by the Terms and Conditions Governing
Use of Euroclear and the related Operating Procedures of the Euroclear
System and applicable Belgian law (collectively, the "Terms and
Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from
Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis
without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no
record of or relationship with persons holding through Euroclear
Participants.
Distributions 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
"Certain Federal Income Tax Consequences----Non-U.S. Persons" and
"----Information Reporting and Backup Withholding" herein. 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 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
39
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) after the occurrence of an
Event of Default (as defined in the related Prospectus Supplement),
beneficial owners having Percentage Interests aggregating not less
than 50% of the aggregate Current Principal Amount of such Book-Entry
Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC Participants in writing that the
continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the
immediately preceding paragraph, the Trustee for such a Series will
be required to notify all beneficial owners of the occurrence of
such event and the 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
Assets 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, or any combination of the foregoing.
Unless otherwise specified in the related Prospectus Supplement, any
credit enhancement will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance
of the Certificates and interest thereon. If losses occur which
exceed the amount covered by credit enhancement or which are not
covered by the credit enhancement, Certificateholders will bear their
allocable share of deficiencies.
Subordination
If so 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 accomplished by the preferential right
of holders of one or more other classes of such Series (the "Senior
40
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 (" 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 below, cover loss by reason of
default in payment on Mortgage Loans in the Mortgage Pool in an amount
equal to a percentage specified in such Prospectus Supplement of the
aggregate principal balance of such Mortgage Loans on the Cut-off Date
which are not covered as to their entire outstanding principal
balances by Primary Mortgage Insurance Policies. As more fully
described below, the Master Servicer will present claims thereunder to
the Pool Insurer on behalf of itself, the Trustee and the holders of
the Certificates. The Mortgage Pool Insurance Policies, however,
are not blanket policies against loss, since claims thereunder
may be made only respecting particular defaulted Mortgage Loans
and only upon satisfaction of certain conditions precedent described
below. Unless otherwise specified in the related Prospectus Supplement,
the Mortgage Pool Insurance Policies will not cover losses due to a
failure to pay or denial of a claim under a Primary Mortgage Insurance
Policy.
41
Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Pool Insurance Policy will provide that
no claims may be validly presented unless (i) any required Primary
Mortgage Insurance Policy is in effect for the defaulted Mortgage Loan
and a claim thereunder has been submitted and settled; (ii) hazard
insurance on the related Mortgaged Property has been kept in force and
real estate taxes and other protection and preservation expenses have
been paid; (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its physical condition
(reasonable wear and tear excepted) at the time of issuance of the
policy; and (iv) the insured has acquired good and merchantable title
to the Mortgaged Property free and clear of liens except certain
permitted encumbrances. Upon satisfaction of these conditions, the
Pool Insurer will have the option either (a) to purchase the property
securing the defaulted Mortgage Loan at a price equal to the principal
balance thereof plus accrued and unpaid interest at the Mortgage
Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Certificateholders or (b)
to pay the amount by which the sum of the principal balance of the
defaulted Mortgage Loan plus accrued and unpaid interest at the
Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved
sale of the Mortgaged Property, in either case net of certain amounts
paid or assumed to have been paid under the related Primary Mortgage
Insurance Policy. If any property securing a defaulted Mortgage Loan
is damaged and proceeds, if any, from the related hazard insurance
policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged property to a condition sufficient
to permit recovery under the Mortgage Pool Insurance Policy, the
Master Servicer will not be required to expend its own funds to
restore the damaged property unless it determines that (i) 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) such expenses will be recoverable
by it through proceeds of the sale of the property or proceeds of
the related Mortgage Pool Insurance Policy or any related Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus
Supplement, no Mortgage Pool Insurance Policy will insure (and many
Primary Mortgage Insurance Policies do not insure) against loss
sustained by reason of a default arising from, among other things,
(i) fraud or negligence in the origination or servicing of a
Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof or (ii)
failure to construct a Mortgaged Property in accordance with plans and
specifications. A failure of coverage attributable to one of the
foregoing events might result in a breach of the related Seller's
representations described above and, in such event, might give rise to
an obligation on the part of such Seller to purchase the defaulted
Mortgage Loan if the breach cannot be cured by such Seller. No
Mortgage Pool Insurance Policy will cover (and many Primary Mortgage
Insurance Policies do not cover) a claim in respect of a defaulted
Mortgage Loan occurring when the servicer of such Mortgage Loan, at the
time of default or thereafter, was not approved by the applicable
insurer.
Unless otherwise specified in the related Prospectus
Supplement, the original amount of coverage under each Mortgage Pool
Insurance Policy will be reduced over the life of the related
Certificates by the aggregate dollar amount of claims paid less the
aggregate of the net amounts realized by the Pool Insurer upon
disposition of all foreclosed properties. The amount of claims paid will
include certain expenses incurred by the Master Servicer as well as
accrued interest on delinquent Mortgage Loans to the date of payment
of the claim, unless otherwise specified in the related Prospectus
Supplement. Accordingly, if aggregate net claims paid under any
Mortgage Pool Insurance Policy reach the original policy limit,
coverage under that Mortgage Pool Insurance Policy will be exhausted
and any further losses will be borne by the Certificateholders.
Special Hazard Insurance Policies
If specified in the related Prospectus Supplement, a separate
Special Hazard Insurance Policy will be obtained for the Mortgage
Pool and will be issued by the insurer (the "Special Hazard Insurer")
named in such Prospectus Supplement. Each Special Hazard Insurance
Policy will, subject to limitations described below, 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
42
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 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 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.
Subject to the foregoing limitations, and unless otherwise
specified in the related Prospectus Supplement, each Special Hazard
Insurance Policy will provide that where there has been damage to
property securing a foreclosed Mortgage Loan (title to which has
been acquired by the insured) and to the extent such damage is not
covered by the hazard insurance policy or flood insurance policy,
if any, maintained by the Mortgagor or the Master Servicer, the Special
Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property
to the Special Hazard Insurer, the unpaid principal balance of such
Mortgage Loan at the time of acquisition of such property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the
Master Servicer with respect to such property. If the unpaid principal
balance of a Mortgage Loan plus accrued interest and certain expenses
is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by
such amount less any net proceeds from the sale of the property. Any
amount paid as the cost of repair of the property will further reduce
coverage by such amount. So long as a Mortgage Pool Insurance Policy
remains in effect, the payment by the Special Hazard Insurer of the
cost of repair or of the unpaid principal balance of the related
Mortgage Loan plus accrued interest and certain expenses will not affect
the total insurance proceeds paid to Certificateholders, but will
affect the relative amounts of coverage remaining under the related
Special Hazard Insurance Policy and Mortgage Pool Insurance Policy.
To the extent and in the manner specified in an applicable
Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to
each nationally recognized rating agency rating the Certificates of
the related Series in a special trust account to provide protection in
lieu of or in addition to that provided by a Special Hazard Insurance
Policy. The amount of any Special Hazard Insurance Policy or of the
deposit to the special trust account relating to such Certificates in
lieu thereof may be reduced so long as any such reduction will not
result in a downgrading of the rating of such Certificates by any such
rating agency.
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 cancelled 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 and Other Limitations on Lenders."
To the extent specified in an applicable Prospectus
Supplement, the Seller may deposit cash, an irrevocable letter of
credit or any other instrument acceptable to each nationally recognized
rating agency rating the Certificates of the related Series in a
special trust account to provide protection in lieu of or in addition
to that provided by a Bankruptcy Bond. The amount of any Bankruptcy
Bond or of the deposit to the special trust account relating to such
43
Certificates in lieu thereof may be reduced so long as any such
reduction will not result in a downgrading of the rating of such
Certificates by any such rating agency.
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.
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 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 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.
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Letter of Credit
Alternative credit support with respect to a Series of
Certificates may be provided by the issuance of a Letter of Credit
by the bank or financial institution specified in the applicable
Prospectus Supplement. The coverage, amount and frequency of any
reduction in coverage provided by a Letter of Credit issued with respect
to a Series of Certificates will be set forth in the 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 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 Assets, including any Subsequent
Mortgage Assets, exceeds the aggregate Certificate Balance of the
Certificates. Such overcollateralization may exist on the Closing Date
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
Assets, including any Subsequent Mortgage Assets. 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 Assets
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. Unless otherwise
specified in the related Prospectus Supplement, Mortgage Loans may be
prepaid without penalty in full or in part at any time. 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. Unless otherwise provided
in the related Prospectus Supplement, 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 Agreement----Collection Procedures" and "Certain Legal
Aspects of the Mortgage Loans" for a description of certain provisions
of each Agreement and certain legal developments that may affect the
prepayment experience on the Mortgage Loans.
45
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. Unless otherwise 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. Unless otherwise specified in the related Prospectus
Supplement, both full and partial prepayments will not be passed
through until the month following receipt.
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 (unless otherwise
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 or the
holder(s) of the residual interest(s) in a REMIC 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 Seller 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, a Seller 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 Assets 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
Agreement which are not described elsewhere in this Prospectus.
Where particular provisions or terms used in the Agreements are
referred to, such provisions or terms are as specified in the
Agreements.
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Assignment of Mortgage Assets
Assignment of the 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
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.
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 Agreement. Unless
otherwise specified in the related Prospectus Supplement, the
Depositor will 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.
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 the time period
specified in the related Prospectus Supplement 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, and the
Master Servicer will notify the related Seller. If the Seller cannot
cure the omission or defect within the time period specified in the
related Prospectus Supplement after receipt of such notice, the
Seller 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 a Seller 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 by Sellers; Repurchases," neither the Master
Servicer nor the Depositor will be obligated to purchase such Mortgage
Loan if the Seller defaults on its purchase obligation, unless such
breach also constitutes a breach of the representations or
warranties of the Seller or the Depositor, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, this
purchase
47
obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect
in, a constituent document.
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 an 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.
Assignment of Agency Securities. The Depositor will cause
the Agency Securities to be registered in the name of the Trustee or
its nominee, and the Trustee concurrently will execute, countersign
and deliver the Certificates. Each Agency Security will be identified
in a schedule appearing as an exhibit to the Agreement, which will
specify as to each Agency Security the original principal amount and
outstanding principal balance as of the Cut-off Date, the annual
pass-through rate (if any) and the maturity date.
Assignment of Private Mortgage-Backed Securities. The
Depositor will cause Private Mortgage-Backed Securities to be
registered in the name of the Trustee. The Trustee (or the custodian)
will have possession of any certificated Private Mortgage-Backed
Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of
record of any underlying assets for a Private Mortgage-Backed
Security. See "The Trust Fund---- Private Mortgage-Backed Securities"
herein. Each Private Mortgage-Backed Security will be identified in
a schedule appearing as an exhibit to the related Agreement which
will specify the original principal amount, outstanding principal
balance as of the Cut-off Date, annual pass-through rate or
interest rate and maturity date and certain other pertinent information
for each Private Mortgage-Backed Security conveyed to the Trustee.
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 BIF or SAIF, (iii) an account or accounts the deposits in
which are insured by the BIF or SAIF (to the limits established by the
FDIC), 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 FUNB
so long as it maintains a long-term unsecured rating of at least A by
Standard & Poor's Ratings Group and A2 by Moody's Investor's Service,
Inc., and a short-term rating of at least A-1 by Standard & Poor's
Ratings Group and P-1 by Moody's Investor's Service, Inc. Investments
in which amounts in the Collection Account may be invested are limited
to United States government securities and other high-quality
investments ("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. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer or its designee will be
entitled to receive any such interest or other income earned on funds
in the Collection Account as additional compensation and will be
obligated to deposit in the Collection Account the amount of any loss
immediately as realized. The Collection Account may be
48
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,
to the extent applicable and unless otherwise specified in the related
Prospectus Supplement and provided in the Agreement, 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):
(i) all payments on account of principal,
including Principal Prepayments and, if specified in the
related Prospectus Supplement, prepayment penalties, on the
Mortgage Loans;
(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 or
any Sub-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 or any Sub-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 any Seller as
described under "Mortgage Loan Program----Representations
by Sellers; Repurchases" or "----Assignment of Mortgage
Assets" 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 Agreement.
The Master Servicer (or the Depositor, as applicable) may from
time to time direct the institution which maintains the Collection
Account, unless otherwise specified in the related Prospectus
Supplement, to withdraw funds from the Collection Account for the
following purposes:
(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;
49
(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
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 Agreement;
(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 Agreement.
In addition, unless otherwise specified in the related
Prospectus Supplement, on or prior to the Business Day
immediately preceding each Distribution Date, 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.
Pre-Funding Account
If so specified in the Prospectus Supplement, the related
Agreement may provide for the transfer by the Depositor of additional
Mortgage Assets (the "Subsequent Mortgage Assets") to the related
Trust Fund after the Closing Date for the related Certificates. Such
Subsequent Mortgage Assets 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 Assets are transferred to the Trust Fund. The related
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, directly or through one or more
Sub-Servicers, 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 Guaranty Policy 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
50
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 . Such schedules for liquidation of
delinquencies for Mortgage Loans other than Home Equity Loans generally
do not exceed 180 days. 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 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 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.
51
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 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. The Master Servicer will
maintain or cause to be maintained, as the case may be, in full force
and effect, to the extent specified in the related Prospectus
Supplement, a Primary Mortgage Insurance Policy with regard to each
Mortgage Loan for which such coverage is required. 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 Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled 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 Servicer not being approved
as a servicer by the Primary Insurer.
52
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 (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
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
53
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 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 FHA will be insured
by the FHA as authorized under the United States Housing Act of
1937, as amended. 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 or any Sub-Servicers
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 or any
Sub-Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Master Servicer
or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-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 or any
Sub-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
or any Sub-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 or any Sub-Servicer may initiate
foreclosure proceedings.
54
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 or Sub-Servicer for
certain costs and expenses and to deduct certain amounts received or
retained by the Master Servicer or Sub-Servicer after default. When
entitlement to insurance benefits results from foreclosure (or other
acquisition of possession) and conveyance to HUD, the Master Servicer
or Sub-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 VA will be partially guaranteed
by the VA under the Serviceman's Readjustment Act of 1944, as
amended (a "VA Guaranty Policy"). 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 or Sub-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 master servicing 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 Trust Fund (the "Master
Servicing Fee"). Unless otherwise specified in the related Prospectus
Supplement, as compensation for its servicing duties, the Master
Servicer will be entitled to a monthly servicing fee as described
55
in the related Prospectus Supplement. In addition, the Master Servicer
or a Sub-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 be
responsible for the payment of any fees owing to any Sub-Servicer.
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 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
Sub-Servicers and Sellers. 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 Agreement will provide that on or before a specified date
in each year, the Master Servicer will cause a firm of independent
public accountants to 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 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 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 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
The Master Servicer under each Agreement will be named in the
related Prospectus Supplement. An entity serving as Master Servicer or
Sub-Servicer may have normal business relationships with the
Depositor or the Depositor's affiliates.
Each 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 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 Agreement.
Each 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
56
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
Agreement. Each Agreement will further provide that the Master
Servicer, the Depositor 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 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 Agreement) and any loss, liability or
expense incurred by reason of any breach of the terms and conditions of
the Agreement. In addition, each 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 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
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.
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 Agreement. In
addition, the Master Servicer may assign its rights, and delegate its
duties, pursuant to the terms of the Agreement.
Events of Default
Unless otherwise specified in the related Prospectus
Supplement, Events of Default under each 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 the related Trust Fund
(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 25% of the related Trust Fund (based on the outstanding principal
balances of the Certificates); and (iv) certain events of insolvency,
readjustment of debt, marshalling 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.
If specified in the related Prospectus Supplement, the
Agreement will permit the Trustee to sell the Mortgage Assets 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 an Agreement remains
unremedied, the Trustee may, and at the direction of holders of
Certificates having not less than 25% 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 Agreement, the
Trustee shall, terminate all of the rights and obligations of the
Master Servicer under the 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 Agreement, including, if specified in the related
Prospectus Supplement, the obligation to make advances, and will be
entitled to similar compensation arrangements. In the
57
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
$10,000,000 to act as successor to the Master Servicer under the
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
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 25% 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 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 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
Agreement, an 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 the then current rating on the class or classes of Certificates
of such Series that have been rated. In addition, if a REMIC election
is made with respect to a Trust Fund, the related 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, 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 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 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 Agreement then outstanding. If a REMIC election is
made with respect to a Trust Fund, the Trustee will not be entitled
to consent to an amendment to the related 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.
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Termination; Optional Termination
Unless otherwise specified in the related Agreement, the
obligations created by each 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
and required to be paid to them pursuant to such Agreement following
the later of (i) the final payment or other liquidation of the last
of the Mortgage Assets subject thereto or the disposition of all
property acquired upon foreclosure of any such Mortgage Assets
remaining in the Trust Fund and (ii) the purchase by the Master
Servicer, the Depositor or, if REMIC treatment has been elected and
if specified in the related Prospectus Supplement, by the holder of
the residual interest in the REMIC (see "Certain Federal Income Tax
Consequences" below), from the related Trust Fund of all of the
remaining Mortgage Assets and all property acquired in respect of such
Mortgage Assets.
Unless otherwise specified in the related Prospectus
Supplement, any such purchase of Mortgage Assets and property
acquired in respect of Mortgage Assets evidenced by a Series of
Certificates will be made at the option of the Master Servicer, the
Depositor or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified
in the related Prospectus Supplement. The exercise of such right
will effect early retirement of the Certificates of that Series, but the
right of the Master Servicer, the Depositor or, if applicable, such
holder of the REMIC residual interest, to so purchase is subject to the
principal balance of the related Mortgage Assets being less than the
percentage specified in the related Prospectus Supplement of the
aggregate principal balance of the Mortgage Assets at the Cut-off Date
for the Series. The foregoing is subject to the provision that if a
REMIC election is made with respect to a Trust Fund, any repurchase
pursuant to clause (ii) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section
860F(g)(4) of the Code.
The Trustee
The Trustee under each 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 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
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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
Violations of certain provisions of these federal laws may
limit the ability of the Master Servicer to collect all or part of the
principal of or interest on the Mortgage Loans and in addition could
subject the Trust Fund to damages and administrative enforcement. 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. The Act also provides that any purchaser
or assignee of a mortgage covered by the 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 under the
Act from an assignee is the remaining amount of indebtedness plus
the total amount paid by the borrower in connection with the mortgage
loan. If the Trust Fund includes Mortgage Loans subject to the Act, it
will be subject to all of the claims and defenses which the borrower
could assert against a Seller. Any violation of the Act which would
result in such liability would be a breach of such Seller's
representations and warranties, and such Seller would be obligated
to cure, repurchase or, if permitted by the 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 loans secured by liens encumbering
owner-occupied residential properties. Since many of the Mortgaged
Properties will be owner-occupied, it is anticipated that 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
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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. See "Certain Legal Aspects of the Mortgage Loans" herein.
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 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.
100034.01340
FUNB/FURST
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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.
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, which are generally designed to mitigate the legal
consequences to the borrower of the borrower's defaults under the loan
documents. 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.
Home Equity Loans. Since the Mortgages securing Home Equity
Loans are often 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
62
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
cancelled 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.
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 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 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
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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.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that
limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states, including California, statutes
limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or
sale under a deed of trust. A deficiency judgment is a personal judgment
against the borrower equal in most cases to the difference between the
amount due to the lender and the purchase price offered or paid for the
property at the time of the foreclosure sale. As a result of
these prohibitions, it is anticipated that in most instances the Master
Servicer will utilize the non-judicial foreclosure remedy and will
not seek deficiency judgments against defaulting Mortgagors. In
some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower; for example, in the
event of waste of the property.
Some state statutes may require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the
borrower on the debt without first exhausting such security; however,
in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may
be precluded from exercising remedies with respect to the security.
Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the
security rather than bringing a personal action against the borrower.
In addition to anti-deficiency and related legislation,
numerous other federal and state statutory provisions, including the
federal bankruptcy laws, the federal Soldiers' and Sailors' Civil
Relief Act of 1940 and state laws affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender
to realize upon its security. For example, in a proceeding under
the federal Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide,
if the Mortgaged Property is not the debtor's principal residence and
the court determines that the value of the Mortgaged Property is less
than the principal balance of the mortgage loan, for the reduction of
the secured indebtedness to the value of the Mortgaged Property as of
the date of the commencement of the bankruptcy, rendering the
lender a general unsecured creditor for the difference, and also may
reduce the monthly payments due under such mortgage loan, change the
rate of interest and alter the mortgage loan repayment schedule. The
effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in
delays in receiving payments on the Mortgage Loans underlying a
Series of Certificates and possible reductions in the aggregate
amount of such payments.
The Mortgage Loans are also subject to federal laws, including:
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(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.
Generally, Article 9 of the UCC governs foreclosure on
Cooperative shares and the related proprietary lease or occupancy
agreement. 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 Cooperative Loan,
would be the shares of the Cooperative and the related proprietary
lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Environmental Risks
Real property pledged as security to a lender may be
subject to unforeseen environmental risks. Under the laws of certain
states, contamination of a property may give rise to a lien on the
property to assure the payment of the costs of clean-up. In several
states such a lien has priority over the lien of an existing mortgage
against such property. In addition, under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA")
may impose a lien on property where EPA has incurred clean-up costs.
However, a CERCLA lien is subordinate to pre-existing, perfected
security interests.
Under the laws of some states, and under CERCLA, it is
conceivable that a lender may be held liable, as an "owner" or
"operator," for costs of addressing releases or threatened
releases of hazardous substances at a Mortgaged Property,
regardless of whether or not the environmental damage or threat was
caused by a prior owner or operator. CERCLA imposes liability on any
and all "responsible parties" (which includes, inter alia, the
property owner and operator) for the cost of clean-up of releases of
hazardous substances. However, CERCLA excludes from the definition
of "owner or operator" secured creditors who hold indicia of ownership
for the purpose of protecting their security interest, but "without
participating in the management of the facility." That exclusion
was substantially narrowed by a May 1990 decision of the United States
Court of Appeals for the Eleventh Circuit in United States v. Fleet
Factors Corp., which held 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 management in order to be
liable; rather, liability could attach to the lender if its
involvement with the management of the facility is broad enough to
support the inference that the lender could affect hazardous waste
management practices if it so chose. 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.
In response to Fleet Factors, EPA promulgated regulations designed to
clarify the range of activities a lender may engage in without losing
the benefit of the statutory exclusion. Under the regulations, which
took effect in April 1992, a lender is permitted to monitor the
borrower's environmental practices in order to determine if the
facility is in compliance with applicable law, and to require the
borrower to take measures necessary
65
to achieve or maintain compliance or conduct necessary clean-ups. The
lender may not, however, exercise control over or assume
responsibility for the borrower's environmental practices. Such actions
would be considered "participation in the management of the facility."
Also, if the lender takes title to or possession of the property, it
might be deemed to have obviated the security interest exclusion and
to be liable for clean-up costs pursuant to CERCLA. The EPA
regulations allow lenders to take certain actions with respect to
foreclosure, without losing the benefit of the statutory exclusion.
Essentially, the regulations allow the lender to take actions
consistent with protecting its security interest, but not actions
which demonstrate an intent to exercise long-term ownership interest in
the property. While the EPA regulations offer some protection to
lenders, it must be noted that such protection may not be available
under applicable state law. Furthermore, the regulations are
binding only on EPA with respect to EPA's enforcement powers and cost
recovery rights. It has not yet been determined whether the federal
courts will apply the regulations in cost recovery actions brought
against lenders by other responsible parties, although the regulations
may well be considered persuasive by the courts. (Two judicial
challenges have been brought against the EPA regulations in the United
States Court of Appeals for the District of Columbia Circuit. The
challenges both allege that the regulations are inconsistent with the
statutory requirements of CERCLA and, therefore, should be
invalidated. The challenges were filed on July 28, 1992, and are still
pending.) If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a
previous owner or operator, who created the environmental hazard, but
those persons or entities may be bankrupt or otherwise judgment proof.
The costs associated with environmental clean-up may be substantial. It
is conceivable that such remedial costs arising from the circumstances
set forth above would become a liability of the Trust Fund and occasion
a loss to Certificateholders.
Except as otherwise specified in the applicable Prospectus
Supplement, at the time the Mortgage Loans were originated, no
environmental assessment or a very limited environmental assessment of
the Mortgaged Properties was conducted.
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 Act"), subject to certain exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement
of due-on-sale clauses. 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. Since many of the Mortgaged
Properties will be owner-occupied, it is anticipated that 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.
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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.
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. Unless otherwise provided in the
applicable Prospectus Supplement, 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary represents the advice of Petree Stockton, L.L.P.
and Moore & Van Allen, PLLC, counsel to the Depositor, as to the anticipated
material federal income tax consequences of the purchase, ownership and
disposition of Certificates. The summary is based on the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, including, where applicable,
proposed regulations and, in particular, regulations promulgated
under the REMIC provisions of the Code (the "REMIC Regulations"),
judicial and administrative rulings and decisions now in effect , all of
which are subject to change , possibly with retroactive effect. The
summary does not purport to address all aspects of federal income
taxation that may affect particular investors in view of their
individual circumstances, including investors that may be subject to
special treatment under the federal income tax laws, such as banks and
insurance companies. In addition, the discussion is addressed
primarily to investors who will hold Certificates as "capital assets"
within the meaning of Section 1221 of the Code. The tax consequences to
an investor from an investment in Certificates will depend in part on
the status or individual tax circumstances of the investor. Accordingly,
prospective investors are urged to consult their tax advisors regarding
the particular federal, state, local and other tax consequences to
them of the purchase, ownership and disposition of Certificates.
General
The federal income tax consequences to Certificateholders
will vary depending on whether an election is made to treat the Trust
Fund relating to a particular Series of Certificates as a REMIC
under the Code. The Prospectus Supplement for each Series of
Certificates will specify whether a REMIC election will be made.
Non-REMIC Certificates; Tax Status as a Grantor Trust
If a REMIC election is not made for a Trust Fund which
relates to a particular Series of Certificates, Petree Stockton, L.L.P.
or Moore & Van Allen, PLLC will deliver its opinion that the Trust Fund
will not be classified as
67
an association taxable as a corporation, but will be classified as a
grantor trust under subpart E, Part I of subchapter J of the Code,
and that owners of Certificates issued by a particular Trust Fund
will be subject to federal income taxation as owners of their pro rata
share of the Trust Fund's assets . Unless otherwise specified, for
purposes of the discussion below relating to non-REMIC Certificates,
the term "Mortgage Loan" includes Mortgage Loans and mortgages
underlying Agency Securities and other Mortgage Assets owned by a
Trust Fund.
Single Class of Senior Certificates
Characterization. A Trust Fund may be created with one class
of Senior Certificates and one class of Subordinated Certificates. In
such case, each Senior Certificateholder will be treated as the owner
of a pro rata undivided interest in the interest and principal portions
of the Trust Fund represented by that Senior Certificate and will be
considered the equitable owner of a pro rata undivided interest in each
of the assets in the pool. Any amounts received by a Senior
Certificateholder in lieu of amounts due with respect to any Mortgage
Loan because of a default or delinquency in payment will be treated for
federal income tax purposes as having the same character as the payments
they replace.
Each holder of a Senior Certificate will be required to
report on its federal income tax return its pro rata share of the
entire income from the Mortgage Assets in the Trust Fund
represented by that Senior Certificate, including interest, original
issue discount, if any, prepayment fees, assumption fees, any gain
recognized upon an assumption and late payment charges received by the
Master Servicer in accordance with such Senior Certificateholder's
method of accounting. Under Code Section 162 or 212, each Senior
Certificateholder will be entitled to deduct its pro rata share of
servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the Master
Servicer, provided that such amounts are reasonable compensation
for services rendered to the Trust Fund. A Senior Certificateholder that
is an individual, estate or trust will be entitled to deduct its share
of expenses only to the extent such expenses plus all other Code
Section 212 expenses exceed two percent of its adjusted gross
income. A Senior Certificateholder using the cash method of
accounting must take into account its pro rata share of income and
deductions as and when collected by or paid to the Master Servicer. A
Senior Certificateholder using an accrual method of accounting
must take into account its pro rata share of income and deductions as
they become due or are paid to the Master Servicer, whichever is
earlier. If the Servicing Fees paid to the Master Servicer were
deemed to exceed reasonable servicing compensation, the amount of
such excess could be considered as a retained ownership interest
by the Master Servicer (or any person to whom the Master Servicer
assigned for value all or a portion of the Servicing Fees) in a portion
of the interest payments on the Mortgage Loans. The Mortgage Loans may
then be subject to the "coupon stripping" rules of the Code discussed
below.
Unless otherwise specified in the related Prospectus
Supplement, as to each Series of Certificates, Petree Stockton, L.L.P.
or Moore & Van Allen, PLLC will render its opinion that:
(i) a Senior Certificate owned by a "domestic
building and loan association" within the meaning of Code
Section 7701(a)(19) representing principal and interest
payments on Mortgage Loans will be considered to represent
"loans . . . secured by an interest in real property which is .
. . residential property" within the meaning of Code Section
7701(a)(19)(C)(v); to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described
in such Code section;
(ii) a Senior Certificate owned by a
financial institution described in Code Section 593(a)
representing principal and interest payments on Mortgage Loans
will be considered to represent "qualifying real property
loans" within the meaning of Code Section 593(d) and the
Treasury regulations under Code Section 593; to the extent
that the Mortgage Loans represented by that Senior
Certificate are of a type described in such Code section;
(iii) a Senior Certificate owned by a real
estate investment trust representing an interest in Mortgage
Loans will be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(5)(A), and interest
income on the Mortgage Loans will be considered "interest on
obligations secured
68
by mortgages on real property" within the meaning of Code
Section 856(c)(3)(B); to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described
in such Code section; and
(iv) a Senior Certificate owned by a REMIC will
be an "obligation . . . which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3).
Buydown Mortgage Loans. The assets constituting certain Trust
Funds may include Buydown Mortgage Loans. The characterization of
any investment in Buydown Mortgage Loans will depend upon the precise
terms of the related Buydown Agreement, but to the extent that such
Buydown Mortgage Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. There are no directly
applicable precedents with respect to the federal income tax
treatment or the characterization of investments in Buydown Mortgage
Loans. Accordingly, holders of Senior Certificates should consult
their own tax advisors with respect to characterization of investments
in Senior Certificates representing an interest in a Trust Fund that
includes Buydown Mortgage Loans.
Premium. The price paid for a Senior Certificate by a holder
will be allocated to such holder's undivided interest in each
Mortgage Loan based on each Mortgage Loan's relative fair market value,
so that such holder's undivided interest in each Mortgage Loan will
have its own tax basis. A Senior Certificateholder that acquires
an interest in Mortgage Loans at a premium may elect to amortize such
premium under a constant interest method, provided that such Mortgage
Loan was originated after September 27, 1985. Premium allocable to a
Mortgage Loan originated on or before September 27, 1985, should be
allocated among the principal payments on the Mortgage Loan and
allowed as an ordinary deduction as principal payments are made.
Amortizable bond premium will be treated as an offset to interest
income on such Senior Certificate. The basis for such Senior
Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption
should be used in computing amortization of premium allowable under Code
Section 171. If a premium is not subject to amortization using a
reasonable prepayment assumption, the holder of a Senior Certificate
acquired at a premium should recognize a loss, if a Mortgage Loan
prepays in full, equal to the difference between the portion of the
prepaid principal amount of the Mortgage Loan that is allocable to the
Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a reasonable
prepayment assumption is used to amortize such premium, it appears
that such a loss would be available, if at all, only if prepayments have
occurred at a rate faster than the reasonable assumed prepayment
rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate
and the actual rate of prepayments.
Original Issue Discount. The Internal Revenue Service (the
"IRS") has stated in published rulings that, in circumstances similar
to those described herein, the special rules of the Code relating to
"original issue discount" (currently Code Sections 1271 through
1273 and 1275) will be applicable to a Senior Certificateholder's
interest in those Mortgage Loans meeting the conditions necessary
for these sections to apply. Rules regarding periodic inclusion of
original issue discount income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate
mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Such
original issue discount could arise by the financing of points or
other charges by the originator of the mortgages in an amount
greater than a statutory de minimis exception to the extent that the
points are not currently deductible under applicable Code
provisions or are not for services provided by the lender.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method. See "Accrual
of Original Issue Discount" under "Senior Certificates Representing
Interests in Loans Other Than ARMs" below.
Market Discount. A Senior Certificateholder that acquires an
undivided interest in Mortgage Loans may be subject to the market
discount rules of Code Sections 1276 through 1278 to the extent an
undivided interest in a Mortgage Loan is considered to have been
purchased at a "market discount." Generally, any market discount would
be equal to the excess of the portion of the principal amount of such
Mortgage Loan allocable to such holder's undivided interest over such
holder's tax basis in such interest. Pursuant to certain de minimis
rules applicable to
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the computation of market discount, market discount with respect to a
Senior Certificate will be considered to be zero if the amount allocable
to the Senior Certificate is less than 0.25% of the Senior
Certificate's stated redemption price at maturity multiplied by the
weighted average maturity remaining after the date of purchase.
Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax
advisors regarding the application of these rules and the advisability
of making any of the elections allowed under Code Sections 1276 through
1278.
The Code provides that any principal payment (whether a
scheduled payment or a prepayment) or any gain on disposition of a
market discount bond acquired by the taxpayer after October 22, 1986,
shall be treated as ordinary income to the extent that it does not
exceed the accrued market discount at the time of such payment. The
amount of accrued market discount for purposes of determining the tax
treatment of subsequent principal payments or dispositions of the
market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants the Treasury Department authority
to issue regulations providing for the computation of accrued market
discount on debt instruments, the principal of which is payable in more
than one installment. The Treasury Department has not yet issued any
such regulations; however, the relevant legislative history
provides the best guidance applicable to this situation. Under
certain analogous rules set forth in the Code and pursuant to the
legislative history, the holder of such a market discount bond may
elect to accrue market discount either on the basis of a constant
interest rate or according to one of the following methods. If a
Senior Certificate is issued with original issue discount, the amount
of market discount that accrues during any accrual period would be
equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the original
issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the
accrual period. For Senior Certificates issued without original
issue discount, the amount of market discount that accrues during a
period is equal to the product of (i) the total remaining market
discount, multiplied by (ii) a fraction, the numerator of which is
the amount of stated interest paid during the accrual period and
the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above
methods in the case of instruments (such as the Senior Certificates)
which provide for payments which may be accelerated by reason of
prepayments of other obligations securing such instruments, the same
prepayment assumption applicable to calculating the accrual of
original issue discount will apply. Because the regulations described
above have not yet been issued, it is not possible to predict what
effect those regulations might have on the tax treatment of a Senior
Certificate purchased at a discount or premium in the secondary market.
A holder who acquires a Senior Certificate at a market
discount also may be required to defer, until the maturity date of such
Senior Certificate or its earlier disposition in a taxable transaction,
the deduction of a portion of the amount of interest that the holder
paid or accrued during the taxable year on any indebtedness incurred
or maintained to purchase or carry the Senior Certificate in excess
of the aggregate amount of interest (including original issue
discount) includable in such holder's gross income for the taxable
year with respect to such Senior Certificate. The amount of such net
interest expense deferred in a taxable year may not exceed the amount of
market discount accrued on the Senior Certificate for the days during
the taxable year on which the holder held the Senior Certificate and,
in general, would be deductible when such market discount is
includable in income. The amount of any remaining deferred deduction
is to be taken into account in the taxable year in which the Senior
Certificate matures or is disposed of in a taxable transaction. In
the case of a disposition in which gain or loss is not recognized in
whole or in part, any remaining deferred deduction will be allowed
to the extent of gain recognized on the disposition. This deferral
rule does not apply if the Senior Certificateholder elects to include
such market discount in income currently as it accrues on all market
discount obligations acquired by such Senior Certificateholder in
that taxable year or thereafter.
Multiple Classes of Senior Certificates
Stripped Bonds and Stripped Coupons. Pursuant to Code Section
1286, the separation of ownership of the right to receive some or
all of the interest payments on an obligation from ownership of the
right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and
70
"stripped coupons" with respect to interest payments. For purposes of
Code Sections 1271 through 1288, Code Section 1286 treats a stripped
bond or a stripped coupon as an obligation issued on the date that such
stripped interest is created. If a Trust Fund is created with two
classes of Senior Certificates, one class of Senior Certificates will
represent the right to principal and interest, or principal only, on
all or a portion of the Loans (the "Stripped Bond Certificates"), while
the second class of Offered Certificates will represent the right to
some or all of the interest on all or a portion of such Loans (the
"Stripped Coupon Certificates").
Certain IRS guidance suggests that a servicing fee in
excess of reasonable servicing ("excess servicing") will be
characterized under the stripped bond rules. In such case, this
guidance would appear to require that reasonable servicing be
calculated on a Mortgage Loan by Mortgage Loan basis which could
result in some Mortgage Loans being treated as having more than 100
basis points of interest (i.e., 1% interest on the Mortgage Loan
principal balance) stripped off. However, if the Certificates are
initially sold with a de minimis discount (assuming no prepayment
assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Certificates should be treated as
market discount. See "Certain Federal Income Tax
Consequences----Non-REMIC Certificates," "----Single Class of
Senior Certificates----Market Discount" herein.
Under the Treasury Regulations issued December 28, 1992, a
Stripped Bond Certificate is generally treated as a single debt
instrument issued on the day it is purchased for purposes of calculating
any original issue discount. Generally, if the discount on a Stripped
Bond Certificate is larger than a de minimis amount (as calculated for
purposes of the original issue discount rules) a purchaser of such a
certificate will be required to accrue the discount under the original
issue discount rules of the Code. See "Non-REMIC Certificates" and
"Single Class of Senior Certificates----Original Issue Discount"
herein. However, a purchaser of a Stripped Bond Certificate will be
required to account for any discount on the certificate as market
discount rather than original issue discount if either (i) the amount
of original issue discount with respect to the certificate was treated
as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing)
is stripped off of the Trust Fund's Mortgage Loans. The stripped
bond rules constitute a method of accounting and, pursuant to
Revenue Procedure 91-49 issued on August 8, 1991, purchasers of
Stripped Bond Certificates using a method of accounting inconsistent
with that set forth under these procedures are required to change their
method of accounting to conform with such rules by requesting the
consent of the IRS to the change in their accounting method on a
statement attached to their first timely tax return filed after August
8, 1991.
The precise tax treatment of Stripped Coupon
Certificates is substantially uncertain. The Code could be read
literally to require that original issue discount computations be
made on a Loan by Loan basis. Certain IRS guidance would appear to
suggest that a Stripped Coupon Certificate be treated as a single
installment obligation subject to the original issue discount rules
of the Code. Under this characterization, all payments on a
Stripped Coupon Certificate would be included in the certificate's
stated redemption price at maturity for purposes of calculating
income on such certificate under the original issue discount rules of
the Code.
It is unclear under what circumstances, if any, the
prepayment of Mortgage Loans will give rise to a loss to the holder
of a Stripped Bond Certificate purchased at a premium or a Stripped
Coupon Certificate. If such Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and
the effect of prepayments is taken into account in computing yield with
respect to such Senior Certificate, it appears that no loss may be
available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate.
However, if such Certificate is treated as an interest in discrete
Mortgage Loans, or if no prepayment assumption is used, then when a
Mortgage Loan is prepaid, the holder of such Certificate should be
able to recognize a loss equal to the portion of the adjusted issue
price of such Certificate that is allocable to such Mortgage Loan.
Holders of Stripped Bond Certificates and Stripped Coupon
Certificates are urged to consult with their own tax advisors regarding
the proper treatment of these Certificates for federal income tax
purposes.
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Treatment of Certain Owners. Several Code sections, as noted
below, provide beneficial treatment to certain taxpayers that invest in
mortgage loans of the type that would typically make up a Trust Fund.
With respect to these Code sections, there is no specific legal
authority specifying whether the character of Senior Certificates
issued in connection with the issuance of a multiple class of Senior
Certificates will necessarily be treated the same as that of the
underlying Mortgage Loans for purposes of these provisions. For
example, while Code Section 1286 treats a stripped obligation as a
separate obligation for purposes of the Code provisions addressing
original issue discount, as described above, there is some
uncertainty whether such characterization would necessarily apply
with regard to other Code sections. Nevertheless, unless otherwise
specified in the related Prospectus Supplement, as to each class
of Senior Certificates, Petree Stockton, L.L.P. or Moore & Van
Allen, PLLC will render its opinion that, although the issue
is not free from doubt, based on policy considerations, each class
of Senior Certificates should be considered to represent "qualifying
real property loans" within the meaning of Code Section 593(d), "real
estate assets" within the meaning of Code Section 856(c)(5)(A) and
"loans . . . secured by, an interest in real property which is . . .
residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest income attributable to Senior
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 underlying
Mortgage Loans and interest on such Mortgage Loans qualify for such
treatment. In addition, such opinion will opine that Senior
Certificates will be "obligation[s] (including any participation or
certificate of beneficial ownership therein) which [are] principally
secured by an interest in real property" within the meaning of Code
Section 860G(a)(3).
Offered Certificates Representing Interests in Loans Other Than ARMs
Original issue discount on a Senior Certificate
representing an interest in a Mortgage Loan must be included in the
owner's ordinary income for federal income tax purposes as it
accrues, in accordance with a constant interest method that takes
into account the compounding of interest, in advance of receipt of the
cash attributable to such income. The amount of original issue discount
required to be included in an owner's income in any taxable year with
respect to a Senior Certificate representing an interest in Mortgage
Loans other than ARMs likely will be computed as described below under
"Accrual of Original Issue Discount." The following discussion is
based in part on Treasury regulations under Code Sections 1271
through 1273 and 1275 (the "OID Regulations") and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act").
In general, under the Code, original issue discount is equal to the
excess of a debt instrument's stated redemption price at maturity over
its issue price. The issue price of a debt instrument as to any
purchaser is generally equal to the price paid by such purchaser for
the debt instrument. The stated redemption price at maturity of a
debt instrument is the sum of all payments to be made on such debt
instrument other than payments that are treated as qualified stated
interest payments. The accrual of original issue discount on a
Senior Certificate representing an interest in Mortgage Loans, as
described below under "Accrual of Original Issue Discount," will,
unless otherwise specified in the related Prospectus Supplement,
utilize the original yield to maturity of the Senior Certificate to
compute any original issue discount, as calculated based on a
reasonable assumed prepayment rate for the Mortgage Loans underlying
the Senior Certificate (the "Prepayment Assumption"), and taking into
account events that occur during the calculation period. The Prepayment
Assumption is required to be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The
legislative history of the 1986 Act (the "Legislative History")
provides, however, that the regulations will require that the
Prepayment Assumption be the prepayment assumption that is used in
determining the offering price of such Certificate. No representation
is made that such Certificate will prepay at the Prepayment
Assumption or at any other rate. Although the existing authority
literally only apply to debt instruments collateralized by
mortgages that are subject to prepayment rather than direct ownership
interests , such as the Senior Certificates, in mortgages, because no
other legal authority provides guidance with regard to the proper
method for accruing original issue discount on obligations that are
subject to prepayment, until Treasury regulations or other legal
authority instructs otherwise, the Master Servicer intends to
calculate, and report original issue discount under the method
described below.
Accrual of Original Issue Discount. Generally, the owner of
a Senior Certificate must include in gross income the sum of the
"daily portions," as defined below, of the original issue discount
on such Senior Certificate for each day on which it owns a Senior
Certificate, including the date of purchase but excluding the date of
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disposition. In the case of an original owner, the daily portions of
original issue discount with respect to each component generally
will be determined as follows under the existing authority. A
calculation will be made by the Master Servicer or such other entity
specified in the related Prospectus Supplement of the portion of
original issue discount that accrues during each successive monthly
accrual period (or shorter period from the date of original issue)
that ends on the day in the calendar year corresponding to each of
the Distribution Dates on the Senior Certificate (or the day prior to
each such date). This will be done, in the case of each full month
accrual period, by adding (i) the present value at the end of the
accrual period (determined by using as a discount factor the original
yield to maturity of the respective component, under the Prepayment
Assumption) of all remaining payments to be received under the
Prepayment Assumption on the respective component, and (ii) any
payments received during such accrual period, and subtracting from
that total the "adjusted issue price" of the respective component
at the beginning of such accrual period. The "adjusted issue price" of a
Senior Certificate at the beginning of the first accrual period is its
issue price; the "adjusted issue price" of a Senior Certificate at the
beginning of a subsequent accrual period is the "adjusted issue price"
at the beginning of the immediately preceding accrual period plus the
amount of original issue discount allocable to that accrual period
reduced by the amount of any payment made at the end of or during that
accrual period. The original issue discount accruing during such
accrual period 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 monthly accrual period, the daily portions of
original issue discount must be determined according to an appropriate
allocation under any reasonable method.
Senior Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of
instruments, such as the Senior Certificates, which represent
interests in Mortgage Loans with Mortgage Rates which adjust
periodically ("ARM Loans"). Additionally, the IRS has not issued
guidance under the Code's coupon stripping rules with respect to such
instruments. In the absence of any authority the Master Servicer
will report original issue discount on Senior Certificates attributable
to ARM Loans ("Stripped ARM Obligations") to holders in a manner it
believes is consistent with the rules described above under the
heading "Senior Certificates Representing Interests in Loans Other
Than ARM Loans" and with the OID Regulations. In general,
application of these rules may require inclusion of income on a
Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest
deferred by reason of negative amortization ("Deferred Interest") to
the principal balance of an ARM Loan may require the inclusion of
such amount in the income of the Senior Certificateholder when such
amount accrues. Furthermore, the addition of Deferred Interest to the
Senior Certificate's principal balance will result in additional
income (including possibly original issue discount income) to the
Senior Certificateholder over the remaining life of such Senior
Certificates.
Because the treatment of Stripped ARM Obligations is
uncertain, investors are urged to consult their tax advisors regarding
how income will be includable with respect to such Certificates.
Possible Application of Contingent Payment Rules to Certain Non-REMIC
Certificates
The regulations under Section 1275 of the Code include
rules for obligations that provide for one or more contingent
payments. Rights to interest-only payments on a mortgage loan might
be considered to be contingent within the meaning of the OID Regulations
if such interest would not be paid upon the borrower exercising a
right to prepay the related mortgage loan. In the case of an investor
having a right to shares of the interest and principal payments on a
mortgage loan where the share of interest is not substantially
greater than the share of principal, the possibility of prepayment
should not be considered to characterize otherwise noncontingent
interest payments as contingent payments; the absence of interest
payments following a prepayment would be the normal consequence of
the return of such investor's capital in the form of a principal
payment. On the other hand, a right to interest on such a mortgage
loan is more likely to be regarded as contingent if held by an investor
that does not also hold a right to the related principal; such an
investor would not recover its capital through receipt of a principal
payment at the time of the prepayment of the mortgage loan.
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Applying these principles to the Senior Certificates,
because the Mortgage Loans are subject to prepayment at any time,
payments on a Class of Senior Certificates representing a right to
interest on the Mortgage Loans could be considered to be contingent
within the meaning of the OID Regulations, at least if the right is to
interest only or if such Senior Certificate was issued at a premium.
The likelihood that such payments will be considered contingent
increases the greater the amount of such premium.
The IRS recently issued regulations (the "Final
Contingent Debt Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Final Contingent
Debt Regulations, which apply to debt instruments issued on or after
August 13, 1996, specifically do not apply (similar to the proposed
contingent debt regulations) for purposes of calculating OID on debt
instruments subject to principal acceleration under Code Section
1272(a)(6), such as the Senior Certificates likely represent.
In the event that payments on a Senior Certificate in
respect of interest on the Mortgage Loans were considered contingent,
the holder would generally report income or loss as described above
under "Stripped Bonds and Stripped Coupons," except that the yield
that would be used in calculating interest income would not be the
actual yield but would instead equal the "applicable Federal rate"
(the "AFR," generally, an average of current yields of Treasury
securities computed and published monthly by the IRS), in effect at the
time of purchase of such Senior Certificate by such holder. In
addition, once such holder's adjusted basis in such Senior
Certificate has been reduced (by prior distributions or losses) to an
amount equal to the aggregate amount of the remaining noncontingent
payments of the Mortgage Loans that are allocable to such Senior
Certificate (or to zero if such Senior Certificate does not share in
principal payments), then such holder would recognize income in each
subsequent month equal to the full amount of interest on the Mortgage
Loans that accrues in that month and is allocable to such Senior
Certificate. It is uncertain whether, under the contingent payment
rules, any other adjustments would be made to take account of
prepayments of the Mortgage Loans.
Sale or Exchange of a Senior Certificate
Sale or exchange of a Senior Certificate prior to its
maturity will result in gain or loss equal to the difference, if
any, between the amount received, and the owner's adjusted basis
in the Senior Certificate. Such adjusted basis generally will equal
the seller's purchase price for the Senior Certificate, increased by
the original issue discount included in the seller's gross income with
respect to the Senior Certificate, and reduced by principal payments
on the Senior Certificate previously received by the seller. Such gain
or loss will be capital gain or loss to an owner for which a Senior
Certificate is a "capital asset" within the meaning of Code Section
1221, and will be long-term or short-term depending on whether the
Senior Certificate has been owned for the long-term capital gain
holding period (currently more than one year).
Senior Certificates will be "evidences of indebtedness"
within the meaning of Code Section 582(c)(1), so that gain or loss
recognized from the sale of a Senior Certificate by a bank or a thrift
institution to which such section applies will be ordinary income or
loss.
Non-U.S. Persons
Generally, to the extent that a Senior 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 (i) an owner that
is not a U.S. Person (as defined below), or (ii) a Senior
Certificateholder holding on behalf of an owner that is not a U.S.
Person, will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for
interest by an applicable tax treaty. Accrued original issue discount
recognized by the owner on the sale or exchange of such a Senior
Certificate also will be subject to federal income tax at the same
rate. Generally, such payments would not be subject to withholding
to the
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extent that a Senior Certificate evidences ownership in Mortgage
Loans issued after July 18, 1984, if (i) such Senior
Certificateholder does not actually or constructively own 10 percent or
more of the combined voting power of all classes of equity in the
issuer (which for purposes of this discussion may be defined as the
Trust Fund (the "Issuer")); (ii) such Senior Certificateholder is
not a controlled foreign corporation (within the meaning of Code
Section 957) related to the Issuer; and (iii) such Senior
Certificateholder complies with certain identification requirements
(including delivery of a statement, signed by the Senior
Certificateholder under penalties of perjury, certifying that such
Senior Certificateholder is not a U.S. Person and providing the
name and address of such Senior Certificateholder).
A "U.S. Person" means a citizen or resident of the United
States, a corporation or a partnership organized in or under the
laws of the United States, or any political subdivision thereof or an
estate or trust, the income of which is includable in gross income
for federal income tax purposes regardless of source.
Information Reporting and Backup Withholding
The Master Servicer will furnish or make available, within a
reasonable time after the end of each calendar year, to each
Certificateholder at any time during such year, such information as
may be deemed necessary or desirable to assist Certificateholders in
preparing their federal income tax returns, or to enable holders to make
such information available to owners or other financial intermediaries
of holders that hold such Certificates as nominees. If a holder, owner
or other recipient of a payment on behalf of an owner fails to supply
a certified taxpayer identification number or if the Secretary of
the Treasury determines that such person has not reported all interest
and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any
payments. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's
federal income tax liability.
REMIC Certificates
A Trust Fund relating to a Series of Certificates may
elect to be treated as a REMIC. Qualification as a REMIC requires
ongoing compliance with certain conditions. Although a REMIC is not
generally subject to federal income tax (see, however, "Residual
Certificates----Prohibited Transactions and Other Taxes"), if a Trust
Fund with respect to which a REMIC election is made fails to comply with
one or more of the ongoing requirements of the Code for REMIC status
during any taxable year, including the implementation of restrictions
on the purchase and transfer of the residual interest in a REMIC as
described below under "Residual Certificates," the Code provides that
a Trust Fund will not be treated as a REMIC for such year and
thereafter. In that event, such entity may be taxable as a separate
corporation, and the related REMIC Certificates may not be accorded the
status or given the tax treatment described below. While the Code
authorizes the Treasury Department to issue regulations providing relief
in the event of an inadvertent termination of status as a REMIC,
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 REMIC's income for the period in which the
requirements for such status are not satisfied. With respect to each
such Trust Fund that elects REMIC status, Petree Stockton, L.L.P. or
Moore & Van Allen, PLLC will deliver its opinion generally to the
effect that, under then existing law and assuming compliance with
all provisions of the related Agreement, such Trust Fund will qualify as
a REMIC and the related Certificates will be considered to be regular
interests ("Regular Certificates") or residual interests ("Residual
Certificates") in the REMIC. The related Prospectus Supplement for each
Series of Certificates will indicate whether the Trust Fund will make a
REMIC election and whether a class of Certificates will be treated as a
regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for
which a REMIC election is made, (i) Certificates held by a thrift
institution taxed as a "mutual savings bank" or "domestic building and
loan association" will represent interests in "qualifying real property
loans" within the meaning of Code Section 593(d)(1); (ii) Certificates
held by a thrift institution taxed as a "domestic building and loan
association" will constitute assets described in Code Section
7701(a)(19)(C); (iii) Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(5)(A); and (iv) interest on Certificates held by a real
estate investment trust will be considered "interest on obligations
secured by mortgages on real property" within the meaning of Code
Section
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856(c)(3)(B). If less than 95% of the REMIC's assets are assets
qualifying under any of the foregoing Code sections, the
Certificates will be qualifying assets only to the extent that the
REMIC's assets are qualifying assets. In addition, payments on
Mortgage Loans held pending distribution on the REMIC Certificates
will be considered to be qualifying real property loans for purposes
of Code Section 593(d)(1) and real estate assets for purposes of Code
Section 856(c).
In some instances the Mortgage Loans may not be treated
entirely as assets described in the foregoing sections. See, in this
regard, the discussion of Buydown Mortgage Loans contained in
"Non-REMIC Certificates" and "Single Class of Senior Certificates"
above. REMIC Certificates held by a real estate investment trust will
not constitute "Government Securities" within the meaning of Code
Section 856(c)(5)(A), and REMIC Certificates held by a regulated
investment company will not constitute "Government Securities"
within the meaning of Code Section 851(b)(4)(A)(ii). REMIC
Certificates held by certain financial institutions will constitute
"evidences of indebtedness' within the meaning of Code Section
582(c)(1).
A "qualified mortgage" for REMIC purposes is any obligation
(including certificates of participation in such an obligation) that is
principally secured by an interest in real property and that is
transferred to the REMIC within a prescribed time period in exchange
for regular or residual interests in the REMIC. The REMIC Regulations
provide that manufactured housing or mobile homes (not including
recreational vehicles, campers or similar vehicles) which are "single
family residences" under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code
Section 25(e)(10), a single family residence includes any manufactured
home which has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches and which is of a kind
customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of
Certificates, two separate elections may be made to treat designated
portions of the related Trust Fund as REMICs (respectively, the
"Subsidiary REMIC" and the "Master REMIC") for federal income tax
purposes. Upon the issuance of any such Series of Certificates,
Petree Stockton, L.L.P. or Moore & Van Allen, PLLC, counsel to the
Depositor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the related Agreement, the
Master REMIC as well as any Subsidiary REMIC will each qualify as
a REMIC and the REMIC Certificates issued by the Master REMIC and the
Subsidiary REMICs, respectively, will be considered to evidence
ownership of Regular Certificates or Residual Certificates in the
related REMIC within the meaning of the REMIC provisions.
Only REMIC Certificates issued by the Master REMIC will be
offered hereunder. The Subsidiary REMIC and the Master REMIC will
be treated as one REMIC solely for purposes of determining whether the
REMIC Certificates will be (i) "qualifying real property loans" under
Section 593(d) of the Code; (ii) "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code; (iii) "loans secured
by an interest in real property" under Section 7701(a)(19)(C)
of the Code; and (iv) whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code.
Regular Certificates
General. Except as otherwise stated in this discussion,
Regular Certificates will be treated for federal income tax purposes as
debt instruments issued by the REMIC and not as ownership interests in
the REMIC or its assets. Moreover, holders of Regular Certificates
that otherwise report income under a cash method of accounting will be
required to report income with respect to Regular Certificates under
an accrual method.
Original Issue Discount . The Regular Certificates may be
issued with "original issue discount" within the meaning of Code Section
1273(a). Generally, such original issue discount, if any, will equal
the difference between the "stated redemption price at maturity" of
a Regular Certificate and its "issue price." Holders of any class of
Certificates issued with original issue discount will be required to
include such original issue discount in gross income for federal
income tax purposes as it accrues, in accordance with a constant
interest method based on the compounding of interest, in advance of
receipt of the cash attributable to such income. The following
discussion is based in part on the OID Regulations and the 1986 Act.
The holder of a Regular Certificate should be aware,
76
however, that the OID Regulations do not currently address certain
issues relevant to prepayable securities, such as the Regular
Certificates.
Rules governing original issue discount are set forth in Code
Sections 1271 through 1273 and 1275. These rules require that the
amount and rate of accrual of original issue discount be calculated
based on a Prepayment Assumption and prescribe a method for
adjusting the amount and rate of accrual of such discount where the
actual prepayment rate differs from the Prepayment Assumption. Under
the Code, the Prepayment Assumption is required to be determined
in the manner prescribed by regulations which have not yet been
issued. The Legislative History provides, however, that Congress
intended the regulations to require that the Prepayment Assumption
be the prepayment assumption that is used in determining the
initial offering price of such Regular Certificates. The Prospectus
Supplement for each Series of Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the
amount and rate of accrual of original issue discount. No
representation is made that the Regular Certificates will prepay
at the Prepayment Assumption or at any other rate.
In general, each Regular Certificate will be treated as
a single installment obligation issued with an amount of original issue
discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Regular
Certificate will generally be the first price at which a substantial
amount of Regular Certificates of that class are first sold to the
public (excluding bond houses, brokers, underwriters or
wholesalers). The issue price of a Regular Certificate also will
include the amount paid by an initial Regular Certificateholder, if
any, for accrued interest that relates to a period prior to the
issue date of the Regular Certificate. The stated redemption price
at maturity of a Regular Certificate will equal all payments to be made
on the Certificate other than payments which constitute "qualified
stated interest." Under the OID Regulations, qualified stated interest
generally means interest payable at a single fixed rate or 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. Interest is payable
at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions
of interest on Regular Certificates, with respect to which deferred
interest will accrue, will not constitute qualified stated interest
payments, in which case the stated redemption price at maturity of such
Regular Certificates includes all distributions of interest as well as
principal thereon. Where the interval between the issue date and the
first Distribution Date on a Regular Certificate is either longer or
shorter than the interval between subsequent Distribution Dates, all
or part of the interest foregone, in the case of the longer interval,
and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity
and tested under the de minimis rule described below. The OID
Regulations suggest that all interest on a long first period Regular
Certificate that is issued with non-de minimis OID may be treated as
OID. Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at
maturity of a Regular Certificate.
Under the 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.
Although currently unclear, it appears that the schedule of such
distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of
Regular Certificates will be set forth in the related Prospectus
Supplement. Holders generally must report de minimis OID pro rata as
principal payments are received, and such income will be capital gain if
the Regular Certificate is held as a capital asset. However, accrual
method holders may elect to accrue all de minimis OID as well as market
discount under a constant interest method.
Generally, a Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the original
issue discount that accrues on a Regular Certificate for each day
the Regular Certificateholder holds the Regular Certificate,
including the purchase date but excluding the disposition date. In the
case of an
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original holder of a Regular Certificate, a calculation will be made of
the portion of the original issue discount that accrues during each
successive period (an "accrual period") that ends on the day in the
calendar year corresponding to a Distribution Date (or if
Distribution Dates are on the first day or first business day of the
immediately preceding month, interest may be treated as payable on
the last day of the immediately preceding month) and begins on the
day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will
be done, in the case of each full accrual period, by (i) adding (a)
the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the
Regular Certificates as calculated under the Prepayment Assumption)
of all remaining payments to be received on the Regular Certificate
under the Prepayment Assumption, and (b) any payments included in
the stated redemption price at maturity received during such accrual
period, and (ii) subtracting from that total the "adjusted issue
price" of the Regular Certificates at the beginning of such accrual
period. The "adjusted issue price" of a Regular Certificate at the
beginning of the first accrual period is its issue price; the "
adjusted issue price" of a Regular Certificate at the beginning of a
subsequent accrual period is the "adjusted issue price" at the
beginning of the immediately preceding accrual period plus the amount
of original issue discount allocable to that accrual period and
reduced by the amount of any payment other than a payment of stated
periodic interest made at the end of or during that accrual period. The
original issue discount accrued during an accrual period 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 accrual period.
The calculation of original issue discount under the method described
above will cause the accrual of original issue discount to either
increase or decrease (but never below zero) in a given accrual period to
reflect the fact that prepayments are occurring faster or slower than
under the Prepayment Assumption. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of
original issue discount may be determined according to an appropriate
allocation under any reasonable method.
A subsequent purchaser of a Regular Certificate issued with
original issue discount who purchases the Regular Certificate at a
cost less than the remaining stated redemption price at maturity will
also be required to include in gross income the sum of the daily
portions of original issue discount on that Regular Certificate. In
computing the daily portions of original issue discount for such a
purchaser (as well as an initial purchaser that purchases at a price
higher than the adjusted issue price but less than the stated redemption
price at maturity), however, the daily portion is reduced by the
amount that would be the daily portion for such day (computed in
accordance with the rules set forth above) multiplied by a fraction,
the numerator of which is the excess of (a) the purchaser's adjusted
basis in the Regular Certificate immediately after the purchase thereof
over (b) the adjusted issue price of the Regular Certificate, and the
denominator of which is the excess of (c) all amounts remaining to be paid
on the Regular Certificate, other than qualified stated interest, over (d)
the adjusted issue price of the Regular Certificate.
Acquisition Premium. A purchaser of a Regular Certificate at
a price greater than its adjusted issue price but less than its
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."
Variable Rate Regular Certificate. Regular Certificates may
provide for interest based on a variable rate. Under the OID
Regulations, interest is treated as payable at a variable rate
and not as contingent interest if, generally, (i) the issue price
does not exceed the original principal balance, and (ii) the interest
compounds or is payable at least annually at current values of (a)
one or more "qualified floating rates," (b) a single fixed rate and
one or more qualified floating rates, (c) a single "objective rate," or
(d) a single fixed rate and a single objective rate that is a
"qualified inverse floating rate." A floating rate is a qualified
floating rate if variations in the rate can reasonably be expected to
measure contemporaneous variations in the cost of newly borrowed funds,
where such rate is subject to a multiple of not less than zero nor more
than 1.35. Such rate may also be increased or decreased by a fixed
spread or subject to a fixed cap or floor, or a cap or floor that is
not reasonably expected as of the issue date to affect the yield
of the instrument significantly. An objective rate includes a rate
determined using a single fixed formula and that is based on one or more
qualified floating rates or the yield or changes in the price of
actively traded personal property. Certain proposed OID Regulations
would expand the definition of objective rate to include
78
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 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 and the
proposed OID Regulations. The proposed 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 proposed OID
Regulations, such regulations may lead to different timing of income
inclusion than 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.
Under the REMIC Regulations, a Regular Certificate (i)
bearing a rate that qualifies as a variable rate under the OID
Regulations that is tied to current values of a variable rate (or the
highest, lowest or average of two or more variable rates, including a
rate based on the average cost of funds of one or more financial
institutions), or a positive or negative multiple of such a rate (plus
or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans,
including such a rate that is subject to one or more caps or floors, or
(ii) bearing one or more such variable rates for one or more periods, or
one or more fixed rates for one or more periods, and a different
variable rate or fixed rate for other periods, qualifies as a regular
interest in a REMIC. Accordingly, unless otherwise indicated in the
applicable Prospectus Supplement, the Depositor intends to 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 otherwise specified
in the applicable Prospectus Supplement, the Depositor intends to
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 includable 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.
Unless otherwise specified in the applicable Prospectus
Supplement, the Depositor intends to treat Regular Certificates bearing
an interest rate that is a weighted average of the net interest
rates on Mortgage Loans as having qualified stated interest. In
the case of adjustable rate Mortgage Loans, the applicable index used to
compute interest on the Mortgage Loans in effect on the pricing date
(or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will
be made in each accrual period either increasing or decreasing the
amount of ordinary income reportable to reflect the actual pass-through
rate on the Regular Certificates.
Market Discount. A purchaser of a Regular Certificate may
also be subject to the market discount provisions of Code Sections
1276 through 1278. Under these provisions and the OID Regulations,
"market discount" equals the excess, if any, of (i) the Regular
Certificate's stated principal amount or, in the case of a Regular
Certificate with original issue discount, the adjusted issue price
(determined for this purpose as if the purchaser had purchased such
Regular Certificate from an original holder) over (ii) the price
for such Regular Certificate paid by the purchaser. A Certificateholder
that purchases a REMIC Regular Certificate at a market discount will
recognize income upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the
Code such a holder generally will be required to allocate each such
principal distribution first to accrued market
79
discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market
discount in income currently as it accrues rather than including it
on a deferred basis in accordance with the foregoing. If made, such
election will apply to all market discount bonds acquired by such
Certificateholder on or after the first day of the first taxable year
to which such election applies. In addition, the OID Regulations
permit a Certificateholder using the accrual method of accounting to
elect to accrue all interest, discount (including de minimis market or
original issue discount) and premium in income as interest, based on a
constant yield method. If such an election were made with respect to a
REMIC Regular Certificate with market discount, the Certificateholder
is deemed to have made an election to include in income currently
market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the
year of the election or thereafter. Similarly, a Certificateholder that
makes this election for a Certificate that is acquired at a premium
is deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that
such Certificateholder owns or acquires. See "Regular
Certificates----Premium." The election to accrue interest, discount and
premium on a constant yield method with respect to a Certificate is
irrevocable.
Market discount with respect to a Regular Certificate
will be considered to be zero if the amount allocable to the Regular
Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the Regular Certificate's
weighted average maturity remaining after the date of purchase. If
market discount on a Regular Certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated
to the remaining principal payments on the Regular Certificate, and gain
equal to such allocated amount will be recognized when the
corresponding principal payment is made. Treasury regulations
implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding
the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a
scheduled payment or a prepayment) or any gain on disposition of a
market discount bond shall be treated as ordinary income to the
extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for
purposes of determining the tax treatment of subsequent principal
payments or dispositions of the market discount bond is to be reduced by
the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department
to issue regulations providing for the computation of accrued market
discount on debt instruments, the principal of which is payable in
more than one installment. Until such time as regulations are issued
by the Treasury, rules described in the Legislative History will
apply. Under those rules, the holder of a market discount bond may
elect to accrue market discount either on the basis of a constant
interest rate or according to one of the following methods. For Regular
Certificates issued with original issue discount, the amount of market
discount that accrues during a period is equal to the product of (i) the
total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the original issue discount accruing during the
period and the denominator of which is the total remaining original
issue discount at the beginning of the period. For Regular Certificates
issued without original issue discount, the amount of market discount
that accrues during a period is equal to the product of (a) the total
remaining market discount and (b) a fraction, the numerator of which
is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining
to be paid at the beginning of the period. For purposes of calculating
market discount under any of the above methods in the case of
instruments (such as the Regular Certificates) which provide for
payments which may be accelerated by reason of prepayments of other
obligations securing such instruments, the same Prepayment Assumption
applicable to calculating the accrual of original issue discount will
apply.
A holder of a Regular Certificate that acquires such
Regular Certificate at a market discount also may be required to
defer, until the maturity date of such Regular Certificate or its
earlier disposition in a taxable transaction, the deduction of a
portion of the amount of interest that the holder paid or accrued during
the taxable year on indebtedness incurred or maintained to purchase
or carry the Regular Certificate in excess of the aggregate amount
of interest (including original issue discount) includable in such
holder's gross income for the taxable year with
80
respect to such Regular Certificate. The amount of such net interest
expense deferred in a taxable year may not exceed the amount of market
discount accrued on the Regular Certificate for the days during the
taxable year on which the holder held the Regular Certificate and,
in general, would be deductible when such market discount is includable
in income. The amount of any remaining deferred deduction is to be
taken into account in the taxable year in which the Regular Certificate
matures or is disposed of in a taxable transaction. In the case of a
disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent
of gain recognized on the disposition. This deferral rule does not
apply if the Regular Certificateholder elects to include such market
discount in income currently as it accrues on all market discount
obligations acquired by such Regular Certificateholder in that taxable
year or thereafter.
Premium. A purchaser of a Regular Certificate that
purchases the Regular Certificate at a cost (not including accrued
qualified stated interest) greater than its remaining stated
redemption price at maturity will be considered to have purchased
the Regular Certificate at a premium, and may elect to amortize such
premium under a constant yield method. It is not clear whether the
Prepayment Assumption would be taken into account in determining the
life of the Regular Certificate for this purpose. However, the
Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in
accruing market discount with respect to Regular Certificates without
regard to whether such Certificates have original issue discount)
will also apply in amortizing bond premium under Code Section 171. The
Code provides that amortizable bond premium will be allocated among
the interest payments on such Regular Certificates and will be applied
as an offset against such interest payment.
Deferred Interest. Certain classes of Regular Certificates may
provide for the accrual of interest when one or more ARM Loans are
adding interest to their principal balance by reason of negative
amortization ("Deferred Interest"). Any Deferred Interest that
accrues with respect to a class of Regular Certificates will
constitute income to the holders of such Certificates prior to the time
distributions of cash with respect to such Deferred Interest are made.
It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or
whether all or a portion of the interest payable on the Certificates
must be included in the stated redemption price at maturity of the
Certificate and accounted for as original issue discount (which could
accelerate such inclusion). Interest on Regular Certificates must in
any event be accounted for under an accrual method by the holders of
such Certificates and, therefore, applying the latter analysis may
result only in a slight difference in the timing of the inclusion in
income of interest on such Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of
Certificates may contain one or more Classes of Subordinate
Certificates, and in the event there are defaults or delinquencies on
the Mortgage Loans, amounts that would otherwise be distributed on
the Subordinate Certificates may instead be distributed on the
Senior Certificates. Holders of Subordinate Certificates
nevertheless will be required to report income with respect to such
Certificates under an accrual method without giving effect to
delays and reductions in distributions on such Subordinate
Certificates attributable to defaults and delinquencies on the
Mortgage Loans, except to the extent that it can be established
that such amounts are uncollectible. As a result, the amount of
income reported by a holder of a Subordinate Certificate in any
period could significantly exceed the amount of cash distributed to
such holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Subordinate
Certificate is reduced as a result of defaults and delinquencies on
the Mortgage Loans. However, the law is unclear with respect to the
timing and character of such losses or reductions in income , and,
accordingly, holders of Subordinate Certificates should consult their
own tax advisors on this point.
Sale, Exchange or Redemption. Upon the sale, exchange or
redemption of a Regular Certificate , the holder will recognize gain
or loss equal to the difference between the amount realized on such
disposition, and the holder's adjusted basis in the Regular
Certificate. Such adjusted basis generally will equal the cost of the
Regular Certificate to the holder, increased by any original issue
discount and market discount included in the holder's gross income
with respect to the Regular Certificate, and reduced (but not below
zero) by payments included in the stated redemption price at
maturity previously received by the holder and by any amortized
premium. Except as provided in the following paragraph and as provided
under "Market Discount" above, any such gain or loss will be capital
gain
81
or loss, provided that the Regular Certificate is held as a "capital
asset" (generally, property held for investment) within the meaning
of Code Section 1221.
Gain from the sale or other disposition of a Regular
Certificate that might otherwise be capital gain will be treated as
ordinary income to the extent that such gain does not exceed the excess,
if any, of (i) the amount that would have been includable in such
holder's income with respect to the Regular Certificate had income
accrued thereon at a rate equal to 110% of the AFR as defined in Code
Section 1274(d) determined as of the date of purchase of such Regular
Certificate, over (ii) the amount actually includable in such holder's
income.
Regular Certificates will be "evidences of indebtedness"
within the meaning of Code Section 582(c)(1), so that gain or loss
recognized from the sale or exchange of a Regular Certificate by a bank
or a thrift institution to which such section applies will be ordinary
income or loss.
The Regular Certificate information reports will include a
statement of the adjusted issue price of the Regular Certificate at
the beginning of each accrual period. In addition, the reports will
include information necessary to compute the accrual of any market
discount that may arise upon secondary trading of Regular Certificates.
Because exact computation of the accrual of market discount on a
constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears
that the information reports will only require information pertaining
to the appropriate proportionate method of accruing market discount.
Non-Interest Expenses of the REMIC. Under the REMIC
regulations, if the REMIC is considered to be a "single-class REMIC,"
a portion of the REMIC's servicing, administrative and other
non-interest expenses will be allocated as a separate item to those
Regular Certificateholders that are "pass-through interest holders."
Certificateholders that are "pass-through interest holders" should
consult their own tax advisors about the impact of these rules on an
investment in the Regular Certificates. See "Pass-Through of
Non-Interest Expenses of the REMIC" under "Residual Certificates" below.
Non-U.S. Persons. Generally, payments of interest
(including any payment with respect to accrued original issue
discount) on the Regular Certificates to a Regular Certificateholder
who is a non-U.S. Person not engaged in a trade or business within the
United States, will not be subject to federal withholding tax if (i)
such Regular Certificateholder does not actually or constructively
own 10 percent or more of the combined voting power of all classes
of equity in the issuer (which for purposes of this discussion may be
defined as the Trust Fund or the beneficial owners of the related
Residual Certificates (the "Issuer")); (ii) such Regular
Certificateholder is not a controlled foreign corporation (within the
meaning of Code Section 957), related to the Issuer; and (iii) such
Regular Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that such
Regular Certificateholder is a foreign person and providing the name
and address of such Regular Certificateholder). If a Regular
Certificateholder is not exempt from withholding, distributions of
interest, including distributions in respect of accrued original issue
discount, such holder may be subject to a 30% withholding tax, subject
to reduction under any applicable tax treaty.
Further, it appears that a REMIC Regular Certificate
would not be included in the estate of a non-resident alien
individual and would not be subject to United States estate taxes.
However, Certificateholders who are non-resident alien individuals
should consult their tax advisors concerning this question.
Regular Certificateholders who are non-U.S. Persons and persons
related to such holders should not acquire any Residual Certificates,
and Residual Certificateholders and persons related to Residual
Certificateholders should not acquire any Regular Certificates without
consulting their tax advisors as to the possible adverse tax
consequences of doing so.
Information Reporting and Backup Withholding. The Master
Servicer will furnish or make available, within a reasonable time
after the end of each calendar year, to each Regular Certificateholder
at any time during such year, such information as may be deemed
necessary or desirable to assist Regular Certificateholders in
preparing their federal income tax returns, or to enable holders to
make such information available to owners or other financial
82
intermediaries of holders that hold such Regular Certificates. If a
holder, owner or other recipient of a payment on behalf of an owner
fails to supply a certified taxpayer identification number or if the
Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal
income tax return, 31% backup withholding may be required with respect
to any payments. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against such recipient's
federal income tax liability.
Residual Certificates
Allocation of the Income of the REMIC to the Residual
Certificates. The REMIC will not be subject to federal income tax
except with respect to income from prohibited transactions and
certain other transactions. See "Prohibited Transactions and Other
Taxes" herein. Instead, each original holder of a Residual
Certificate will report on its federal income tax return, as ordinary
income, its share of the taxable income of the REMIC for each day
during the taxable year on which such holder owns any Residual
Certificates. The taxable income of the REMIC for each day will be
determined by allocating the taxable income of the REMIC for each
calendar quarter ratably to each day in the quarter. Such a holder's
share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding Residual Certificates that such holder
owns on that day. The taxable income of the REMIC will be determined
under an accrual method and will be taxable to the Residual
Certificateholders without regard to the timing or amounts of cash
distributions by the REMIC. Ordinary income derived from Residual
Certificates will be "portfolio income" for purposes of the taxation
of taxpayers subject to the limitations on the deductibility of
"passive losses." As residual interests, the Residual
Certificates will be subject to tax rules, described below, that
differ from those that would apply if the Residual Certificates were
treated for federal income tax purposes as direct ownership interests
in the assets of the Trust Fund or as debt instruments issued by the
REMIC.
A Residual Certificateholder may be required to include
taxable income from the Residual Certificate in excess of the cash
distributed. For example, a structure where principal distributions
are made serially on regular interests (that is, a fast-pay, slow-pay
structure) may generate such a mismatching of income and cash
distributions. This mismatching may be caused by the use of certain
required tax accounting methods by the REMIC, variations in the
prepayment rate of the underlying Mortgage Loans and certain other
factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of
a Residual Certificate to a Residual Certificateholder. Investors
should consult their own tax advisors concerning the federal income
tax treatment of a Residual Certificate and the impact of such tax
treatment on the after-tax yield of a Residual Certificate.
A subsequent Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the
taxable income of the REMIC for each day that such Residual
Certificateholder owns such Residual Certificate. Those daily amounts
generally would equal the amounts that would have been reported for the
same days by an original Residual Certificateholder, as described
above. The Legislative History indicates that certain adjustments may
be appropriate to reduce (or increase) the income of a subsequent
holder of a Residual Certificate that purchased such Residual
Certificate at a price greater than (or less than) the adjusted basis
such Residual Certificate would have in the hands of an original
Residual Certificateholder. See "Sale or Exchange of Residual
Certificates" below. It is not clear, however, whether such adjustments
will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for any such adjustments.
Excess Inclusions. A portion of the income on a Residual
Certificate (referred to in the Code as an "excess inclusion") for
any calendar quarter will, with an exception discussed below for
certain thrift institutions, be subject to federal income tax in all
events. Thus, for example, an excess inclusion (i) may not, except
as described below, be offset by any unrelated losses, deductions or
loss carryovers of a Residual Certificateholder; (ii) will be treated as
"unrelated business taxable income" within the meaning of Code
Section 512 if the Residual Certificateholder is a pension fund or
any other organization that is subject to tax only on its unrelated
business taxable income (see "Tax-Exempt Investors" below); and
(iii) is not eligible for any reduction in the rate of withholding
tax in the case of a Residual Certificateholder that is a foreign
investor. See "Non-U.S. Persons" below. The exception for thrift
83
institutions is available only to the institution holding the Residual
Certificate, and not to any affiliate of the institution, unless the
affiliate is a subsidiary all the stock of which, and substantially all
the indebtedness of which, is held by the institution, and which is
organized and operated exclusively in connection with the organization
and operation of one or more REMICs.
Except as discussed in the following paragraph, with
respect to any Residual Certificateholder, the excess inclusions for
any calendar quarter is the excess, if any, of (i) the income of such
Residual Certificateholder for that calendar quarter from its
Residual Certificate over (ii) the sum of the "daily accruals" (as
defined below) for all days during the calendar quarter on which the
Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual
Certificate are determined by allocating to each day in the calendar
quarter its ratable portion of the product of the "adjusted issue
price" (as defined below) of the Residual Certificate at the beginning
of the calendar quarter and 120 percent of the "Federal long-term
rate" in effect at the time the Residual Certificate is issued. For
this purpose, the " adjusted issue price" of a Residual Certificate at
the beginning of any calendar quarter equals the issue price of the
Residual Certificate, increased by the amount of daily accruals for all
prior quarters, and decreased (but not below zero) by the aggregate
amount of payments made on the Residual Certificate before the
beginning of such quarter. The "Federal long-term rate" is an average
of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
As an exception to the general rule described above, the
Treasury Department has authority to issue regulations that would treat
the entire amount of income accruing on a Residual Certificate as
excess inclusions if the Residual Certificates in the aggregate are
considered not to have "significant value." Under the REMIC
Regulations, Residual Certificateholders that are thrift institutions
described in Code Section 593 can offset excess inclusions with
unrelated deductions, losses and loss carryovers provided the
Residual Certificates have "significant value." For purposes of
applying this rule, thrift institutions that are members of an
affiliated group filing a consolidated return, together with their
subsidiaries formed to issue REMICs, are treated as separate
corporations. Residual Certificates have "significant value" if: (i)
the Residual Certificates have an aggregate issue price that is at
least equal to 2% of the aggregate issue price of all Residual
Certificates and Regular Certificates with respect to the REMIC and
(ii) the anticipated weighted average life of the Residual
Certificates is at least 20% of the anticipated weighted average
life of the REMIC based on the anticipated principal payments to
be received with respect thereto (using the Prepayment Assumption and
any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents), except
that all anticipated distributions are to be used if the Residual
Certificate is not entitled to any principal payments or is entitled to
a disproportionately small portion relative to interest payments
thereon. The principal amount will be considered disproportionately
small if the issue price of the Residual Certificates exceeds
125% of their initial principal amount. Finally, an ordering rule
under the REMIC Regulations provides that a thrift institution may only
offset its excess inclusion income with deductions after it has
first applied its deductions against income that is not excess inclusion
income.
In the case of any Residual Certificates held by a real
estate investment trust, the aggregate excess inclusions with respect
to such Residual Certificates, reduced (but not below zero) by the real
estate investment trust taxable income (within the meaning of Code
Section 857(b)(2), excluding any net capital gain), will be allocated
among the shareholders of such trust in proportion to the dividends
received by such shareholders from such trust, and any amount so
allocated will be treated as an excess inclusion with respect to a
Residual Certificate as if held directly by such shareholder.
Regulated investment companies, common trust funds, and certain
cooperatives are subject to similar rules.
Payments. Any distribution made on a Residual Certificate to a
Residual Certificateholder will be treated as a non-taxable return
of capital to the extent it does not exceed the Residual
Certificateholder's adjusted basis in such Residual Certificate. To
the extent a distribution exceeds such adjusted basis, it will be
treated as gain from the sale of the Residual Certificate.
Sale or Exchange of Residual Certificates. If a Residual
Certificate is sold or exchanged, the seller will generally recognize
gain or loss equal to the difference between the amount realized on the
sale or exchange and its adjusted basis in the Residual Certificate
(except that the recognition of loss may be limited under the "wash
sale"
84
rules described below). A holder's adjusted basis in a Residual
Certificate generally equals the cost of such Residual Certificate to
such Residual Certificateholder, increased by the taxable income of the
REMIC that was included in the income of such Residual Certificateholder
with respect to such Residual Certificate, and decreased (but not
below zero) by the net losses that have been allowed as deductions to
such Residual Certificateholder with respect to such Residual
Certificate and by the distributions received thereon by such
Residual Certificateholder. In general, any such gain or loss will be
capital gain or loss provided the Residual Certificate is held as a
capital asset. However, Residual Certificates will be
"evidences of indebtedness" within the meaning of Code Section
582(c)(1), so that gain or loss recognized from sale of a Residual
Certificate by a bank or thrift institution to which such section
applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued,
if the seller of a Residual Certificate reacquires such Residual
Certificate, or acquires any other Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage
pool" (as defined in Code Section 7701(i)) during the period beginning
six months before, and ending six months after, the date of such
sale, such sale will be subject to the "wash sale" rules of Code Section
1091. In that event, any loss realized by the Residual
Certificateholder on the sale will not be deductible, but, instead,
will increase such Residual Certificateholder's adjusted basis in
the newly acquired asset.
Taxation of the REMIC
General. As noted above, although a REMIC is a separate entity
for federal income tax purposes, a REMIC is not generally subject to
entity-level tax.
Taxable Income of the REMIC Attributable to Residual
Interests. The taxable income of the REMIC will reflect a netting of
(i) the income from the Mortgage Loans and the REMIC's other assets and
(ii) the deductions allowed to the REMIC for interest and original
issue discount on the Regular Certificates and, except as described
below under "Pass-Through of Non-Interest Expenses of the REMIC,"
other expenses.
For purposes of determining its taxable income, the REMIC will
have an initial aggregate tax basis in its assets equal to the sum of
the issue prices of the Regular and Residual Certificates (or, if a
class of Certificates is not sold initially, their fair market
values). Such aggregate basis will be allocated among the Mortgage
Loans and other assets of the REMIC in proportion to their respective
fair market values. A Mortgage Loan will be deemed to have been
acquired with discount or premium to the extent that the REMIC's
basis therein is less than or greater than its principal balance,
respectively. Any such discount (whether market discount or original
issue discount) will be includable in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for
accruing original issue discount on the Regular Certificates.
The REMIC expects to elect under Code Section 171 to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to
which such election applies would be amortized under a constant yield
method. It is not clear whether the yield of a Mortgage Loan would be
calculated for this purpose based on scheduled payments or taking
account of the Prepayment Assumption. Additionally, such an election
would not apply to any Mortgage Loan originated on or before September
27, 1985. Instead, premium on such a Mortgage Loan would be allocated
among the principal payments thereon and would be deductible by the
REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and
original issue discount on the Regular Certificates. The amount
and method of accrual of original issue discount will be calculated
for this purpose in the same manner as described above with respect to
Regular Certificates except that the 0.25% per annum de minimis rule
and adjustments for subsequent holders described therein will not
apply.
A Residual Certificateholder will not be permitted to amortize
the cost of the Residual Certificate as an offset to its share of the
REMIC's taxable income. However, that taxable income will not include
cash received by the REMIC that represents a recovery of the REMIC's
basis in its assets, and, as described above, the issue price of the
Residual Certificates will be added to the issue price of the Regular
Certificates in determining the REMIC's initial basis in its assets.
See "Sale or Exchange of Residual Certificates" herein. For a
discussion of possible
85
adjustments to income of a subsequent holder of a Residual
Certificate to reflect any difference between the actual cost of such
Residual Certificate to such holder and the adjusted basis such
Residual Certificate would have in the hands of an original Residual
Certificateholder, see "Allocation of the Income of the REMIC to the
Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss
for any calendar quarter in which its deductions exceed its gross
income. Such net loss would be allocated among the Residual
Certificateholders in the same manner as the REMIC's taxable income.
The net loss allocable to any Residual Certificate will not be
deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in such Residual Certificate. Any net loss that
is not currently deductible by reason of this limitation may only be
used by such Residual Certificateholder to offset its share of the
REMIC's taxable income in future periods (but not otherwise). The
ability of Residual Certificateholders that are individuals or closely
held corporations to deduct net losses may be subject to additional
limitations under the Code.
Pass-Through of Non-Interest Expenses of the REMIC. As a
general rule, all of the fees and expenses of a REMIC will be taken into
account by holders of the Residual Interests. In the case of a "single
class REMIC," however, the expenses and a matching amount of
additional income will be allocated, under the Treasury regulations,
among the holders of the Regular Certificates and the holders of the
Residual Interests on a daily basis in proportion to the relative
amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even
if they would be classified as debt for federal income tax purposes)
or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. Unless
otherwise stated in the applicable Prospectus Supplement, the expenses
of the REMIC will be allocated to holders of the related Residual
Interests in their entirety and not to holders of the related Regular
Certificates.
In the case of individuals (or trusts, estates, or other
persons who compute their income in the same manner as individuals) who
own an interest in a Regular or Residual Certificate directly or
through a pass-through interest holder which is required to pass
miscellaneous itemized deductions through to its owners or
beneficiaries (e.g., a partnership, an S corporation, or a grantor
trust), such expenses will be deductible under Code Section 67
only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's
adjusted gross income. In addition, Code Section 68 provides that the
amount of itemized deductions otherwise allowable for an individual
whose adjusted gross income exceeds a certain amount (the "Applicable
Amount") will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over the Applicable Amount or (ii)
80% of the amount of itemized deductions otherwise allowable for the
taxable year. The amount of additional taxable income
recognized by Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be
substantial. Further, holders (other than corporations) subject
to the alternative minimum tax may not deduct miscellaneous
itemized deductions in determining such holders' alternative
minimum taxable income. The REMIC is required to report to each
pass-through interest holder and to the IRS such holder's allocable
share, if any, of the REMIC's non-interest expenses. The term
"pass-through interest holder" generally refers to individuals, entities
taxed as individuals and certain pass-through entities, but does not
include real estate investment trusts. Residual Certificateholders
that are "pass-through interest holders" should consult their own tax
advisors about the impact of these rules on an investment in the
Residual Certificates.
Prohibited Transactions and Other Taxes
The REMIC is subject to a tax at a rate equal to 100 percent of
the net income derived from "prohibited transactions." In general,
a prohibited transaction means the disposition of a Mortgage Loan
other than pursuant to certain specified exceptions, the receipt of
investment income from a source other than a Mortgage Loan or
certain other permitted investments or the disposition of an asset
representing a temporary investment of payments on the Mortgage Loans
pending payment on the Residual Certificates or Regular
Certificates. In addition, the assumption of a Mortgage Loan by a
subsequent purchaser could cause the REMIC to recognize gain, which
would also be subject to the 100 percent tax on prohibited transactions.
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In addition, certain contributions to a REMIC made after the
Closing Date could result in the imposition of a tax on the REMIC
equal to 100% of the value of the contributed property.
It is not anticipated that the REMIC will engage in any
prohibited transactions or receive any contributions subject to the
contributions tax. However, in the event that the REMIC is subject
to any such tax, unless otherwise disclosed in the related
Prospectus Supplement, such tax would be borne first by the Residual
Certificateholders, to the extent of amounts distributable to them
and then by the Master Servicer.
Liquidation and Termination
If the REMIC 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 REMICs 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 will
not be subject to any prohibited transaction tax on such sales, provided
that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims)
to holders of Regular and Residual Certificates within the 90-day
period.
Administrative Matters
Solely for the purpose of the administrative provisions of
the Code, the REMIC will be treated as a partnership and the Residual
Certificateholders will be treated as the partners thereof; however,
under the Treasury regulations if there is at no time during the
taxable year more than one Residual Certificateholder, a REMIC
shall not be subject to the rules of Subchapter C of Chapter 63 of the
Code relating to the treatment of Partnership items for a taxable
year. Accordingly, the REMIC will file an annual tax return on Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. In addition, certain other information will be furnished
quarterly to each Residual Certificateholder who held such Residual
Certificate on any day in the previous calendar quarter. Each Residual
Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from
incorrect information received from the REMIC.
Tax-Exempt Investors
Any Residual Certificateholder that is a pension fund or
other entity that is subject to federal income taxation only on its
"unrelated business taxable income" within the meaning of Code
Section 512 will be subject to such tax on that portion of the
distributions received on a Residual Certificate that is considered an
"excess inclusion." See "Residual Certificates---- Excess
Inclusions" herein.
Non-U.S. Persons
Amounts paid to Residual Certificateholders who are not U.S.
persons (see "Regular Certificates----Non-U.S. Persons") are treated
as interest for purposes of the 30% (or lower treaty rate) United
States withholding tax. Treasury regulations provide that amounts
distributed to Residual Holders may qualify as "portfolio interest,"
subject to the conditions described in "Regular Certificates" above,
but only to the extent that the Mortgage Loans were originated
after July 18, 1984, and the Mortgage Loans to which the Residual
Certificates relate are in "registered form" within the meaning of
Section 163(f)(1) of the Code. In general, it is expected that Mortgage
Loans will not be treated as in registered form. Furthermore, the
rate of withholding on any income on a Residual Certificate that is
excess inclusion income will not be subject to reduction under any
applicable tax treaties. See "Residual Certificates----Excess
Inclusions." If the portfolio interest exemption is unavailable,
amounts paid will be subject to United States withholding tax when paid
or otherwise distributed (or when the Residual Certificate is disposed
of) under rules similar to those for withholding upon disposition of
debt instruments that have original issue discount. The Code,
however, grants the Treasury Department authority to issue regulations
requiring that those amounts be taken into account earlier than
otherwise provided where necessary to prevent avoidance of tax (for
example, where the Residual Certificates do not have significant value).
See "Residual Certificates----Excess Inclusions." If the
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amounts paid to Residual Certificateholders that are not U.S.
Persons are effectively connected with their conduct of a trade or
business within the United States, the 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at
regular graduated rates. For special restrictions on the transfer
of Residual Certificates, see "Tax-Related Restrictions on
Transfers of Residual Certificates" below.
Regular Certificateholders and persons related to such
holders should not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders
should not acquire any Regular Certificates without consulting their
tax advisors as to the possible adverse tax consequences of such
acquisition.
Tax-Related Restrictions on Transfers of Residual Certificates
Disqualified Organizations. An entity may not qualify as a
REMIC unless there are reasonable arrangements designed to ensure that
residual interests in such entity are not held by "disqualified
organizations" (as defined below). Further, a tax is imposed on the
transfer of a residual interest in a REMIC to a "disqualified
organization." The amount of the tax equals the product of (A) an amount
(as determined under the REMIC regulations) equal to the present value
of the total anticipated "excess inclusions" with respect to such
interest for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The tax is
imposed on the transferor unless the transfer is through an agent
(including a broker or other middlemen) for a disqualified
organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for
the tax if the transferee furnished to such person an affidavit that
the transferee is not a disqualified organization and, at the time of
the transfer, such person does not have actual knowledge that the
affidavit is false. A "disqualified organization" means (A) the United
States, any State, possession, or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of any of the foregoing (provided that such term does
not include an instrumentality if all its activities are subject to
tax and, except for FHLMC, a majority of its board of directors is not
selected by any such governmental agency), (B) any organization (other
than certain farmers' cooperatives) generally exempt from federal
income taxes unless such organization is subject to the tax on
"unrelated business taxable income" and (C) a rural electric or
telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below)
holding a residual interest in a REMIC if at any time during the
taxable year of the pass-through entity a disqualified organization
is the record holder of an interest in such entity. The amount of
the tax is equal to the product of (A) the amount of excess inclusions
for the taxable year allocable to the interest held by the disqualified
organization, and (B) the highest marginal federal income tax rate
applicable to corporations. The pass-through entity otherwise liable
for the tax, for any period during which the disqualified organization
is the record holder of an interest in such entity, will be relieved
of liability for the tax if such record holder furnishes to such
entity an affidavit that such record holder is not a disqualified
organization and, for such period, the pass-through entity does not
have actual knowledge that the affidavit is false. For this purpose, a
"pass-through entity" means (i) a regulated investment company, real
estate investment trust or common trust fund, (ii) a partnership, trust
or estate and (iii) certain cooperatives. Except as may be provided
in Treasury regulations not yet issued, 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.
In order to comply with these rules, the Agreement will provide
that no record or beneficial ownership interest in a Residual
Certificate may be, directly or indirectly, purchased, transferred
or sold without the express written consent of the Master Servicer.
The Master Servicer will grant such consent to a proposed transfer
only if it receives the following: (i) an affidavit from the
proposed transferee to the effect that it is not a disqualified
organization and is not acquiring the Residual Certificate as a
nominee or agent for a disqualified organization, and (ii) a covenant
by the proposed transferee to the effect that the proposed transferee
agrees to be bound by and to abide by the transfer restrictions
applicable to the Residual Certificate.
Noneconomic Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a
Noneconomic Residual Certificate to a "U.S. Person," as defined below,
if a significant purpose of the transfer is to enable the transferor
to impede the assessment or collection of tax. A Noneconomic Residual
88
Certificate is any Residual Certificate (including a Residual
Certificate with a positive value at issuance) unless, at the time of
transfer, taking into account the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided
for in the REMIC's organizational documents, (i) the present value
of the expected future distributions on the Residual Certificate
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. A significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income
of the REMIC. A transferor is presumed not to have such knowledge if (i)
the transferor conducted a reasonable investigation of the transferee
and (ii) the transferee acknowledges to the transferor that the
residual interest may generate tax liabilities in excess of the
cash flow and the transferee represents that it intends to pay such
taxes associated with the residual interest as they become due. If a
transfer of a Noneconomic Residual Certificate is disregarded, the
transferor would continue to be treated as the owner of the Residual
Certificate and would continue to be subject to tax on its allocable
portion of the net income of the REMIC.
Mark to Market Rules. Prospective purchasers of a Residual
Certificate should be aware that on January 3, 1995, the IRS released
proposed regulations under Section 475 (the "Proposed Regulations").
The Proposed Regulations provide that any Residual Certificate acquired
after January 3, 1995, cannot be marked to market, regardless of the
value of such Residual Certificate. The Proposed Regulations change
temporary regulations under Section 475 (the "Temporary
Regulations") which were issued on December 28, 1993, and which
allowed securities dealers to mark to market securities held for
sale to customers, including Residual Certificates which did not have
"negative value." In general, a Residual Certificate has negative value
if, as of the date a taxpayer acquires the Residual Certificate, the
present value of the tax liabilities associated with holding the
Residual Certificate exceeds the sum of (i) the present value of the
expected future distributions on the Residual Certificate, and (ii)
the present value of the anticipated tax savings associated with
holding the Residual Certificate as the REMIC generates losses. The
amounts and present values of the anticipated tax liabilities, expected
future distributions and anticipated tax savings are all to be
determined using (i) the prepayment and reinvestment assumptions
adopted under Section 1272(a)(6), or that would have been adopted had
the REMIC's regular interests been issued with original issue
discount, (ii) any required or permitted clean up calls, or required
qualified liquidation, provided for in the REMIC's organizational
documents and (iii) a discount rate equal to the "applicable Federal
rate" (as specified in Section 1274(d)(1), that would apply to a
debt instrument issued on the date of acquisition of the Residual
Certificate. The Proposed Regulations still apply to any REMIC residual
interest acquired on or prior to January 3, 1995. Thus, holders of
positive value REMIC residual interests acquired on or prior to
January 3, 1995, may continue to mark such residual interests to market
for the entire economic life of such interests. Prospective
purchasers of a Residual Certificate should consult their tax advisors
regarding the possible application of the Proposed Regulations.
Foreign Investors. The REMIC Regulations provide that the
transfer of a Residual Certificate that has a "tax avoidance potential"
to a "foreign person" will be disregarded for federal income tax
purposes. This rule appears to apply to a transferee who is not a "U.S.
Person," unless such transferee's income in respect of the Residual
Certificate is effectively connected with the conduct of a United Sates
trade or business. A Residual Certificate is deemed to have a tax
avoidance potential unless, at the time of transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee
amounts that will equal at least 30 percent of each excess inclusion,
and that such amounts will be distributed at or after the time the
excess inclusion accrues and not later than the end of the calendar
year following the year of accrual. If the non-U.S. Person transfers
the Residual Certificate to a U.S. Person, the transfer will be
disregarded, and the foreign transferor will continue to be
treated as the owner, if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions. The Agreement
will provide that no record or beneficial ownership interest in a
Residual Certificate may be, directly or indirectly, transferred to
a non-U.S. Person unless such person provides the Trustee with a duly
completed I.R.S. Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the
transfer restrictions shall be absolutely null and void and shall vest
no rights in any purported transferee. Investors in Residual
Certificates are advised to consult their
89
own tax advisors with respect to transfers of the Residual Certificates
and, in addition, pass-through entities are advised to consult their
own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described
above in "Certain Federal Income Tax Considerations," 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
The following describes certain considerations under the
Employee Retirement Income Act of 1974, as amended ("ERISA") and the
Code, which apply only to Certificates of a Series that are not
divided into subclasses. If Certificates are divided into subclasses
the related Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to
such Certificates.
ERISA imposes requirements on employee benefit plans subject
to ERISA (and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans
and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested subject to the requirement
of ERISA and/or the Code) (collectively "Plans") and on persons who are
fiduciaries with respect to such Plans. Generally, ERISA applies to
investments made by Plans. Among other things, ERISA requires that
the assets of Plans be held in trust and that the trustee, or
other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under
ERISA, any person who exercises any authority or control respecting
the management or disposition of the assets of a Plan is considered to
be a fiduciary of such Plan (subject to certain exceptions not here
relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been
made under Section 410(d) of the Code, church plans (as defined in
ERISA Section 3(33)), are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Senior
Certificates without regard to the ERISA considerations described
above and below, subject to the provisions of applicable state law.
Any such plan which is qualified and exempt from taxation under Code
Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor
("Labor") issued final regulations concerning the definition of what
constitutes the assets of a Plan. (Labor Reg. Section 2510.3-101)
Under this regulation, the underlying assets and properties of
corporations, partnerships and certain other entities in which a Plan
makes an "equity" investment could be deemed for purposes of ERISA
to be assets of the investing Plan in certain circumstances. However,
the regulation provides that, generally, the assets of a corporation or
partnership in which a Plan invests will not be deemed for purposes of
ERISA to be assets of such Plan if the equity interest acquired by the
investing Plan is a publicly-offered security. A publicly-offered
security, as defined in the Labor Reg. Section 2510.3-101, is a
security that is widely held, freely transferable and registered
under the Securities Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary
standards of investment prudence and diversification, ERISA
prohibits a broad range of transactions involving Plan assets and
persons ("Parties in Interest") having certain specified relationships
to a Plan and imposes additional prohibitions where Parties in
Interest are fiduciaries with respect to such Plan. Because the Mortgage
Loans may be deemed Plan assets of each Plan that purchases
Certificates, an investment in the Certificates by a Plan might be a
prohibited transaction under ERISA Sections 406 and 407 and subject to
an excise tax under Code Section 4975 unless a statutory or
administrative exemption applies.
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PTE 83-1
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which
amended Prohibited Transaction Exemption 81-7, Labor exempted from
ERISA's prohibited transaction rules certain transactions relating to
the operation of residential mortgage pool investment trusts and the
purchase, sale and holding of "mortgage pool pass-through
certificates" in the initial issuance of such certificates. PTE 83-1
permits, subject to certain conditions, transactions that might
otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans related to the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by
first or second mortgages or deeds of trust on single-family residential
property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage
pools by Plans. If the general conditions (discussed below) of PTE 83-1
are satisfied, investments by a Plan in Certificates that
represent interests in a Mortgage Pool consisting of Mortgage Loans
representing loans for single family homes ("Single Family
Certificates") will be exempt from the prohibitions of ERISA
Sections 406(a) and 407 (relating generally to transactions with
Parties in Interest who are not fiduciaries) if the Plan purchases
the Single Family Certificates at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1)
and (2) (relating generally to transactions with fiduciaries) if,
in addition, the purchase is approved by an independent fiduciary, no
sales commission is paid to the pool sponsor, the Plan does not
purchase more than 25% of all Single Family Certificates, and at least
50% of all Single Family Certificates are purchased by persons
independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate
Certificates. Accordingly, unless otherwise provided in the related
Prospectus Supplement, no transfer of a Subordinate Certificate may be
made to a Plan.
The discussion in this and the next succeeding paragraph
applies only to Single Family Certificates. The Depositor believes
that, for purposes of PTE 83-1, the term "mortgage pass-through
certificate" would include: (i) Certificates issued in a Series
consisting of only a single class of Certificates; and (ii)
Offered Certificates issued in a Series in which there is only one class
of Offered Certificates; provided that the Certificates in the case
of clause (i), or the Offered Certificates in the case of clause
(ii), evidence the beneficial ownership of both a specified
percentage of future interest payments (greater than 0%) and a
specified percentage (greater than 0%) of future principal payments on
the Mortgage Loans. It is not clear whether a class of Certificates
that evidences the beneficial ownership in a Trust Fund divided into
Mortgage Loan Groups, beneficial ownership of a specified
percentage of interest payments only or principal payments only, or a
notional amount of either principal or interest payments, or a class
of Certificates entitled to receive payments of interest and principal
on the Mortgage Loans only after payments to other classes or
after the occurrence of certain specified events would be a
"mortgage pass-through certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be
satisfied for any transaction to be eligible for exemption: (i) the
maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing such loans, and for
indemnifying Certificateholders against reductions in pass-through
payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal
balance of the largest covered pooled mortgage loan; (ii) the
existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a limitation on the amount of the payment retained
by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the
mortgage loans plus reasonable compensation for services provided by the
pool sponsor to the Mortgage Pool. The Depositor believes that the
first general condition referred to above will be satisfied with
respect to the Certificates in a Series issued without a subordination
feature, or the Senior Certificates only in a Series issued with a
subordination feature, provided that the subordination and Reserve Fund,
subordination by shifting of interests, the pool insurance or other
form of credit enhancement described herein (such subordination,
pool insurance or other form of credit enhancement being the system
of insurance or other protection referred to above) with respect to
a Series of Certificates is maintained in an amount not less than the
greater of one percent of the aggregate principal balance of the
Mortgage Loans or the principal balance of the largest
Mortgage Loan. See "Description of the Certificates" herein. In the
absence of a ruling that the system of insurance or other protection
with respect to a Series of Certificates satisfies the first general
condition referred to above, there
91
can be no assurance that these features will be so viewed by Labor. The
Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the
investment decisions whether to purchase or commit to purchase and to
hold Single Family Certificates must make its own determination as to
whether the first and third general conditions, and the specific
conditions described briefly in the preceding paragraph, of PTE 83-1
have been satisfied, or as to the availability of any other prohibited
transaction exemptions. Each Plan fiduciary should also determine
whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate
for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
Underwriter Exemptions
Labor has issued to various underwriters substantially
similar individual exemptions (each, an "Underwriter Exemption" and
collectively, the "Underwriter Exemptions") which apply to certain
sales and servicing of "certificates" that are obligations of a
"trust" with respect to which such underwriters are the underwriter,
manager or co-manager of an underwriting syndicate. The Underwriter
Exemptions provide relief which is generally similar to that provided by
PTE 83-1, but is broader in several respects.
The Underwriter Exemptions contain several requirements, some
of which differ from those in PTE 83-1. The Underwriter Exemptions
contain an expanded definition of "certificate," which includes an
interest which entitles the holder to pass-through payments of
principal, interest and/or other payments. The Underwriter Exemptions
contain an expanded definition of "trust" which permits the trust
corpus to consist of secured consumer receivables, including
obligations secured by shares issued by a cooperative housing
association. The definition of "trust," however, does not include
private mortgage-backed securities like the Private Mortgage-Backed
Securities, and does not include any other investment pool unless, inter
alia: (i) the investment pool consists only of assets of the type which
have been included in other investment pools; (ii) certificates
evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year
prior to the Plan's acquisition of certificates pursuant to the
Underwriter Exemptions; and (iii) certificates in such other
investment pools have been rated in one of the three highest generic
rating categories of the four credit rating agencies noted below.
Generally, the Underwriter Exemptions hold that the acquisition of
certificates by a Plan must be on terms (including the price
for the certificates) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party.
The Underwriter Exemptions require that the rights and interests
evidenced by the certificates held by a Plan not be "subordinated" to
the rights and interests evidenced by other certificates of the
same trust. Further, the Underwriter Exemptions require that
certificates acquired by a Plan have received a rating at the time
of their acquisition that is in one of the three highest generic
rating categories of Standard and Poor's Ratings Group, Moody's
Investors Service, Inc., Duff & Phelps Inc. or Fitch Investors
Service, Inc. The Underwriter Exemptions also specify that the pool
trustee must not be an affiliate of the pool sponsor, nor an affiliate
of the underwriter, the pool servicer, any obligor with respect to
mortgage loans included in the trust constituting more than five
percent of the aggregate unamortized principal balance of the assets
in the trust, or any affiliate of such entities. Finally, the
Underwriter Exemptions stipulate that any Plan investing in the
certificates must be an "accredited investor," as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933. The Prospectus Supplement
relating to a Series of Certificates will describe the Underwriters
Exemption, if any, that may be applicable to such Series of
Certificates.
Any Plan fiduciary which proposes to cause a Plan to
purchase Certificates should consult with their counsel concerning
the impact of ERISA and the Code, the applicability of PTE 83-1, and
the potential consequences in their specific circumstances, prior to
making such investment. The Prospectus Supplement for a Series of
Certificates will contain additional information with respect to PTE
83-1 and other prohibited transaction exemptions that may be
applicable to such Series of Certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards
of investment procedure and diversification an investment in the
Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
92
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Certificates will
specify which, if any, of the Classes of Certificates offered thereby
will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Classes
of Certificates that qualify as "mortgage related securities" will
be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds)
created pursuant to or existing under the laws of the United States
or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to
the same extent as, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any
such entities. Under SMMEA, if a state enacts legislation prior to
October 4, 1991, specifically limiting the legal investment authority of
any such entities with respect to " mortgage related securities," the
Certificates that qualify as mortgage related securities will
constitute legal investments for entities subject to such legislation
only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991, deadline. SMMEA
provides, however, that in no event will the enactment of any such
legislation affect the validity of any contractual commitment to
purchase, hold or invest in Certificates that qualify as mortgage
related securities, or require the sale or other disposition
of such Certificates, so long as such contractual commitment was
made or such Certificates acquired prior to the enactment of such
legislation.
SMMEA also amended the legal investment
authority of federally-chartered depository institutions as follows:
federal savings and loan associations and federal savings banks may
invest in, sell or otherwise deal in Certificates without limitations
as to the percentage of their assets represented thereby, federal
credit unions may invest in mortgage related securities, and
national banks may purchase Certificates for their own account without
regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. SS24 (Seventh), subject in each case to such
regulations as the applicable federal authority may prescribe. In this
connection, federal credit unions should review the National Credit
Union Administration ("NCUA") Letter to Credit Unions No. 96, as
modified by Letter to Credit Unions No. 108, which includes guidelines
to assist federal credit unions in making investment decisions for
mortgage related securities, and the NCUA's regulation "Investment and
Deposit Activities" (12 C.F.R. Part 703), (whether or not the Class
of Certificates under consideration for purchase constitutes a
"mortgage related security").
All depository institutions considering an investment
in the Certificates (whether or not the Class of Certificates under
consideration for purchase constitutes a mortgage related security
should review the Federal Financial Institutions Examination Council's
Supervisory Policy Statement on the Securities Activities (to the
extent adopted by their respective regulators) (the "Policy
Statement"), setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's
investment portfolio, and guidelines for (and restrictions on)
investing in mortgage derivative products, including mortgage related
securities, which are "high-risk mortgage securities" as defined in the
Policy Statement. According to the Policy Statement, such "high-risk
mortgage securities" include securities such as Certificates not
entitled to distributions allocated to principal or interest, or
Subordinated Certificates. Under the Policy Statement, it is
the responsibility of each depository institution to determine, prior
to purchase (and at stated intervals thereafter), whether a particular
mortgage derivative product is a "high-risk mortgage security," and
whether the purchase (or retention) of such a product would be
consistent with the Policy Statement.
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 and provisions that may restrict or
prohibit investment in securities that are not "interest bearing" or
"income paying."
There may be other restrictions on the ability of certain
investors, including depository institutions, either to purchase
Certificates or to purchase Certificates representing more than a
specified percentage of the investor's assets. Investors should
consult their own legal advisors in determining whether and to
what extent the Certificates constitute legal investments for such
investors.
93
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.
This Prospectus and the related Prospectus Supplement may be
used by First Union Capital Markets Corp., an affiliate of the
Depositor, in connection with offers and sales related to market-making
transactions in the Certificates. First Union Capital Markets Corp.
may act as principal or agent in such transactions. Such sales will
be made at prices related to prevailing market prices at the time of
sale or otherwise.
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.
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, FUNB, its affiliates and the Trustee in the
ordinary course of business.
94
LEGAL MATTERS
As specified in the related Prospectus Supplement,
certain legal matters relating to the Certificates, including
certain federal income tax consequences with respect thereto, will be
passed upon for the Depositor and the underwriters by Petree Stockton,
L.L.P., Charlotte, North Carolina, and by Moore & Van Allen, PLLC,
Charlotte, North Carolina.
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.
056\ 203989
056\204175
95
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 DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries
of CEDEL and Euroclear (in such capacity) and as 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 DTC
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 DTC Participants. Secondary market trading
between DTC Participants will be settled using the procedures
applicable to prior Residential Mortgage Pass-Through Certificates
issues in same-day funds.
Trading Between CEDEL And/Or Euroclear Participants.
Secondary market trading between CEDEL Participants or Euroclear
Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading Between DTC Seller And CEDEL Or Euroclear Purchaser
. When Global Securities are to be transferred from the account of a DTC
Participant to the account of a CEDEL Participant or a Euroclear
Participant, the purchaser will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. CEDEL or Euroclear will
instruct the respective Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to
consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the
first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against
delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective
clearing system and by the clearing system, in accordance with its
usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day
(European time) and the cash debt will be back-valued to, and the
interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the CEDEL or Euroclear cash debt will be valued
instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need
to make available to the respective clearing systems the funds
necessary to process same-day funds settlement. The most direct means
of doing so is to preposition funds for settlement, either from cash on
hand or existing lines of credit, as they would for any settlement
occurring within CEDEL or Euroclear. Under this approach, they may
take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line
of credit to them, CEDEL Participants or Euroclear Participants
can elect not to preposition funds and allow that credit line to
be drawn upon the finance settlement. Under this procedure, CEDEL
Participants or Euroclear Participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts.
However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result
will depend on each CEDEL Participant's or Euroclear Participant's
particular cost of funds.
Since the settlement is taking place during New York business
hours, DTC Participants can employ their usual procedures for sending
Global Securities to the respective 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 DTC 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
DTC Participant. The seller will send instructions to CEDEL or
Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or
Euroclear will instruct the respective Depositary, as appropriate, to
deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment to and excluding
the settlement date on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the CEDEL
Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's
account will be back-valued to the value date (which would be the
preceding
2
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 DTC
Participant no later than one day prior to settlement, which would
give the Global Securities sufficient time to be reflected in their
CEDEL or Euroclear account in order to settle the sale side of the
trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the CEDEL Participant or Euroclear Participant.
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 Actively 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 Owners 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).
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). Form
W-8 and Form 1001 are effective for three calendar years and Form 4224
is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of
the United States, (ii) a corporation or partnership organized in or
under the laws of the United States or any political subdivision
thereof or (iii) an estate or trust the income of which is includable
in gross income for United States tax purposes, regardless of its
source. 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.
056\ 203989
056\204175
4
INDEX TO DEFINED TERMS
1986 Act ...................................72
Accrual Certificates................................34
Accrual period ...................................78
Act.................................................60
Adjusted issue price........................73, 78, 84
Advance ................................... ........13
AFR ...................................74
Agency Securities ....................................1
Agreement ...............................5, 20
ALTA .........................................29
Applicable Amount...................................86
ARM Loans ...................................73
Available Distribution Amount.......................33
Balloon Loan........................................29
Balloon payments ................................7, 19
Balloon Period......................................29
Bankruptcy Bond.....................................43
Bankruptcy Bonds....................................12
Beneficial owner....................................37
Book-Entry Certificates..............................37
Buydown Fund........................................19
Buydown Loans.......................................19
Capital asset ...............................74, 82
Cede ...................................37
CEDEL ...................................37
CEDEL Participants..................................38
CERCLA ...........................................65
Certificate Balance..................................35
Certificate Owners...................................37
Certificate Register................................32
Certificates .............................1, 5, 18
Charter Act ........................................24
Closing Date ....................................5
Code ...................................15
Collateral Value ...................................20
Collection Account..................................48
Combined Loan-to-Value Ratio.........................20
Commission ....................................3
Cooperative ...................................39
Cooperative Loans ...............................6, 20
Cooperatives ...............................6, 20
Cut-off Date ...................................12
Deferred Interest ...............................73, 81
Definitive Certificate..............................37
Depositor ...............................1, 27
Detailed Description................................18
Determination Date..................................33
Disqualified organization............................88
Distribution Date ...................................10
DTC ...................................37
Due-on- sale......................................7, 19
Eligible Investments................................48
EPA ........................................65
ERISA ...............................15, 90
Euroclear ...................................37
Euroclear Operator...................................39
Euroclear Participants..............................38
European Depositaries...............................37
Event of Default ...................................40
Excess inclusion....................................83
Excess inclusions ...................................88
Excess servicing ...................................71
FDIC ...................................30
Federal long-term rate..............................84
FHA ...............................6, 21
FHA Insurance.......................................12
FHA Loans ..........................................21
FHLMC ...............................1, 29
FHLMC Act ...................................23
FHLMC Certificate Group.............................23
FHLMC Certificates....................................8
Financial Intermediary..............................37
FNMA ...............................1, 29
FNMA Certificates ....................................8
FUNB ....................................5
Funding Period..................................14, 50
Garn-St Germain Act.................................66
Global Securities ....................................1
GNMA ....................................1
GNMA Certificates ....................................8
GNMA Issuer.........................................21
Guaranty Agreement..................................21
Home Equity Loans ................................6, 21
Housing Act ........................................21
HUD ........................................54
Insurance Proceeds...................................49
Insured Expenses ...................................49
IRS ........................................69
Issuer ..............................75, 82
Labor ..........................................90
Legislative History.................................72
Letter of Credit ...................................13
Limited Guarantee ...................................13
Liquidation Expenses.................................49
Liquidation Proceeds.................................49
Loan-to-Value Ratio..................................20
Lockout periods ...............................7, 19
Master REMIC ...................................76
Master Servicer ....................................5
Master Servicing Fee................................55
i
Morgan ...........................................37
Mortgage............................................47
Mortgage Assets .............................1, 5, 18
Mortgage Loans ....................................1
Mortgage Note ...................................47
Mortgage pass-through certificate....................91
Mortgage Pool ................................5, 18
Mortgage Pool Insurance Policy..................12, 41
Mortgage Rate...................................10, 20
Mortgage related securities.....................14, 93
Mortgaged Properties................................18
Mortgagor...........................................16
NCUA ...................................93
Net Liquidation Proceeds.............................49
OID Regulations ...............................72, 74
Participant ...................................37
Parties in Interest.................................90
Pass-through entity.................................88
Pass-through interest holder........................86
Pass-Through Rate...............................10, 18
Plans ...................................90
PMBS Agreement......................................26
PMBS Issuer.........................................26
PMBS Servicer.......................................26
PMBS Trustee........................................26
Policy Statement....................................93
Pool Insurer........................................41
Pre-Funded Amount ...............................6, 50
Pre-Funding Account...........................1, 14, 50
Prepayment Assumption...............................72
Primary Insurer.....................................52
Primary Mortgage Insurance Policy...................18
Principal Prepayments...............................35
Private Mortgage-Backed Securities....................1
Proposed Contingent Regulations......................74
Proposed Regulations.................................89
PTE 83-1 ...................................91
Purchase Price ...................................31
Qualified mortgage...................................76
Rating Agency...................................15, 48
Record Date.........................................32
Regular Certificates............................75, 87
Regular interests ...................................33
Relevant Depositary.................................37
Relief Act ...................................67
REMIC ...........................2, 15, 32
REMIC Regulations...................................67
Reserve Fund ...................................12
Residual Certificates...........................75, 82
Residual interests...................................33
Retained Interest...................................31
Rules ..........................................37
Seller ....................................1
Sellers ............................................18
Senior Certificates..............................9, 40
Series .................................1, 5
Servicer ....................................5
Significant value...................................84
Single Family Certificates...........................91
SMMEA ......................................14, 93
Special Hazard Insurance Policy.....................12
Special Hazard Insurer..............................42
Stripped ARM Obligations.............................73
Stripped Bond Certificates...........................71
Stripped bonds......................................70
Stripped Coupon Certificates.........................71
Stripped coupons ...................................71
Sub- Servicer....................................13, 20
Subordinated Certificates.........................9, 40
Subsequent Mortgage Assets.....................1, 6, 50
Subsidiary REMIC ...................................76
Subsidy Account.....................................29
Subsidy Loans.......................................29
Subsidy Payments ...................................29
Surety Bond ...................................13
Temporary Regulations................................89
Terms and Conditions.................................39
Title V ...................................67
Trust Fund ................................1, 18
Trustee ....................................5
U.S. Person ................................75, 4
Underwriter Exemption................................92
Underwriter Exemptions...............................92
VA ....................................6
VA Guaranty Policy..................................55
VA Insurance........................................12
VA Loans ...................................21
ii
(A redherring appears on the left-hand side of this page, rotated 90
degrees. Text is as follows.)
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission but has not yet become
effective. Information contained herein is subject to completion or
amendment. These securities may not be sold nor may offers to buy be
accepted prior to the time the registration statement becomes effective.
This preliminary prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities
laws of any state.
Subject to completion, dated __________, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus dated _________, 1996)
$_______________ (Approximate)
First Union Residential Securitization Transactions, Inc.,
Depositor
First Union National Bank of North Carolina,
Seller and Master Servicer
Senior/Subordinate Residential Mortgage Pass-Through Certificates,
Series 1996-__, Class A Principal and interest payable on the 25th
day of each month, beginning in __________ 1996
The Series 1996-__ Certificates will consist of Class A
Certificates, Class B Certificates and Class R Certificates
(collectively, the "Certificates"). Only the Class A Certificates are
offered hereby. The Class A Certificates will be senior to the
Class B and Class R Certificates (collectively, the "Subordinated
Certificates"), to the extent described herein. The Class B and Class R
Certificates are the "Subordinated Certificates." See "Description of
the Certificates----Subordinated Certificates."
The Certificates will represent beneficial interests in a
pool (the "Mortgage Pool") of first lien high balance, adjustable-rate
one- to four-family residential mortgage loans (the "Mortgage Loans"),
including adjustable-rate loans that may be converted to fixed-rate
loans or to adjustable-rate loans based on a different Index, which
were originated or purchased by First Union National Bank of North
Carolina (in such capacity, the "Seller") or its affiliates and
certain related property (the "Trust Fund") conveyed to the Trust Fund
by First Union Residential Securitization Transactions, Inc.
(the "Depositor"). First Union National Bank of North Carolina will
serve as Master Servicer (the "Master Servicer") of the Mortgage
Pool. Terms used and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Prospectus dated
_________________, 1996, attached hereto (the "Prospectus"). The
Class A Certificates will be issued in the initial aggregate principal
amount of approximately $___________, subject to a permitted variance
of plus or minus 5%. The remaining beneficial interests in the Trust
Fund will be evidenced by the Class B and Class R Certificates.
[Certificate Insurer Logo]
On or before the issuance of the Certificates, the
Depositor will obtain from _________________ (the "Certificate
Insurer") a certificate guaranty insurance policy, relating to the
Class A Certificates (the "Certificate Insurance Policy"), in favor
of the Trustee. The Certificate Insurance Policy will protect Holders
of the Class A Certificates against shortfalls in amounts due to be
distributed at the times and to the extent described herein. See "The
Certificate Insurance Policy and the Certificate Insurer."
(Continued on Next Page)
FOR A DISCUSSION OF CERTAIN FACTORS RELATING TO AN
INVESTMENT IN THE CLASS A CERTIFICATES, SEE " RISK FACTORS" ON PAGE
S-9 HEREIN AND " RISK FACTORS" ON PAGE 16 IN THE PROSPECTUS.
The Class A Certificates represent beneficial interests in
the Trust Fund and do not represent an interest in or obligation of
the Depositor, the Master Servicer, the Trustee or any of their
affiliates. The Class A Certificates are not insured or guaranteed
by any governmental agency or by any other person or entity (other
than the Certificate Insurer), including the Depositor, the Master
Servicer, the Trustee or any of their affiliates. Distributions on
the Class A Certificates will be payable solely from the assets
transferred to the Trust Fund for the benefit of the Holders of the
Class A Certificates.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Class A Certificates are being offered by the Underwriter
from time to time in negotiated transactions or otherwise at
varying prices to be determined, in each case, at the time of sale.
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 $_______ in the aggregate. The Underwriter will
reimburse the Depositor for approximately $_______ of such expenses.
The Class A Certificates offered hereby are offered subject
to prior sale, when, as and if issued by the Trust Fund and accepted by
the Underwriter and subject to its right to reject orders in whole or
in part. It is expected that delivery of the Class A Certificates will
be made in book-entry form only through the Same Day Funds Settlement
System of The Depository Trust Company on or about
______________________, 1996.
First Union Capital Markets Corp.
The date of this Prospectus Supplement is _______________, 1996.
(Cover continued from previous page)
The Class A Certificates will be adjustable rate
Certificates. Each Mortgage Loan will be an adjustable rate loan
with an interest rate that is adjusted (subject to a lifetime maximum
cap) either every month or every six months as described herein and,
in the case of certain of those Mortgage Loans, subject to the option of
the Mortgagor to convert the Mortgage Loan to a fixed rate loan or to
a different Index, as described below and herein. Payments of
interest and, to the extent described herein, principal will be due on
the first day (the " Due Date") of each month and will be
distributed, as and to the extent described herein, to the Holders of
the Class A Certificates on the 25th day of that month (or if such day
is not a business day, then on the next succeeding business day)
(each, a "Distribution Date"). The adjustments to the interest rates
of the Mortgage Loans and their scheduled amortization are
described herein. Approximately _____% of the Mortgage Loans (by
aggregate principal balance as of the Cut-off Date) (the "Convertible
Mortgage Loans") provide that, at the option of the related Mortgagors,
the adjustable interest rate on such Mortgage Loans may be converted to
a fixed interest rate and that, at the option of the related
Mortgagors, the Index may be converted to a different Index,
provided that certain conditions have been satisfied. Upon
notification from a Mortgagor of such Mortgagor's intent to convert a
Mortgage Loan from an adjustable interest rate to a fixed interest
rate, and prior to such conversion of any such Mortgage Loan (a
"Converting Mortgage Loan"), the initial Master Servicer, so long as
it is the Master Servicer, will be obligated to purchase the Converting
Mortgage Loan at a price equal to the outstanding principal balance
thereof plus accrued interest thereon net of any servicing fees (the
"Conversion Price"). If the Master Servicer does not purchase a
Converting Mortgage Loan, the Mortgage Loans will thereafter include
such fixed rate converted Mortgage Loan or such Mortgage Loan with a
different Index, as applicable. The Master Servicer will not
purchase a Mortgage Loan upon its conversion to a new Index. See
"Prepayment and Yield Considerations" herein.
The Class A Pass-Through Rate is equal to the lesser of
(i) the applicable one-month LIBOR (as defined herein) plus the
applicable margin described herein and (ii) the applicable Weighted
Average Net Mortgage Rate (defined herein) for the Mortgage Loans, as
described under "Description of the Certificates -- Distributions on
the Certificates."
On each Distribution Date, commencing on ___________, 199__,
Holders of the Class A Certificates will be entitled to receive, from
and to the extent of the funds described herein, distributions with
respect to principal of the Mortgage Loans, to the extent described
herein, together with interest on the outstanding principal balance
of the Class A Certificates at the Class A Pass-Through Rate,
calculated as described herein and subject to the limitations described
herein. Interest will begin to accrue on the Class A Certificates from
the date of their initial issuance as described herein.
The yield on the Class A Certificates will be sensitive to,
among other things, the levels of the Mortgage Rates, the timing of the
changes in those Mortgage Rates, the level of one-month LIBOR and the
rate and timing of principal payments (including prepayments). See
"Prepayment and Yield Considerations."
The only obligation of the Depositor with respect to the
Certificates will be to obtain from FUNB, as seller of the Mortgage
Loans to the Depositor, certain representations and warranties relating
to the Mortgage Loans. FUNB will have the obligation to repurchase
any Mortgage Loan as to which an uncured breach of certain
representations or warranties has occurred that materially adversely
affects the Certificateholders or the Certificate Insurer and will
have contractual servicing obligations as Master Servicer. The Master
Servicer is obligated under certain circumstances to make Advances
(defined herein) to the Certificateholders. See "Description of the
Certificates---- Advances" herein and "Description of the
Certificates---- Distributions on Certificates" in the Prospectus.
An election will be made to treat certain assets of the Trust
Fund as a real estate mortgage investment conduit (a " REMIC") for
federal income tax purposes. See "Certain Federal Income Tax
Consequences" in the Prospectus. The Class A Certificates and Class B
Certificates will represent "regular interests" in the REMIC. The
Class R Certificates will represent the sole class of "residual
interest" in the REMIC.
The interests of the owners of the Class A
Certificates (the "Certificate Owners") will be represented by
book-entries on the records of The Depository Trust Company and
participating members thereof. See "Description of the Certificates --
Registration of Class A Certificates" herein.
First Union Capital Markets Corp. (the "Underwriter") intends
to make a secondary market in the Class A Certificates, but has no
obligation to do so. There can be no assurance that a secondary market
for the Class A Certificates will develop, or if it does develop, that
it will provide Holders of the Class A Certificates with liquidity of
investment at any particular time or for the life of the Class A
Certificates. The Class A Certificates will not be listed on any
securities exchange.
The Underwriter expects to enter into market making
transactions in the Class A Certificates and may act as principal or
agent in any such transactions. Any such purchases or sales will be made
at prices related to prevailing market prices at the time of sale. This
Prospectus Supplement and the Prospectus may be used by the Underwriter
in connection with such transactions.
S-2
----------------
The Class A Certificates constitute part of a separate
series of Residential Mortgage Pass-Through Certificates being
offered by the Depositor from time to time pursuant to this Prospectus
Supplement and the Prospectus accompanying this Prospectus
Supplement. This Prospectus Supplement does not contain complete
information about the offering of the Class A Certificates. Additional
information is contained in the Prospectus and purchasers are urged to
read both this Prospectus Supplement and the Prospectus in full. Sales
of the Class A Certificates may not be consummated unless the
purchaser has received both this Prospectus Supplement and the
Prospectus.
To the extent that any statements in this Prospectus
Supplement modify statements contained in the Prospectus, the
statements in this Prospectus Supplement shall control.
Upon receipt of a request by an investor who has received an
electronic Prospectus Supplement and Prospectus from the Underwriter or
a request by such investor's representative within the period during
which there is an obligation to deliver a Prospectus Supplement and
Prospectus, the Depositor or the Underwriter will promptly deliver,
or cause to be delivered, without charge, a paper copy of the
Prospectus Supplement and Prospectus.
----------------
Until 90 days from the date of this Prospectus Supplement, all
dealers effecting transactions in the Class A Certificates, whether or
not participating in this distribution, may be required to deliver a
Prospectus Supplement and Prospectus. This is in addition to the
obligation of dealers to deliver a Prospectus Supplement and
Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
S-3
SUMMARY OF TERMS OF THE CERTIFICATES
This summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus
Supplement and in the accompanying Prospectus. Capitalized terms used
herein and not otherwise defined shall have the respective meanings
assigned them in the Prospectus or elsewhere in this Prospectus
Supplement.
Securities Offered............................. Senior/Subordinate Residential Mortgage Pass-Through
Certificates, Series 1996-__, Class A (the " Class A
Certificates"). The Class B and Class R Certificates (the "
Subordinated Certificates") will be subordinated to the Class A
Certificates as described herein. The Subordinated Certificates
are not offered hereby and may be retained or sold by the
Depositor or certain affiliates thereof. The Certificate
Insurance Policy will be available to protect the Holders of the
Class A Certificates against shortfalls in amounts due to be
distributed at the times and to the extent described herein. See
"Summary of Terms of the Certificates----Certificate Insurance
Policy" below and "The Certificate Insurance Policy and the
Certificate Insurer" herein.
Issuer......................................... FURST Residential Mortgage Trust 1996-__ (the"Trust Fund")
is the issuer of the Certificates.
Depositor...................................... First Union Residential Securitization Transactions, Inc., a
North Carolina corporation. The Depositor is a wholly
owned, limited purpose subsidiary of First Union National
Bank of North Carolina (" FUNB"), a national banking
association (a wholly owned subsidiary of First Union
Corporation, a North Carolina corporation) and an affiliate of
First Union Capital Markets Corp. (the "Underwriter").
Neither First Union Corporation nor any of its affiliates,
including the Depositor and the Master Servicer, has insured or
guaranteed the Certificates.
Seller......................................... First Union National Bank of North Carolina.
Master Servicer................................ First Union National Bank of North Carolina, a national
banking association and an affiliate of both the Depositor and
the Underwriter.
Trustee........................................ _____________________________________________.
Custodian...................................... First Union National Bank of North Carolina.
Original Pool Scheduled Principal Balance...... $
Original Class A Principal Balance........... $
Original Class B Principal Balance........... $
S-4
Each of the original principal balance amounts above is
approximate, subject to a permitted variance of plus or minus
5%:
Class A Pass-Through Rate................... On each Distribution Date, the Class A Pass-Through Rate will
equal the London interbank offered rate for one-month United
States dollar deposits ("LIBOR") (calculated as described under
"Description of the Certificates-- Distributions on the
Certificates") as of the second LIBOR business day prior to the
immediately preceding Distribution Date (but as of October __,
1996 in the case of the Distribution Date on _________, 1996)
plus ____% (which margin is subject to increase as described
below), subject in each case to the following limitation. If the
Class A Pass-Through Rate for a Distribution Date so
calculated on the basis of LIBOR is greater than the Weighted
Average Net Mortgage Rate for the Mortgage Loans applicable
at the beginning of the preceding month (giving effect to the
Monthly Payments due on such Due Date and unscheduled
principal payments received prior to such Due Date), then the
Class A Pass-Through Rate for such Distribution Date will
equal such Weighted Average Net Mortgage Rate for the
Mortgage Loans. The "Net Mortgage Rate" of a Mortgage
Loan is its Mortgage Rate less the sum of (i) the Servicing Fee
Rate of ___% and (ii) the Certificate Insurance Policy annual
premium rate (which, together with the 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.
Notwithstanding the foregoing, the __% margin added to the
applicable LIBOR formula for the calculation of the Class A
Pass-Through Rate will instead be __% for each Distribution
Date occurring at least 120 days after the first Distribution Date
in respect of which the option to purchase the Mortgage Loans,
described under "Description of the Certificates-- Option
Termination," may be exercised by the Master Servicer. The
Class A Pass-Through Rate thus calculated will still be subject
to the limitation of the Weighted Average Net Mortgage Rate
as described above in this paragraph.
Class B Pass-Through Rate................... On each Distribution Date, the Class B Pass-Through Rate will
equal the applicable LIBOR plus ___%, subject to a maximum
rate as described under "Description of the Certificates--
Distributions on the Certificates."
Denominations............................... The Class A Certificates will be issuable in denominations of
$________ and integral multiples of $_____ in excess thereof.
Cut-Off Date................................ __________, 1996.
Agreement................................... The Pooling and Servicing Agreement dated as of __________,
1996 (the " Agreement"), among the Depositor, FUNB, as
S-5
Master Servicer, and
_____________________, as
trustee (the "Trustee"),
relating to the Certificates.
The Mortgage Loans.......................... High balance, adjustable rate mortgage loans (including
adjustable rate loans that may be converted to a fixed rate at
the option of the borrower or to a different Index (and may
thereafter be converted to a fixed rate)) secured by first lien,
one- to four-family residential properties (including shares
issued by cooperative housing units), having an aggregate
unpaid principal balance as of the Cut-off Date of
approximately $___________ (the "Mortgage Loans").
Generally, high balance mortgage loans are loans whose initial
principal balances exceed, and in certain cases substantially
exceed, the maximum initial principal amount of mortgage
loans eligible to be purchased by FNMA or FHLMC. Certain
of the Mortgage Loans may have initial principal balances
below such thresholds. The Mortgage Loans were originated
or acquired by the Seller in the ordinary course of its real
estate lending activities. Monthly payments of interest and, to
the extent described herein, principal on the Mortgage Loans
(" Monthly Payments") will be due on the first day of each
month (each, a "Due Date"). Each Mortgage Loan has an
original term to maturity of __ years and is scheduled to pay
only interest for the first __ years of its term. Commencing in
its eleventh year, each Mortgage Loan is scheduled to amortize
on a 15-year fully amortizing basis.
The per annum interest rate (the " Mortgage Rate") for certain
of the Mortgage Loans is adjusted monthly and the Mortgage
Rate for the remainder of the Mortgage Loans is adjusted every
six months. The adjustment date is referred to as the "Interest
Adjustment Date." Subject to its Maximum Mortgage Rate,
the Mortgage Rate borne by a Mortgage Loan may be
calculated as follows:
Prime Index. The Mortgage Rate borne by _____% of the
-----------
Mortgage Loans (by Cut-off Date Principal Balance) is adjusted
every month and the Mortgage Rate borne by ___% of the
Mortgage Loans (by Cut-off Date Principal Balance) is adjusted
every six months, to equal either (i) the highest Prime Rate
listed under "Money Rates" in The Wall Street Journal most
recently available as of 45 days prior to such Interest
Adjustment Date (the "Prime Index") minus a margin (the
"Margin") generally ranging from ____% to zero or (ii) such
Prime Index plus a Margin generally ranging from zero to
-----%
Six-Month LIBOR Index. The Mortgage Rate borne by
---------------------
_____% of the Mortgage Loans (by Cut-off Date Principal
Balance) is adjusted every six months to equal the London
interbank offered rate for six-month U.S. dollar deposits (the
S-6
"Six-Month LIBOR Index") as
listed under "Money Rates" in
The Wall Street Journal most
recently available as of 45
days prior to the related
Interest Adjustment Date plus a
Margin generally ranging from
______% to _____%.
One-Month LIBOR Index. The Mortgage Rate borne by
---------------------
_____% of the Mortgage Loans (by Cut-off Date Principal
Balance) is adjusted every month to equal the London interbank
offered rate for one-month U.S. dollar deposits (the
"One-Month LIBOR Index") as listed under "Money Rates" in
The Wall Street Journal most recently available as of 45 days
prior to the related Interest Adjustment Date plus a Margin
generally ranging from _____% to _____%.
Treasury Index. The Mortgage Rate borne by ____% of the
--------------
Mortgage Loans (by Cut-off Date Principal Balance) is adjusted
every six months, and the Mortgage Rate borne by ___% of the
Mortgage Loans (by Cut-off Date Principal Balance) is adjusted
monthly, to equal the weekly average yield on the United States
Treasury Securities adjusted to a constant maturity of one year,
as made available by the Federal Reserve board in Statistical
Release H.15 (the "Treasury Index") most recently available as
of 45 days prior to the related Interest Adjustment Date plus a
Margin generally ranging from _____% to _____%.
Notwithstanding the foregoing, all of the Mortgage Loans (by
Cut-off Date Principal Balance) will have a maximum
Mortgage Rate (the "Maximum Mortgage Rate") of between
_____% and _____%.
Approximately _____% of the Mortgage Loans (by Cut-off
Date Principal Balance) are Convertible Mortgage Loans,
which provide that, at the option of the related Mortgagor, the
adjustable interest rate on such Mortgage Loan may be
converted to a fixed interest rate, and that, at the option of the
related Mortgagor, the adjustable rate on such Mortgage Loan
may be converted to a different Index (and may thereafter be
converted to a fixed rate), provided in each case that certain
conditions have been satisfied. The available Indices to which
a Convertible Mortgage Loan may be converted are the Prime
Index, the One-Month LIBOR Index, the Six-Month LIBOR
Index and the Treasury Index. The margins generally
applicable to such Indices are specified under "The Seller and
Its Mortgage Program." In connection with the conversion to
a new Index, the frequency of the Interest Adjustment Date is
not changed. Upon notification from a Mortgagor of such
Mortgagor's intent to convert any Mortgage Loan from an
adjustable interest rate to a fixed interest rate or to a different
Index, and prior to the conversion of any such Mortgage Loan,
the Master Servicer will be obligated to purchase such
Mortgage Loan (a " Converting Mortgage Loan"), if such
S-7
Mortgage Loan is eligible for
such conversion in accordance
with the terms thereof, at a
price (the " Conversion Price")
equal to the outstanding
principal balance thereof plus
accrued interest thereon net of
any servicing fee.
If the Master Servicer does not purchase a Converting
Mortgage Loan that converts to a fixed rate or a different
Index, the Mortgage Loans will thereafter include such fixed
rate converted Mortgage Loan as well as adjustable rate
Mortgage Loans, and the yield on the Class A Certificates
might be lower than it would have been if such purchase had
been made. See "The Seller and Its Mortgage Program" and
"Prepayment and Yield Considerations" herein. If the initial
Master Servicer is terminated as Master Servicer, it will not
thereafter be obligated to purchase any Converting Mortgage
Loan. A successor Master Servicer (including the Trustee if it
becomes the successor Master Servicer) will become obligated
to purchase Convertible Mortgage Loans that become
Converting Mortgage Loans only if such successor Master
Servicer elects in its discretion to obligate itself to make such
purchases.
On each Interest Adjustment Date for a Mortgage Loan during
the first __ years of its term, its Monthly Payment is adjusted
to equal one month's interest at the Mortgage Rate determined
for such Interest Adjustment Date. During the last 15 years of
its term the Monthly Payment is adjusted on each Interest
Adjustment Date to equal an amount that will fully amortize the
outstanding principal of the Mortgage Loan over its remaining
term at the related Mortgage Rate.
One Mortgage Loan having a Cut-off Date Principal Balance of
$____________ is scheduled to pay only interest for 15 years,
after which time its entire principal amount becomes due in a
balloon payment. Interest on such Mortgage Loan is payable
monthly at a rate adjusted every six months and equal to the
One-Month LIBOR plus a Margin of _____%.
See "The Seller and Its Mortgage Program" and "The
Mortgage Pool---- Mortgage Loans" herein.
S-8
Summary of Mortgage Loans
Characteristics as of the Cut-off Date
(Approximate)
Aggregate Outstanding Principal Balance......................................... $
Number of Mortgage Loans........................................................
Weighted Average Mortgage Rate.................................................. %
Index Used in determining the Mortgage Rate:
Prime Index................................................................ %
One-Month LIBOR Index...................................................... %
Six-Month LIBOR Index...................................................... %
Treasury Index............................................................. %
Weighted Average Margins:
Prime Index Mortgage Loans................................................. %
One-Month LIBOR Index...................................................... %
Six-Month LIBOR Index Mortgage Loans....................................... %
Treasury Index Mortgage Loans.............................................. %
Range of Maximum Mortgage Rates................................................. % to %
Weighted Average of Maximum Mortgage Rates...................................... %
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 Mortgage Rates......................................................... % to %
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 Convertible
Mortgage Loans............................................................. %
Description of the Certificates................ The Class A Certificates will evidence beneficial interests in the
pool of Mortgage Loans (the "Mortgage Pool") and certain
other property held in the Trust Fund for the benefit of the
Certificateholders. Exclusive of the interest of the Class R
Certificates, the Class A Certificates will evidence in the
aggregate a beneficial interest of approximately _____% in the
Mortgage Loans and the Class B Certificates will evidence the
remaining approximate ____%. The Class B and Class R
Certificates are subordinated in certain respects to the Class A
Certificates. See "Description of the Certificates" herein.
Record Date.................................... As to any Distribution Date, the last business day preceding the
immediately preceding Distribution Date (or the date of initial
issuance of the Certificates in the case of the first Distribution
Date).
Distributions on the Certificates.............. Distributions of interest and principal to each Holder of a
Class A Certificate will be made on the 25th day of each month
S-9
(or if such 25th day is not a
business day, then on the next
succeeding business day) (each,
a "Distribution Date"),
commencing in __________ 1996,
in an amount equal to each such
Holder's respective Percentage
Interest multiplied by the
amount distributed in respect
of the Class A Certificates.
The undivided percentage
interest (the "Percentage
Interest") evidenced by any
Class A Certificate will be
equal to the percentage
obtained by dividing the
initial principal balance of
such Certificate by the
aggregate initial principal
balance of all Class A
Certificates. 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 the actual number
of days in the Accrual Period
divided by 360. Interest will
accrue with respect to each
Distribution Date in respect of
the Class A and Class B
Certificates during the
one-month period beginning on
the 25th day of the month
preceding the month of such
Distribution Date (or, in the
case of the first Distribution
Date, beginning on ___________,
1996) and ending on the 14th
day of the month of such
Distribution Date (each, an
"Accrual Period").
Certain collections on deposit in the Collection Account
("Available Distribution Amount"), as described in detail under
"Description of the Certificates" herein, on the Determination
Date for the related Distribution Date will be distributed in the
following amounts and order of priority:
(i) to the Class A Certificateholders, interest for the
related Accrual Period at the Class A Pass-Through
Rate on the Class A Principal Balance, together with
any previously undistributed shortfalls in distributions
of interest due on the Class A Certificates (the
"Class A Unpaid Interest Shortfall") Interest
distributions are subject to reduction on account 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 Principal Balance is reduced to zero;
(iii) to the Certificate Insurer, the monthly premium due on
the Certificate Insurance Policy;
(iv) [intentionally omitted]
(v) 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");
S-10
(vi) to the Reserve Fund, the amount (but not in excess of
the Formula Excess Interest Amount) required to be
deposited in the Reserve Fund as described under
"Description of the Certificates-- Distributions on the
Certificates" and "-- Reserve Fund" herein;
(vii) to the Class B Certificateholders, interest for the
related Accrual Period at the Class B Pass-Through
Rate on the Class B Principal Balance, together with
any previously undistributed shortfalls in required
distributions of interest on the Class B Certificates.
Interest distributions are subject to reduction on
account of Net Interest Shortfalls as described below;
(viii) on account of principal, to the Holders of the Class A
Certificates 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 Principal Balance is reduced to zero;
(ix) to the Class B Certificateholders on account of
principal the Class B Formula Principal Distribution
Amount until the Class B Principal Balance is reduced
to zero;
(x) to the Class B Certificateholders, the Class B Loss
Amounts not previously distributed to them pursuant to
this clause; and
(xi) any remaining balance to the Class R
Certificateholders.
The Class A Principal Balance is the Original Class A Principal
Balance less all prior distributions to Class A Certificateholders
on account of principal.
The interest entitlement above for Class A and Class B
Certificates with respect to each Distribution Date will be
reduced by the amount of the 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.
Distributions on the Class A Certificates in respect of interest
shortfalls and principal shortfalls (exclusive of Net Interest
Shortfalls) may be made from the Reserve Fund to the extent
and in the priority described under "Reserve Fund" below. In
addition, the amount on deposit in the Reserve Fund will also
be applied as described under "Reserve Fund" below.
S-11
The Class A Formula Principal Distribution Amount will be
comprised of a percentage of the scheduled payments of
principal on the Mortgage Loans and a percentage of certain
unscheduled payments of principal of the Mortgage Loans.
Such percentages will be a function of the ratio of the Class A
Principal Balance to the Pool Scheduled Principal Balance and
the level of subordination, if any, provided to the Class A
Certificates by the Class B Certificates and are fully described
under "Description of the Certificates--Distributions on the
Certificates." The Class B Formula Principal Distribution
Amount will comprise a percentage of the scheduled principal
payments and certain unscheduled principal payments of the
Mortgage Loans equal, in each case, to 100% less the
respective percentage allocable to the Class A Certificates. See
"Description of the Certificates----Distributions on the
Certificates."
The "Pool Scheduled Principal Balance" as of a Distribution
Date is equal to the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date less the sum of (i) the
aggregate of the Formula Principal Distribution Amounts for all
prior Distribution Dates (exclusive of undistributed shortfalls
described in clause (g) of the definition of Formula Principal
Distribution Amount) and (ii) the aggregate of the Unrecovered
Principal Amounts for all prior Distribution Dates.
In no event will the aggregate distributions of principal to the
Holders of the Class A Certificates (whether out of Available
Distribution Amounts, Reserve Fund draws or payments under
the Certificate Insurance Policy) exceed the Original Class A
Principal Balance.
See "Description of Certificates---- Distributions on
Certificates."
Priority Sequence of Distributions
of Principal on Certificates................. The Formula Principal Distribution Amount for a Distribution
Date, which includes prepayments on the Mortgage Loans, will
be distributed on the Class A and Class B Certificates on the
shifting-interest basis as described under "Description of the
Certificates--Distributions on the Certificates." Unless offset
by cash flow insufficiencies, this prioritization of distributions
should have the effect of accelerating the amortization of the
Class A Certificates from what it would otherwise be if such
distributions were made on a pro rata basis. The rate of
principal payments on the Class A Certificates is directly
related to the rate of payments of principal on the Mortgage
Loans and the level of subordination, if any, provided by the
Class B Certificates and will affect the yield on the Class A
Certificates. See "Prepayment and Yield Considerations"
herein and "Yield and Prepayment Considerations" in the
Prospectus.
S-12
Reserve Fund................................... At the time of the initial issuance of the Certificates, a Reserve
Fund will be established as part of the Trust Fund and will be
funded up to $________ from the application of the Available
Distribution Amount pursuant to clause (vi) under
"Distributions on the Certificates."
On each Distribution Date, funds, if any, in the Reserve Fund
will be applied in the following order of priority: (i) to make
any required Advance not made by the Master Servicer, (ii) to
distribute any shortfall in the amount required to be distributed
to the Holders of the Class A Certificates 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. 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), the amount of such deficiency shall be
allocated pro rata among the Class A Certificates on the basis
of their respective Principal 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 such clause (ii), then the Reserve Fund may be
reinstated one time up to $_________ from the application of
the Available Distribution Amount pursuant to such clause (vi)
under "Distributions on the Certificates" 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 respective Holders of Class A
Certificates of the full amount of monthly distributions due
them and to protect the Holders of Class A Certificates and the
Certificate Insurer against losses, but no assurance can be given
that the Holders of Class A Certificates will not experience
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 a Distribution Date is not
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sufficient to permit the
distribution of the entire
Class A Formula Principal
Distribution Amount and all
previously undistributed
Unrecovered Principal Amounts,
by the right of the Holders of
the 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.
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.
If the Available Distribution Amount for any Distribution Date
is not sufficient to cover, in addition to interest distributable to
the Class A Certificateholders, the entire Class A Formula
Principal Distribution Amount and all previously undistributed
Unrecovered Principal Amounts distributable to the Class A
Certificateholders on such Distribution Date, then the amount
of the Pool Scheduled Principal Balance available to the
Class B Certificates (i.e., such Pool Scheduled Principal
Balance less the Class A Principal Balance) on future
Distribution Dates will be reduced. See "Description of the
Certificates----Distributions on the Certificates" herein. If,
because of liquidation losses, the Pool Scheduled Principal
Balance were to decrease disproportionately faster than
distributions to the Class A Certificateholders reducing the
Class A Principal Balance, the level of protection afforded to
the Class A Certificateholders by the subordination of the
Class B Certificates (i.e., the percentage of the Pool Scheduled
Principal Balance available to the Class B Certificates) would
be reduced. If the Certificate Insurer were to fail to perform
its obligations under the Certificate Insurance Policy and the
Pool Scheduled Principal Balance were to become equal to or
less than the Class A Principal Balance, the Class A
Certificateholders would bear all losses and delinquencies on
the Mortgage Loans and could incur a loss on their investment.
See "Description of the Certificates---- Subordinated
Certificates" herein.
Certificate Insurance Policy................... The Depositor will obtain the Certificate Insurance Policy,
which is noncancelable, in favor of the Trustee, which will
provide for payment of Insured Amounts solely to the Holders
of the Class A Certificates in accordance with the terms of the
Certificate Insurance Policy. Payment of an Insured Amount,
if applicable, is intended to provide the Trustee with sufficient
funds to make distributions to the Holders of the Class A
Certificates of the full amount of interest, together with the
related Class A Formula Principal Distribution Amount, due on
the Class A Certificates on each Distribution Date and, on the
Distribution Date following the month in which the latest
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original scheduled maturity
date of any then outstanding
Mortgage Loan occurs, the
outstanding Principal Balance,
if any, of the Class A
Certificates. The Certificate
Insurance Policy does not
guarantee to Holders of the
Class A Certificates, and does
not protect against any adverse
consequences caused by, any
specified rate of prepayments
of the Mortgage Loans and does
not protect such
Certificateholders against any
adverse consequences caused by
any Net Interest Shortfalls.
See "The Certificate Insurance
Policy and the Certificate
Insurer" herein.
Certificate Insurer............................ _____________________.
Advances....................................... The Master Servicer is obligated to make advances of cash,
which will be part of the Available Distribution Amount, in an
amount equal to the delinquent Monthly Payments due on the
immediately preceding Due Date (the "Advances"). The
Master Servicer is under no obligation to make Advances to the
extent it determines such Advances are not recoverable from
future payments or collections on the related Mortgage Loans.
Such Advances, however, will be reimbursed to the Master
Servicer and are not intended to guarantee or insure against
losses. See "Description of the Certificates----Advances"
herein.
Optional Termination........................... The Master Servicer may, at its option, and, in the absence of
the exercise thereof by the Master Servicer, the Certificate
Insurer may, at its option, 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.
The repurchase price will equal the greater of (i) the aggregate
principal balances of the Mortgage Loans plus accrued interest
thereon at the related Net Mortgage Rate, (ii) the fair market
value of the Mortgage Loans as determined by the Master
Servicer, and (iii) the sum of (a) the aggregate of the Class A
Principal Balance together with one month's interest at the
Class A 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. See
"Description of the Certificates----Optional Termination"
herein.
Prepayment and Yield
Considerations............................... The actual rate of prepayment of principal on the Mortgage
Loans cannot be predicted. The investment performance of the
Class A Certificates may vary materially and adversely from
the investment expectations of investors due to prepayments on
the Mortgage Loans being higher or lower than anticipated by
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investors. In addition, the
Class A Certificates will be
more sensitive to prepayments
on the Mortgage Loans than the
Subordinated Certificates due
to the disproportionate
allocation of such prepayments
to investors in the Class A
Certificates then entitled to
principal distributions during
the ______ years beginning on
the first Distribution Date.
The actual yield to the holder
of a Class A Certificate may
not be equal to the yield
anticipated at the time of
purchase of the Certificate or,
notwithstanding that the actual
yield is equal to the yield
anticipated at that time, the
total return on investment
expected by the investor or the
weighted average life of the
Certificate may not be
realized.
Yield. If an investor purchases a Class A Certificate at an
amount equal to its unpaid principal balance (at "par"), the
effective yield to that investor (assuming that there are no
interest shortfalls and assuming the full return of the
purchaser's invested principal) will approximate the
pass-through rate on that Certificate. If an investor pays less
or more than the unpaid principal balance of a Class A
Certificate (a "discount" or "premium," respectively), then,
based on the assumptions set forth in the preceding sentence,
the effective yield to the investor will be higher or lower,
respectively, than the stated interest rate on the Certificate,
because such discount or premium will be amortized over the
life of the Certificate. Any deviation in the actual rate of
prepayments on the Mortgage Loans from the rate assumed by
the investor will affect the period of time over which, or the
rate at which, the discount or premium will be amortized and,
consequently, will change the investor's actual yield from that
anticipated. The timing of receipt of prepayments may also
affect the investor's actual yield.
Reinvestment Risk. As stated above, if a Class A Certificate is
purchased at an amount equal to its unpaid principal balance,
fluctuations in the rate of distributions of principal will
generally not affect the yield to maturity of that Certificate.
However, the total return on any investor's investment,
including an investor who purchases at par, will be reduced to
the extent that principal distributions received on its Class A
Certificate cannot be reinvested at a rate as high as the stated
interest rate of the Certificate.
Weighted Average Life Volatility. One indication of the impact
of varying prepayment rates on a security is the change in its
weighted average life. The "weighted average life" of a
Class A Certificate is the average amount of time that will
elapse between the date of issuance of the Certificate and the
date on which each dollar in reduction of the principal balance
of the Certificate is distributed to the investor. Low rates of
prepayment may result in the extension of the weighted average
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life of a Certificate; high
rates may result in the
shortening of such weighted
average life. In general, if
the weighted average life of a
Certificate purchased at par is
extended beyond that initially
anticipated, such Certificate's
market value may be adversely
affected even though the yield
to maturity on the Certificate
is unaffected. The weighted
average lives of the Class A
Certificates, under various
prepayment scenarios, are
displayed in the tables
appearing under the heading
"Prepayment and Yield
Considerations" in this
Prospectus Supplement.
Certain Federal Income Tax
Considerations............................... 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 (i) qualifying real
property loans within the meaning of section 593(d) of the
Internal Revenue Code of 1986, as amended (the "Code"), (ii)
assets described in section 7701(a)(19)(C) of the Code and (iii)
"real estate assets" within the meaning of section 856(c)(5)(A)
of the Code, in each case to the extent described in the
Prospectus.
See "Certain Federal Income Tax Consequences" herein and in
the Prospectus.
ERISA Considerations........................... A fiduciary of any employee benefit plan subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or section 4975 of the Code, should
carefully review with its legal advisors whether the purchase or
holding of Class A Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or the
Code. See "ERISA Considerations" herein and in the
Prospectus.
Legal Investment Considerations................ So long as the Class A Certificates are rated in one of the two
highest rating categories by at least one nationally recognized
statistical rating agency, the Class A Certificates, will constitute
"mortgage related securities" under the Secondary Mortgage
Market Enhancement Act of 1984 and, as such, will be "legal
investments" for certain types of institutional investors to the
extent provided in such Act. See "Legal Investment
Considerations" in the Prospectus.
Use of Proceeds................................ Substantially all of the net proceeds from the sale of the
Class A Certificates will be applied by the Depositor to the
purchase price of the Mortgage Loans and to pay expenses
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connected with pooling the Mortgage Loans and issuing the
Certificates. See "Use of Proceeds" herein.
Certificate Ratings............................ It is a condition to the issuance of the Class A Certificates that
the Class A Certificates be rated AAAr by Standard & Poor's
Ratings Group, a division of McGraw Hill, Inc. (" Standard &
Poor's") and Aaa by Moody's Investors Service, Inc. ("
Moody's"). Standard & Poor's assigns the additional symbol
of "r" to highlight classes of securities that Standard & Poor's
believes may experience high volatility or high variability in
expected returns due to non-credit risks; however, the absence
of an "r" symbol should not be taken as an indication that a
class will exhibit no volatility or variability in total return. The
ratings of Standard & Poor's and Moody's for the Class A
Certificates will not represent any assessment of the Master
Servicer's ability to purchase Converting Mortgage Loans. If
the Master Servicer does not purchase a Converting Mortgage
Loan that it is obligated to purchase as described herein, the
Holders of the applicable Class A Certificates might experience
a lower than anticipated yield on their Certificates. A security
rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the
assigning rating agency. A security rating does not address the
frequency of prepayments on the Mortgage Loans or the
corresponding effect on yield to investors. See "Certificate
Rating" herein.
Registration of Class A Certificates........... The Class A Certificates initially will be represented by
certificates registered in the name of Cede & Co. ("Cede") as
the nominee of The Depository Trust Company ("DTC"), and
will only be available in the form of book-entries on the
records of DTC and participating members thereof.
Certificates representing the Class A Certificates will be issued
in definitive form only under the limited circumstances
described herein. All references herein to "Holders" or "
Certificateholders" shall reflect the rights of owners of Class A
Certificates (" Certificate Owners") as they may indirectly
exercise such rights through DTC and participating members
thereof, except as otherwise specified herein. See "Description
of the Certificates----Registration of Class A Certificates"
herein.
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RISK FACTORS
Limited Liquidity. Although the Underwriter intends to make a
market in the Class A Certificates, it is under no obligation to do
so. There can be no assurance that a secondary market will develop or,
if a secondary market does develop, that it will provide Holders of the
Class A Certificates with liquidity of investment or that it will
continue for the lives of the Class A Certificates. The
Certificates will not be listed on any securities exchange. Issuance
of the Class A Certificates in book-entry form may reduce the liquidity
of such Certificates in the secondary trading market since
investors may be unwilling to purchase Class A Certificates for which
they cannot obtain physical certificates. See "Description of the
Certificates---- Registration of the Class A Certificates."
Prepayments. Substantially all the Mortgage Loans may be
prepaid in whole or in part at any time without penalty. In addition, a
substantial portion of the Mortgage Loans contain due-on-sale
provisions which, to the extent enforced by the Master Servicer, will
result in prepayment of such Mortgage Loans. See "Prepayment and
Yield Considerations." The rate of prepayments on adjustable-rate
mortgage loans, such as the Mortgage Loans, although not as
sensitive as fixed-rate mortgage loans, is sensitive to prevailing
interest rates. Generally, if prevailing interest rates fall
significantly below the current interest rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayment rates
than if prevailing rates remain at or above the current interest
rates on the Mortgage Loans. Conversely, if prevailing interest
rates rise significantly above the current interest rates on the
Mortgage Loans, the rate of prepayments is likely to decrease. The
average life of the Class A Certificates, and, if purchased at
other than par, the yields realized by Class A Certificateholders,
will be sensitive to levels of payment (including prepayments) on the
Mortgage Loans. In general, the yield on a Class A Certificate that is
purchased at a premium from the outstanding principal amount thereof
will be adversely affected by a higher than anticipated level of
prepayments of the Mortgage Loans and enhanced by a lower than
anticipated level. Conversely, the yield of a Class A Certificate
that is purchased at a discount from the outstanding principal amount
thereof will be enhanced by a higher than anticipated level of
prepayments and adversely affected by a lower than anticipated level.
No assurance can be given as to the level of prepayments the Trust Fund
will experience.
Difficulty in Pledging. Since transactions in Class A
Certificates can be effected only through DTC, participating
organizations, indirect participants and certain banks, the ability
of a Certificate Owner to pledge a Class A Certificate to persons or
entities that do not participate in the DTC system, or otherwise to take
actions in respect of such Certificates, may be limited due to lack of a
physical certificate representing the Offered Certificates. See
"Description of the Certificates---- Registration of Class A
Certificates."
Potential Delays in Receipt of Distributions.
Certificateholders may experience some delay in their receipt of
distributions of interest and principal on the Class A Certificates
since such distributions will be forwarded by the Trustee to DTC, and
DTC will credit such distributions to the accounts of its Participants
(as defined herein) which will thereafter credit them to the accounts
of Certificateholders either directly or indirectly through indirect
participants. See "Description of the Certificates----Registration of
Class A Certificates."
Certificate Ratings. The rating of the Class A Certificates
will depend primarily on an assessment by the Rating Agencies of the
underlying Mortgage Loans, the Certificate Insurance Policy and the
amount of overcollateralization. The rating by the Rating Agencies
of the Class A Certificates is not a recommendation to purchase,
hold or sell the Class A Certificates, inasmuch as such rating does
not comment as to the market price or suitability 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.
Certificate Insurance Policy. Credit enhancement with
respect to the Class A Certificates will be provided by the Certificate
Insurance Policy. See "Certificate Insurer and Certificate Insurance
Policy." If the available amount under the Certificate Insurance
Policy is reduced to zero, the Class A Certificateholders will be
at greater risk with respect to losses on the Mortgage Loans.
Realization Upon Nonperforming Loans; Delays and Expenses
Associated With Legal Actions. An action to foreclose a Mortgage Loan
is regulated by statutes and rules and is subject to a court's equitable
powers. A
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foreclosure action is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, an
action to obtain a deficiency judgment also is regulated by statutes
and rules, and the amount of a deficiency judgment may be limited by
law. In the event of a default by a borrower, these restrictions, among
others, may impede the ability of the Master Servicer to foreclose on
or to sell the Mortgaged Property or to obtain a deficiency
judgment in connection therewith. If required payments under the
Certificate Insurance Policy were not made and the protection
afforded the Class A Certificateholders by the subordination of the
Subordinated Certificates is exhausted, such restrictions may
delay distributions to the Class A Certificateholders and may
ultimately limit the amounts distributed with respect to such defaulted
Mortgage Loans and result in a loss to the Class A
Certificateholders on their investments. See "Certain Legal
Aspects of the Mortgage Loans" in the Prospectus.
Insolvency of the Seller or the Depositor. The Seller and the
Depositor will treat as sales the transfers of the Mortgage Loans from
the Seller to the Depositor and from the Depositor to the Trust Fund.
As a sale of the Mortgage Loans to the Trust Fund, the Mortgage Loans
would not be part of the Seller's or the Depositor's assets in the
event of the insolvency of the Seller or the Depositor and would
not be available to the Seller's or the Depositor's creditors.
However, in the event of the insolvency of the Seller or the
Depositor, it is possible that a receiver or conservator of the
Seller, the bankruptcy trustee of the Depositor, or a creditor of
either, or the Depositor as debtor in possession, may attempt to argue
that the transactions between the Seller, the Depositor and the Trust
Fund were a pledge of the Mortgage Loans rather than a true sale or
that, in an insolvency of the Seller, the transactions between
the Depositor and the Trust Fund were a pledge of the Mortgage Loans
and other assets of the Trust Fund rather than a sale and that the
assets of the Depositor should be substantively consolidated with
those of the Seller. Either such position, if argued before or accepted
by a court, could prevent timely payments of amounts due on each
class of Certificates and/or result in payment of reduced amounts
distributed on each class of Certificates. Furthermore, so long as the
Seller retains the documentation relating to the Mortgage Loans in
its possession, if such recharacterization were to occur, the Class A
Certificateholders may be treated as unsecured creditors of the Seller.
In addition, cash collections may be commingled with the Master
Servicer's own funds and used for the Master Servicer's own benefit
prior to each Distribution Date. In the event of the insolvency of the
Seller (so long as the Seller is the Master Servicer), the Trust Fund
will likely not have a perfected interest in such collections since
they would not have been deposited in a segregated account within 10
days after the collection thereof, and the inclusion thereof in the
assets of the Seller may result in delays in payment and failure to
pay amounts due on the Certificates.
The Federal Deposit Insurance Corporation (the "FDIC"),
or other conservator, or other federal banking agency or any other
person or entity, as receiver or conservator for the Seller, could
attempt to avoid the perfected security interest of the Trust Fund in
the Mortgage Loans and require the Trustee to establish its
rights to those payments by submitting to and completing certain
administrative claims procedures (which may take up to 180 days), or to
request a stay of judicial proceedings with respect to the Seller. If a
receiver or conservator were successful in such actions, delays in
payments on the Certificates and possible reductions in the amount of
distributions of principal and interest could occur. A receiver or
conservator may disaffirm or repudiate the obligation of the Seller to
purchase Mortgage Loans as to which a breach of representation or
warranty has occurred. A conservator or receiver also may have the
power to cause the early sale of the Trust Fund and the early
retirement of the Certificates. Further, if a receiver or
conservator is appointed for the Master Servicer, the receiver or
conservator may have the power either to terminate the Master
Servicer and replace it with a successor servicer or to prevent the
termination of the Master Servicer and its replacement by a
successor servicer if no default exists other than the insolvency
of the Master Servicer or its receivership or conservatorship.
Other Legal Considerations. Applicable state laws generally
regulate interest rates and other charges, require certain
disclosures, and require licensing of the Seller. In addition, other
state laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and
collection of the Mortgage Loans. The Seller will not be required to
repurchase any Mortgage Loans which, at the time of origination,
did not comply with applicable federal and state laws and regulations.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Trust Fund to
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collect all or part of the principal of or interest on the Mortgage
Loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the Seller to damages and administrative
enforcement. See "Certain Legal Aspects of the Mortgage Loans" in the
Prospectus.
The Mortgage Loans are also subject to federal laws,
including the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, and the Fair Credit Reporting Act. Violations
of certain provisions of these federal laws may limit the ability of
the Seller to collect all or part of the principal of or interest on
the Mortgage Loans and, in addition, could subject the Seller to
damages and administrative enforcement. The Seller 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.
THE MORTGAGE POOL
The mortgage pool with respect to the Certificates (the "
Mortgage Pool") will consist of approximately ___ conventional mortgage
loans evidenced by high balance, adjustable interest rate promissory
notes (each, a "Mortgage Note") having an aggregate principal
balance as of the Cut-off Date of approximately $_____________.
The Mortgage Notes are secured by mortgages or deeds of trust or other
similar security instruments creating first liens on one- to
four-family residential properties (the "Mortgaged Properties"). The
Mortgage Loans were originated by the Seller, or acquired by the
Seller in the ordinary course of its real estate lending
activities. With respect to approximately ___% of the Mortgage Loans
(by Cut-off Date Principal Balance), the borrowers were initially
solicited by, and the documentation for the Mortgage Loans was
processed by, mortgage brokers, mortgage bankers, credit unions and
other financial institutions that are not affiliated with the Seller.
Personnel of the Seller or its agents reviewed the documentation for
each such Mortgage Loan and underwrote such loans in accordance
with the Seller's underwriting standards.
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 dated as
of __________, 1996 (the "Agreement"), by and among the Depositor, the
Seller, as master servicer (the "Master Servicer"), and
_____________________, as trustee (the "Trustee"), (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
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 Seller 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 Depositor will purchase the Mortgage Loans from the Seller
and will cause such Mortgage Loans to be assigned to the Trustee. The
Master Servicer will service the Mortgage Loans, either by itself or
through other mortgage servicing institutions (the "Sub-servicers"),
pursuant to the Agreement. With respect to any Mortgage Loans
serviced by the Master Servicer through a Sub-servicer, the
Master Servicer will remain liable for its servicing obligations
under the Agreement as if the Master Servicer alone were servicing such
Mortgage Loans.
The Seller will make certain representations and warranties
for the benefit of the Depositor, the Certificate Insurer and the
Trustee with respect to the Mortgage Loans as described in the
Prospectus under "Mortgage Loan Program----Representations by
Sellers; Repurchases" and 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
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these representations and warranties will be the repurchase
obligation of the Seller provided in the Agreement as described in the
sections of the Prospectus referred to above. The Trustee will enforce
the Seller's repurchase obligation, and the Depositor will not be
obligated to repurchase any Mortgage Loan for such a breach of any
representation or warranty. In lieu of such repurchase
obligation, the Seller 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 by Sellers; Repurchases" in the Prospectus
and as provided by the 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 aggregate principal balance
of the Mortgage Loans as of the Cut-off Date, based on the outstanding
balances of the Mortgage Loans as of the Cut-off Date, giving effect to
scheduled Monthly Payments due on or prior to the Cut-off Date.
Approximately _____% of the Mortgage Loans are One-Month
LIBOR Index based Mortgage Loans, approximately _____% are Six-Month
LIBOR Index based Mortgage Loans, approximately ____% are Prime Index
based Mortgage Loans that adjust monthly, ___% are Prime Index based
Mortgage Loans that adjust every six months, approximately ___% are
Treasury Index based Mortgage Loans that adjust monthly and
approximately ___% are Treasury Index based Mortgage Loans that
adjust every six months. Approximately _____% of the Mortgage
Loans are Convertible 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 __ 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.
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 $_________.
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Set forth below is a description of certain additional
characteristics of the Mortgage Loans.
Geographical Distribution of Mortgaged Properties
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-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.
S-23
Range of Cut-off Date Principal Balances(1)
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-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...................
$2,000,000.01 - $2,500,000.00...................
$2,500,000.01 - $3,000,000.00...................
$3,000,000.01 - $3,500,000.00...................
$3,500,000.01 - $4,000,000.00...................
----------------- ------------------ --------------------
Total.................................. $ 100.00%
================= ================== ====================
- -------------------
(1) As of the Cut-off Date, the average outstanding principal balance
of the Mortgage Loans was approximately $--------.
S-24
Range of Original Loan-to-Value Ratios(1)
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-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
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Mortgage Principal Principal
Status Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
Owner-Occupied.................................. $ %
Second Home.....................................
Investor........................................
----------------- ------------------ --------------------
Total.................................. $ 100.00%
================= ================== ====================
S-25
Loan Purpose
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Mortgage Principal Principal
Loan Purpose Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
Purchase........................................ $ %
Rate and Term Refinance.........................
Cash-out Refinance..............................
----------------- ------------------ --------------------
Total.................................. $ 100.00%
================= ================== ====================
- ------------------
(1) As described under "the Seller and its Mortgage Program."
Mortgaged Properties
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-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-26
Maximum Mortgage Rates(1)
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Mortgage Principal Principal
Maximum Mortgage Rates Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
12.000% - 12.249%............................... $ %
12.250% - 12.499%...............................
12.500% - 12.749%...............................
12.750% - 12.999%..............................
13.000% - 13.249%...............................
13.250% - 13.749%...............................
13.750% - 13.999%...............................
14.000% - 14.249%...............................
14.250% - 14.499%...............................
14.500% - 14.749%...............................
14.750% - 14.999%...............................
15.000% + ......................................
----------------- ------------------ --------------------
Total.................................. $ 100.00%
================= ================== ====================
- -------------------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage
Rate was ______%.
S-27
Range of Current Mortgage Rates(1)
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Range of Current Mortgage Principal Principal
Mortgage Rates Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
6.50% - 6.74%................................... $ %
6.75% - 6.99%...................................
7.00% - 7.24%...................................
7.50% - 7.74%...................................
7.75% - 7.99%..................................
8.00% - 8.24%...................................
8.25% - 8.49%...................................
8.50% - 8.74%...................................
8.75% - 8.99%...................................
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
Number Cut-off Mortgage Loans
Range of Remaining of Date by Cut-off Date
Terms to Stated Mortgage Principal Principal
Maturity in Months 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.
S-28
Next Interest Rate Adjustment Date(1)
for Prime Index Mortgage Loans
That Adjust Every Six Months
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Month of Next Mortgage Principal Principal
Adjustment Date Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
May 1, 1996..................................... $ %
June 1, 1996....................................
July 1, 1996....................................
August 1, 1996..................................
September 1, 1996..............................
October 1, 1996.................................
----------------- ------------------ --------------------
Total.................................. $ %
================= ================== ====================
- -------------------
(1) As of the Cut-off Date, the weighted average number of months to
the next Interest Adjustment Date was __ months.
Next Interest Rate Adjustment Date(1)
for One-Year Treasury Index Mortgage Loans
That Adjust Every Six Months
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Month of Next Mortgage Principal Principal
Adjustment Date Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
May 1, 1996..................................... $ %
June 1, 1996....................................
July 1, 1996....................................
August 1, 1996..................................
September 1, 1996..............................
October 1, 1996.................................
----------------- ------------------ --------------------
Total.................................. $ 100.00%
================= ================== ====================
- -------------------
(1) As of the Cut-off Date, the weighted average number of months to the
next Interest Adjustment Date was __ months.
S-29
Next Interest Rate Adjustment Date(1)
for SIX-Month LIBOR Index Mortgage Loans
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Month of Next Mortgage Principal Principal
Adjustment Date Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
May 1, 1996..................................... $ %
June 1, 1996....................................
July 1, 1996....................................
August 1, 1996..................................
September 1, 1996..............................
October 1, 1996.................................
----------------- ------------------ --------------------
Total.................................. $ %
================= ================== ====================
- -------------------
(1) As of the Cut-off Date, the weighted average number of months to
the next Interest Adjustment Date was __ months.
Prime Index Mortgage Loan Margins
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Mortgage Principal Principal
Margin(1) Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
- -0.875%......................................... $ %
- -0.750..........................................
- -0.500..........................................
- -0.250..........................................
0.000...........................................
0.250...........................................
0.500...........................................
0.750...........................................
----------------- ------------------ --------------------
Total.................................. $ %
================= ================== ====================
- -------------------
(1) As of the Cut-off Date, the weighted average current Margin was
_____%.
S-30
One-Month LIBOR Index Mortgage Loan Margins(1)
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Mortgage Principal Principal
Margin Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
1.125%.......................................... $ %
1.250...........................................
1.375...........................................
1.500...........................................
1.625...........................................
1.750...........................................
1.875...........................................
2.000...........................................
2.125...........................................
2.250...........................................
2.375...........................................
2.500..........................................
2.625...........................................
2.875...........................................
----------------- ------------------ --------------------
Total.................................. $ %
================= ================== ====================
- -------------------
(1) As of the Cut-off Date, the weighted average current Margin was _____%.
S-31
Six-Month LIBOR Index Mortgage Loan Margins(1)
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Mortgage Principal Principal
Margin Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
0.625%.......................................... $ %
1.000...........................................
1.125...........................................
1.250...........................................
1.375...........................................
1.500...........................................
1.625...........................................
1.750...........................................
1.875...........................................
2.000...........................................
2.125...........................................
2.250...........................................
2.375...........................................
2.500...........................................
2.625...........................................
2.875...........................................
----------------- ------------------ --------------------
Total.................................. $ %
================= ================== ====================
- -------------------
(1) As of the Cut-off Date, the weighted average current Margin was _____%.
S-32
One-Year Treasury Index Mortgage Loan Margins(1)
Percent of
Number Cut-off Mortgage Loans
of Date by Cut-off Date
Mortgage Principal Principal
Margin Loans Balance Balance
- ---------------------------------------------------------------------------------------------------------------------
1.000%.......................................... $ %
1.500...........................................
1.875...........................................
2.000...........................................
2.125...........................................
2.250...........................................
2.375...........................................
2.500...........................................
2.625...........................................
2.750...........................................
----------------- ------------------ --------------------
Total................................. $ %
================= ================== ====================
- -------------------
(1) As of the Cut-off Date, the weighted average current Margin was _____%.
S-33
THE SELLER AND ITS MORTGAGE PROGRAM
First Union National Bank of North Carolina ("FUNB") is the Seller and
the Master Servicer under the Agreement. FUNB is a banking subsidiary of First
Union Corporation, a North Carolina-based, multi-bank holding company registered
under the Bank Holding Company Act. First Union Corporation is the sixth largest
holding company in the United States based on total assets as of December 31,
1995. On January 1, 1996, First Union Corporation acquired First Fidelity
Bancorporation, a New Jersey-based bank holding company with banking offices in
six states. On a combined, restated basis, as of December 31, 1995, First Union
Corporation had assets of $131.8 billion, net loans of $89.1 billion, deposits
of $92.6 billion and shareholders' equity of $5.04 billion. For the fiscal year
ended December 31, 1995, First Union Corporation had net earnings (after payment
of the redemption premium on its preferred stock) of $1.4 billion. At December
31, 1995, First Union Corporation's tier 1 and total capital ratios were 6.62%
and 11.33%, respectively. First Union Corporation's leverage ratio at December
31, 1995, was 5.49%.
FUNB underwriting standards are applied to evaluate an applicant's
credit standing and repayment ability, and the value and adequacy of the
mortgaged property as collateral. Initially, an applicant is required to
complete an application providing pertinent credit information and to mail the
application along with an application fee to FUNB. As part of the description of
the applicant's financial condition, the applicant is required to provide
information concerning his or her assets, liabilities, income and expenses, as
well as an authorization permitting FUNB to apply for a credit report
summarizing the applicant's credit history.
Upon receipt of the application package, which typically requires
submission of the last two years' personal income tax returns and business tax
returns for self-employed applicants, FUNB conducts its own review of the
application package and obtains additional information concerning the
prospective borrower prior to approving the loan. Along with obtaining a credit
report, FUNB 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 generally is required to submit the
prior year's mortgage statements which generally reflect a monthly payment
history. In addition, a written employment verification may be requested from
the applicant'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.
Mortgage loans have Loan-to-Value Ratios at origination not in excess
of 95%. The Loan-to-Value Ratio is the ratio, expressed as a percentage, of the
principal amount of a mortgage loan at origination to the lesser of (i) the
appraised value of the related mortgaged property, as established by an
appraisal obtained by the originator generally no more than 120 days prior to
origination, or (ii) the sale price for such property. In some instances, the
Loan-to-Value Ratio may be based on an appraisal that was obtained by the
originator more than 120 days prior to origination, provided that (i) a
recertification of the original appraisal is obtained and (ii) the original
appraisal was obtained no more than 12 months prior to origination. For purposes
of calculating the Loan-to-Value Ratio of any mortgage loan that is the result
of the refinancing (including a refinancing for "equity take-out" purposes) of
an existing mortgage loan, the appraised value of the related mortgaged property
is generally determined by reference to an appraisal obtained in connection with
the origination of the replacement loan. With respect to a loan secured by a
second home, an owner-occupied cooperative or a non-owner occupied property, the
Loan-to-Value Ratio will not exceed 80%, and with respect to a mortgage loan
which is made to refinance, for equity take-out purposes, an existing mortgage
loan on a non-owner occupied property, the Loan-to-Value Ratio will not
generally exceed 75%. Loans having a Loan-to-Value Ratio in excess of 80% will
be covered by primary mortgage insurance.
The applicant has the option of directly obtaining a title report or
may choose to have FUNB obtain the report. Generally, all liens must be
satisfied and removed prior to or upon the closing of the loan. Title insurance
is required to be obtained for all loans. Where applicable, in addition to
providing proof of standard hazard insurance on the property, the applicant is
required to obtain, to the extent available, flood insurance when the subject
property is identified as being in a federally designated flood hazard area.
S-34
Deviations from the above described underwriting guidelines are
permitted in certain cases deemed appropriate by FUNB's underwriting personnel
on the basis of mitigating factors.
FUNB also acquires loans from its affiliate, First Union Mortgage
Corporation ("FUMC"), and from mortgage brokers, mortgage bankers, credit unions
and other financial institutions that are not affiliated with FUNB. These
third-party originators solicit the prospective borrower and process the
documentation described above for such borrower's loan. Personnel of FUNB review
such documentation and underwrite the loan in accordance with the above
described underwriting standards.
Delinquency and Loan Loss Experience
Delinquency and Foreclosure Experience. The following table sets forth
the delinquency and foreclosure experience of residential mortgage loans master
serviced by FUNB, as of December 31, 1995. FUNB'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 and foreclosure
experience with respect to the Mortgage Loans in the Mortgage Pool will be
similar to that reflected in the table below, nor is any representation made as
to the rate at which losses may be experienced on liquidation of defaulted
Mortgage Loans in the Mortgage Pool. 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)
As of December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
Number Principal
of Loans Balance
Loans outstanding .................................................. 7.938 $ 1.878
Period of delinquency(2)
30-59 days................................................. 88 17.6
60-89 days................................................. 12 2.2
90 days or more ........................................... 18 6.2
----------------- -------------------
Total delinquencies(3) ............................................. 121 $ 26.1
================= ===================
Delinquencies as a percent of number of mortgage % %
loans and principal amount outstanding .............................
Foreclosures/bankruptcies ......................................... 23 4.9
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 date 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-35
Loss Experience. FUNB's portfolio of mortgage loans has had no losses
as of December 31, 1995. It is possible that losses may be experienced on some
of the loans that are currently the subject of bankruptcy or foreclosure
proceedings.
Because of the short time during which FUNB has originated and serviced
mortgage loans and the resulting lack of experience as to delinquencies and
losses on such loans, the following two tables are presented to set forth
information regarding the delinquency and loss experience on mortgage loans
originated and serviced by First Union Mortgage Corporation ("FUMC"), an
affiliate of FUNB. FUNB believes that the underwriting standards used by FUMC in
originating mortgage loans are similar, although not identical, to the
underwriting standards employed by FUNB and required of third party originators
by FUNB. The mortgage loans in FUMC's portfolio may differ significantly from
the Mortgage Loan with respect to interest rates, principal balances, geographic
distribution, Loan-to-Value Ratios and other relevant characteristics. The
delinquency and loss information presented below represents the historical
experience of FUMC, and there can be no assurance that the future experience on
the Mortgage Loans in the Mortgage Pool will be the same as, or more favorable
than, that of the mortgage loans in FUMC's servicing portfolio.
S-36
FUMC Loan Delinquency and Foreclosure Experience
As of December 31,
1991 1992 1993 1994 1995
Number Number Number Number Number
of Loans Amount of Loans Amount of Loans Amount of Loans Amount of Loans Amount
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Loans outstanding........... $ $ $ $ $
Period of delinquency:
30-59 days................
60-89 days................
90 days or more*..........
Total delinquency......
Delinquencies as a percentage of number
of loans and principal amount outstanding
Foreclosures*...............
Foreclosures as a percentage of number of
loans and principal amount outstanding
As of _______________, 1996
Principal Number of Principal
Amount Loans Amount
- --------------------------------------------------------------------------------------------------------------------------
Loans outstanding......................................... $ $
Period of delinquency:
30-59 days..............................................
60-89 days..............................................
90 days or more*........................................
Total delinquency....................................
Delinquencies as a percentage of number of loans and
principal amount outstanding..............................
Foreclosures*.............................................
Foreclosures as a percentage of number of loans and
principal amount outstanding..............................
- ---------
* Does not include loans subject to bankruptcy proceedings and real estate
owned.
S-37
The following table presents, for FUMC'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.
FUMC Loan Loss Experience
Fiscal Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995
---- ---- ---- ----
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----Subordinate Certificates" or the
Reserve Fund, subject to the effect of the Certificate Insurance Policy as
described 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 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
Principal 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" herein. 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
S-38
affected by any repurchase of the Mortgage Loans by the Master Servicer or the
Certificate Insurer as described herein. See "The Mortgage Pool" and
"Description of the Certificates----Optional Termination" herein. 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.
All of the Mortgage Loans are adjustable rate loans for which only
interest is due during the first ten years of their terms. Approximately _____%
of the Mortgage Loans (by Cut-off Date Principal Balance) are Convertible
Mortgage Loans, in respect of which the Mortgagor, during the related conversion
period, may convert the adjustable rate to a fixed rate and may convert to a
different Index (and may thereafter convert to a fixed rate). The Depositor is
not aware of any publicly available statistics that set forth principal
prepayment or conversion experience or prepayment or conversion forecasts of
adjustable rate mortgage loans over an extended period of time, and the
experience of the Seller is insufficient to draw any conclusions with respect to
the expected prepayment or conversion rates on the Mortgage Loans. The rate of
principal prepayments and conversions with respect to adjustable rate mortgage
loans has fluctuated in recent years. As is the case with conventional fixed
rate mortgage loans, adjustable rate mortgage loans may be subject to a greater
rate of principal prepayments and conversions in a declining interest rate
environment. For example, if prevailing interest rates fall significantly,
adjustable rate mortgage loans could be subject to higher prepayment rates than
if prevailing interest rates remain constant because the availability of fixed
rate or other adjustable rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance their adjustable rate loans, or convert them
to a fixed rate or other adjustable rate, to "lock in" a lower adjustable or
fixed interest rate. The fixed rate conversion option may also be exercised in a
rising interest rate environment as Mortgagors avoid the risk of higher rates.
No prediction can be made as to the rate of prepayments or conversions on the
Mortgage Loans in stable or changing interest rate environments. If a
substantial number of Mortgagors exercise their conversion option with respect
to the Convertible Mortgage Loans to convert to a fixed rate, and the Master
Servicer purchases such Converting Mortgage Loans, the Mortgage Loans will, in
effect, experience substantial prepayments of principal. If the Master Servicer
fails to purchase Converting Mortgage Loans that are converting to a fixed rate,
then the Mortgage Loans will include fixed rate Mortgage Loans, which will have
the effect of limiting the extent to which the Net Mortgage Rate can increase
(or decrease) in accordance with changes in the Indices and accordingly may
limit the Class A Pass-Through Rate on the Class A Certificates to the related
Weighted Average Net Mortgage Rate rather than the applicable Class A
Pass-Through Rate calculated on the basis of the LIBOR formula. The Master
Servicer will not purchase of Mortgage Loans upon their conversion to a
different Index. Consequently, the Mortgage Loans will include any such Mortgage
Loans with the different Index, which may have an adverse effect on the level of
the Class A Pass-Through Rate. See "Yield and Prepayment Considerations" in the
Prospectus.
To the extent that amounts paid to the Holders of the Class A
Certificates on any Distribution Date are less than the amount due to the
Holders of the Class A Certificates on such date, the weighted average life of
the Class A Certificates will be longer than if shortfalls had not occurred.
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 or the occurrence of certain other events resulting
in acceleration as described under "Description of the Certificates----Servicing
and Insurance," 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 Servicing Fee in respect of the month of
prepayment will be applied
S-39
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 Servicing Fee will be sufficient for such purpose. Net
Interest Shortfalls will be borne by the Certificateholders as described under
"Description of the Certificates----Distributions on the Certificates" and will
result in a lower than anticipated yield.
No prediction can be made as to future levels of LIBOR, the One-Month
LIBOR Index, the Six-Month LIBOR Index, the Prime Index or the Treasury Index or
as to the timing of any changes therein, each of which will directly affect the
yields of the Class A Certificates. In addition, the Holders of the Class A
Certificates will absorb the yield risk associated with a possible narrowing of
the spread between the Class A Pass-Through Rate (which rate, except as
otherwise provided, is based on LIBOR) and the Weighted Average Net Mortgage
Rate. The Mortgage Rates reset at different times and are subject to lifetime
interest rate caps. The conversions of Convertible Mortgage Loans to a fixed
rate may, if the Master Servicer fails to purchase such Converting Mortgage
Loans, have the effect of narrowing the spread between the Class A Pass-Through
Rate calculated on the basis of LIBOR and the Weighted Average Net Mortgage
Rate. If such spread disappears (i.e., if LIBOR plus ____% exceeds the related
Weighted Average Net Mortgage Rate), then the Class A Pass-Through Rate for such
Distribution Date will be limited to such lower Weighted Average Net Mortgage
Rate.
The Maximum Mortgage Rates range from _____% to _____% per annum and
the weighted average maximum Mortgage Rate for the Mortgage Loans (by Cut-off
Date Principal Balance) is equal to _____%.
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 may be measured by a prepayment
standard or model. The model used in this Prospectus Supplement is a Constant
Prepayment Rate ("CPR"). The CPR represents an assumed constant rate of
prepayment each month, expressed as a per annum percentage of the scheduled
principal balance of the pool of mortgage loans for that month. As used in the
following table, the column headed "0%" assumes that none of the Mortgage Loans
is prepaid before maturity. The columns headed "10%," "15%," "18%," "20%," "23%"
and "30%" assume that prepayments on the Mortgage Loans are made at CPRs of
"10%," "15%," "18%," "20%," "23%" and "30%," respectively. THE CPR DOES NOT
PURPORT TO BE A HISTORICAL DESCRIPTION OF PREPAYMENT EXPERIENCE OR A PREDICTION
OF THE ANTICIPATED RATE OF PREPAYMENT OF ANY POOL OF MORTGAGE LOANS, INCLUDING
THE MORTGAGE LOANS.
There is no assurance, however, that prepayments of the Mortgage Loans
will conform to any level of CPR, and no representation is made that the
Mortgage Loans will prepay at the CPRs shown or any other prepayment rate. The
rate of principal payments on pools of mortgage loans is influenced by a variety
of economic, geographic, social and other factors, including the level of
interest rates and the rate at which homeowners sell their homes or default on
their mortgage loans. Other factors affecting prepayment of mortgage loans
include changes in borrowers' housing needs, job transfers, unemployment and
obligors' net equity in their homes.
The percentages and weighted average lives in the following table were
determined assuming that (i) scheduled interest and principal payments on the
Mortgage Loans are received in a timely manner and prepayments are made at the
indicated CPRs; (ii) with respect to each table, principal prepayments on the
Mortgage Loans will be received on the last day of each month commencing in
____________ 1996 at the respective constant percentages of CPR set forth in
such table and there are no Prepayment Interest Shortfalls; (iii) neither the
Master
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Servicer nor the Certificate Insurer exercises its right of optional termination
described above; (iv) each Mortgage Loan will pay interest only for the first
___ years from origination and will fully amortize during the following fifteen
years; (v) each Mortgage Loan will, as of the Cut-off Date, have an original
term to maturity of ___ months and the applicable remaining term to maturity
specified below; (vi) each Mortgage Loan bears interest at the applicable
current Mortgage Rate specified in the table below for the number of months
specified in the table below and thereafter bears interest at the sum of the
applicable Index and Margin specified in the table below; (vii) there are no
losses or delinquencies on the Mortgage Loans; (viii) the Class A Certificates
are issued on _________ __, 1996; (ix) the Distribution Date is the 25th day of
each month commencing in ________ 1996; and (x) no Convertible Mortgage Loans
are converted to fixed rate Mortgage Loans or to different Indices. No
representation is made that the actual losses and delinquencies on the Mortgage
Loans will be experienced at the assumed rate or at any other rate. In addition,
the Mortgage Loans are assumed to have the following characteristics:
Level of
Months at Index After
Cut-Off Date Current Current Current
Principal Mortgage Mortgage Mortgage Remaining
Index Balance Rate Rate Rate Margin Term (months)
- ----------------------------------------------------------------------------------------------------------------
Six-Month LIBOR $ % % %
Prime $ % % %
Treasury $ % % %
One-Month LIBOR $ % % %
Since the table was prepared on the basis of the assumptions in the
preceding paragraph, there are discrepancies between the characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Original Class A Principal Balance outstanding and the
weighted average lives of the Class A Certificates set forth in the tables. In
particular, the Mortgage Rates are adjustable and will most likely vary from the
assumed interest rates, which may have a significant effect on the percentages
of the Original Class A Principal Balance outstanding and the weighted average
life. In addition, since the actual Mortgage Loans in the Trust Fund have
characteristics which differ from those assumed in preparing the tables set
forth below, the distributions of principal on the Class A Certificates may be
made earlier or later than as indicated in the table.
It is not likely that the Mortgage Loans will prepay at any constant
CPR to maturity or that all Mortgage Loans will prepay at the same rate. In
addition, the diverse remaining terms to maturity of the Mortgage Loans could
produce slower distributions of principal than as indicated in the related
tables at the various CPRs specified even if the weighted average remaining term
to maturity of the Mortgage Loans is as assumed above.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class A Certificates and sets forth the
percentage of the Original Class A Principal Balance that would be outstanding
after each of the dates shown at the indicated CPR.
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Percent of the Original Principal Balances
of the Class A Certificates Outstanding For :
Class A Certificates at the
Following Percentages of CPR
--------------------------------------------------
Distribution Date 0% 10% 15% 20% 30% 0% 10%
- ----------------------- ------ ------ ------- ------
Initial Percentage................................. 100 100 100 100 100 100 100
_______, 1996......................................
_______, 1997......................................
_______, 1998......................................
_______, 1999......................................
_______, 2000......................................
_______, 2001......................................
_______, 2002......................................
_______, 2003......................................
_______, 2004......................................
_______, 2005......................................
_______, 2006......................................
_______, 2007......................................
_______, 2008......................................
_______, 2009......................................
_______, 2010......................................
_______, 2011......................................
_______, 2012......................................
_______, 2013......................................
_______, 2014......................................
_______, 2015......................................
_______, 2016......................................
_______, 2017......................................
_______, 2018......................................
_______, 2019......................................
_______, 2020......................................
Weighted Average Life (years)(1)..............
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by
(i) multiplying the amount of each principal distribution by the number of
years from the date of the issuance of such Certificate to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum by
the original principal balance of such Certificate.
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DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement among the
Depositor, the Master Servicer and the Trustee. A copy of the 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
Agreement. When particular provisions or terms used in the 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 Class A Certificates will be issued in fully registered form only,
in denominations of $25,000 and integral multiples of $1,000 in excess thereof.
The Percentage Interest of a Class A Certificate is the percentage obtained from
dividing its denomination by the Original Class A Principal Balance. Definitive
Class A Certificates, if issued, will be transferable and exchangeable at the
corporate trust office of the Trustee at its Corporate Trust Department in
California 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
_____________ 1996, to the persons in whose names the Class A Certificates are
registered at the close of business on the last business day preceding the
immediately preceding Distribution Date or on the date of the initial issuance
of the Certificates in the case of the first 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 "Registration of Class A Certificates" below. If
definitive Class A 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 _____________
1996, 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 with respect to the Certificates will be made by the Master
Servicer on the fifth day of the month (or if such fifth 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
S-43
Certificates will be made on the basis of the actual number of days in the
Accrual Period divided by 360. Interest will accrue with respect to each
Distribution Date during the one-month period beginning on the 25th day of the
month preceding the month of such Distribution Date (or, in the case of the
first Distribution Date, beginning on _______________, 1996) and ending on the
14th day of 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 Nonrecoverable Advances
and other amounts (including the 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 Repurchase Proceeds, 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:
(i) to the Class A Certificateholders, interest for the
related Accrual Period at the Class A Pass-Through
Rate on the Class A Principal 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 subject to reduction on account 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 Principal Balance is
reduced to zero;
(iii) to the Certificate Insurer, the monthly premium due
on the Certificate Insurance Policy;
(iv) [intentionally omitted]
(v) 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");
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(vi) to the Reserve Fund, the amount (but not in excess of
the Formula Excess Interest Amount) required to be
deposited in the Reserve Fund;
(vii) to the Class B Certificateholders, interest for the
related Accrual Period at the Class B Pass-Through
Rate on the Class B Principal Balance, together with
any previously undistributed shortfalls in required
distributions of interest on the Class B
Certificates;
(viii) 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 Principal Balance is
reduced to zero;
(ix) to the Class B Certificateholders on account of
principal the Class B Formula Principal Distribution
Amount until the Class B Principal Balance is reduced
to zero;
(x) to the Class B Certificateholders, the Class B Loss
Amounts not previously distribute to them pursuant to
this clause; and
(xi) 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 Section 11.01 of the 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 Master Servicer on account of a breach of a
representation or warranty that materially adversely affects the interests of
the Certificateholders or the Certificate Insurer, or on account of its
conversion to a fixed rate Mortgage Loan or to a new Index, 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 this paragraph for
such Distribution Date. The "Unscheduled Formula Principal Distribution
S-45
Amount" for a Distribution Date is the sum of the amounts in clauses (b), (c),
(d), (e) and (f) of this 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 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
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 Original Principal 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 for Loan 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 weighted average of the Class A and Class B Pass-Through Rates for
such Distribution Date on the aggregate Principal Balance of such Certificates.
The Class A Principal Balance is the Original Class A Principal Balance
less all prior distributions to Class A Certificateholders, on account of
principal.
The Class B Principal Balance, which shall not be less than zero, is
the Original Class B Principal 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.
S-46
The term "Principal Balance," when used in respect of a Class or
Classes of 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 Principal 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 _______ 2004 will be 100%. The " Class A Prepayment
Percentage" for a Distribution Date after the Distribution Date in ______ 2004
will be as follows: for any Distribution Date subsequent to ______ 2004 to and
including the Distribution Date in ________ 2005, the Class A Percentage for
such Distribution Date plus 70% of the Subordinated Percentage for such
Distribution Date; for any Distribution Date subsequent to _______ 2005 to and
including the Distribution Date in _______ 2006, the Class A Percentage for such
Distribution Date plus 60% of the Subordinated Percentage for such Distribution
Date; for any Distribution Date subsequent to _______ 2006 to and including the
Distribution Date in _______ 2007, the Class A Percentage for such Distribution
Date plus 40% of the Subordinated Percentage for such Distribution Date; for any
Distribution Date subsequent to ________ 2007 to and including the Distribution
Date in ________ 2008, 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.
Notwithstanding the foregoing, if on any Distribution Date (i) the
Current Subordination Level equals at least twice the Original Subordination
Level, (ii) cumulative Realized Principal Losses with respect to the Mortgage
Loans have not exceeded ___% of the initial Class B Principal Balance, and (iii)
over the prior six months, the average aggregate outstanding principal balance
of 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) has not exceeded
__% of the average aggregate outstanding principal balance of all Mortgage
Loans, then the Class A Prepayment Percentage for such Distribution Date will be
as follows: (A) as to any Distribution Date prior to the third anniversary of
the first Distribution Date, the Class A Percentage for such Distribution Date
plus 50% of the Subordinated Percentage for such Distribution Date; and (B) as
to any Distribution Date thereafter, the Class A Percentage for such
Distribution Date.
The "Current Subordination Level" in respect of a Distribution Date is
the percentage derived from dividing (i) the Class B Principal Balance (before
giving effect to the distributions and the allocation of the Unrecovered
Principal Amounts for such Distribution Date) by (ii) the Pool Scheduled
Principal Balance (before giving effect to the Formula Principal Distribution
Amount for such Distribution Date). The "Original Subordination Level" is the
percentage derived from dividing (i) the Original Class B Principal Balance by
(ii) the Original Pool Scheduled Principal Balance, which percentage is ____%.
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) above
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
S-47
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 Principal 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 Class A Pass-Through Rate for a Distribution Date will be equal to
LIBOR (as described below) plus ____% subject to the following limitation. If
the Class A Pass-Through Rate for a Distribution Date so calculated on the basis
of LIBOR is greater than the Weighted Average Net Mortgage Rate for the Mortgage
Loans applicable at the beginning of the preceding month (after giving effect to
the Monthly Payments due on such Due Date and unscheduled principal payments
received prior to such Due Date), then the Class A Pass-Through Rate, for such
Distribution Date will equal such lower Weighted Average Net Mortgage Rate. The
Class B Pass-Through Rate will be similarly calculated, but will equal LIBOR
plus ____% subject to the same limitation of the related Weighted Average Net
Mortgage Rate. The "Net Mortgage Rate" of a Mortgage Loan is its Mortgage Rate
less the sum of (i) the Servicing Fee Rate of ____% and (ii) the Certificate
Insurance Policy annual premium rate (which, together with the 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.
Notwithstanding the foregoing, the __% margin added to the applicable LIBOR
formula for the calculation of the Class A Pass-Through Rate will instead be __%
for each Distribution after the first Distribution Date in respect of which the
option to purchase the Mortgage Loans, described under "Description of the
Certificates----Option Termination," may first be exercised by the Master
Servicer. The Class A Pass-Through Rate thus calculated will still be subject to
the limitation of the Weighted Average Net Mortgage Rate as described above in
this paragraph.
Calculation of LIBOR. LIBOR with respect to any Distribution Date shall
be established by the Trustee and shall equal the arithmetic mean (rounded, if
necessary, to the nearest one-sixteenth of a percent, with a one thirty-second
being rounded upwards) of the offered rates for United States dollar deposits
for one month which appear on the Reuters Screen LIBO Page (as defined below) as
of 11:00 a.m., London time, on the second LIBOR Business Day prior to the
immediately preceding Distribution Date (but as of ____________, 1996, in the
case of the Distribution Date on _________ 15, 1996); provided that at least two
such offered rates appear on the Reuters Screen LIBO Page on such date. If fewer
than two offered rates appear, LIBOR will be determined on such date as
described in the paragraph below. "Reuters Screen LIBO Page" means the display
designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such
other page as may replace the LIBO page on that service for the purpose of
displaying London interbank offered rates of major banks). "LIBOR Business Day,"
for purposes of the Agreement, is a day which is both a Business Day (as defined
in the Agreement) and a day on which banking institutions in the City of London,
England are not required or authorized by law to be closed.
If on such date fewer than two offered rates appear on the Reuters
Screen LIBO Page, the Trustee will request the principal London office of each
of the Reference Banks (which shall be major banks specified in, or determined
by the Master Servicer under, the Agreement that are engaged in transactions in
the London interbank market) to provide the Trustee with its offered quotation
for United States dollar deposits for one month to prime banks in the London
interbank market as of 11:00 a.m., London time, on such date. If at least two
Reference Banks provide the Trustee with such offered quotations, LIBOR on such
date will be the arithmetic mean (rounded, if necessary, to the nearest
one-sixteenth of a percent, with a one thirty-second being rounded upwards) of
all such quotations. If on such date fewer than two of the Reference Banks
provide the Trustee with such an offered quotation, LIBOR on such date will be
the arithmetic mean (rounded, if necessary, to the nearest one-sixteenth of a
percent, with a one thirty-second being rounded upwards) of the offered per
annum rates which one or more leading banks in The City of New York specified in
or determined by the Agreement are quoting as of 11:00 a.m., New York City time,
on such date to leading European banks for United States dollar deposits for one
month;
S-48
provided, however, that if such banks are not quoting as described above, LIBOR
will be the LIBOR applicable to the immediately preceding Distribution Date.
Reserve Fund
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 pursuant to clause (vi) under
"Distributions on the Certificates" above. On each Distribution Date, funds, if
any, in the Reserve Fund will be applied in the following order 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 pursuant to clause (vi) under "Distributions on the Certificates" above
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 Principal 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 (vi) under "Distributions
on the Certificates" 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 Class A Certificates of the full
amount of monthly distributions due them and to protect the Holders of 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
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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 Balance will have
become less than the outstanding Principal 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 Principal Balance of such Class A Certificates.
Certificate Insurance Policy
The Depositor will obtain 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" herein.
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. The Certificate
Insurer has the right to terminate the Trust Fund, causing the transfer of
amounts in certain accounts and the acceleration of the Class A Certificates,
under certain circumstances if the Pool Scheduled Principal Balance becomes
equal to or less than 10% of the Pool Scheduled Principal Balance as of the
Cut-off Date.
Assignment of Mortgage Loans
The Depositor will cause the Mortgage Loans to be assigned to the
Trustee, together with all principal and interest collected on or with respect
to the Mortgage Loans and due after the Cut-off Date. The Trustee will,
concurrently with such assignment, authenticate and deliver the Certificates.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit to
the Agreement (the "Mortgage Loan Schedule"). The Mortgage Loan Schedule
specifies, among other things, with respect to each Mortgage Loan, the original
principal amount and the unpaid principal balance as of the Cut-off Date; the
Monthly Payment as of the Cut-off Date; the months remaining to maturity of the
Mortgage Loan; the Margin; and the Mortgage Rate as of the Cut-off Date.
The Mortgage Notes and Mortgages and certain other documents (the
"Mortgage Files") will be delivered by the Master Servicer to the Trustee or a
custodian of the Trustee within 21 days after the date of the initial issuance
of the Certificates, and at least 50% of the Mortgage Notes will have been
delivered by such issuance date. The Trustee, or its custodian, will review each
Mortgage File (or copies thereof) and if any document required to be included in
any Mortgage File is found to be defective in any material respect and such
defect is not cured within 60 days (or such longer period as may be agreed to by
the Trustee) following notification thereof to the Master
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Servicer by the Trustee, the Master Servicer will repurchase or substitute for
such Mortgage Loan in the manner set forth under "The Pooling and Servicing
Agreement----Assignment of Mortgage Assets----Assignment of the Mortgage Loans"
in the Prospectus and as set forth in the Agreement.
The assignments of the Mortgages to the Trustee will not be recorded.
Amendments to Mortgage Loan Documents
In connection with the servicing of the Mortgage Loans, the Master
Servicer may at the request of a borrower or at its own initiative agree to
modify the Mortgage Note or Mortgage relating to a Mortgage Loan or waive
compliance by the borrower with any provision of the Mortgage Note or Mortgage,
provided that any such modification or waiver (i) does not extend the scheduled
maturity date of, modify the interest rate payable under (except as required by
law or as contemplated by the Mortgage Note), or constitute a cancellation or
discharge of the outstanding principal balance under such Mortgage Loan, (ii) is
not inconsistent with the Master Servicer's then current practice respecting
comparable mortgage loans held in its own portfolio, or (iii) does not
materially and adversely affect the security afforded by the Mortgaged Property;
provided, however, that the Master Servicer may agree to changes to the terms of
a Mortgage Note or Mortgage which would otherwise be violative of clauses (i)
and (iii) above if (a) the Master Servicer has determined that such changes are
necessary to avoid prepayment of the related Mortgage Loan as a result of
refinancing provided by another lender or to accommodate the request of a
borrower to extend the scheduled maturity date of the related Mortgage Loan and
such changes are consistent with prudent business practice, (b) the Master
Servicer repurchases the related Mortgage Loan for the Purchase Price on the
business day preceding the Distribution Date immediately following the Principal
Prepayment Period during which such changes were made and (c) such changes and
subsequent repurchase will not affect the status of the Trust Fund as a REMIC as
evidenced by an opinion of counsel. Any such repurchase will be accomplished in
the manner described under "Description of the Certificates----Assignment of
Mortgage Loans" herein.
Servicing and Insurance
The Mortgage Loans will be serviced in accordance with procedures as
described generally in the Prospectus under "The Pooling and Servicing
Agreement" and as set forth in the Agreement.
Except as described below, when any Mortgaged Property is conveyed by
the Mortgagor, the Master Servicer may, but is not obligated to, enforce any
due-on-sale clause contained in the Mortgage Loan, to the extent permitted under
applicable law and governmental regulations. Acceleration of Mortgage Loans as a
result of enforcement of such "due-on-sale" provisions in connection with
transfers of the related Mortgaged Properties will affect the level of
prepayments on the Mortgage Loans, thereby affecting the weighted average life
of the Class A Certificates. See "Yield and Prepayment Considerations" in the
Prospectus and "Prepayment and Yield Considerations" herein. If the Master
Servicer elects not to enforce any due-on-sale clause or is prevented from
enforcing such due-on-sale clause under applicable law, the Master Servicer is
authorized to enter into an assumption and modification agreement with the
person to whom such Mortgaged Property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Loan and, to the
extent permitted by applicable law, the borrower remains liable thereon.
The Master Servicer will be obligated to maintain a Standard Hazard
Insurance Policy with respect to each Mortgage Loan in an amount equal to the
replacement cost of the improvements securing such Mortgage Loan or the
outstanding principal balance of such Mortgage Loan, whichever is less. See "The
Pooling and Servicing Agreement----Hazard Insurance" in the Prospectus. No
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy or Mortgagor
Bankruptcy Insurance will be maintained with respect to the Mortgage Pool, nor
will any Mortgage Loan included in the Mortgage Pool be subject to FHA Insurance
or VA Guaranty or be covered by a Primary Mortgage Insurance Policy.
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Servicing Compensation and Payment of Expenses
The Master Servicer will be paid a monthly Servicing Fee (including any
sub-servicing compensation) with respect to each Mortgage Loan in an amount
equal to approximately one-twelfth of ____% of the principal balance of each
Mortgage Loan (the " Servicing Fee Rate"). The Master Servicer will not receive
excess interest or excess proceeds as additional servicing compensation. See
"Certain Federal Income Tax Consequences" herein 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 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." No assurance can be given that the amount
of the Servicing Fee will be sufficient for such purpose.
Optional Purchase of Defaulted Mortgage Loans
The Master Servicer may, in its sole discretion, purchase from the
Trust Fund any Mortgage Loan as to which a Monthly Payment is 180 or more days
delinquent. 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 Master 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.
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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 Principal
Balance together with one month's interest at the Class A 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 Agreement. Under certain
circumstances, the Certificate Insurer may exercise the Master Servicer's right
of repurchase.
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----Amendment" in the Prospectus, such percentage shall be based upon
the relative outstanding Principal Balances of the Certificates. Amendments to
the 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 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.
A successor Master Servicer, if any, will become obligated to purchase
Convertible Mortgage Loans that convert to a fixed rate after such successor
becomes the Master Servicer only if such successor Master Servicer, at its
discretion, elects to obligate itself to make such purchases. A terminated
Master Servicer (including the initial Master Servicer) will not be obligated to
make such purchases after its termination as Master Servicer.
Registration of Class A Certificates
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
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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 Class A 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
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 Class A
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 Class A 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 ______________.
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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 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 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 October 1, 1996, 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.
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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]
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 the
Prospectus Supplemental other than the information supplied by the Certificate
Insurer and presented under the heading "The Certificate Insurer" and in
Appendix A and Appendix B.
CERTAIN 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 the Class B
Certificates will be regular interests in the Trust Fund and the Class R
Certificates will be the residual interest in the Trust Fund.
The Class A Certificates [may] [will not] be treated as having been
issued with original issue discount. [It is anticipated that the Class A
Certificates will be issued at a premium.] The prepayment assumption that will
be used for purposes of computing original issue discount, if any, for federal
income tax purposes is a CPR of __%. No representation is made that the Mortgage
Loans will, in fact, prepay at these or any other rates.
See "Certain Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans that are
subject to ERISA ("Plans") and on persons who are fiduciaries with respect to
such Plans. See "ERISA Considerations" in the Prospectus.
The U.S. Department of Labor has granted to First Union Corporation,
the parent of First Union Capital Markets Corp., an administrative exemption
(Prohibited Transaction Exemption 96-22, Exemption Application No. D-10165, 61
Fed. Reg. 5577 (1996) (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) FUNB, (b) any person
directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with FUNB and(c) any member of the
underwriting syndicate or selling group of which FUNB or a person described in
(b) is a manager or co-manager with respect to the Class A Certificates.
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The Exemption application 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, if and
when the Exemption is issued. 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, Duff & Phelps, Inc. (" Duff & Phelps") or Fitch Investors
Service, Inc. ("Fitch"). 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 Sub-servicer, the Trustee, the provider of
any Credit Enhancement, any borrower with respect to Mortgage Loans constituting
more than 5% of the aggregate unamortized principal balance of the Mortgage
Loans as of the date of initial issuance of the Class A Certificates 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 sub-servicer 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.
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 "AAAr" and "Aaa" by
Standard & Poor's and Moody's, 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 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 purchasing 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 Certificate as of the date of
such purchase.
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) 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.
Any Plan fiduciary who proposes to cause a Plan to purchase Class A
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code, of the Plan's acquisition and ownership
of Class A Certificates. Assets of a Plan or individual retirement account
should not be invested in the Class A Certificates unless it is clear that the
assets of the Trust Fund will not be plan assets or unless it is clear that the
Exemption or a prohibited transaction class exemption will apply and exempt all
potential prohibited transactions.
LEGAL INVESTMENT
The Class A Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as they are rated in one of the two highest rating categories by at
least one nationally recognized statistical rating organization. As such, the
Class A Certificates are legal investments for certain entities to the extent
provided in the SMMEA. The Depositor makes no representation as to the ability
of particular investors to purchase the Class A Certificates under applicable
legal investment or other restrictions. All institutions 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
S-57
determining whether and to what extent the Class A Certificates constitute legal
investments for them or are subject to investment, capital or other
restrictions. It should also be noted that certain states recently have enacted,
or have proposed enacting, legislation limiting to varying extents the ability
of certain entities (in particular insurance companies) to invest in mortgage
related securities. 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.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Class A Certificates will be applied by the Depositor to the purchase price
of the Mortgage Loans and expenses connected with pooling the Mortgage Loans and
issuing the Certificates.
UNDERWRITING
First Union Capital Markets Corp., the [sole] underwriter, has agreed,
on the terms and conditions of the Underwriting Agreement and a Terms Agreement
(together, 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 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 of 1933, or contribute to payments the Underwriter may be
required to make in respect thereof.
All of the Mortgage Loans evidenced by the Certificates will have been
acquired by the Depositor in a privately negotiated transaction with the Seller.
EXPERTS
The consolidated balance sheets [and other selected financial
information] of [the Certificate Insurer] appearing in Appendix A to this
Prospectus Supplement, have been included herein in reliance upon the report of
_____________________________________, independent certified public accountants,
included in Appendix A to this Prospectus Supplement, and upon the authority of
said firm as experts in accounting and auditing.
S-58
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Petree
Stockton, L.L.P., Charlotte, North Carolina and for the Underwriter by Moore &
Van Allen, PLLC, Charlotte, North Carolina. The material federal income tax
consequences of the Certificates will be passed upon for the Depositor by Petree
Stockton, L.L.P.
CERTIFICATE RATING
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated AAAr by Standard & Poor's and Aaa by Moody's. Standard &
Poor's assigns the additional symbol of "r" to highlight classes of securities
that Standard & Poor's believes may experience high volatility or high
variability in expected returns due to non-credit risks; however, the absence of
an "r" symbol should not be taken as an indication that a class will exhibit no
volatility or variability in total return.
The ratings of Standard & Poor's and Moody's do not represent any
assessment of the ability of the Master Servicer to purchase any Converting
Mortgage Loan. If the Master Servicer fails to purchase a Converting Mortgage
Loan that it is obligated to purchase, investors in the Class A Certificates
might experience a lower than anticipated yield. 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 rating agency. The ratings assigned to the Class A
Certificates address the likelihood of the receipt of distributions due on the
Class A Certificates according to their terms. The ratings take into
consideration, among other things, the credit quality of the Mortgage Loans, the
structural and legal aspects associated with the Class A Certificates, and the
claims-paying ability of the Certificate Insurer. An adverse change in any of
such factors or in other factors may be a basis for the downward revision or
withdrawal of the rating of any Class of Class A Certificates affected by such
change. The ratings assigned to the Class A Certificates do not represent any
assessment of the likelihood that principal prepayments might differ from those
originally anticipated. The rating does not address the possibility that the
Holders of the Class A Certificates might suffer a lower than anticipated yield.
There can be no assurance as to whether any other rating agency will rate the
Class A Certificates, or if it does, what rating it will assign to the Class A
Certificates.
056\ 203574
056\204187
S-59
INDEX OF PRINCIPAL TERMS
Accrual Period ..........................................S-10, S-44
Advances ................................................S-15
Agreement .....................................S-5, S-21, S-55
Available Distribution Amount.....................................S-10
Cede ..........................................S-18, S-43
Certificate Insurance Policy.......................................S-1
Certificate Insurer................................................S-1
Certificate Owners...........................................S-2, S-18
Certificateholders................................................S-18
Certificates .................................................S-1
Class A Certificates...............................................S-4
Class A Formula Principal Distribution Amount.....................S-47
Class A Percentage................................................S-47
Class A Prepayment Percentage.....................................S-47
Class A Unpaid Interest Shortfall...........................S-10, S-44
Class B Formula Principal Distribution Amount.....................S-47
Class B Loss Amount...............................................S-46
Code ................................................S-17
Collection Account................................................S-21
Conversion Price ............................................S-2, S-8
Convertible Mortgage Loans.........................................S-2
Converting Mortgage Loan......................................S-2, S-7
CPR ................................................S-40
Current Subordination Level.......................................S-47
Definitive Class A Certificates...................................S-54
Depositor ............................................S-1, S-4
Determination Date................................................S-43
Distribution Account..............................................S-21
Distribution Account Shortfall....................................S-47
Distribution Date .....................................S-2, S-10, S-43
DTC ..........................................S-18, S-43
Due Date ............................................S-2, S-6
Duff & Phelps ................................................S-57
ERISA ..........................................S-17, S-56
ERISA Considerations..............................................S-17
Exemption ................................................S-56
FDIC ................................................S-20
Fitch ................................................S-57
Formula Excess Interest Amount....................................S-46
Formula Principal Distribution Amount.............................S-45
FUMC ....................................S-21, S-35, S-36
FUNB ...........................................S-4, S-34
Holders ................................................S-18
Insured Amount ................................................S-55
Insured Payment ................................................S-55
Interest Adjustment Date...........................................S-6
Legal investments ................................................S-17
LIBOR .................................................S-5
LIBOR Business Day................................................S-48
Liquidated Mortgage Loan..........................................S-49
Loan-to-Value Ratio...............................................S-34
Margin .................................................S-6
Master Servicer ...........................................S-1, S-21
Maximum Mortgage Rate..............................................S-7
Monthly Payments .................................................S-6
Moody's ................................................S-18
Mortgage Files ................................................S-50
Mortgage Loan Schedule............................................S-50
Mortgage Loans ............................................S-1, S-6
Mortgage Note ................................................S-21
Mortgage Pool ......................................S-1, S-9, S-21
Mortgage Rate .................................................S-6
Mortgage Rates ................................................S-22
Mortgage related securities.......................................S-17
Mortgaged Properties..............................................S-21
Net Interest Shortfall............................................S-46
Net Mortgage Rate ...........................................S-5, S-48
Net Prepayment Interest Shortfall.................................S-46
Non-recoverable Advances..........................................S-52
Nonpayment ................................................S-55
One-Month LIBOR Index..............................................S-7
Original Subordination Level......................................S-47
Outstanding Mortgage Loan.........................................S-46
Participants ................................................S-53
Percentage Interest...............................................S-10
Plans ................................................S-56
Pool Scheduled Principal Balance..................................S-12
Preference Amount ................................................S-55
Prepayment Interest Shortfall.....................................S-52
Prime Index .................................................S-6
Principal Balance ..........................................S-46, S-47
Principal Prepayment Period.......................................S-45
Prospectus .................................................S-1
Record Date ................................................S-43
Relief Act Reduction..............................................S-46
REMIC .................................................S-2
Reuters Screen LIBO Page..........................................S-48
Scheduled Formula Principal Distribution
Amount..........................................S-45
Seller .................................................S-1
Servicing Fee Rate................................................S-52
Six-Month LIBOR Index..............................................S-7
SMMEA ................................................S-57
Standard & Poor's ................................................S-18
Sub-servicers ................................................S-21
Subordinated Certificates.....................................S-1, S-4
Treasury Index .................................................S-7
Trust Fund .................................................S-1
Trustee ...........................................S-6, S-21
Underwriter ......................................S-2, S-4, S-56
Underwriting Agreement............................................S-58
Unrecovered Principal Amount......................................S-46
Unreimbursed Insurer Amounts................................S-10, S-44
Unscheduled Formula Principal Distribution
Amount..........................................S-45
Weighted Average Net Mortgage Rate...........................S-5, S-48
S-60
No person has been authorized to give any information or to make
any representations other than those contained in this Prospectus
Supplement or the Prospectus and, if given or made, such
information or representations must not be relied upon. This Prospectus
Supplement and the Prospectus do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Class A
Certificates, nor an offer of the Class A Certificates in any state or
jurisdiction in which, or to any person to whom, such offer would be
unlawful. The delivery of this Prospectus Supplement or the Prospectus
at any time does not imply that information herein or therein is correct
as of any time subsequent to its date; however, if any material
change occurs while this Prospectus Supplement or the Prospectus is
required by law to be delivered, this Prospectus Supplement or the
Prospectus will be amended or supplemented accordingly.
-------------------
TABLE OF CONTENTS
Prospectus Supplement
SUMMARY OF TERMS OF THE CERTIFICATES..................S-4
RISK FACTORS.........................................S-19
THE MORTGAGE POOL....................................S-21
THE SELLER AND ITS MORTGAGE PROGRAM..................S-34
PREPAYMENT AND YIELD CONSIDERATIONS..................S-38
DESCRIPTION OF THE CERTIFICATES......................S-43
THE CERTIFICATE INSURANCE POLICY AND THE
CERTIFICATE INSURER........................ S-55
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..............S-56
ERISA CONSIDERATIONS.................................S-56
LEGAL INVESTMENT.....................................S-57
USE OF PROCEEDS......................................S-58
UNDERWRITING.........................................S-58
EXPERTS ............................................S-58
LEGAL MATTERS........................................S-59
CERTIFICATE RATING...................................S-59
INDEX OF PRINCIPAL TERMS.............................S-60
Appendix A--Audited Financial Statements of the
Certificate Insurer..........................A-1
Appendix B--Unaudited Financial Statements of
the Certificate Insurer......................B-1
Prospectus
PROSPECTUS SUPPLEMENT...................................3
AVAILABLE INFORMATION...................................3
REPORTS TO CERTIFICATEHOLDERS...........................3
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE...................................4
SUMMARY OF TERMS........................................5
RISK FACTORS...........................................16
THE TRUST FUND.........................................17
USE OF PROCEEDS........................................27
THE DEPOSITOR..........................................27
MORTGAGE LOAN PROGRAM..................................27
DESCRIPTION OF THE CERTIFICATES........................31
CREDIT ENHANCEMENT.....................................40
YIELD AND PREPAYMENT CONSIDERATIONS....................45
THE POOLING AND SERVICING AGREEMENT....................46
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS............59
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................67
STATE TAX CONSIDERATIONS...............................89
ERISA CONSIDERATIONS...................................89
LEGAL INVESTMENT.......................................92
METHOD OF DISTRIBUTION.................................93
LEGAL MATTERS..........................................94
FINANCIAL INFORMATION..................................94
RATING.................................................94
INDEX TO DEFINED TERMS..................................i
$
(Approximate)
First Union Residential
Securitization
Transactions, Inc.,
Depositor
Senior/Subordinate Residential
Mortgage Pass-Through
Certificates,
Series 1996-__, Class A
First Union National Bank of
North Carolina,
Seller and Master Servicer
-------------------
PROSPECTUS SUPPLEMENT
-------------------
First Union Capital Markets Corp.
____________, 1996
S-61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The estimated expenses in connection with the issuance and distribution
of the securities being registered, other than underwriting compensation, are:
SEC Filing Fees......................................... $ 689,655
Legal Fees and Expenses *............................... $ 400,000
Accounting Fees and Expenses *.......................... $ 200,000
Blue Sky Fees and Expenses *............................ $ 20,000
Trustee's Fees and Expenses *........................... $ 100,000
Rating Agency Fees *.................................... $1,000,000
Printing and Engraving Fees *........................... $ 160,000
Certificate Insurer's Fee *............................. $ 200,000
Miscellaneous *......................................... $ 200,000
--------------
Total.......................................... $2,969,655
* Estimated in accordance with Item 511 of Regulation S-K.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Pooling and Servicing Agreements will provide that no director,
officer, employee or agent of the Registrant is liable to the Trust Fund or the
Certificateholders, except for any liability which would otherwise be imposed by
reason of misfeasance, bad faith or negligence in the performance of duties
under such Pooling and Servicing Agreements, or by reason of reckless disregard
of such duties. The Pooling and Servicing Agreements will further provide that,
with the exceptions stated above, a director, officer, employee or agent of the
Registrant is entitled to be indemnified and held harmless by the Trust Fund
against any loss, liability or expense incurred in connection with legal action
relating to such Pooling and Servicing Agreements and related Certificates,
other than any loss, liability or expense: (i) specifically required to be borne
thereby pursuant to the terms of such Pooling and Servicing Agreements, or
otherwise incidental to the performance of obligations and duties thereunder;
and (ii) incurred in connection with any violation of any state or federal
securities law.
Sections 55-8-50 through 55-8-58 of the revised North Carolina Business
Corporation Act (the "NCBCA") contain specific provisions relating to
indemnification of directors and officers of North Carolina corporations. In
general, the statute provides that (i) a corporation must indemnify a director
or officer who is wholly successful in defense of a proceeding to which he is a
party because of his status as such, unless limited by the articles of
incorporation, and (ii) a corporation may indemnify a director or officer if he
is not wholly successful in such defense, if it is determined as provided in the
statute that the director or officer meets a certain standard of conduct;
provided, when a director or officer is liable to the corporation, the
corporation may not indemnify him. The statute also permits a director or
officer of a corporation who is a party to a proceeding to apply to the courts
for indemnification, unless the articles of incorporation provide otherwise, and
the court may order indemnification under certain circumstances set forth in the
statute. The statute further provides that a corporation may, in its articles of
incorporation, by contract or by resolution, provide indemnification in addition
to that provided by the statute, subject to certain conditions set forth in the
statute.
II-1
The Registrant maintains directors and officers liability insurance,
which provides coverage of up to $80,000,000, subject to certain deductible
amounts. In general, the policy insures (i) the Registrant's directors and, in
certain cases, its officers against any loss by reason of any of their wrongful
acts, and/or (ii) the Registrant against loss arising from claims against the
directors and officers by reason of their wrongful acts, all subject to the
terms and conditions contained in the policy.
Under agreements which may be entered into by the Registrant, certain
controlling persons, directors and officers of the Registrant may be entitled to
indemnification by underwriters and agents who participate in the distribution
of Certificates covered by the Registration Statement against certain
liabilities, including liabilities under the Securities Act.
ITEM 16. EXHIBITS
1.1 -- Form of Underwriting Agreement*
3.1 -- Articles of Incorporation of First Union Residential Securitization Transactions, Inc.*
3.2 -- Bylaws of First Union Residential Securitization Transactions, Inc.*
4.1 -- Form of Pooling and Servicing Agreement*
4.2 -- Form of Pooling and Servicing Agreement for Home Equity Loans*
5.1 -- Opinion of Petree Stockton, L.L.P. as to legality of the Certificates (including consent of such firm)
8.1 -- Opinion of Petree Stockton, L.L.P. as to tax matters (including consent of such firm)
8.2 -- Opinion of Moore & Van Allen, PLLC as to tax matters (including consent of such firm)*
10.1 -- Form of Mortgage Loan Purchase Agreement*
10.2 -- Form of Mortgage Loan Purchase Agreement for Home Equity Loans*
23.1 -- Consent of Petree Stockton, L.L.P. (included as part of Exhibits 5.1 and 8.1)
23.2 -- Consent of Moore & Van Allen, PLCC (included as part of Exhibit 8.2)*
24.1 -- Power of Attorney of Directors and Officers of Company*
- ---------------
*Previously filed
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;
(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. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of the prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change of such information in the Registration
Statement; provided, however, paragraphs (A)(1)(i) and (A)(1)(ii) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the
II-2
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this
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. FILINGS INCORPORATING SUBSEQUENT EXCHANGE ACT DOCUMENTS BY
REFERENCE
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 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to 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 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense o any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
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
Pre-Effective Amendment No. 2 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Charlotte,
State of North Carolina, on the 21st day of June, 1996.
FIRST UNION RESIDENTIAL
SECURITIZATION TRANSACTIONS, INC.
By: /s/ Ross M. Annable
Name: Ross M. Annable
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 2 to its Registration Statement has been signed
below by the following persons in the capacities indicated on June 21, 1996.
Signature Title
/s/ Ross M. Annable President and Chairman of the Board
Name: Ross M. Annable (Principal Executive Officer)
* Senior Vice President (Principal Financial Officer
Name: James H. Hatch and Principal Accounting Officer)
/s/ K. Wesley M. Jones Director
Name: K. Wesley M. Jones
* By: /s/ James F. Powers
James F. Powers
Attorney-in-Fact
II-4
EXHIBIT INDEX
Exhibit No. Description Page No.
5.1 Opinion of Petree Stockton, L.L.P. as to legality of the Certificates (including
consent of such firm)........................................................... 193
8.1 Opinion of Petree Stockton, L.L.P. as to tax matters (including consent of such
firm) .......................................................................... 194
23.1 Consent of Petree Stockton, L.L.P. (included as part of Exhibits 5.1 and 8.1)...