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Salomon Brothers Mortgage Securities VII Inc – ‘424B5’ on 5/1/97 re: Salomon Bros Mort SEC VII Inc Mor Pa THR Cert Se 1997 Hud-1

As of:  Thursday, 5/1/97   ·   Accession #:  882377-97-162   ·   File #s:  333-22559, -02

Previous ‘424B5’:  ‘424B5’ on 4/29/97   ·   Next:  ‘424B5’ on 5/29/97   ·   Latest:  ‘424B5’ on 10/29/03

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/01/97  Salomon Brothers Mtge Secs V… Inc 424B5                  1:822K Salomon Bros Mort SEC VII … Hud-1 Thacher Proffitt… LLP/FA

Prospectus   —   Rule 424(b)(5)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B5       Salomon Brothers Mortgage Securities Vii, Inc.       213   1.13M 


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
4Summary of Prospectus Supplement
20Senior P&I Certificates
21Class B Certificates
25Risk Factors
26Nature of the Mortgage Loans
28The Mortgage Pool
"General
30The Section 203(b) and 703 Insurance Programs
31Servicing of the Mortgage Loans
32Representations and Warranties
33Yield on the Certificates
42Yield Sensitivity of the Class IO Certificates
44Arrearage
45Description of the Certificates
47Registration of the Book-Entry Certificates
48Definitive Certificates
"Distributions on the Certificates
53P&I Advances
54Allocation of Losses; Subordination
55Restrictions on Transfer of the Offered Certificates
"Pooling and Servicing Agreement
56The Master Servicer
58The Trustee
59The Fiscal Agent
"Sale of Defaulted Mortgage Loans
61Termination
"Certain Federal Income Tax Consequences
63Method of Distribution
64Secondary Market
"Legal Opinions
"Ratings
65Legal Investment
"ERISA Considerations
69Cut-off Date
"Cut-off Date Pool Arrearage
85Table of Contents
87Available Information
"Reports to Certificateholders
"Incorporation of Certain Information by Reference
88Summary of Prospectus
98The Trust Funds
"The Mortgage Loans
102Multifamily Loans
103Cooperative Loans
"Contracts
"Agency Securities
"GNMA Certificates
105FHLMC Certificates
107FNMA Certificates
108Private Mortgage-Backed Securities
110Funding Agreements
111Use of Proceeds
"Yield Considerations
112Maturity and Prepayment Considerations
114The Depositor
"Mortgage Loan Program
"Underwriting Standards
116Qualifications of Originators and Mortgage Loan Sellers
"Representations by or on behalf of Mortgage Loan Sellers; Repurchases
120Assignment of Trust Fund Assets
123Deposits to Certificate Account
126Payments on Agency Securities and Private Mortgage-Backed Securities
"Distributions
127Available Distribution Amount
"Interest on the Certificates
128Principal of the Certificates
"Pre-Funding Account
129Allocation of Losses
"Advances in respect of Delinquencies
131Collection and Other Servicing Procedures
132Sub-Servicing
133Realization Upon Defaulted Mortgage Loans
134Retained Interest; Servicing or Administration Compensation and Payment of Expenses
135Evidence as to Compliance
136Certain Matters Regarding the Master Servicer and the Depositor
137Events of Default
"Rights Upon Event of Default
138Amendment
139Duties of the Trustee
"Description of Credit Support
140Subordination
141Letter of Credit
142Mortgage Pool Insurance Policy
144Special Hazard Insurance Policy
146Bankruptcy Bond
"Certificate Guarantee Insurance
"Reserve Fund
147Cash Flow Agreements
"Description of Primary Insurance Policies
"Primary Mortgage Insurance Policies
"Primary Hazard Insurance Policies
149FHA Insurance
"VA Guarantees
150Certain Legal Aspects of Mortgage Loans
"Single-Family Loans and Multifamily Loans
151Leases and Rents
154Foreclosure on Mortgages
156Foreclosure on Cooperative Shares
157Repossession with respect to Contracts
158Louisiana Law
"Rights of Redemption with respect to Single-Family Properties and Multifamily Properties
"Notice of Sale; Redemption Rights with respect to Manufactured Homes
"Anti-Deficiency Legislation and Other Limitations on Lenders
160Junior Mortgages
"Consumer Protection Laws with respect to Contracts
161Other Limitations
"Enforceability of Certain Provisions
163Prepayment Charges and Prepayments
"Subordinate Financing
"Applicability of Usury Laws
164Alternative Mortgage Instruments
165Formaldehyde Litigation with respect to Contracts
"Soldiers' and Sailors' Civil Relief Act of 1940
166Environmental Legislation
167Forfeitures in Drug and RICO Proceedings
"Negative Amortization Loans
168REMICs
"Characterization of Investments in REMIC Certificates
169Taxation of Owners of REMIC Regular Certificates
170Original Issue Discount
172Market Discount
174Premium
"Realized Losses
175Taxable Income of the REMIC
178Excess Inclusions
"Noneconomic REMIC Residual Certificates
180Possible Pass-Through of Miscellaneous Itemized Deductions
"Sales of REMIC Certificates
181Prohibited Transactions and Other Possible REMIC Taxes
183Reporting and Other Administrative Matters
184Foreign Investors in REMIC Certificates
185Grantor Trust Funds
186Grantor Trust Fractional Interest Certificates
"Grantor Trust Strip Certificates
"Taxation of Owners of Grantor Trust Fractional Interest Certificates
189If Stripped Bond Rules Do Not Apply
193Taxation of Owners of Grantor Trust Strip Certificates
194Possible Application of Contingent Payment Rules
"Sales of Grantor Trust Certificates
195Grantor Trust Reporting
196Partnership Trust Funds
202State and Other Tax Consequences
208Methods of Distribution
209Legal Matters
"Financial Information
210Index of Principal Definitions
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PROSPECTUS SUPPLEMENT (To Prospectus Dated March 6, 1997) MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-HUD1 SALOMON BROTHERS MORTGAGE SECURITIES VII, INC. DEPOSITOR OCWEN FEDERAL BANK FSB MASTER SERVICER The Series 1997-HUD1 Certificates (collectively, the "Certificates") will consist of 15 classes of certificates, designated as: (i) the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates (collectively, the "Senior P&I Certificates"); (ii) the Class IO Certificates; (iii) the Class A-WAC Certificates (collectively with the Senior P&I Certificates and the Class IO Certificates, the "Senior Certificates"); (iv) the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates (collectively, the "Class B Certificates"; the Senior P&I Certificates and the Class B Certificates, together, the "P&I Certificates"; the Senior Certificates and the Class B Certificates, together, the "REMIC Regular Certificates"); and (v) the Class R-I, Class R-II and Class R-III Certificates (collectively, the "Residual Certificates"). (COVER CONTINUED ON NEXT PAGE) ----------------------------- PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE S-25 OF THIS PROSPECTUS SUPPLEMENT. ----------------------------- PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE OFFERED CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE DEPOSITOR, THE MORTGAGE LOAN SELLER, THE MASTER SERVICER, THE TRUSTEE, THE FISCAL AGENT OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY. 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 SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [Enlarge/Download Table] ==================================================================================================================================== INITIAL CERTIFICATE PASS-THROUGH INITIAL CERTIFICATE PASS-THROUGH CLASS PRINCIPAL BALANCE(1) RATE CLASS PRINCIPAL BALANCE(1) RATE ------------------------------------------------------------------------------------------------------------------------------------ A-1................... $101,348,000 6.97% A-WAC................. $52,706,878(4) (5) A-2................... $ 18,362,000 7.37% B-1................... $12,231,000 7.75%(2) A-3................... $ 26,662,000 7.51% B-2................... $ 8,969,000 7.75%(2) A-4................... $ 51,185,000 7.70%(2) B-3................... $15,493,000 7.75%(2) IO.................... $272,574,770(3) 0.68%(5)(6) ==================================================================================================================================== (1) Approximate. (2) The Pass-Through Rate will equal the lesser of the rate stated above and the Weighted Average Stripped Net Mortgage Rate (as defined herein). (3) Initial Notional Amount (approximate). (4) The Class A-WAC Certificates have both a Certificate Balance and a Notional Amount. The initial Certificate Balance of the Class A-WAC Certificates is approximately $52,706,878 and is equal to the Cut-off Date Pool Arrearage, other than the portion thereof payable as fees and expenses. In addition to an initial Certificate Balance, the Class A-WAC Certificates have an initial Notional Amount, which is approximately $272,574,770 and is equal to the aggregate initial Certificate Balance of the P&I Certificates. (5) The Class IO and Class A-WAC Certificates accrue interest on the Notional Amount thereof outstanding from time to time at the fixed Pass-Through Rate set forth above (in the case of the Class IO Certificates) and at a variable Pass-Through Rate calculated as described herein (in the case of the Class A-WAC Certificates). Interest does not accrue on the Certificate Balance of the Class A-WAC Certificates, and the Class IO Certificates are interest-only certificates and do not have a Certificate Balance. (6) Approximate. -------------- The Offered Certificates will be purchased by the Underwriter from the Depositor and will be offered by the Underwriter from time to time to the public in negotiated transactions or otherwise at varying prices to be determined at the time of sale. Proceeds to the Depositor from the sale of the Offered Certificates, before deducting expenses payable by the Depositor, will be 102.6895% of the initial Certificate Balance of the Offered Certificates (other than the Class IO Certificates), plus accrued interest on the Offered Certificates from the Cut-off Date. The Offered Certificates are offered subject to receipt and acceptance by the Underwriter, to prior sale and to the Underwriter's right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the Offered Certificates (other than the Class IO Certificates) will be made through the facilities of The Depository Trust Company, and the delivery of each other class of the Offered Certificates will be made at the offices of Salomon Brothers Inc, Seven World Trade Center, New York, New York 10048, in each case, on or about April 30, 1997 (the "Closing Date"). -------------------- SALOMON BROTHERS INC --------------------------------------------------------------------------- The date of this Prospectus Supplement is April 29, 1997.
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(COVER CONTINUED) Only the Senior Certificates and the Class B-1, Class B-2 and Class B-3 Certificates (collectively, the "Offered Certificates") are offered hereby. The rights of the holders of the Class B Certificates and the Residual Certificates to receive distributions with respect to the Mortgage Loans will be subordinate to the rights of the holders of the Senior Certificates, and the rights of the holders of the Residual Certificates to receive distributions with respect to the Mortgage Loans will be subordinate to the rights of the holders of the Senior Certificates and the Class B Certificates, in each case to the extent described herein. Further, the Class B Certificates of any class having a higher numerical class designation are subordinated, to the extent described herein, to the Class B Certificates of each class having a lower numerical class designation. Distributions on the Certificates will be made, to the extent of available funds, on the 25th day of each month (or, if any such 25th day is not a business day, then on the next succeeding business day), beginning in May 1997 (each, a "Distribution Date"). As more fully described herein, distributions allocable to interest accrued on each class of P&I Certificates and the Class A-WAC Certificates will be made on each Distribution Date based on the pass-through rate (the "Pass-Through Rate") then applicable to such class and the stated principal amount (the "Certificate Balance") or, in the case of the Class IO Certificates and Class A-WAC Certificates, the notional principal amount (the "Notional Amount"), of such class outstanding immediately prior to such Distribution Date and in accordance with the priorities described herein. The Residual Certificates will not accrue interest. Distributions allocable to principal or Arrearage (as defined below) on each class of P&I Certificates and the Class A-WAC Certificates will be made on each Distribution Date in the amounts and in accordance with the priorities described herein. The Class IO Certificates are interest-only certificates, will not have a Certificate Balance and are not entitled to distributions allocable to principal or Arrearage. No class of Residual Certificates will have a Certificate Balance or entitle the holders thereof to receive distributions of principal or Arrearage. It is a condition to the issuance of the Certificates that each class of Senior Certificates be rated not lower than "AAA" by Duff & Phelps Credit Rating Co. ("DCR") and "Aaa" by Moody's Investors Service, Inc. ("Moody's"), the Class B-1 Certificates be rated not lower than "AA" by DCR and "Aa2" by Moody's, the Class B-2 Certificates be rated not lower than "A" by DCR and "A2" by Moody's and the Class B-3 Certificates be rated not lower than "BBB" by DCR and "Baa2" by Moody's. The Certificates represent in the aggregate the entire beneficial ownership interest in a trust fund (the "Trust Fund") consisting primarily of a segregated pool (the "Mortgage Pool") of approximately 6,738 conventional mortgage loans (the "Mortgage Loans") having, as of April 1, 1997 (the "Cut-off Date"), an aggregate Unpaid Principal Balance of approximately $272,574,770 (the "Cutoff Date Pool Unpaid Principal Balance"), an aggregate Arrearage of approximately $53,585,190 (the "Cut-off Date Pool Arrearage") and an aggregate Legal Balance of approximately $326,159,960 (the "Cut-off Date Pool Legal Balance"). The Arrearage has been repaid in full in 2,018 of the Mortgage Loans and, in certain instances, Arrearage is no longer owed as the related Mortgage Loans have been modified to include the Arrearage in the principal balance thereof. In all such cases, the Arrearage is deemed to be zero. The Mortgage Loans were acquired by Salomon Brothers Realty Corp. (the "Mortgage Loan Seller"), an affiliate of the Depositor, from the United States Department of Housing and Urban Development ("HUD") in 1996. Each Mortgage Loan is a fixed-rate or adjustable-rate loan secured by a first lien on residential real property and generally was originated as a 30-year, fully amortizing loan primarily under HUD's Section 203(b) or 703 mortgage insurance programs. Each Mortgage Loan defaulted, and after default, such Mortgage Loan was determined by HUD to be eligible for forbearance relief and was assigned to HUD. Forbearance relief generally resulted in a reduction and/or suspension of the borrower's obligation to make scheduled monthly payments of principal and interest required under the loan's original terms (the "Original Scheduled Payment") for a period (the "Forbearance Period") which typically lasted for 36 months. In each case, at the expiration of the Forbearance Period, the borrower's "Legal Balance" was equal to the sum of the Unpaid Principal Balance plus any Arrearage. The "Unpaid Principal Balance" equaled the unpaid principal balance of the Mortgage Loan as of the commencement of the Forbearance Period reduced by amounts, if any, paid in respect of principal during the Forbearance Period. The "Arrearage" equaled the sum of all accrued but unpaid interest on the Mortgage Loan at the end of the Forbearance Period and the amount of any tax and insurance advances made with respect to the Mortgage Loan from the acquisition of the Mortgage Loan by the Mortgage Loan Seller to but not including the Cut-off Date and, in certain cases, accrued but unpaid interest prior to the transfer of servicing to the Master Servicer. Following the expiration of the Forbearance Period, each borrower was and is required to make a payment (the "Modified Scheduled Payment") generally in an amount at least equal to the Original Scheduled Payment plus, to the extent of the borrower's ability to pay, an additional amount to be applied to pay down the Arrearage. AS OF THE CUTOFF DATE, NO MORTGAGE LOAN WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY OR PRIVATE INSURER. ALL HUD INSURANCE WITH RESPECT TO THE MORTGAGE LOANS HAS TERMINATED. All of the Mortgage Loans are reperforming mortgage loans. As of the Cut-off Date, except with respect to approximately 6.00% of the Mortgage Loans, by aggregate Unpaid Principal Balance as of the Cut-off Date, the borrower under each Mortgage Loan has made at least 97.5% of the aggregate amount of Original Scheduled Payments due for the four calendar months preceding the Cut-off Date (regardless of either the timing of receipt of such payments or the payment history of such loans prior to December 1996). FOR FURTHER INFORMATION ABOUT THE RECENT PAYMENT HISTORY OF THE MORTGAGE LOANS, SEE "RISK FACTORS--NATURE OF THE MORTGAGE LOANS" HEREIN, AND FOR FURTHER INFORMATION ABOUT THE MORTGAGE LOANS GENERALLY, SEE "THE MORTGAGE POOL" HEREIN. S-2
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The Senior P&I Certificates, the Class A-WAC Certificates and the Class B-1, Class B-2 and Class B-3 Certificates (collectively, the "Book-Entry Certificates") initially will be represented by Certificates registered in the name of CEDE & Co., as nominee of The Depository Trust Company ("DTC"). The interests of beneficial owners of the Book-Entry Certificates will be represented by book entries on the records of participating members of DTC. Definitive Certificates will be available for the Book-Entry Certificates only under the limited circumstances described herein. See "Description of the Certificates--Registration of BookEntry Certificates" herein. The Class IO Certificates will be issued in fully registered, certificated form. There is currently no secondary market for the Offered Certificates and there can be no assurance that a secondary market for the Offered Certificates will develop. Salomon Brothers Inc (the "Underwriter") intends to establish a market in the Offered Certificates, but is not obligated to do so. There is no assurance that any such market, if established, will continue. See "Secondary Market" herein. Any person purchasing any of the Offered Certificates (other than the Class IO Certificates) by, on behalf of or with the assets of a Plan (as defined herein) will be deemed to have made certain representations in connection with such purchase, as provided herein. The Class IO Certificates may not be purchased by, on behalf of or with the assets of a Plan except upon the delivery of an opinion of counsel or a certification of facts, as provided herein. See "ERISA Considerations" and "Description of the Certificates--Restrictions on Transfer of the Offered Certificates" herein. THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES, PARTICULARLY THE CLASS IO CERTIFICATES AND THE CLASS A-WAC CERTIFICATES, WILL BE SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND REPURCHASES AND, WITH RESPECT TO THE CLASS A-WAC CERTIFICATES, THE PAYMENT OF ARREARAGES). THE MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME. A SLOWER (FASTER) THAN ANTICIPATED RATE OF PRINCIPAL PREPAYMENTS ON THE MORTGAGE LOANS WILL HAVE A NEGATIVE EFFECT ON THE YIELD TO MATURITY OF THE P&I CERTIFICATES AND THE CLASS A-WAC CERTIFICATES IF SUCH CERTIFICATES ARE PURCHASED AT A DISCOUNT (PREMIUM). IN ADDITION, THE YIELD TO MATURITY ON THE CLASS B-1 CERTIFICATES, THE CLASS B-2 CERTIFICATES AND THE CLASS B-3 CERTIFICATES WILL BE EXTREMELY SENSITIVE TO LOSSES DUE TO DEFAULTS ON THE MORTGAGE LOANS (AND THE TIMING THEREOF) TO THE EXTENT THAT SUCH LOSSES ARE NOT COVERED BY THE CLASSES OF CLASS B CERTIFICATES WITH HIGHER NUMERICAL CLASS DESIGNATIONS. A RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE MORTGAGE LOANS, TO THE EXTENT THAT SUCH PREPAYMENTS ARE APPLIED TO REDUCE THE CERTIFICATE BALANCES OF THE CLASSES OF P&I CERTIFICATES, WILL HAVE A MATERIAL NEGATIVE EFFECT ON THE YIELD TO MATURITY OF THE CLASS IO CERTIFICATES AND THE CLASS A-WAC CERTIFICATES. IN ADDITION, THE AMOUNT OF INTEREST PAYABLE ON THE CLASS A-WAC CERTIFICATES, WHICH IS BASED ON THE WEIGHTED AVERAGE OF THE NET MORTGAGE RATES (AS DEFINED HEREIN) ON THE MORTGAGE LOANS, WILL DECREASE MORE SIGNIFICANTLY AS A RESULT OF PRINCIPAL PREPAYMENTS ON MORTGAGE LOANS WITH RELATIVELY HIGH NET MORTGAGE RATES. INVESTORS IN THE CLASS IO CERTIFICATES AND THE CLASS A-WAC CERTIFICATES SHOULD CAREFULLY CONSIDER THE ASSOCIATED RISKS, INCLUDING, IN THE CASE OF THE CLASS IO CERTIFICATES, THE RISK THAT A RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF INVESTORS IN THE CLASS IO CERTIFICATES TO RECOVER FULLY THEIR INITIAL INVESTMENTS. THE YIELD TO INVESTORS IN THE OFFERED CERTIFICATES MAY BE ADVERSELY AFFECTED BY ANY SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS, LIQUIDATIONS OR OTHERWISE. SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS WILL BE OFFSET BY THE MASTER SERVICER BUT ONLY TO THE EXTENT DESCRIBED HEREIN. SEE "SUMMARY OF THE PROSPECTUS SUPPLEMENT--SPECIAL PREPAYMENT CONSIDERATIONS" AND "--SPECIAL YIELD CONSIDERATIONS" AND "YIELD ON THE CERTIFICATES" HEREIN. As described herein, three separate "real estate mortgage investment conduit" ("REMIC") elections will be made with respect to the Trust Fund for federal income tax purposes (the REMICs formed thereby, "REMIC I", "REMIC II" and "REMIC III"). As described more fully herein, the REMIC Regular Certificates will be the "regular interests" in REMIC III and each class of the Residual Certificates will be the sole class of "residual interests" in the related REMIC. See "Certain Federal Income Tax Consequences" herein and in the Prospectus. ----------------------------- THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL CONSTITUTE A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR PURSUANT TO ITS PROSPECTUS DATED MARCH 6, 1997, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. S-3
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SUMMARY OF PROSPECTUS SUPPLEMENT The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere herein and in the Prospectus. Capitalized terms used but not defined herein shall have the meanings assigned thereto in the Prospectus. An Index of Principal Definitions is included at the end of the Prospectus. Title of Series..................... Mortgage Pass-Through Certificates, Series 1997-HUD1 (collectively, the "Certificates") will consist of 15 classes of certificates, designated as: (i) the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates (collectively, the "Senior P&I Certificates"); (ii) the Class IO Certificates; (iii) the Class A-WAC Certificates (collectively with the Senior P&I Certificates and the Class IO Certificates, the "Senior Certificates"); (iv) the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates (collectively, the "Class B Certificates"; the Senior P&I Certificates and the Class B Certificates, together, the "P&I Certificates"; the Senior Certificates and the Class B Certificates, together, the "REMIC Regular Certificates"); and (v) the Class R-I, Class R-II and Class R-III Certificates (collectively, the "Residual Certificates"). The rights of the holders of the Class B Certificates and Residual Certificates to receive distributions with respect to the Mortgage Loans will be subordinate to the rights of the holders of the Senior Certificates, and the rights of the holders of the Residual Certificates to receive distributions with respect to the Mortgage Loans will be subordinate to the rights of the holders of the Senior Certificates and the Class B Certificates, in each case to the extent described herein. Further, the Class B Certificates of any class having a higher numerical class designation are subordinated, to the extent described herein, to the Class B Certificates of each class having a lower numerical class designation. The Certificates will be issued pursuant to a Pooling and Servicing Agreement, to be dated as of April 1, 1997 (the "Agreement"), among the Depositor, the Master Servicer, the Trustee and the Fiscal Agent. Offered Certificates................ Only the Senior Certificates and the Class B-1, Class B-2 and Class B-3 Certificates (collectively, the "Offered Certificates") are offered hereby. The Class B-4, Class B- 5 and Class B-6 Certificates and the Residual Certificates are not offered hereby. Each class of the Offered Certificates will have the approximate initial Certificate Balance and/or Notional Amount as set forth on the cover hereof and will have the Pass-Through Rate determined as provided under "Summary of Prospectus Supplement--Description of the S-4
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Certificates" and "Description of the Certificates--General" herein. As more fully described herein, the Senior Certificates (other than the Class IO Certificates) in the aggregate evidence an initial undivided interest of approximately 76.73% in the Trust Fund, and the Class B-1, Class B-2 and Class B-3 Certificates evidence initial undivided interests of approximately 3.75%, approximately 2.75% and approximately 4.75%, respectively, in the Trust Fund. The Offered Certificates are subject to various priorities for payment of interest and principal as described under "Summary of Prospectus Supplement--Distributions on the Certificates" and "Description of the Certificates--Distributions on the Certificates" herein. Any person purchasing the Offered Certificates (other than the Class IO Certificates) by, on behalf of or with the assets of a Plan (as defined herein) will be deemed to have made certain representations in connection with such purchase, as provided herein. The Class IO Certificates may not be purchased by, on behalf of or with the assets of a Plan except upon the delivery of an opinion of counsel or a certification of facts, as provided herein. See "ERISA Considerations" and "Description of the Certificates--Restrictions on Transfer of the Offered Certificates" herein. Class B-4, Class B-5 and Class B-6 Certificates and Residual Certificates............ The Class B-4, Class B-5 and Class B-6 Certificates have initial Certificate Balances of approximately $11,416,000, approximately $9,785,000 and approximately $17,123,770, respectively, and will evidence initial undivided interests of approximately 3.50%, approximately 3.00% and approximately 5.25%, respectively, in the Trust Fund. The Class B-4, Class B-5 and Class B-6 Certificates have a Pass-Through Rate equal to the lesser of (i) 7.75% per annum and (ii) the Weighted Average Stripped Net Mortgage Rate (as defined herein). The Residual Certificates have no Certificate Balance or Pass-Through Rate. The Class B-4, Class B-5 and Class B-6 Certificates and the Residual Certificates, which are not being offered hereby, will be sold by the Depositor to Salomon Brothers Inc on the Closing Date. Depositor of Mortgage Loans......... Salomon Brothers Mortgage Securities VII, Inc., an indirect wholly-owned subsidiary of Salomon Inc and an affiliate of Salomon Brothers Inc. See "The Depositor" in the Prospectus. Mortgage Loan Seller................ Salomon Brothers Realty Corp., an indirect wholly-owned subsidiary of Salomon Inc and an affiliate of Salomon S-5
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Brothers Inc. See "The Mortgage Pool--Representations and Warranties" herein. Master Servicer..................... Ocwen Federal Bank FSB, a federally chartered savings bank. See "Pooling and Servicing Agreement--The Master Servicer" herein. Trustee............................. LaSalle National Bank, a nationally chartered bank and an affiliate of the Fiscal Agent. The Trustee will be obligated to perform the Master Servicer's obligation to make P&I Advances and certain other advances with respect to the Mortgage Loans under certain circumstances described herein. See "Pooling and Servicing Agreement--The Trustee" herein. Fiscal Agent........................ ABN AMRO Bank N.V., a Netherlands banking corporation and an affiliate of the Trustee. The Fiscal Agent will be obligated to make P&I Advances and certain other advances with respect to the Mortgage Loans under certain circumstances described herein. See "Pooling and Servicing Agreement--The Fiscal Agent" herein. Cut-off Date........................ April 1, 1997. Closing Date........................ On or about April 30, 1997. Distribution Date................... The 25th day of each month (or, if any such 25th day is not a business day, the next succeeding business day), commencing in May 1997. Determination Date.................. With respect to any Distribution Date, the 13th day of the calendar month in which such Distribution Date occurs (or, if such 13th day is not a business day, the immediately preceding business day). Record Date......................... The record date for each Distribution Date will be the close of business on the last business day of the month preceding the month in which such Distribution Date occurs. See "Description of the Certificates--General" herein. Interest Accrual Period............. With respect to any class of REMIC Regular Certificates and any Distribution Date, the calendar month preceding the month in which such Distribution Date occurs. See "Description of the Certificates--Distributions on the Certificates" herein. Due Period and Prepayment Period................. With respect to any Distribution Date, the "Due Period" is the period that begins on the second day of the calendar month preceding the month in which such Distribution Date occurs and ends on the first day of the month in which such Distribution Date occurs. With respect to any Distribution Date, the "Prepayment Period" is the previous calendar month. S-6
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Registration; Denomination.......... The Senior P&I Certificates, the Class A-WAC Certificates and the Class B-1, Class B-2 and Class B-3 Certificates (collectively, the "Book-Entry Certificates") will initially be represented by one or more global certificates registered in the name of CEDE & Co., as nominee of The Depository Trust Company ("DTC"), in minimum denominations of $10,000 initial Certificate Balance and integral multiples of $1.00 in excess thereof. Each Class A-WAC Certificates will also have an initial Notional Amount equal to the percentage interest of such Certificate in such class times the aggregate initial Notional Amount of the Class A-WAC Certificates. No person acquiring an interest in the Book-Entry Certificates (a "Certificate Owner") will be entitled to receive a Certificate in fully registered, certificated form (a "Definitive Certificate"), except under the limited circumstances described herein. See "Description of the Certificates--Definitive Certificates" herein. Instead, DTC will effect payments and transfers by means of its electronic record keeping services, acting through certain participating organizations ("Participants"). This may result in certain delays in receipt of distributions by an investor and may restrict an investor's ability to pledge its securities. All references herein to Certificateholders of the Book-Entry Certificates will reflect the rights of Certificate Owners, as such rights may be exercised through DTC and its Participants, except as otherwise specified herein. See "Description of the Certificates-- Registration of the Book-Entry Certificates" herein. The Class IO Certificates will be issued in registered, certificated form, in minimum denominations or percentage interests corresponding to initial Notional Amounts of $10,000 and integral multiples of $1,000 in excess thereof, except that one Certificate of such class may be issued evidencing an amount equal to either (i) the sum of an otherwise authorized denomination thereof plus the remainder of the aggregate initial Notional Amount for such class or (ii) such remainder. The Mortgage Pool................... The Mortgage Pool will consist of approximately 6,738 residential fixed-rate or adjustable-rate, first lien seasoned mortgage loans (the "Mortgage Loans") with an aggregate Unpaid Principal Balance, exclusive of Arrearages, of approximately $272,574,770 (the "Cut-off Date Pool Unpaid Principal Balance"), an aggregate Arrearage of approximately $53,585,190 (the "Cut-off Date Pool Arrearage") and an aggregate Legal Balance of approximately $326,159,960 (the "Cut-off Date Pool Legal Balance"). The Mortgage Loans were acquired by the Mortgage Loan Seller from HUD in 1996. See "The Mortgage Pool" herein. S-7
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Substantially all of the Mortgage Loans were originated as 30-year, fully amortizing loans under HUD's Section 203(b) or 703 mortgage insurance programs. A limited number of Mortgage Loans had longer or shorter original terms to maturity and/or had graduated payments; however, the period of any reduced payment with respect to any Mortgage Loans that had graduated payments is now over. The goal of HUD's single-family insurance program is to make mortgage credit more readily available through the Federal Housing Administration (the "FHA") to American home buyers, particularly those with low or moderate income, by insuring private sector lenders against the risk of default. The FHA is part of, and provides insurance services for, HUD. HUD's Section 203(b) or 703 mortgage insurance programs insure mortgagees against losses on eligible mortgage loans used to finance the purchase of proposed, under construction, or existing one- to four-family dwellings or manufactured homes, as well as to refinance indebtedness on existing housing. In connection with a default under an FHA-insured mortgage loan, the lender may, among other things, assign such mortgage loan to HUD in order to obtain the applicable insurance benefits. Each Mortgage Loan defaulted, and after default, such Mortgage Loan was determined by HUD to be eligible for forbearance relief and was assigned to HUD. See "The Mortgage Pool--General" and "--The Section 203(b) and 703 Insurance Programs" herein. NO MORTGAGE LOAN WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY OR PRIVATE INSURER. ALL HUD INSURANCE WITH RESPECT TO THE MORTGAGE LOANS HAS TERMINATED. Each Mortgage Loan is secured by a mortgage, deed of trust or other similar instrument (a "Mortgage") creating a first lien on a residential property (a "Mortgaged Property"). Substantially all of the monthly payments on the Mortgage Loans are due on the first day of each month. Set forth below is certain information regarding the Mortgage Loans and the Mortgaged Properties as of the Cut-off Date (except as otherwise indicated). All such information is provided on an approximate basis. All weighted average information provided below, except loan-to-value ratios, reflects weighting of the Mortgage Loans by their respective Unpaid Principal Balances as of the Cut-off Date. In each case, the Unpaid Principal Balance has been calculated on the assumption that the principal portion of all Original Scheduled Payments due in respect of each Mortgage Loan on or before the Cut-off S-8
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Date have been received. In each case, Arrearage of the Mortgage Loan has been calculated after application of all payments of Arrearage actually received as of the Cut-off Date. Number of Mortgage Loans .......... 6,738 Cut-off Date Pool Legal Balance ... $326,159,960 Cut-off Date Pool Unpaid Principal Balance ......................... $272,574,770 Cut-off Date Pool Arrearage ....... $53,585,190 Minimum Legal Balance ............. $179.76 Maximum Legal Balance ............. $200,633.83 Average Legal Balance ............. $48,406.05 Minimum Unpaid Principal Balance .. $179.76 Maximum Unpaid Principal Balance .. $200,633.83 Average Unpaid Principal Balance .. $40,453.36 Minimum Arrearage ................. $0 Maximum Arrearage ................. $81,162.03 Average Arrearage ................. $7,952.68 Minimum Mortgage Rate(1) .......... 0.38% per annum Maximum Mortgage Rate(1) .......... 17.50% per annum Weighted Average Mortgage Rate .... 9.763% per annum Minimum Remaining Term to Original Stated Maturity (months) ........ 1 Maximum Remaining Term to Original Stated Maturity (months) ........ 404 Weighted Average Remaining Term to Stated Original Maturity (months) 229 Weighted Average Loan-to-Value Ratio(2) ........................ 97.549% ---------- (1) The Minimum Mortgage Rate and Maximum Mortgage Rate for the adjustable-rate Mortgage Loans were determined based on the actual rate as of the Cut-off Date. (2) The "Loan-to-Value Ratio" of any Mortgage Loan is calculated on the basis of the Legal Balance of such Mortgage Loan and the average of the most recent broker's price opinions in the possession of the Master Servicer. The Mortgage Loans either contain due-on-sale provisions or are assumable by a creditworthy purchaser of the related Mortgaged Property. The Mortgage Loans generally provide that a full or partial prepayment can be made at any time without penalty. See "The Mortgage Pool" herein. Description of the Certificates.................. The Certificates will represent in the aggregate the entire beneficial ownership of a trust fund (the "Trust Fund") to be established by the Depositor, which Trust Fund will S-9
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consist primarily of the Mortgage Pool and certain related assets. The initial aggregate Certificate Balance of the P&I Certificates will equal the aggregate Unpaid Principal Balance of the Mortgage Loans as of the Cut-off Date, after application of the principal portion of all Original Scheduled Payments due on or before such date, whether or not received, and the initial Certificate Balance of the Class A-WAC Certificates will equal approximately 98.36% of the aggregate Arrearage of the Mortgage Loans as of the Cut-off Date, after application of all payments of Arrearage actually received as of such date. The "Certificate Balance" of any class of P&I Certificates or the Class A-WAC Certificates outstanding at any time generally represents the maximum amount that the holders thereof are entitled to receive as distributions allocable to principal or Arrearage, as applicable, from the cash flow on the Mortgage Loans and the other assets in the Trust Fund. The Certificate Balance of each such class will be reduced on each Distribution Date by any distributions of principal or Arrearage, as applicable, actually made on such class on such Distribution Date and, further, by any losses on or in respect of the Mortgage Loans and certain additional Trust Fund expenses allocated to such class on such Distribution Date. Neither the Class IO Certificates nor any class of Residual Certificates will have a Certificate Balance or entitle the holders thereof to receive distributions of principal or Arrearage. Interest will accrue on each class of REMIC Regular Certificates. The per annum rate at which interest will accrue with respect to any such class is the "Pass- Through Rate" for such class. In the case of each class of P&I Certificates, interest will accrue as described herein on the Certificate Balance of such class outstanding from time to time. In the case of the Class IO Certificates and Class A-WAC Certificates, however, interest will accrue as described herein on a notional principal amount ("Notional Amount") in respect of such class outstanding from time to time. The Notional Amount of the Class IO Certificates and of the Class A-WAC Certificates will in each case be equal at all times to the aggregate Certificate Balance of the P&I Certificates. The Residual Certificates will not accrue interest. See "Description of the Certificates-- General" and "--Distributions on the Certificates" herein. The Pass-Through Rates for the Senior P&I Certificates (other than the Class A-4 Certificates) and for the Class S-10
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IO Certificates will, in each case, be fixed at the rate per annum specified on the cover hereof. The Pass-Through Rates for the Class A-4 Certificates and the Class B-1, Class B-2 and Class B-3 Certificates will, in each case and for any Distribution Date, be equal to the lesser of (i) the rate per annum specified on the cover hereof and (ii) the Weighted Average Stripped Net Mortgage Rate for such Distribution Date. The Pass-Through Rate for the Class A-WAC Certificates will be variable and, with respect to each Distribution Date, will equal the weighted average of ten variable rates: the Component A-1 Rate, the Component A-2 Rate, the Component A-3 Rate, the Component A-4 Rate, the Component B-1 Rate, the Component B-2 Rate, the Component B-3 Rate, the Component B-4 Rate, the Component B-5 Rate and the Component B-6 Rate, each weighted according to the proportion the Certificate Balance of the related class of P&I Certificates (that is, the P&I Certificate with the same alphabetical and numerical class designation) outstanding immediately prior to such Distribution Date bears to the sum of the Certificate Balances of the P&I Certificates (and, therefore, the Notional Amount of the Class A-WAC Certificates) outstanding immediately prior to such Distribution Date. Each Component Rate is, as stated above, a variable rate and, with respect to each such Distribution Date, will equal (but will not be less than zero) the Weighted Average Stripped Net Mortgage Rate for such Distribution Date minus (i) the Pass-Through Rate for the Class A-1 Certificates, in the case of the Component A-1 Rate, (ii) the Pass-Through Rate for the Class A-2 Certificates, in the case of the Component A-2 Rate, (iii) the Pass-Through Rate for the Class A-3 Certificates, in the case of the Component A-3 Rate, (iv) the Pass-Through Rate for the Class A-4 Certificates, in the case of the Component A-4 Rate, (v) the PassThrough Rate for the Class B-1 Certificates, in the case of the Component B-1 Rate, (vi) the Pass-Through Rate for the Class B-2 Certificates, in the case of the Component B-2 Rate, (vii) the Pass-Through Rate for the Class B-3 Certificates, in the case of the Component B-3 Rate, (viii) the Pass-Through Rate for the Class B-4 Certificates, in the case of the Component B-4 Rate, (ix) the PassThrough Rate for the Class B-5 Certificates, in the case of the Component B-5 Rate and (x) the Pass-Through Rate for the Class B-6 Certificates, in the case of the Component B-6 Rate. The Weighted Average Stripped Net Mortgage Rate for any Distribution Date is equal to (x) the weighted average of Net Mortgage Rates in effect for the Mortgage Loans as of the commencement of the related Due Period minus (y) 0.68055% per annum. The S-11
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Net Mortgage Rate for each Mortgage Loan is generally equal to the Mortgage Rate minus the sum of the per annum rates at which the Master Servicer's fee and the Trustee's fee accrue. See "Description of the Certificates--General" and "--Distributions on the Certificates" herein. The Notional Amount of the Class IO Certificates and Class A-WAC Certificates is solely intended to be used for purposes of calculating the accrual of interest in respect of each such class and do not entitle the holder thereof to principal distributions with respect thereto. Distributions on the Certificates.................. Distributions on the Certificates will be made, to the extent of available funds, on each Distribution Date, beginning in May 1997. The total of all payments and other collections (or advances in lieu thereof) on or in respect of the Mortgage Loans that are available for distribution to holders of the Certificates ("Certificateholders") on any Distribution Date is the "Available Distribution Amount" for such date. In general, on each Distribution Date, the Available Distribution Amount for such date will be distributed among the respective classes of Certificates for the following purposes and in the following order of priority: (1) to pay interest to the holders of the Senior Certificates of each class, PRO RATA based on entitlement, up to an amount equal to the Interest Distribution Amount (as defined below) in respect of each such class of Certificates for such Distribution Date; (2) to pay interest to the holders of the Class B-1 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (3) to pay interest to the holders of the Class B-2 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (4) to pay interest to the holders of the Class B-3 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (5) to pay interest to the holders of the Class B-4 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (6) to pay interest to the holders of the Class B-5 Certificates, up to an amount equal to the Interest Distribution Amount S-12
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in respect of such class of Certificates for such Distribution Date; (7) to pay interest to the holders of the Class B-6 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (8) to pay principal sequentially to the holders of the Senior P&I Certificates from Class A-1 to Class A-4, in the order of their numerical class designation, in each case until the related Certificate Balance is reduced to zero, up to an amount equal to the Senior Principal Distribution Amount (as defined below), and to pay to the holders of the Class A-WAC Certificates, up to an amount equal to the Basic Class A-WAC Distribution Amount (as defined below), provided that if the then remaining Available Distribution Amount is less than the aggregate of the Senior Principal Distribution Amount and the Basic Class A-WAC Distribution Amount, then distributions pursuant to this clause (8) will be allocated between the holders of the Senior P&I Certificates and the holders of the Class A- WAC Certificates on a PRO RATA basis in accordance with their respective entitlements; (9) to pay to the holders of the Class A-WAC Certificates, up to an amount equal to the Additional Class A-WAC Distribution Amount (as defined below); (10) to pay principal to the holders of the Class B Certificates, up to an amount with respect to each class of Class B Certificates equal to such class's portion, as described herein, of the Subordinate Principal Distribution Amount (as defined below) for such Distribution Date; and (11) to pay any remainder amount to the holders of the Residual Certificates. The "Interest Distribution Amount" with respect to any class of P&I Certificates, the Class IO Certificates or the Class A-WAC Certificates, for any Distribution Date, will generally equal: (i) one month's interest (calculated on the basis of a 360-day year consisting of twelve 30-day months) at the applicable Pass-Through Rate accrued on the Certificate Balance of such class, in the case of any class of P&I Certificates, or the Notional Amount of such class, in the case of the Class IO Certificates and Class A-WAC Certificates, in each case outstanding immediately prior to such Distribution Date; increased by (ii) the excess, if any, of the Interest Distribution Amount for such class for the immediately preceding Distribution Date, if any, over the aggregate distributions of interest made with respect to such class on such immediately preceding Distribution Date; and (iii) in the case of each such class, reduced (to not less than zero) by the allocable share S-13
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for such class of Prepayment Interest Shortfalls (to the extent not covered by Compensating Interest paid by the Master Servicer) and certain other interest shortfalls described herein. With respect to each Distribution Date, the "Senior Principal Distribution Amount" will equal the lesser of (1) the aggregate Certificate Balance of the Senior P&I Certificates outstanding immediately prior to such Distribution Date and (2) the sum of (x) the Senior Percentage (as defined below) of all scheduled payments of principal due on the Mortgage Loans during the related Due Period, whether or not received, and of the aggregate principal portion of any unscheduled net collections (other than amounts described in clauses (y) or (z) hereof and other than payments allocable to Arrearage) received on or in respect of the Mortgage Loans during the related Prepayment Period, including proceeds from repurchases of Mortgage Loans, insurance proceeds, condemnation proceeds and liquidation proceeds, (y) the Senior Prepayment Percentage (as defined below) of all voluntary prepayments of principal received on the Mortgage Loans during the related Prepayment Period (other than the amount thereof allocable to Arrearage) and (z) with respect to the principal portion of any net liquidation proceeds received during the related Prepayment Period in connection with the final liquidation of a Mortgage Loan during such Prepayment Period, the lesser of the Senior Percentage of the then scheduled principal balance of such Mortgage Loan and the Senior Prepayment Percentage of the principal portion of such net liquidation proceeds (other than the amount thereof allocable to Arrearage). See "Description of the Certificates--Distributions on the Certificates" herein. With respect to each Distribution Date, the "Basic Class A- WAC Distribution Amount" will equal the lesser of (1) the Certificate Balance of the Class A-WAC Certificates outstanding immediately prior to such Distribution Date, and (2) the aggregate portion of (a) all Modified Scheduled Payments due on the Mortgage Loans during the related Due Period, to the extent received and allocable to Arrearage, other than the portion thereof payable as fees and expenses, and (b) any unscheduled net collections received on the Mortgage Loans during the related Prepayment Period allocable to Arrearage, including voluntary prepayments, proceeds from repurchases of Mortgage Loans, insurance proceeds, condemnation proceeds and liquidation proceeds, other than the portion thereof payable as fees and expenses. With respect to each Distribution Date, the "Additional Class A-WAC Distribution Amount" will equal the lesser of (1) the Certificate Balance of the Class A-WAC Certificates outstanding immediately prior to such Distribution Date (net of the Basic Class A-WAC Distribution Amount for such Distribution Date) and (2) with respect to the final liquidation of a Mortgage Loan S-14
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during the related Prepayment Period, the amount of any Arrearage remaining unpaid with respect to such Mortgage Loan following the receipt of all related liquidation proceeds, other than the portion thereof payable as fees and expenses. As further provided herein, all payments and recoveries in respect of any Mortgage Loan (exclusive of escrow payments and "pay-aheads") will be applied by the Master Servicer first, to pay accrued interest on such Mortgage Loan; second, to pay scheduled principal on such Mortgage Loan; third, to repay Arrearage of such Mortgage Loan; and fourth, to prepay Unpaid Principal Balance of such Mortgage Loan. This may result in an accelerated amortization of the Certificate Balance of the Class A-WAC Certificates relative to the Senior P&I Certificates. Holders of each class of Class B Certificates will be entitled to receive on each Distribution Date, to the extent of the portion of the Available Distribution Amount remaining after distribution on such date of the amounts described in clauses (1) through (9) above, distributions allocable to principal in reduction of the Certificate Balances thereof equal to the sum of the following: (i) the related Class B Percentage (as defined herein) of all scheduled payments of principal due on the Mortgage Loans during the related Due Period, whether or not received, and of the aggregate principal portion of any unscheduled net collections (other than amounts described in clauses (ii) or (iii) hereof and other than payments allocable to Arrearage) received on or in respect of the Mortgage Loans during the related Prepayment Period, including proceeds from repurchases of Mortgage Loans, insurance proceeds, condemnation proceeds and liquidation proceeds, (ii) such class's PRO RATA share (if any), as described herein, of the Subordinate Prepayment Percentage of all voluntary prepayments of principal received on the Mortgage Loans during the related Prepayment Period (other than the amount thereof allocable to Arrearage), (iii) with respect to the principal portion of any net liquidation proceeds received during the related Prepayment Period in connection with the final liquidation of a Mortgage Loan during such Prepayment Period, such class's PRO RATA share (if any), as described herein, of the principal portion of such net liquidation proceeds (other than the amount thereof allocable to Arrearage) to the extent not included in the Senior Principal Distribution Amount and (iv) any amounts allocable to principal for any previous Distribution Date (calculated pursuant to the three preceding clauses) that remain undistributed, to the extent that any such amounts are not attributable to Realized Losses that were allocated to Classes of Class B Certificates bearing a higher numerical class designation. See "Description of the Certificates--Distributions on the Certificates" herein. S-15
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With respect to any Distribution Date, the "Subordinate Principal Distribution Amount" will equal the lesser of (a) the balance of the Available Distribution Amount remaining after the distribution of the amounts described in clauses (1) through (9) above and (b) the aggregate of the sum for each class of Class B Certificates of the amounts described in the preceding paragraph. The "Senior Percentage", the "Class B-1 Percentage", the "Class B-2 Percentage", the "Class B-3 Percentage", the "Class B-4 Percentage", the "Class B-5 Percentage" and the "Class B-6 Percentage" initially will be approximately 72.48%, approximately 4.49%, approximately 3.29%, approximately 5.68%, approximately 4.19%, approximately 3.59% and approximately 6.28%, respectively. Each such percentage will be recalculated for each Distribution Date to be a percentage (not to exceed 100%) equal to the aggregate Certificate Balance of the Senior P&I Certificates, in the case of the Senior Percentage, or of the applicable class of Class B Certificates, in the case of the Class B Percentages, in each case immediately prior to such Distribution Date divided by the aggregate scheduled principal balance of the Mortgage Loans as of the end of the Prepayment Period for the immediately preceding Distribution Date. For each Distribution Date occurring prior to the Distribution Date in May 2002, the "Senior Prepayment Percentage" will equal 100%, and until the earlier of such date and the date on which the Senior P&I Certificates are paid in full, no distributions based on principal prepayments or, in certain instances, the principal portion of net liquidation proceeds, on the Mortgage Loans will be distributed to the Class B Certificates. Thereafter, during certain periods, subject to certain loss and delinquency criteria, the Senior Prepayment Percentage may continue to be 100% or otherwise disproportionately large (relative to the Senior Percentage) and, accordingly, the percentage of principal prepayments payable to the Class B Certificates may continue to be 0% or otherwise disproportionately small. The "Subordinate Prepayment Percentage" for any Distribution Date will equal 100% minus the Senior Prepayment Percentage. As further provided herein, prepayments will be allocated to the Senior P&I Certificates only after the satisfaction of any unpaid Arrearage with respect to a Mortgage Loan regardless of the Senior Prepayment Percentage at any time. See "Description of the Certificates-- Distributions on the Certificates" herein. Holders of the Class IO Certificates and the Residual Certificates are not entitled to receive any distributions allocable to principal or Arrearage. S-16
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Allocation of Losses; Subordination..................... In general, losses on or in respect of the Mortgage Loans ("Realized Losses") and certain Trust Fund expenses ("Extraordinary Trust Fund Expenses") will be allocated first, to the Class B-6 Certificates, second, to the Class B-5 Certificates, third, to the Class B-4 Certificates, fourth, to the Class B-3 Certificates, fifth, to the Class B-2 Certificates and sixth, to the Class B-1 Certificates, in each case until the Certificate Balance of such class has been reduced to zero, and thereafter, such losses and expenses will be allocated to the Senior Certificates (other than the Class IO Certificates) on a PRO RATA basis based on their respective Certificate Balances then outstanding. The subordination provided to the Senior Certificates by the Class B Certificates and to the Class B Certificates by classes of Class B Certificates with higher numerical class designations is intended to cover Realized Losses on the Mortgage Loans and Extraordinary Trust Fund Expenses as further described under "Description of the Certificates--Allocation of Losses; Subordination" herein. Sale of Defaulted Mortgage Loans.................... If consent to the operation of the provisions described below shall have been given by the Master Servicer, then with respect to any Mortgage Loan that is delinquent in excess of the number of days provided in the Agreement, (i) the holder of a majority in Percentage Interest of the Class B-6 Certificates, or if the Certificate Balance of the Class B-6 Certificates has been reduced to zero, the holder of a majority in Percentage Interest of the Class B-5 Certificates (the "Directing Holder"), may direct the Master Servicer to commence foreclosure and (ii) prior to commencement of foreclosure of any Mortgage Loan, the Master Servicer will notify the Directing Holder of such proposed foreclosure in order to permit the Directing Holder the right to instruct the Master Servicer to delay the proposed foreclosure. In the case of the exercise by the Directing Holder of the right to direct the Master Servicer pursuant to either clause (i) or clause (ii) above, the Directing Holder will deposit into the Collateral Account (as defined herein) an amount equal to 125% of the Valuation (as defined herein) of any such Mortgage Loan, plus three months' interest at the related Mortgage Rate. In general, upon final liquidation, the amount realized on any such Mortgage Loan will be deposited into the Certificate Account, with the excess of the Valuation of such Mortgage Loan over such amount realized being withdrawn from the Collateral Account. After final liquidation with respect to any such Mortgage Loan, any amount remaining in the Collateral Account with respect to such Mortgage Loan will be remitted to the Directing Holder. See "Pooling and Servicing Agreement--Sale of Defaulted Mortgage Loans" herein. S-17
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P&I Advances........................ The Master Servicer is required to make advances in respect of delinquent payments of principal and interest, but not in respect of Arrearage (except in the limited circumstances described herein), subject to the limitations regarding recoverability as described herein. See "Description of the Certificates--P&I Advances" herein and "Description of the Certificates--Advances in respect of Delinquencies" in the Prospectus. Servicing of the Mortgage Loans................ The Master Servicer will service the Mortgage Loans in accordance with the terms of the Agreement. To the extent possible, the Master Servicer has and will enter into annual payment plans with each borrower pursuant to which the borrower will be obligated to pay interest, principal, Arrearage and certain other amounts (the "Modified Scheduled Payment"). The amount of the Modified Scheduled Payment with respect to each Mortgage Loan will be reviewed by the Master Servicer on an annual basis and, based on the then current financial position of the borrower, either will be increased or decreased solely with respect to the portion of the Modified Scheduled Payment allocable to the repayment of Arrearage. The Master Servicer may not be able to foreclose on a Mortgaged Property in the event of a failure by a borrower to pay the Modified Scheduled Payment if the borrower is able to make a payment in an amount at least equal to the Original Scheduled Payment and certain other conditions are met. See "The Mortgage Pool--The Section 203(b) and 703 Insurance Programs--SERVICING OF THE MORTGAGE LOANS" and "Pooling and Servicing Agreement--The Master Servicer" herein. Optional Termination................ At its option and subject to the limitations provided herein, the Master Servicer may purchase all of the Mortgage Loans and any REO Properties in the Trust Fund on any Distribution Date on which the aggregate Legal Balance of such Mortgage Loans and the Mortgage Loans relating to such properties, after taking into account all payments made in respect thereof through the last day of the month preceding such date, is less than 5% of the Cut-off Date Pool Legal Balance. See "Pooling and Servicing Agreement--Termination" herein and "Description of the Certificates--Termination" in the Prospectus. General Prepayment Considerations.................... The rate of distributions allocable to principal on each class of P&I Certificates will depend, in general, on the rate and timing of principal payments (including prepayments and collections upon defaults, liquidations and repurchases) on the Mortgage Loans. The rate of distributions allocable to principal on the Class A-WAC Certificates will depend on the rate and timing of the payment of Arrearage. As further described herein, S-18
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prepayments will be allocated to the Senior P&I Certificates only after the satisfaction of any unpaid Arrearage with respect to a Mortgage Loan regardless of the Senior Prepayment Percentage at any time. As is the case with mortgage pass-through certificates generally, the Offered Certificates are subject to substantial inherent cash-flow uncertainties because the Mortgage Loans may be prepaid at any time. Generally, when prevailing interest rates are increasing, prepayment rates on mortgage loans tend to decrease; a decrease in the prepayment rates on the Mortgage Loans will result in a reduced rate of return of principal to investors in the Offered Certificates (other than the Class IO Certificates) at a time when reinvestment at such higher prevailing rates would be desirable. Conversely, when prevailing interest rates are declining, prepayment rates on mortgage loans tend to increase; an increase in the prepayment rates on the Mortgage Loans will result in a greater rate of return of principal to investors in the Offered Certificates (other than the Class IO Certificates) at a time when reinvestment at comparable yields may not be possible. Mortgagors may prepay the Mortgage Loans at any time without penalty. Distributions of principal will be made to the classes of Senior P&I Certificates sequentially as described herein. The timing of commencement of principal distributions and the weighted average life of each such class of Certificates will be affected by the rates of prepayment on the Mortgage Loans experienced both before and after the commencement of principal distributions on each such class. As described herein, during certain periods all or a disproportionately large percentage of principal prepayments on the Mortgage Loans will be allocated among the Senior Certificates (other than the Class IO Certificates) and none or a disproportionately small percentage of such prepayments will be distributed among the Class B Certificates. To the extent that no prepayments or a disproportionately small percentage of such prepayments are distributed on the Class B Certificates, the subordination afforded the Senior Certificates by the Class B Certificates, in the absence of offsetting Realized Losses allocated thereto, will be increased. The allocation among the classes of Class B Certificates of the portion of principal prepayments and net liquidation proceeds on the Mortgage Loans that is not distributable to holders of the Senior Certificates will be governed by certain loss and delinquency criteria described herein. See "Description of the Certificates-Distributions on the Certificates" and "Yield on the Certificates" herein and "Maturity and Prepayment Considerations" in the Prospectus. For further information regarding the effect of principal prepayments on the weighted average lives of the Senior P&I S-19
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Certificates, the Class A-WAC Certificates and the Class B-1, Class B-2 and Class B-3 Certificates, see "Yield on the Certificates" herein and the table entitled "Percent of Initial Certificate Balance Outstanding at the Following Percentages of CPR" therein. Special Yield Considerations.................... The yield to maturity on each class of the Offered Certificates, particularly the Class IO Certificates and the Class A-WAC Certificates, will depend, in general, on the rate and timing of principal payments (including prepayments and collections upon defaults, liquidations and repurchases) on the Mortgage Loans and the allocation thereof to reduce the Certificate Balance and/or Notional Amount of such Certificates, as well as other factors, such as interest at the Pass-Through Rate (as the same will change from time to time in the case of the Class A-WAC Certificates), and the purchase price for such Certificates. The yield to investors on any class of Offered Certificates will be adversely affected by any allocation thereto of interest shortfalls on the Mortgage Loans. In general, if a class of Offered Certificates (other than the Class IO Certificates) is purchased at a premium and principal distributions thereon occur at a rate faster than anticipated at the time of purchase, the investor's actual yield to maturity will be lower than that assumed at the time of purchase. Conversely, in general, if a class of Offered Certificates (other than the Class IO Certificates) is purchased at a discount and principal distributions thereon occur at a rate slower than that assumed at the time of purchase, the investor's actual yield to maturity will be lower than that originally anticipated. The proceeds to the Depositor from the sale of the Offered Certificates were determined based on a number of assumptions, including a prepayment assumption of 8% CPR (as defined herein) and weighted average lives corresponding thereto. No representation is made that the Mortgage Loans will prepay at that rate or at any other rate. The yield assumptions for the Offered Certificates will vary as determined at the time of sale. The multiple class structure of the Offered Certificates causes the yield of certain classes to be particularly sensitive to changes in the rates of prepayment of the Mortgage Loans and other factors, as follows: SENIOR P&I CERTIFICATES: Because distributions of principal will be made to the classes of Senior P&I Certificates sequentially as described herein, the yield to maturity on the Certificates of any such class will be sensitive to the rates of prepayment on the Mortgage Loans experienced S-20
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both before and after the commencement of principal distributions on such class. CLASS IO CERTIFICATES: The yield to maturity on the Class IO Certificates will be extremely sensitive to the rate of principal payments (including prepayments and collections upon defaults, liquidations and repurchases) on the Mortgage Loans, which may fluctuate significantly from time to time. Prospective investors should consider fully the risks associated with an investment in the Class IO Certificates, including the risk that a rapid rate of principal payments on the Mortgage Loans will have a materially negative effect on the yield to investors in the Class IO Certificates and may result in the failure of investors in the Class IO Certificates to recover fully their initial investment. CLASS A-WAC CERTIFICATES: The yield to maturity of the Class A-WAC Certificates will be especially sensitive to the prepayment, repurchase and default experience on the Mortgage Loans, which may fluctuate significantly from time to time. In addition, the aggregate of distributions in respect of, and the yield to maturity of, the Class A-WAC Certificates will be related to the rate and timing of the payment of the Arrearage. Reductions in the Certificate Balances of the P&I Certificates will result in the reduction of the Notional Amount of the Class A-WAC Certificates, which will reduce the amount of interest payable on the Class A-WAC Certificates. Losses and other shortfalls in collections on the Mortgage Loans allocated to the Class B Certificates will cause a reduction in the Certificate Balances thereof and a corresponding reduction in the Notional Amount of the Class A-WAC Certificates, which will reduce the amount of interest payable on the Class A- WAC Certificates. In addition, the amount of interest payable on the Class A-WAC Certificates will decrease more significantly as a result of principal prepayments on Mortgage Loans with relatively high Net Mortgage Rates. CLASS B CERTIFICATES: The yield to maturity on the Class B Certificates will be extremely sensitive to losses due to defaults on the Mortgage Loans (and the timing thereof), to the extent such losses are not covered by Class B Certificates with higher numerical class designations. Furthermore, as described herein, the timing of receipt of principal and interest by any class of Class B Certificates may be adversely affected by losses even if such class does not ultimately bear such loss. Certain Federal Income Tax Consequences...................... Three separate "real estate mortgage investment conduit" ("REMIC") elections will be made with respect to the Trust Fund for federal income tax purposes (the REMICs formed thereby, "REMIC I", "REMIC II" and "REMIC III"). Upon the S-21
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issuance of the Offered Certificates, Thacher Proffitt & Wood, counsel to the Depositor, will deliver its opinion generally to the effect that, assuming compliance with all provisions of the Agreement, for federal income tax purposes, REMIC I, REMIC II and REMIC III will each qualify as a REMIC under Sections 860A through 860G of the Internal Revenue Code of 1986 (the "Code"). The assets of REMIC I will consist of the Mortgage Loans, any properties acquired on behalf of the Certificateholders and the Certificate Account. For federal income tax purposes, (i) the REMIC Regular Certificates will be the "regular interests" in, and generally will be treated as debt obligations of, REMIC III, and (ii) the Class R-III Certificates will be the sole class of "residual interests" in REMIC III. The Offered Certificates will be treated as assets described in Section 7701(a)(19)(C) of the Internal Revenue Code of 1986 (the "Code") and "real estate assets" under Section 856(c)(5)(A) of the Code, generally in the same proportion that the assets in the Trust Fund would be so treated. In addition, interest on the Offered Certificates will be treated as "interest on obligations secured by mortgages on real property" under Section 856(c)(3)(B) of the Code generally to the extent that such Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of the Code. The Offered Certificates also will be treated as "qualified mortgages" under Section 860G(a)(3) of the Code. See "Certain Federal Income Tax Consequences--Characterization of Investments in REMIC Certificates" herein and in the Prospectus. For federal income tax reporting purposes, the Class IO Certificates and Class A-WAC Certificates will, but the other Classes of Offered Certificates will not, be issued with "original issue discount". The prepayment assumption that will be used in determining the rate of accrual of original issue discount, market discount and amortizable premium, if any, for federal income tax purposes will be 8% CPR. However, the Depositor makes no representation that the Mortgage Loans will in fact prepay or, if they do prepay, that they will prepay at any particular rate. If the method for computing original issue discount described herein results in a negative amount for any period with respect to an Offered Certificate issued with original issue discount, in particular, a Class IO Certificate or a Class A-WAC Certificate, the amount of original issue discount allocable to such period will be zero and the holder of such a Certificate will be permitted to offset such negative amount only against future original issue discount (if any) attributable to such Certificate. See "Yield on the Certificates" herein. For further information regarding the federal income tax consequences of investing in the Offered Certificates, see S-22
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"Certain Federal Income Tax Consequences" herein and in the Prospectus. Ratings............................. It is a condition to the issuance of the Certificates that each class of Senior Certificates be rated not lower than "AAA" by Duff & Phelps Credit Rating Co. ("DCR") and "Aaa" by Moody's Investors Service, Inc. ("Moody's"), the Class B-1 Certificates be rated not lower than "AA" by DCR and "Aa2" by Moody's, the Class B-2 Certificates be rated not lower than "A" by DCR and "A2" by Moody's and the Class B-3 Certificates be rated not lower than "BBB" by DCR and "Baa2" by Moody's. The Depositor has not requested that any rating agency rate any class of the Offered Certificates other than as stated above. If another rating agency were to rate any class of the Offered Certificates, such rating agency may assign a rating different from the ratings described above. 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. A security rating does not address the frequency of prepayments on the Mortgage Loans, the corresponding effect on yield to investors or whether investors in the Class IO Certificates may fail to recover fully their initial investment. See "Yield on the Certificates" and "Ratings" herein and "Yield Considerations" in the Prospectus. Legal Investment.................... The Senior Certificates and Class B-1 Certificates will constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than the second highest rating category by a Rating Agency (as defined in the Prospectus) and, as such, will be legal investments for certain entities to the extent provided in SMMEA. SMMEA, however, provides for state limitation on the authority of such entities to invest in "mortgage related securities", provided that such restricting legislation was enacted prior to October 3, 1991. The other Classes of Offered Certificates will not constitute "mortgage related securities" for purposes of SMMEA. Institutions whose investment activities are subject to legal investment laws and regulations or to review by regulatory authorities may be subject to restrictions on investment in the Offered Certificates, particularly the Class IO Certificates and Class A-WAC Certificates. Any such institution should consult with their own legal advisors in determining whether and to what extent the Offered Certificates constitute legal investments or are subject to restrictions on investment. See "Legal Investment" herein and in the Prospectus. ERISA Considerations................ Any person acquiring the Offered Certificates (other than the Class IO Certificates) by or on behalf of, or with the assets of, an employee benefit plan subject to the subject to the S-23
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Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the Code will be deemed to have represented that the purchase of such Offered Certificates is permissible under applicable law, will not constitute or result in any non-exempt prohibited transaction under ERISA or Section 4975 of the Code and will not subject the Depositor, the Master Servicer, the Trustee, the Fiscal Agent or the Trust Fund to any obligation in addition to those undertaken in the Agreement. The Class IO Certificates may not be purchased by, on behalf of or with the assets of a Plan except upon the delivery of an opinion of counsel or a certification of facts, as provided herein. A fiduciary of any employee benefit plan subject to ERISA and the Code should carefully review with its legal advisors whether the purchase or holding of the Certificates could give rise to a transaction that is prohibited or not otherwise permissible under ERISA and the Code. See "ERISA Considerations" herein and in the Prospectus. S-24
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RISK FACTORS In addition to the matters described elsewhere in this Prospectus Supplement and the Prospectus, prospective investors should carefully consider the following factors before deciding to invest in the Offered Certificates. CLASS IO CERTIFICATES AND CLASS A-WAC CERTIFICATES Principal payments (including prepayments and collections upon defaults, liquidations and repurchases) distributed in reduction of the Certificate Balances of the P&I Certificates will result in the corresponding reduction of the Notional Amount of the Class IO Certificates and of the Class AWAC Certificates, which will reduce the amount of interest payable on the Class IO Certificates and Class A-WAC Certificates. Losses and other shortfalls in collections on the Mortgage Loans allocated to the Class B Certificates will cause a reduction in the Certificate Balances thereof and a corresponding reduction in the Notional Amount of the Class IO Certificates and of the Class A-WAC Certificates, which will also reduce the amount of interest payable on the Class IO Certificates and Class A-WAC Certificates. In addition, the amount of interest payable on the Class A-WAC Certificates will decrease more significantly as a result of principal prepayments on Mortgage Loans with relatively high Net Mortgage Rates. In addition to the right to receive interest on the related Notional Amount, the Class A-WAC Certificates represent the right to receive payments in respect of Arrearage. The rate at which the Arrearage is repaid on any Mortgage Loan is dependent on a variety of factors including the financial status of the borrower. To the extent that the rate of payment in respect of Arrearage is slower than expected, the weighted average life of the Class A-WAC Certificates will be longer than expected and to the extent that the rate of payment in respect of Arrearages is faster than expected, the weighted average life of the Class A-WAC Certificates will be shorter than expected. None of the Master Servicer, the Trustee or the Fiscal Agent will advance the portion of any Modified Scheduled Payment allocable to Arrearage. See "Description of the Certificates--P&I Advances" herein. SUBORDINATION; LOSSES ON THE MORTGAGE LOANS; VARIABILITY OF YIELD The Class B Certificates represent credit support for the Senior Certificates. The yield to maturity on the Class B Certificates will be extremely sensitive to the default and loss experience on or in respect of the Mortgage Loans and to the timing of any such defaults or losses. The rights of the holders of the Class B Certificates to receive distributions in respect of the Mortgage Loans will be subordinate to the rights of the holders of the Senior Certificates to the extent described herein. In general, all losses and other shortfalls in collections on the Mortgage Loans will be allocated to the Class B Certificates to the extent of amounts otherwise payable thereon prior to any allocation of such losses and shortfalls to the Senior Certificates. Such allocation of losses and other shortfalls in collections on the Mortgage Loans will be effected by the priority of distributions on the Certificates and by reducing the Certificate Balance of the Class B Certificates. Although the Residual Certificates are subordinate to the Class B Certificates, the Residual Certificates do not have Certificate Balances and do not provide any material protection to the holders of the Class B Certificates against losses and other shortfalls in collections on the Mortgage Loans. Because of the sensitivity of the yield to maturity of the Class B Certificates to the default and loss experience of the Mortgage Pool, prospective investors are strongly advised to conduct their own investigation of the ability of the respective Mortgaged Properties to service the indebtedness secured thereby prior to making an investment in the Certificates. INVESTORS IN THE CLASS B CERTIFICATES SHOULD FULLY CONSIDER THE RISK OF LOSSES ON OR IN RESPECT OF THE MORTGAGE LOANS. S-25
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NATURE OF THE MORTGAGE LOANS As described herein under "The Mortgage Pool", all of the Mortgage Loans in the past have defaulted and have been assigned to HUD pursuant to the HUD Assignment Program. The Mortgage Loans may have a greater than normal risk of future defaults and delinquencies, as compared to a pool of newly originated, high quality, one- to four-family residential mortgage loans of comparable size and geographic concentration. Repayment of the P&I Certificates and the Class A-WAC Certificates is dependent, among other things, upon the borrowers continuing to make Modified Scheduled Payments or, in the event of borrower default, upon the ability of the Master Servicer to sell or foreclose upon the Mortgage Loans or to acquire title to and liquidate the Mortgaged Properties. There can be no assurance whether the Master Servicer will be successful in such efforts or as to the timing thereof; there are restrictions on the Master Servicer's actions in respect of foreclosure as described under "The Mortgage Pool--The Section 203(b) and 703 Insurance Programs" herein. Limitations on the Master Servicer's ability to foreclose may extend the weighted average lives of the Certificates and may increase the risk of Realized Losses on any Mortgage Loan. As of the Cut-off Date, with respect to approximately 94.00% of the Mortgage Loans, by aggregate Unpaid Principal Balance as of the Cut-off Date, the borrower under each Mortgage Loan has made at least 97.5% of the aggregate amount of Original Scheduled Payments due for the four calendar months preceding the Cut-off Date (regardless of either the timing of receipt of such payments or the payment history of such loans prior to December 1996). As of the Cut-off Date, with respect to approximately the remaining approximately 6.00% of the Mortgage Loans, by aggregate Unpaid Principal Balance as of the Cut-off Date, the borrower under each Mortgage Loan has made at least 75% but less than 97.5% (with a weighted average of 76.0%) of the aggregate amount of Original Scheduled Payments due for the four calendar months preceding the Cut-off Date (regardless of either the timing of receipt of such payments or the payment history of such loans prior to December 1996). THE RISK OF FUTURE DEFAULTS AND DELINQUENCIES, WHICH AS DESCRIBED ABOVE MAY BE GREATER THAN NORMAL WITH RESPECT TO THE MORTGAGE LOANS GENERALLY, IS LIKELY TO BE EXCEPTIONALLY HIGH IN THE CASE OF THOSE MORTGAGE LOANS WHERE THE BORROWER HAS MADE LESS THAN 97.5% OF THE AGGREGATE AMOUNT OF SUCH FOUR PRECEDING ORIGINAL SCHEDULED PAYMENTS, AND THE DELINQUENCY, FORECLOSURE AND BORROWER BANKRUPTCY RATES FOR SUCH MORTGAGE LOANS ARE LIKELY TO GREATLY EXCEED SUCH RATES FOR THE MORTGAGE LOANS GENERALLY. INVESTORS SHOULD FULLY CONSIDER THE RISK THAT AT ANY TIME A SUBSTANTIAL NUMBER OF SUCH BORROWERS MAY CEASE MAKING PAYMENTS ON THEIR MORTGAGE LOANS. BROKER'S PRICE OPINIONS There were obtained for the Mortgage Loans, in substantially all cases within the last year, broker's price opinions or "BPOs" for sales of the Mortgaged Properties. The BPOs were obtained either by HUD or the Mortgage Loan Seller. No assurance can be given that the actual proceeds from defaulted Mortgage Loans will equal, or otherwise be comparable to, those shown in the BPOs or that sales of the related Mortgage Loans can or will be made in periods comparable to the marketing time assumed for purposes of the BPOs. BANKRUPTCY OF CERTAIN BORROWERS A portion of the Trust Fund consists of Mortgage Loans, the borrowers under which are the subject of a case under the Bankruptcy Code. In the event a bankruptcy petition is filed by or against a borrower, it is possible that holders of Certificates could experience a loss. As of the Cut-off Date, borrowers under approximately 7 Mortgage Loans, representing approximately $206,840 of the Cut-off Date Pool Unpaid Principal Balance and approximately $24,128 of the Cut-off Date Pool Arrearage are the subject of cases under the Bankruptcy Code or had confirmed bankruptcy plans. No assurance, however, can be given as to either the number or the proportion of the borrowers that will become the subject of cases under the Bankruptcy Code in the future, the timing of the outcome of such cases or the aggregate Unpaid Principal Balance or Arrearage of the related Mortgage Loans. S-26
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Numerous statutory provisions of the Bankruptcy Code may interfere with or affect the ability of the Master Servicer to obtain payment of a Mortgage Loan, to realize upon collateral and/or to enforce a deficiency judgment. CONFLICTS OF INTEREST BETWEEN THE MASTER SERVICER AND THE TRUST FUND The Master Servicer may initially own the Class B-5 and Class B-6 Certificates. If the Master Servicer causes foreclosures on Mortgage Loans and sales of the related Mortgaged Properties to occur more rapidly than assumed, the weighted average lives and yields of the Certificates may be affected without regard to the ability of a Certificateholder to reinvest funds at a comparable rate. Similarly, actions taken to delay foreclosures and sales (in order to postpone the incurrence of losses) may affect the weighted average lives and yields of the Certificates by postponing receipts of principal thereon. Investors should consider these potential conflicts of interest in the context of making an investment in the Certificates and be aware that no formal policies or guidelines have been established to resolve or minimize these conflicts. SERVICER LIMITATIONS As provided herein, the Master Servicer may be limited in its ability to foreclose on a Mortgaged Property in the event that a borrower defaults under a payment agreement, the terms of which require the borrower to pay a Modified Scheduled Payment that exceeds the Original Scheduled Payment. If there is a default under such a payment plan agreement, the Master Servicer will be required to renegotiate the payment plan agreement if the following requirements are satisfied: (i) the borrower demonstrates a loss of income or other reasonable justification for the default; (ii) the borrower demonstrates that it would be within the borrower's reasonable ability to pay an amount at least equal to the Original Scheduled Payment; and (iii) the borrower makes a lump sum payment equal to the product of (A) the number of months that the borrower is delinquent under the existing payment plan agreement and (B) the new payment required to be made each month under the renegotiated payment plan agreement. If the borrower does not cure the default, then the Master Servicer may take such action against the borrower and the Mortgaged Property as may be permitted pursuant to the terms of the Mortgage and Mortgage Note. If any Unpaid Principal Balance (due to the possible delays in the amortization of principal during a Forbearance Period) or Arrearage remains unpaid at the original maturity for a Mortgage Loan, the borrower's obligation to repay such remaining amounts generally will be extended for the period of time (not to exceed ten years) required to repay in full the Unpaid Principal Balance and the Arrearage based on the Modified Scheduled Payment in effect on the original maturity date of the Mortgage Loan. The limitation on the Master Servicer's ability to foreclose may extend the weighted average life of the Certificates. See "The Mortgage Pool--The Section 203(b) and 703 Insurance Programs--SERVICING OF THE MORTGAGE LOANS" herein. LIMITED OBLIGATIONS The Certificates will not represent an interest in or obligation of the Depositor, the Master Servicer, the Mortgage Loan Seller, the Trustee, the Fiscal Agent or any of their respective affiliates. The only obligations of the foregoing entities with respect to the Certificates or any Mortgage Loan will be the obligations of the Mortgage Loan Seller pursuant to certain limited representations and warranties made with respect to the Mortgage Loans and of the Master Servicer with respect to its servicing obligations under the Agreement (including the limited obligation to make certain P&I Advances). Neither the Offered Certificates nor the underlying Mortgage Loans will be guaranteed or insured by any governmental agency or instrumentality, or by the Depositor, the Master Servicer, the Mortgage Loan Seller, the Trustee, the Fiscal Agent or any of their respective affiliates. Proceeds of the assets included in the Trust Fund (including the Mortgage Loans) will be the sole source of payments on the Offered Certificates, and there will be no recourse to the Depositor, the Master Servicer, the Mortgage S-27
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Loan Seller, the Trustee, the Fiscal Agent or any other entity in the event that such proceeds are insufficient or otherwise unavailable to make all payments provided for under the Offered Certificates. THE MORTGAGE POOL GENERAL The Mortgage Pool will consist of approximately 6,738 mortgage loans (the "Mortgage Loans") that are expected to have, as of April 1, 1997 (the "Cut-off Date"), an aggregate Unpaid Principal Balance, exclusive of Arrearages, of approximately $272,574,770 (the "Cut-off Date Pool Unpaid Principal Balance"), an aggregate Arrearage of approximately $53,585,190 (the "Cut-off Date Pool Arrearage"), and an aggregate Legal Balance of approximately $326,159,960 (the "Cut-off Date Pool Legal Balance"). The Mortgage Loans were acquired by the Mortgage Loan Seller, an affiliate of the Depositor, from the United States Department of Housing and Urban Development ("HUD") in 1996. Each Mortgage Loan is a fixed-rate or adjustable-rate loan secured by a first lien on residential real property (the "Mortgaged Property") and generally was originated as a 30-year, fully amortizing loan primarily under HUD's Section 203(b) or 703 mortgage insurance programs. See "--The Section 203(b) and 703 Insurance Programs" below for a general description of the related program requirements. A limited number of Mortgage Loans had longer or shorter original terms to maturity and/or had graduated payments; however, the period of any reduced payment with respect to any Mortgage Loans that had graduated payments is now over. Each Mortgage Loan defaulted, and after default, the Mortgage Loan was determined by HUD to be eligible for forbearance relief under its Assignment Program and was assigned to HUD. To be eligible for such relief, HUD must determine that the default was due to a one time event beyond the borrower's control and that the borrower demonstrated both an ability and willingness to repay all amounts owed in lieu of foreclosure. Forbearance relief under the Assignment Program generally resulted in a reduction and/or suspension of the borrower's obligation to make scheduled monthly payments of principal and interest required under the loan's original terms (the "Original Scheduled Payments") for a period (the "Forbearance Period") which typically extended for 36 months (the payment, if any, made by the borrower during the Forbearance Period, the "Forbearance Payment"). In each case, following the expiration of the Forbearance Period, the borrower's "Legal Balance" was equal to the sum of the Unpaid Principal Balance plus any Arrearage. The "Unpaid Principal Balance" equaled the unpaid principal balance of the Mortgage Loan as of the commencement of the Forbearance Period reduced by amounts, if any, paid in respect of such unpaid principal balance during the Forbearance Period. The "Arrearage" equaled the sum of all accrued but unpaid interest on the Mortgage Loan at the end of the Forbearance Period and the amount of any tax and insurance advances made with respect to the Mortgage Loan from the acquisition of the Mortgage Loan by the Mortgage Loan Seller to but not including the Cut-off Date and, in certain cases, accrued but unpaid interest prior to the transfer of servicing to the Master Servicer. Following the expiration of the Forbearance Period, each borrower was and is required to make a payment (the "Modified Scheduled Payment") generally in an amount at least equal to the Original Scheduled Payment plus, to the extent of the borrower's ability to pay, an additional amount to be applied to reduce the Arrearage (the "Arrearage Component"). The Arrearage Component generally will be reviewed by the Master Servicer on an annual basis and may be increased or decreased based on the borrower's ability to pay. The Unpaid Principal Balance of each Mortgage Loan will bear interest at a specified rate (as to such Mortgage Loan, the "Mortgage Rate"); the Arrearage does not accrue interest. If any Unpaid Principal Balance (due to the possible delays in the amortization of principal during a Forbearance Period) or Arrearage remains unpaid at the original maturity for a Mortgage Loan, the borrower's obligation to repay such remaining amounts generally will be extended (the "Additional Extension Period"). It is anticipated that the Additional Extension Period will be the period of time required to repay in full the Unpaid Principal Balance and the Arrearage, not to exceed S-28
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10 years, based on the Modified Scheduled Payment in effect on the original maturity date of the Mortgage Loan. Substantial Arrearage could remain outstanding following the final payment of Unpaid Principal Balance on any Mortgage Loan. Except where indicated otherwise, references to percentages of the Mortgage Loans under "The Mortgage Pool" herein are references to percentages of the Cut-off Date Pool Unpaid Principal Balance. ALL OF THE MORTGAGE LOANS ARE REPERFORMING MORTGAGE LOANS. AS OF THE CUT-OFF DATE, EXCEPT WITH RESPECT TO APPROXIMATELY 6.00% OF THE MORTGAGE LOANS, BY AGGREGATE UNPAID PRINCIPAL BALANCE AS OF THE CUT-OFF DATE, THE BORROWER UNDER EACH MORTGAGE LOAN HAS MADE AT LEAST 97.5% OF THE AGGREGATE AMOUNT OF ORIGINAL SCHEDULED PAYMENTS DUE FOR THE FOUR CALENDAR MONTHS PRECEDING THE CUT-OFF DATE (REGARDLESS OF EITHER THE TIMING OF RECEIPT OF SUCH PAYMENTS OR THE PAYMENT HISTORY OF SUCH LOANS PRIOR TO DECEMBER 1996). SEE RISK FACTORS--NATURE OF THE MORTGAGE LOANS" HEREIN. Approximately 3.1% of the Mortgage Loans have adjustable Mortgage Rates. Such Mortgage Loans provide for annual adjustment to the Mortgage Rate thereon based on the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of one year as published by the Federal Reserve Board in Statistical Release H.15(519) (the "Index"), and for a corresponding adjustment to the monthly payments due thereon, in each case subject to the limitations described below. On each annual Adjustment Date, the Mortgage Rate on each such Mortgage Loan will be adjusted to equal the sum of (a) the Index and (b) a fixed percentage amount (a "Gross Margin"); provided, however, that the Mortgage Rate will not increase or decrease in substantially all cases by more than 1.0% on any related Adjustment Date (the "Periodic Rate Cap"), and will not exceed a specified maximum Mortgage Rate over the life of such Mortgage Loan (the "Maximum Mortgage Rate") or be less than a specified minimum Mortgage Rate over the life of such Mortgage Loan (the "Minimum Mortgage Rate"). Effective with the first payment due on each Mortgage Loan after each related Adjustment Date, the portion of the monthly payment allocable to principal and interest will be adjusted to an amount that will amortize fully the outstanding principal balance of the related Mortgage Loan over its remaining term, and pay interest at the Mortgage Rate as so adjusted. Due to the application of the Periodic Rate Caps and the Maximum Mortgage Rates, the Mortgage Rate on each such Mortgage Loan, as adjusted on any related Adjustment Date, may be less than the sum of the Index and Gross Margin, rounded as described herein. As of the Cut-off Date, the adjustable-rate Mortgage Loans had Gross Margins ranging from 0.00% to 2.98%, Minimum Mortgage Rates ranging from 1.00% to 5.50% per annum and Maximum Mortgage Rates ranging from 10.50% per annum to 15.50% per annum. With respect to the adjustable-rate Mortgage Loans as of the Cut-off Date, the weighted average Gross Margin was approximately 2.141%, the weighted average Minimum Mortgage Rate was approximately 3.26% per annum, the weighted average Maximum Mortgage Rate was approximately 13.16% per annum and the weighted average Mortgage Rate was approximately 7.16% per annum. No Mortgage Loan will be covered by a primary mortgage insurance policy. Substantially all of the Mortgage Loans have scheduled monthly payments due on the first day of the month (with respect to each Mortgage Loan, a "Due Date"). Each Mortgage Loan will contain either a customary "due-on-sale" clause or will be assumable by a creditworthy purchaser of the related Mortgaged Property. Each Mortgage Loan had a Mortgage Rate as of the Cut-off Date of not less than 0.38% per annum and not more than 17.50% per annum and as of the Cut-off Date, the weighted average Mortgage Rate was approximately 9.763% per annum. The weighted average remaining term to maturity of the Mortgage Loans will be approximately 19 years and 2 months as of the Cut-off Date. None of the Mortgage Loans will have a remaining term to maturity of greater than 404 months as of the Cut-off Date. The latest original maturity date of any Mortgage Loan is in December 2030. 164 Mortgage Loans with a Legal Balance as of the Cut-off Date of approximately $4,275,442 have already passed their related maturity date due to the effect of the Forbearance Period. The actual maturity date for each Mortgage Loan will generally extend S-29
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beyond the stated maturity date by at least the length of the related Forbearance Period and may extend beyond the stated maturity date significantly longer due to limitations on the ability of the Master Servicer to foreclose as described herein. The Mortgage Loans are expected to have the additional characteristics as of the Cut-off Date listed on Appendix A hereto. THE SECTION 203(B) AND 703 INSURANCE PROGRAMS MORTGAGE LOAN ORIGINATION CRITERIA The following origination criteria are the current criteria for the HUD Section 203(b) and 703 Mortgage Insurance Programs. Under the Section 203(b) and 703 Mortgage Insurance Programs, insurable mortgages are subject to size and loan-to-value restrictions. Currently, an insurable mortgage cannot exceed the lesser of (i) the statutory loan limit for the area and (ii) the applicable loan-to-value limit. The statutory loan limit is generally equal to the lesser of (i) the amount derived from applying a fixed percentage (the "Limit Percentage") to a HUD determined median home price (the "Median Price") for single, two, three and four family homes in the related locale and (ii) 75% of the related size limitation in effect on September 30, 1992 for mortgages eligible for purchase by the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Limit Percentage for mortgages on single, two, three and four family homes is equal to 95%, 107%, 130% and 150%, respectively. For the purposes of the loan-to-value criteria, properties are divided into three main groups. The first group consists of principal residences (i) approved for mortgage insurance (or for a Department of Veterans Affairs loan guaranty) before the start of construction, (ii) covered by an acceptable ten-year warranty plan or (iii) completed more than one year prior to the date of the application for the FHA Insurance. For this first group of properties, the maximum loan-to-value ratio (the "Maximum LTV") is as follows: (a) if the appraised value of the property is less than $50,000, the Maximum LTV is 97% of the appraised value, (b) if the appraised value of the property exceeds $50,000, the Maximum LTV is 97% of the first $25,000 of the appraised value, 95% of the amount between $25,000 and $125,000, and 90% of any remaining amount over $125,000 or (c) certain higher percentages of up to 100% in certain instances if the borrower qualifies as a veteran. The second group of properties includes principal residences which were less than one year old, not approved for insurance prior to construction and not covered by an acceptable warranty plan. These properties are subject to a Maximum LTV of 90% of appraised value. The third group of properties, secondary residences, is subject to a Maximum LTV of 85%. Closing costs are often financed under the Mortgage Loan and, accordingly, notwithstanding the Maximum LTVs described above, there is an overall Maximum LTV ceiling applicable to any loan made to a borrower who is not a veteran. In such cases, the Maximum LTV is 98.75% of the appraised value of the property (97.75%, in the case of a mortgage with an appraised value in excess of $50,000), plus the amount of any mortgage insurance premium paid at the time the mortgage is insured. In connection with HUD's credit analysis in the origination of a Mortgage Loan, a prospective borrower must meet certain credit standards, make a sufficient downpayment (which varies by program) and have income which is sufficient to support the monthly payments. The acceptability of credit risk is determined by analyzing each borrower's credit history, stability and adequacy of income to support the mortgage and other obligations, and assets to close the transaction. Two separate debt-to-income ratios are computed by the lender to determine the borrower's ability to repay the debt. Absent compensating factors, the total mortgage payment generally does not exceed 20% of the borrower's gross income and the total mortgage payment and all limited recurring charges (I.E., real estate loans, child support, alimony) generally do not exceed 41% of gross income. HUD expects the lender to require sufficient documentation to support its decision to approve the S-30
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mortgage loan. Credit documents may not be more than 120 days old. The application materials include a mortgage credit analysis worksheet, a residential mortgage credit report, a verification of employment and most recent pay stub, a verification of deposit and most recent bank statements, federal income tax returns for the past two years, a verification of payment history of previous mortgages and an appraisal. HUD INSURANCE ASSIGNMENT PROGRAM The HUD Insurance Assignment Program offers qualified borrowers an opportunity to avoid foreclosure and retain their homes where at least three full monthly installments due on the mortgage note are unpaid after application of any partial payments that may have been accepted, but not yet applied to the mortgage account. The procedures for the assignment of an insured mortgage include an affirmative determination by the mortgagee that certain borrower eligibility criteria have been met, including among other things (i) a determination that circumstances beyond the borrower's control caused the default and rendered the borrower unable to correct the delinquency within a reasonable time, taking into consideration any curtailments of family income, uninsured damage to the mortgaged property, expenses related to any death or illness and other factors and (ii) a determination that there is a reasonable prospect that the borrower can resume full mortgage payments after a temporary period of reduced or suspended payments, not exceeding 36 months, and will be able to pay the mortgage in full by its original maturity date extended, if necessary, by up to 10 years. In certain instances, a mortgage loan is not eligible for the Assignment Program. These instances include but are not limited to cases where (i) the mortgaged property has been abandoned or vacant for more than 60 days or (ii) the borrower (A) has indicated that it has no intention of fulfilling its obligation under the mortgage, (B) has two or more rental properties but does not apply rental income from the mortgaged property under review to the debt service on that property or (C) is a corporation or a partnership. In any case where the mortgagee has determined that such criteria have not been met, the borrower may present HUD with a direct request such approval. In all cases, however, the ultimate decision as to whether a mortgage loan will be accepted for assignment is made by HUD. SERVICING OF THE MORTGAGE LOANS The Master Servicer will comply with each payment plan agreement, oral or written, until the term thereof expires or until there is a default thereunder. As long as the borrower under a payment plan agreement makes the payments due under the payment plan agreement, the Master Servicer will accept and apply such payments (exclusive of escrow payments and "pay-aheads") first, to pay interest then due and owing in respect of such loan; second, to pay scheduled principal then due and owing in respect of such loan; third, to repay Arrearage of such loan; and fourth, to prepay Unpaid Principal Balance of such loan. The Master Servicer will review the financial status of borrowers under payment plan agreements annually. If, based on such review, it would not reasonably be within the borrower's ability to pay a Modified Scheduled Payment in an amount that is at least equal to the Original Scheduled Payment, the Master Servicer may choose not to continue the payment plan agreement and may take such action against the borrower and the Mortgaged Property as may be permitted pursuant to the terms of the Mortgage and Mortgage Note. A borrower may cure a default under a payment plan agreement by making a lump sum payment in an amount necessary to cure the default. Additionally, if there is a default under a payment plan agreement, the terms of which require the borrower to pay a Modified Scheduled Payment that exceeds the Original Scheduled Payment, the Master Servicer will renegotiate the payment plan agreement if the following requirements are satisfied: (i) the borrower demonstrates a loss of income or other reasonable justification for the default; (ii) the borrower demonstrates that it would be within the borrower's reasonable ability to pay an amount at least equal to the Original Scheduled Payment; S-31
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and (iii) the borrower makes a lump sum payment equal to the product of (A) the number of months that the borrower is delinquent under the existing payment plan agreement and (B) the new payment required to be made each month under the renegotiated payment plan agreement. If the borrower does not cure the default, then the Master Servicer may take such action against the borrower and the Mortgaged Property as may be permitted pursuant to the terms of the Mortgage and Mortgage Note. If any Unpaid Principal Balance (due to the possible delays in the amortization of principal during a Forbearance Period) or Arrearage remains unpaid at the original maturity for a Mortgage Loan, the borrower's obligation to repay such remaining amounts generally will be extended (the "Additional Extension Period"). The Additional Extension Period generally will be the period of time (not to exceed ten years) required to repay in full the Unpaid Principal Balance and the Arrearage based on the Modified Scheduled Payment in effect on the original maturity date of the Mortgage Loan. REPRESENTATIONS AND WARRANTIES The Mortgage Loan Seller will make representations and warranties as to the accuracy in all material respects of certain identifying information furnished to the Trustee in respect of each such Mortgage Loan (E.G., Loan-to-Value Ratio (based on the Legal Balance of such Mortgage Loan and the average of the most recent broker's price opinions), principal balance as of the Cut-off Date, Mortgage Rate and maturity). In addition, the Mortgage Loan Seller will represent and warrant that, as of the Cut-off Date, except with respect to approximately 6.00% of the Mortgage Loans, by aggregate Unpaid Principal Balance as of the Cut-off Date, the borrower under each Mortgage Loan will have made at least 97.5% of the aggregate amount of Original Scheduled Payments due for the four calendar months preceding the Cut-off Date (regardless of either (i) the timing of receipt of such payments or (ii) the payment history of such loans prior to December 1996). The Mortgage Loan Seller will also make representations regarding ownership of the Mortgage Loans, lien status, title and taxes, among other items. See the Agreement for the exact representations and warranties to be made by the Mortgage Loan Seller. Upon a breach of any such representation of the Mortgage Loan Seller that materially and adversely affects the value of a Mortgage Loan or the interests of the Certificateholders therein, the Mortgage Loan Seller will be obligated either to cure the breach in all material respects, repurchase the Mortgage Loan at the purchase price provided in the Agreement (the "Purchase Price") or substitute for such Mortgage Loan as described below. If the Mortgage Loan Seller discovers or receives notice of any breach of its representations or warranties with respect to a Mortgage Loan, the Mortgage Loan Seller may, rather than repurchase the Mortgage Loan as provided above, remove such Mortgage Loan from the Trust Fund (a "Deleted Mortgage Loan") and substitute in its place one or more Mortgage Loans (each, a "Substitute Mortgage Loan"), but only if such substitution is effected within two years of the date of initial issuance of the Certificates (plus permissible extensions). Any Substitute Mortgage Loan will, on the date of substitution, among other things (i) have an outstanding principal balance, after deduction of all scheduled payments due in the month of substitution, not in excess of (and not more than $10,000 less than) the outstanding principal balance, after deduction of all unpaid scheduled payments due as of the date of substitution, of the Deleted Mortgage Loan, (ii) have a Mortgage Rate not less than (and not more than 1% greater than) the Mortgage Rate of the Deleted Mortgage Loan, (iii) have a Net Mortgage Rate not less than (and not more than 1% greater than) the Mortgage Rate of the Deleted Mortgage Loan, (iv) have a remaining term to maturity not greater than (and not more than one year less than) that of the Deleted Mortgage Loan, (v) pay the same or a greater percentage of its Original Scheduled Payment, (vi) have an Arrearage, if any, not greater than the Arrearage of the Deleted Mortgage Loan and (vii) comply with all of the representations and warranties set forth in the applicable mortgage loan purchase agreement as of the date of substitution. In connection with any substitution, an amount equal to the difference between the Purchase Price of the Deleted Mortgage Loan and the outstanding principal balance of the Substitute Mortgage Loan (after deduction of all S-32
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scheduled payments due in the month of substitution), together with one month's interest at the applicable Net Mortgage Rate on such balance, will be deposited in the Certificate Account and distributed to Certificateholders on the first Distribution Date following the Prepayment Period in which the substitution occurred. In the event that one Substitute Mortgage Loan is substituted for more than one Deleted Mortgage Loan, or more than one Substitute Mortgage Loan is substituted for one or more Deleted Mortgage Loans, then the amount described in clause (i) will be determined on the basis of aggregate principal balances, the rates described in clauses (ii) and (iii) with respect to Deleted Mortgage Loans will be determined on the basis of weighted average Mortgage Rates and Net Mortgage Rates, as the case may be, and the terms described in clause (iv) will be determined on the basis of weighted average remaining terms to maturity. The obligation to repurchase or to substitute Mortgage Loans as described above constitutes the sole remedy available to the Certificateholders or the Trustee for any breach of the above-described representations. YIELD ON THE CERTIFICATES DELAY IN DISTRIBUTIONS ON THE CERTIFICATES The effective yield to holders of the Certificates of each class will be less than the yields otherwise produced by their respective Pass-Through Rates and purchase prices because (i) on the first Distribution Date, one month's interest is payable thereon even though 54 days will have elapsed from the date on which interest begins to accrue thereon, (ii) on each succeeding Distribution Date the interest payable thereon is the interest accrued during the month preceding the month of such Distribution Date, which ends 24 days prior to such Distribution Date and (iii) during each Interest Accrual Period, interest accrues on a Certificate Balance or Notional Amount that is less than the Certificate Balance or Notional Amount of such class actually outstanding for the first 24 days of such Interest Accrual Period. CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST When a principal prepayment in full is made on a Mortgage Loan, the mortgagor is charged interest only for the period from the Due Date of the preceding monthly payment up to the date of such prepayment, instead of for a full month. When a partial principal prepayment is made on a Mortgage Loan, the mortgagor is not charged interest on the amount of such prepayment for the month in which such prepayment is made. In addition, the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), to any Mortgage Loan will adversely affect, for an indeterminate period of time, the ability of the Master Servicer to collect full amounts of interest on such Mortgage Loan. See "Certain Legal Aspects of the Mortgage Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in the Prospectus. The Master Servicer is obligated to pay from its own funds interest shortfalls attributable to full and partial prepayments by the mortgagors on the Mortgage Loans, but only to the extent of the aggregate of its Servicing Fees (as defined herein) for the related Due Period. Accordingly, the effect of (i) any principal prepayments on the Mortgage Loans, to the extent that any resulting shortfall (a "Prepayment Interest Shortfall") exceeds any payments made by the Master Servicer from its own funds ("Compensating Interest") or (ii) any shortfalls resulting from the application of the Relief Act, will be to reduce the aggregate amount of interest collected that is available for distribution to Certificateholders entitled to payments of interest. Any such shortfalls will be allocated among the Certificates entitled to payments of interest, as provided under "Description of the Certificates--Distributions on the Certificates" herein. S-33
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GENERAL PREPAYMENT CONSIDERATIONS The rate of principal payments on each class of P&I Certificates, the aggregate amount of distributions on each class of Certificates and the yield to maturity of each class of Certificates will be related to the rate and timing of payments of principal on the Mortgage Loans. In addition, the aggregate of distributions in respect of, and the yield to maturity of, the Class A-WAC Certificates will be related to the rate and timing of the payment of the Arrearage. The rate of principal payments and Arrearage payments on the Mortgage Loans will in turn be affected by the amortization schedules of such Mortgage Loans and by the rate of principal prepayments thereon (including for this purpose payments resulting from refinancings, liquidations of the Mortgage Loans due to defaults, casualties, condemnations and repurchases, whether optional or required, by the Depositor or the Master Servicer, as the case may be). The Mortgage Loans may be prepaid by the mortgagors at any time without payment of any prepayment fee or penalty. As described under "Description of the Certificates--Distributions on the Certificates" herein, prior to the Distribution Date in May 2002, all principal prepayments on the Mortgage Loans will be allocated to the Senior Certificates (other than the Class IO Certificates). Thereafter, as further described herein, during certain periods, subject to certain loss and delinquency criteria described herein, the Senior Prepayment Percentage may continue to be disproportionately large (relative to the Senior Percentage) and the percentage of principal prepayments payable to the Class B Certificates may continue to be disproportionately small. Accordingly, the Class B Certificates will not be entitled to any principal prepayments for at least the first five years after the Closing Date (unless the Certificate Balances of the Senior P&I Certificates have been reduced to zero before the end of such period), and may receive no prepayments or a disproportionately small portion of prepayments relative to the related Class B Percentage during certain periods thereafter. In addition, as described herein, prepayments will be allocated by the Master Servicer to any unpaid Arrearage prior to any allocation to Unpaid Principal Balance. The effect of that allocation will be to pay the Class A-WAC Certificates in reduction of their Certificate Balances prior to payments on any P&I Certificates regardless of the Senior Prepayment Percentage then in effect. Prepayments, liquidations and purchases of the Mortgage Loans will result in distributions in respect of principal to the holders of the class or classes of Certificates then entitled to receive such distributions, and distributions in respect of Arrearage to the Class A-WAC Certificates, that otherwise would be distributed over the remaining terms of the Mortgage Loans. See "Maturity and Prepayment Considerations" in the prospectus. Since the rates of payment of principal and Arrearage on the Mortgage Loans will depend on future events and a variety of factors, no assurance can be given as to such rates or the rate of principal prepayments. The extent to which the yield to maturity of any class of P&I Certificates may vary from the anticipated yield will depend upon the degree to which they are purchased at a discount or premium and the degree to which the timing of payments thereon is sensitive to prepayments on the Mortgage Loans. Further, in the case of any such Certificate purchased at a discount, an investor should consider the risk that a slower than anticipated rate of principal payments on the Mortgage Loans could result in an actual yield to such investor that is lower than the anticipated yield and, in the case of any such Certificate purchased at a premium, the risk that a faster than anticipated rate of principal payments could result in an actual yield to such investor that is lower than the anticipated yield. In general, the earlier a prepayment of principal on the Mortgage Loans, the greater will be the effect on the investor's yield to maturity. As a result, the effect on an investor's yield of principal payments occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the issuance of such Certificates would not be fully offset by a subsequent like reduction (or increase) in the rate of principal payments. The yield to maturity on the Class IO Certificates and Class A-WAC Certificates will be extremely sensitive to prepayments on the Mortgage Loans, and the yield to maturity on the Class A-WAC Certificates will also be extremely sensitive to payments in respect of Arrearage on the Mortgage Loans. See "--Yield Sensitivity of the Class IO Certificates" and "--Yield Sensitivity of the Class AWAC Certificates" herein. S-34
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It is highly unlikely that the Mortgage Loans will prepay at any constant rate until maturity or that all of the Mortgage Loans will prepay at the same rate. Moreover, the timing of prepayments on the Mortgage Loans may significantly affect the actual yield to maturity on the Certificates, even if the average rate of principal payments experienced over time is consistent with an investor's expectation. The rate of payments (including prepayments) on pools of mortgage loans is influenced by a variety of economic, geographic, social and other factors. If prevailing mortgage rates fall significantly below the Mortgage Rates on the Mortgage Loans, the rate of prepayment and refinancing (and, potentially, the rate of payment in respect of Arrearage) would be expected to increase. Conversely, if prevailing mortgage rates rise significantly above the Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage Loans (and, potentially, the rate of payment in respect of Arrearage) would be expected to decrease. Other factors affecting prepayment of mortgage loans include changes in mortgagors' housing needs, job transfers, unemployment, mortgagors' ability to obtain alternative credit, mortgagors' net equity in the mortgaged properties and servicing decisions. There can be no certainty as to the rate of prepayments on the Mortgage Loans or the rate of payment in respect of Arrearage during any period or over the life of the Certificates. See "Yield Considerations" and "Maturity and Prepayment Considerations" in the Prospectus. Because the Mortgage Rates on over 96.9% of the Mortgage Loans are fixed, such rates will not change in response to changes in market interest rates. Accordingly, if mortgage market interest rates or market yields for securities similar to the Certificates were to rise, the market value of the Certificates may decline. As described under "Description of the Certificates--Allocation of Losses; Subordination", amounts otherwise distributable to holders of each class of Class B Certificates may be made available to protect the holders of the Senior Certificates and the classes, if any, of Class B Certificates with a lower numerical class designation, against interruptions in distributions due to certain borrower delinquencies, to the extent not covered by P&I Advances. Such delinquencies may affect the yield to investors on each class of Class B Certificates, and, even if subsequently cured, will affect the timing of the receipt of distributions by the holders of such classes of Class B Certificates. In addition, a larger than expected rate of delinquencies or losses will also affect the rate of principal payments on the Class B Certificates if it delays the scheduled reduction of the Senior Prepayment Percentage or triggers an increase of the Senior Prepayment Percentage to 100%. WEIGHTED AVERAGE LIFE Weighted average life refers to the amount of time that will elapse 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 life of the Certificates of each class will be influenced by the rate at which principal on the Mortgage Loans is paid, which may be in the form of scheduled payments or prepayments (including prepayments of principal by the borrower as well as amounts received by virtue of condemnation, insurance or foreclosure with respect to the Mortgage Loans). Distributions of principal to the Certificates will be made in the priority described herein. The timing of commencement of principal distributions to each class of Senior Certificates (other than the Class IO Certificates) and to each class of Class B Certificates and the weighted average life of each such class will be affected by the rates of prepayment on the Mortgage Loans experienced both before and after the commencement of principal distributions on each such class. Prepayments on mortgage loans are commonly measured relative to a prepayment standard or model. The model used in this Memorandum, the Constant Prepayment Rate model ("CPR") assumes that the outstanding principal balance of a pool of mortgage loans prepays at a specified constant annual rate or CPR. In generating monthly cash flows, this rate is converted to an equivalent constant monthly rate. No representation is made that the Mortgage Loans will prepay at that or any other rate. S-35
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The following table indicates the percentage of the initial Certificate Balance of the indicated Classes of the Certificates that would be outstanding after each of the dates shown at various constant percentages of CPR and the corresponding weighted average lives of such Certificates. The table is based on the following assumptions (the "Modeling Assumptions"): (i) the Mortgage Pool consists of 31 fixed-rate Mortgage Loans with the characteristics set forth in the table below, (ii) distributions on such Certificates are received, in cash, on the 25th day of each month, commencing in May 1997, (iii) the Mortgage Loans prepay at the constant percentages of CPR indicated, (iv) no defaults or delinquencies occur in the payment by mortgagors of principal and interest on the Mortgage Loans and no shortfalls due to the application of the Relief Act are incurred, (v) no person purchases from the Trust Fund any Mortgage Loan pursuant to any obligation or option under the Agreement, except as stated herein, (vi) scheduled monthly payments on the Mortgage Loans are received on the first day of each month commencing in May 1997, and are computed prior to giving effect to any prepayments received in the prior month, (vii) prepayments representing payment in full of individual Mortgage Loans are received on the last day of each month commencing in April 1997, (viii) the Certificates are purchased on April 30, 1997, (ix) Modified Scheduled Payments (for Mortgage Loans that have Arrearage) as a percentage of Original Scheduled Payments (such percentage, the "Arrearage Repayment Percentage") are equal to approximately 120% at all levels of CPR, (x) expenses and fees of 0.50375% of the Unpaid Principal Balances of the Mortgage loans are paid as provided herein to the Master Servicer and the Trustee, (xi) expenses and fees of 0.40375% of the aggregate outstanding Arrearage are paid as provided herein to the Master Servicer and the Trustee and the Arrearage was assumed to pay at 8% CPR and (xii) no Mortgage Loan will mature later than 480 months after the Cut-off Date. S-36
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[Enlarge/Download Table] ASSUMED MORTGAGE LOAN CHARACTERISTICS Unpaid Principal Monthly Payment in Remaining Term to Balance respect of Principal Stated Maturity as of the Cut-off Date Mortgage Rate(%) and Interest(1) (Months) ---------------------- ---------------- --------------- -------- $ 23,903.46 7.7740 $ 3,075.69 8 162,592.82 8.3094 8,733.64 20 447,656.63 8.3686 16,107.78 31 830,224.70 7.7713 22,182.51 43 1,065,794.04 7.9706 23,196.28 55 1,579,417.70 8.0213 29,674.81 66 1,619,749.89 8.6552 26,968.17 79 1,871,545.42 9.0546 28,724.34 90 2,130,930.68 8.4808 29,194.13 103 2,440,368.33 8.7752 31,628.97 114 2,814,336.77 8.6221 33,861.73 127 2,961,196.65 9.1048 34,691.51 138 3,531,254.32 9.6236 40,557.88 150 2,390,238.91 9.4350 26,065.22 163 2,610,194.06 9.4535 27,537.87 175 3,259,561.99 9.9624 34,388.56 187 4,723,412.35 9.9350 48,508.31 199 4,744,875.83 10.2970 48,750.62 211 6,536,259.48 9.7592 63,605.66 223 9,991,563.39 9.9518 96,753.67 235 9,929,656.80 10.0430 95,378.45 246 10,261,814.29 10.1590 97,904.25 259 18,947,081.14 10.1590 178,585.80 271 35,012,407.08 9.5693 312,179.10 283 26,747,861.76 9.7746 239,971.80 294 29,270,032.53 10.0480 265,810.00 306 33,150,734.87 9.8264 293,203.90 319 33,464,577.37 9.8689 294,983.60 330 18,472,042.79 9.5360 157,377.30 341 1,583,484.07 9.2232 12,996.19 360 53,585,190.00(2) N/A 423,043.00(3) 480 -------------- ------------ --- Total or Weighted Average............... $326,159,960.12 9.7628(4) $3,045,640.74 275(5) ============== ====== ============ === ----------------------- (1) Calculated with respect to each Mortgage Loan based on remaining term to stated maturity. (2) Arrearage as of the Cut-off Date. (3) Monthly Payment of Arrearage. (4) Weighted Average Mortgage Rate on Unpaid Principal Balances (but not on Arrearage) as of the Cut-off Date. (5) Weighted Average Remaining Term to Stated of Maturity does not include the Remaining Term to Stated Maturity of the Arrearage of 480 months. There will be discrepancies between the characteristics of the actual Mortgage Loans and the characteristics assumed in preparing the table below. For instance, some of the Mortgage Loans are adjustable-rate Mortgage Loans, but the table has been prepared assuming that all the Mortgage S-37
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Loans are fixed-rate Mortgage Loans. Any such discrepancy may have an effect upon the percentages of the initial Certificate Balances outstanding (and the weighted average lives) of the Classes of Certificates set forth in the table. In addition, to the extent that the actual Mortgage Loans included in the Mortgage Pool have characteristics that differ from those assumed in preparing the tables below, such classes of Certificates may mature earlier or later than indicated by the table below. Based on the foregoing assumptions, the tables below indicates the weighted average life of each class of Senior P&I Certificates, the Class A-WAC Certificates and the Class B-1, Class B-2 and Class B-3 Certificates and sets forth the percentage of the initial Certificate Balance of each such class of Certificates that would be outstanding after each of the dates shown, at various percentages of CPR. Neither the prepayment model used herein nor any other prepayment model or assumption purports to be an historical description of prepayment experience or a prediction of the anticipated rate of prepayment of any pool of mortgage loans, including the Mortgage Loans included in the Trust Fund. Variations in the prepayment experience and the balance of the Mortgage Loans that prepay may increase or decrease the percentages of initial Certificate Balance (and weighted average lives) shown in the following table. Such variations may occur even if the average prepayment experience of all such Mortgage Loans equals any of the specified percentages of the prepayment assumption. The table below assumes the Mortgage Loans prepay at specified percentages of CPR; however, due to the allocation of principal on a specific Mortgage Loan to Arrearage prior to Unpaid Principal Balance as described herein, there may be variations from the percentages shown even if the Mortgage Loans as a whole prepay at the specified percentages of CPR. S-38
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[Enlarge/Download Table] PERCENT OF INITIAL CERTIFICATE BALANCE OUTSTANDING AT THE SPECIFIED PERCENTAGES OF CPR CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES ----------------------------------------------- ---------------------------------------------- DISTRIBUTION DATE 0% 3% 6% 8% 10% 12% 14% 0% 3% 6% 8% 10% 12% 14% ----------------- --- --- --- --- ----- ----- ----- --- --- --- --- ----- ----- ---- Closing Date............... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 April 1998................. 96 88 81 75 70 65 59 100 100 100 100 100 100 100 April 1999................. 92 77 62 53 43 34 25 100 100 100 100 100 100 100 April 2000................. 88 66 45 32 20 8 0 100 100 100 100 100 100 79 April 2001................. 84 56 30 14 0 0 0 100 100 100 100 95 18 0 April 2002................. 79 45 15 0 0 0 0 100 100 100 85 0 0 0 April 2003................. 74 36 3 0 0 0 0 100 100 100 11 0 0 0 April 2004................. 69 27 0 0 0 0 0 100 100 57 0 0 0 0 April 2005................. 64 19 0 0 0 0 0 100 100 6 0 0 0 0 April 2006................. 58 11 0 0 0 0 0 100 100 0 0 0 0 0 April 2007................. 52 4 0 0 0 0 0 100 100 0 0 0 0 0 April 2008................. 46 0 0 0 0 0 0 100 82 0 0 0 0 0 April 2009................. 39 0 0 0 0 0 0 100 44 0 0 0 0 0 April 2010................. 32 0 0 0 0 0 0 100 6 0 0 0 0 0 April 2011................. 25 0 0 0 0 0 0 100 0 0 0 0 0 0 April 2012................. 17 0 0 0 0 0 0 100 0 0 0 0 0 0 April 2013................. 8 0 0 0 0 0 0 100 0 0 0 0 0 0 April 2014................. 0 0 0 0 0 0 0 96 0 0 0 0 0 0 April 2015................. 0 0 0 0 0 0 0 43 0 0 0 0 0 0 April 2016................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2017................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2018................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2019................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2020................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2021................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2022................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2023................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2024................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2025................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2026................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2027................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Weighted Average Life in Years(1)................... 9.77 4.81 2.87 2.25 1.84 1.56 1.34 17.90 11.87 7.18 5.50 4.46 3.76 3.24 Weighted Average Life in Years(2)................... 9.77 4.81 2.87 2.25 1.84 1.56 1.34 17.90 11.87 7.18 5.50 4.46 3.76 3.24 ----------------- (1) The weighted average life of a Certificate is determined by (a) multiplying the amount of each distribution of principal by the number of years from the date of issuance of the Certificate to the related Distribution Date, (b) adding the results and (c) dividing the sum by the initial Certificate Balance of the Certificate. (2) Calculated pursuant to footnote one but assumes the Master Servicer exercises its option to purchase the Mortgage Loans. See "Pooling and Servicing Agreement--Termination" herein (TABLE CONTINUED ON NEXT PAGE.)
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[Enlarge/Download Table] PERCENT OF INITIAL CERTIFICATE BALANCE OUTSTANDING AT THE SPECIFIED PERCENTAGES OF CPR CLASS A-3 CERTIFICATES CLASS A-4 CERTIFICATES -------------------------------------------- ------------------------------------------------ DISTRIBUTION DATE 0% 3% 6% 8% 10% 12% 14% 0% 3% 6% 8% 10% 12% 14% ----------------- --- --- --- --- ---- ---- ---- --- --- --- --- ---- ---- ---- Closing Date............... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 April 1998................. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 April 1999................. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 April 2000................. 100 100 100 100 100 100 100 100 100 100 100 100 100 100 April 2001................. 100 100 100 100 100 100 63 100 100 100 100 100 100 100 April 2002................. 100 100 100 100 96 39 0 100 100 100 100 100 100 93 April 2003................. 100 100 100 100 43 0 0 100 100 100 100 100 92 65 April 2004................. 100 100 100 65 0 0 0 100 100 100 100 100 70 45 April 2005................. 100 100 100 30 0 0 0 100 100 100 100 83 55 32 April 2006................. 100 100 74 1 0 0 0 100 100 100 100 70 44 24 April 2007................. 100 100 48 0 0 0 0 100 100 100 89 60 37 20 April 2008................. 100 100 24 0 0 0 0 100 100 100 78 52 32 16 April 2009................. 100 100 1 0 0 0 0 100 100 100 69 45 26 13 April 2010................. 100 100 0 0 0 0 0 100 100 90 60 38 22 11 April 2011................. 100 79 0 0 0 0 0 100 100 79 52 32 18 9 April 2012................. 100 53 0 0 0 0 0 100 100 70 45 27 15 7 April 2013................. 100 28 0 0 0 0 0 100 100 61 38 22 12 6 April 2014................. 100 2 0 0 0 0 0 100 100 52 32 18 10 4 April 2015................. 100 0 0 0 0 0 0 100 88 44 26 15 8 3 April 2016................. 92 0 0 0 0 0 0 100 76 36 21 12 6 3 April 2017................. 53 0 0 0 0 0 0 100 63 29 17 9 5 2 April 2018................. 13 0 0 0 0 0 0 100 51 23 13 7 3 1 April 2019................. 0 0 0 0 0 0 0 85 40 17 10 5 2 1 April 2020................. 0 0 0 0 0 0 0 64 29 12 7 3 2 1 April 2021................. 0 0 0 0 0 0 0 45 20 8 4 2 1 0 April 2022................. 0 0 0 0 0 0 0 29 12 5 3 1 1 0 April 2023................. 0 0 0 0 0 0 0 16 7 3 1 1 0 0 April 2024................. 0 0 0 0 0 0 0 7 3 1 0 0 0 0 April 2025................. 0 0 0 0 0 0 0 1 1 0 0 0 0 0 April 2026................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2027................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Weighted Average Life in Years(1)................... 20.09 15.15 10.00 7.50 5.92 4.90 4.19 24.00 21.41 17.83 15.17 12.54 10.16 8.09 Weighted Average Life in Years(2)................... 20.09 15.15 10.00 7.50 5.92 4.90 4.19 23.73 21.07 17.42 14.73 12.12 9.80 7.84 ----------------- (1) The weighted average life of a Certificate is determined by (a) multiplying the amount of each distribution of principal by the number of years from the date of issuance of the Certificate to the related Distribution Date, (b) adding the results and (c) dividing the sum by the initial Certificate Balance of the Certificate. (2) Calculated pursuant to footnote one but assumes the Master Servicer exercises its option to purchase the Mortgage Loans. See "Pooling and Servicing Agreement--Termination" herein. (TABLE CONTINUED ON NEXT PAGE.)
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[Enlarge/Download Table] PERCENT OF INITIAL CERTIFICATE BALANCE OUTSTANDING AT THE SPECIFIED PERCENTAGES OF CPR CLASS A-WAC CERTIFICATES CLASS B-1, CLASS B-2 AND CLASS B-3 CERTIFICATES ------------------------------------------- ----------------------------------------------- DISTRIBUTION DATE 0% 3% 6% 8% 10% 12% 14% 0% 3% 6% 8% 10% 12% 14% ----------------- --- --- --- --- ---- ---- ---- --- --- --- --- ---- ---- ---- Closing Date................ 100 100 100 100 100 100 100 100 100 100 100 100 100 100 April 1998.................. 91 88 85 83 82 80 78 98 98 98 98 98 98 98 April 1999.................. 81 77 72 69 66 63 60 96 96 96 96 96 96 96 April 2000.................. 72 66 60 56 52 49 45 94 94 94 94 94 94 94 April 2001.................. 63 55 49 45 41 37 34 92 92 92 92 92 92 92 April 2002.................. 53 46 39 35 31 28 25 89 89 89 89 89 89 89 April 2003.................. 44 37 30 26 23 20 17 87 86 85 85 84 84 83 April 2004.................. 34 28 22 19 16 14 12 84 82 81 79 78 77 76 April 2005.................. 25 19 15 13 10 9 7 81 78 75 73 71 69 67 April 2006.................. 15 11 9 7 6 5 4 78 74 69 66 63 60 57 April 2007.................. 5 4 3 2 2 1 1 75 69 62 58 54 51 47 April 2008.................. 0 0 0 0 0 0 0 72 64 56 51 47 43 39 April 2009.................. 0 0 0 0 0 0 0 69 59 50 45 40 36 32 April 2010.................. 0 0 0 0 0 0 0 65 54 45 39 34 30 26 April 2011.................. 0 0 0 0 0 0 0 61 49 40 34 29 25 21 April 2012.................. 0 0 0 0 0 0 0 57 45 35 29 24 20 17 April 2013.................. 0 0 0 0 0 0 0 53 40 30 25 20 17 13 April 2014.................. 0 0 0 0 0 0 0 48 36 26 21 17 13 11 April 2015.................. 0 0 0 0 0 0 0 43 31 22 17 13 11 8 April 2016.................. 0 0 0 0 0 0 0 38 27 18 14 11 8 6 April 2017.................. 0 0 0 0 0 0 0 33 22 15 11 8 6 5 April 2018.................. 0 0 0 0 0 0 0 28 18 12 9 6 5 3 April 2019.................. 0 0 0 0 0 0 0 22 14 9 6 5 3 2 April 2020.................. 0 0 0 0 0 0 0 17 10 6 4 3 2 1 April 2021.................. 0 0 0 0 0 0 0 12 7 4 3 2 1 1 April 2022.................. 0 0 0 0 0 0 0 8 4 2 2 1 1 0 April 2023.................. 0 0 0 0 0 0 0 4 2 1 1 1 0 0 April 2024.................. 0 0 0 0 0 0 0 2 1 0 0 0 0 0 April 2025.................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2026.................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 April 2027.................. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Weighted Average Life in Years(1).................... 5.35 4.82 4.35 4.06 3.80 3.55 3.33 15.60 13.93 12.64 11.94 11.34 10.82 10.37 Weighted Average Life in Years(2).................... 5.35 4.82 4.35 4.06 3.80 3.55 3.33 15.53 13.81 12.44 11.65 10.95 10.33 9.77 ----------------- (1) The weighted average life of a Certificate is determined by (a) multiplying the amount of each distribution of principal by the number of years from the date of issuance of the Certificate to the related Distribution Date, (b) adding the results and (c) dividing the sum by the initial Certificate Balance of the Certificate. (2) Calculated pursuant to footnote one but assumes the Master Servicer exercises its option to purchase the Mortgage Loans. See "Pooling and Servicing Agreement--Termination" herein.
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There is no assurance that prepayments of the Mortgage Loans will conform to any of the levels of the CPR indicated in the tables above, or to any other level, or that the actual weighted average life of any class of Certificates will conform to any of the weighted average lives set forth in the tables above. Furthermore, the information contained in the tables with respect to the weighted average life of each class of Senior P&I Certificates, the Class A-WAC Certificates and the Class B-1, Class B-2 and Class B-3 Certificates is not necessarily indicative of the weighted average life of each such class that might be calculated or projected under different or varying prepayment assumptions. The characteristics of the Mortgage Loans will differ from those assumed in preparing the tables above. In addition, it is unlikely that any Mortgage Loan will prepay at any constant percentage of CPR until maturity or that all of the Mortgage Loans will prepay at the same rate. The timing of changes in the rate of prepayments may significantly affect the actual yield to maturity to investors, even if the average rate of principal prepayments is consistent with the expectations of investors. YIELD SENSITIVITY OF THE CLASS IO CERTIFICATES The yield to maturity of the Class IO Certificates will be extremely sensitive to the prepayment, repurchase and default experience on the Mortgage Loans, which may fluctuate significantly from time to time. A rapid rate of principal payments on the Mortgage Loans will have a materially negative effect on the yield to maturity of the Class IO Certificates. There can be no assurance that the Mortgage Loans will prepay at any particular rate. Prospective investors in the Class IO Certificates should fully consider the associated risks, including the risk that such investors may not fully recover their initial investment. The following table indicates the sensitivity of the yield of the Class IO Certificates to various rates of prepayment on the Mortgage Loans and the corresponding pre-tax yield on a corporate bond equivalent basis. The table set forth below has been prepared based on the Modeling Assumptions. PRE-TAX YIELD TO MATURITY ON THE CLASS IO CERTIFICATES AT VARIOUS PERCENTAGES OF CPR PERCENTAGES OF CPR ASSUMED AGGREGATE ---------------------------------------------------------- PURCHASE PRICE 0% 3% 6% 8% 10% 12% ----------------- -------- --------- -------- -------- -------- ------- $10,030,266.58....... 15.87% 12.65% 9.39% 7.18% 4.94% 2.69% On the basis of a CPR of approximately 14% and the purchase price assumed above, the yield to maturity of the Class IO Certificates would be approximately 0%. If the actual prepayment rate were to exceed such rate, initial investors in the Class IO Certificates would not fully recover their initial investment. The pre-tax yields set forth in the preceding table were calculated by determining the monthly discount rates that, when applied to the assumed streams of cash flows to be paid on the Class IO Certificates, would cause the discounted present value of such assumed stream of cash flows to equal the assumed aggregate purchase price of such Class IO Certificates, which includes accrued interest, and by converting such monthly rates to corporate bond equivalent rates. Such calculation does not take into account shortfalls in collection of interest due to prepayments (or other liquidations) on the Mortgage Loans or the interest rates at which investors may be able to reinvest funds received by them as distributions on the Class IO Certificates and consequently does not purport to reflect the return on any investment in the Class IO Certificates when such reinvestment rates are considered. The characteristics of the Mortgage Loans will differ from those assumed in preparing the table above. There can be no assurance that the cash flows on the Class IO Certificates will correspond to those used to determine the pre-tax yields shown above or that the aggregate purchase price of the Class IO Certificates will be as assumed. It is unlikely that any Mortgage Loan will prepay at the S-42
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specified percentages of the CPR until maturity or that all of the Mortgage Loans will prepay at the same rate. The timing of changes in the rate of prepayments may significantly affect the actual yield to maturity to investors, even if the average rate of principal prepayments is consistent with the expectations of investors. There can be no assurance that the Mortgage Loans will prepay at any of the rates shown in the table or at any other particular rate. Investors must make their own decisions as to the appropriate prepayment assumptions to be used in deciding whether to purchase the Class IO Certificates. YIELD SENSITIVITY OF THE CLASS A-WAC CERTIFICATES The yield to maturity of the Class A-WAC Certificates will be especially sensitive to the prepayment, repurchase and default experience on the Mortgage Loans, which may fluctuate significantly from time to time. In addition, the aggregate of distributions in respect of, and the yield to maturity of, the Class A-WAC Certificates will be related to the rate and timing of the payment of the Arrearage. The pre-tax yields set forth in the following tables were calculated by determining the monthly discount rates that, when applied to the assumed streams of cash flows to be paid on the Class A-WAC Certificates, would cause the discounted present value of such assumed stream of cash flows to equal the assumed aggregate purchase price of such Class A-WAC Certificates, which includes accrued interest, and by converting such monthly rates to corporate bond equivalent rates. Such calculation does not take into account the interest rates at which investors may be able to reinvest funds received by them as distributions on the Class A-WAC Certificates and consequently does not purport to reflect the return on any investment in the Class A-WAC Certificates when such reinvestment rates are considered. The characteristics of the Mortgage Loans will differ from those assumed in preparing the tables below. There can be no assurance that the Mortgage Loans will prepay at any of the rates shown in the tables or at any other particular rate, that the cash flows on the Class A-WAC Certificates will correspond to those used to determine the pre-tax yields shown below or that the aggregate purchase price of the Class A-WAC Certificates will be as assumed. In addition, it is unlikely that any Mortgage Loan will prepay at the specified percentages of CPR until maturity or that all of the Mortgage Loans will prepay at the same rate. Timing of changes in the rate of prepayments may significantly affect the actual yield to maturity to investors, even if the average rate of principal prepayments is consistent with the expectations of investors. Because the portion of interest payments allocable to the holders of the Class A-WAC Certificates varies from Mortgage Loan to Mortgage Loan and is greater with respect to Mortgage Loans with higher Mortgage Rates, the yield on the Class A-WAC Certificates will be lower than indicated in the table below with respect to any particular average prepayment rate if Mortgage Loans with higher Mortgage Rates prepay faster than Mortgage Loans with lower Mortgage Rates (assuming the same Mortgage Loan principal balance). Investors must make their own decisions as to the appropriate prepayment assumptions to be used in deciding whether to purchase the Class A-WAC Certificates. The following table indicates the sensitivity of the yield of the Class A-WAC Certificates to various rates of prepayment on the Mortgage Loans and various Arrearage Repayment Percentages and the corresponding pre-tax yield on a corporate bond equivalent basis. The table set forth below has been prepared based on the Modeling Assumptions and assuming that the purchase price for the Class A-WAC Certificates is 99.75% of the Certificate Balance thereof plus accrued interest on the Notional Amount thereof (as such accrued interest varies at each percentage of CPR). S-43
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[Enlarge/Download Table] PRE-TAX YIELD TO MATURITY ON THE CLASS A-WAC CERTIFICATES AT VARIOUS PERCENTAGES OF CPR (ASSUMING NO OPTIONAL TERMINATION) ARREARAGE REPAYMENT PERCENTAGE PERCENTAGES OF CPR ---------------------- ------------------------------------------------------------------------------------------------ 0% 3% 6% 8% 10% 12% 14% ----------- ----------- ----------- ---------- --------- --------- --------- 105%................. 5.21% 5.19% 5.16% 5.15% 5.14% 5.13% 5.12% 110%................. 7.72% 7.05% 6.57% 6.33% 6.15% 6.00% 5.88% 115%................. 9.64% 8.65% 7.90% 7.51% 7.19% 6.93% 6.72% 120%................. 11.26% 10.07% 9.13% 8.63% 8.21% 7.86% 7.56% 125%................. 12.68% 11.36% 10.27% 9.69% 9.19% 8.76% 8.39% 130%................. 13.98% 12.54% 11.34% 10.68% 10.12% 9.62% 9.18% 135%................. 15.16% 13.64% 12.35% 11.63% 11.00% 10.45% 9.96% 140%................. 16.26% 14.67% 13.30% 12.52% 11.84% 11.24% 10.70% [Enlarge/Download Table] PRE-TAX YIELD TO MATURITY ON THE CLASS A-WAC CERTIFICATES AT VARIOUS PERCENTAGES OF CPR (ASSUMING OPTIONAL TERMINATION ON THE EARLIEST PERMITTED DISTRIBUTION DATE) ARREARAGE REPAYMENT PERCENTAGE PERCENTAGES OF CPR ---------------------- ------------------------------------------------------------------------------------------------ 0% 3% 6% 8% 10% 12% 14% ---------- --------- ---------- ---------- --------- --------- --------- 105%................. 5.40% 5.36% 5.29% 5.25% 5.22% 5.20% 5.17% 110%................. 7.71% 7.04% 6.54% 6.30% 6.11% 5.96% 5.83% 115%................. 9.63% 8.64% 7.87% 7.47% 7.14% 6.86% 6.62% 120%................. 11.25% 10.06% 9.11% 8.60% 8.16% 7.79% 7.47% 125%................. 12.68% 11.35% 10.26% 9.66% 9.14% 8.69% 8.30% 130%................. 13.97% 12.54% 11.33% 10.66% 10.07% 9.56% 9.10% 135%................. 15.16% 13.64% 12.34% 11.60% 10.96% 10.39% 9.87% 140%................. 16.26% 14.66% 13.29% 12.50% 11.81% 11.18% 10.62% YIELD SENSITIVITY OF THE CLASS B-1, CLASS B-2 AND CLASS B-3 CERTIFICATES If the Certificate Balances of the Class B Certificates not offered hereby, the Class B-3 Certificates and the Class B-2 Certificates have been reduced to zero, the yield to maturity on the Class B-1 Certificates will become extremely sensitive to losses on the Mortgage Loans (and the timing thereof) that are covered by subordination, because the entire amount of such losses will be allocated to the Class B-1 Certificates. If the Certificate Balances of the Class B Certificates not offered hereby and the Class B-3 Certificates have been reduced to zero, the yield to maturity on the Class B-2 Certificates will become extremely sensitive to losses on the Mortgage Loans (and the timing thereof) that are covered by subordination, because the entire amount of such losses will be allocated to the Class B-2 Certificates. If the Certificate Balances of the Class B Certificates not offered hereby have been reduced to zero, the yield to maturity on the Class B-3 Certificates will become extremely sensitive to losses on the Mortgage Loans (and the timing thereof) that are covered by subordination, because the entire amount of such losses will be allocated to the Class B-3 Certificates. The percentage interest in the Trust Fund initially evidenced by the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates will be approximately 3.75%, approximately 2.75%, approximately 4.75%, approximately 3.50%, approximately 3.00% and approximately 5.25%, respectively. Investors in the Class B-1, Class B-2 and Class B-3 Certificates should fully consider the risk that Realized Losses on the Mortgage Loans could result in the failure of such investors to fully recover their investments. S-44
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DESCRIPTION OF THE CERTIFICATES GENERAL The Series 1997-HUD1 Certificates (collectively, the "Certificates") will consist of 15 classes of certificates, designated as: (i) the Class A-1, Class A-2, Class A-3 and Class A-4 Certificates (collectively, the "Senior P&I Certificates"); (ii) the Class IO Certificates; (iii) the Class A-WAC Certificates (collectively with the Senior P&I Certificates and the Class IO Certificates, the "Senior Certificates"); (iv) the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates (collectively, the "Class B Certificates"; the Senior P&I Certificates and the Class B Certificates, together, the "P&I Certificates"; the Senior Certificates and the Class B Certificates, together, the "REMIC Regular Certificates"); and (v) the Class R-I, Class R-II and Class R-III Certificates (collectively, the "Residual Certificates"). Only the Senior Certificates and the Class B-1, Class B-2 and Class B-3 Certificates (collectively, the "Offered Certificates") are offered hereby. The rights of the holders of the Class B Certificates and the Residual Certificates to receive distributions with respect to the Mortgage Loans will be subordinate to the rights of the holders of the Senior Certificates, and the rights of the holders of the Residual Certificates to receive distributions with respect to the Mortgage Loans will be subordinate to the rights of the holders of the Senior Certificates and the Class B Certificates, in each case to the extent described herein. Further, the Class B Certificates of any class having a higher numerical class designation are subordinated, to the extent described herein, to the Class B Certificates of each class having a lower numerical class designation. The Certificates represent in the aggregate the entire beneficial ownership interest in a Trust Fund (the "Trust Fund") consisting primarily of a segregated pool (the "Mortgage Pool") of approximately 6,738 conventional mortgage loans (the "Mortgage Loans") that have, as of April 1, 1997 (the "Cut-off Date"), an aggregate Unpaid Principal Balance of approximately $272,574,770 (the "Cut-off Date Pool Unpaid Principal Balance"), an aggregate Arrearage of approximately $53,585,190 (the "Cut-off Date Pool Arrearage") and an aggregate Legal Balance of approximately $326,159,960 (the "Cut-off Date Pool Legal Balance"). See "The Mortgage Pool" for additional information regarding the Mortgage Loans. The Senior P&I Certificates and the Class B-1, Class B-2 and Class B-3 Certificates will have the approximate initial Certificate Balances as set forth on the cover hereof and will have the PassThrough Rates determined as provided under "Summary of Prospectus Supplement--Description of the Certificates" herein. The Class IO Certificates will have the approximate initial Notional Amount as set forth on the cover hereof and will accrue interest on the Notional Amount thereof outstanding from time to time at the fixed Pass-Through Rate of 0.68055% per annum. The Class A-WAC Certificates will have the approximate initial Certificate Balance and Notional Amount as set forth on the cover hereof and will accrue interest only on the Notional Amount thereof outstanding from time to time at the variable Pass-Through Rate determined as provided under "Summary of Prospectus Supplement--Description of the Certificates" herein. The Class B-4, Class B-5 and Class B-6 Certificates will have a initial Certificate Balances equal to approximately $11,416,000, approximately $9,785,000 and approximately $17,123,770, respectively. The Class B-4, Class B-5 and Class B-6 Certificates have a Pass-Through Rate equal to the lesser of (i) 7.75% per annum and (ii) the Weighted Average Stripped Net Mortgage Rate. The Residual Certificates have no Certificate Balance or Pass-Through Rate. The Residual Certificates represent the right to receive distributions in respect of the Trust Fund on any Distribution Date after all required payments of principal, interest and Arrearage have been made on such date in respect of the other Classes of Certificates, although it is not anticipated that funds will be available for any such additional distribution. The Class B-4, Class B-5, Class B-6 Certificates and the Residual Certificates, which are not being offered hereby, will be sold by the Depositor to Salomon Brothers Inc on the Closing Date. S-45
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The Trust Fund to be established by the Depositor will consist primarily of the Mortgage Pool and certain related assets. The initial aggregate Certificate Balance of the P&I Certificates will equal the aggregate Unpaid Principal Balance of the Mortgage Loans as of the Cut-off Date, after application of the principal portion of all Modified Scheduled Payments due on or before such date, whether or not received, and the initial Certificate Balance of the Class A-WAC Certificates will equal approximately 98.36% of the aggregate Arrearage of the Mortgage Loans as of the Cut-off Date, after application of all payments of Arrearage actually received as of such date. The "Certificate Balance" of the Class A-WAC Certificates or any class of P&I Certificates outstanding at any time generally represents the maximum amount that the holders thereof are entitled to receive as distributions allocable to Arrearage or principal, as applicable, from the cash flow on the Mortgage Loans and the other assets in the Trust Fund. The Certificate Balance of each such class will be reduced on each Distribution Date by any distributions of Arrearage or principal, as applicable, actually made on such class on such Distribution Date and with respect to any class of P&I Certificates (and, correspondingly, to the Class A-WAC Certificates), further, by any losses on or in respect of the Mortgage Loans, other than the portion thereof payable as fees and expenses and certain additional Trust Fund expenses allocated to such class on such Distribution Date. Neither the Class IO Certificates nor any class of Residual Certificates will have a Certificate Balance or entitle the holders thereof to receive distributions of principal or Arrearage. The "Notional Amount" of the Class IO Certificates and of the Class A-WAC Certificates will in each case be equal at all times to the aggregate Certificate Balance of the P&I Certificates. The Notional Amount of the Class IO Certificates and Class A-WAC Certificates is solely intended to be used for purposes of calculating the accrual of interest in respect of such class. The Notional Amount of the Class A-WAC Certificates will not represent the right to receive distributions of principal or Arrearage. The Senior P&I Certificates, the Class A-WAC Certificates and the Class B-1, Class B-2 and Class B-3 Certificates (collectively, the "Book-Entry Certificates") will be issued, maintained and transferred on the book-entry records of DTC and its Participants in minimum denominations of $10,000 initial Certificate Balance and integral multiples of $1.00 in excess thereof. Each Class A-WAC Certificate will also have an initial Notional Amount equal to the percentage interest of such Certificate in such class times the aggregate initial Notional Amount of the Class A-WAC Certificates. The Class IO Certificates will be issued in registered, certificated form, in minimum percentage interests corresponding to initial Notional Amounts of $10,000 and integral multiples of $1,000 in excess thereof, except that one Certificate of such class may be issued evidencing an amount equal to either (i) the sum of an otherwise authorized denomination thereof plus the remainder of the aggregate initial Notional Amount for such class or (ii) such remainder. The Book-Entry Certificates will initially be represented by one or more global certificates registered in the name of the nominee of DTC (together with any successor clearing agency selected by the Depositor, the "Clearing Agency"), except as provided below. The Depositor has been informed by DTC that DTC's nominee will be CEDE & Co. ("CEDE"). No Certificate Owner will be entitled to receive a certificate representing such person's interest, except as set forth below under "--Definitive Certificates". Unless and until Definitive Certificates are issued under the limited circumstances described herein, all references to actions by Certificateholders with respect to the Book-Entry Certificates shall refer to actions taken by DTC upon instructions from its Participants (as defined below), and all references herein to distributions, notices, reports and statements to Certificateholders with respect to the Book-Entry Certificates shall refer to distributions, notices, reports and statements to DTC or CEDE, as the registered holder of the Book-Entry Certificates, for distribution to Certificate Owners in accordance with DTC procedures. See "--Registration of the Book-Entry Certificates" and "--Definitive Certificates" herein. Class IO Certificates and Definitive Certificates will be transferable and exchangeable at the offices of the Trustee. Any person purchasing the Offered Certificates (other than the Class IO Certificates) S-46
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by, on behalf of or with the assets of a Plan (as defined herein) will be deemed to have made certain representations in connection with such purchase, as provided herein. The Class IO Certificates may not be purchased by, on behalf of or with the assets of a Plan except upon the delivery of an opinion of counsel or a certification of facts, as provided herein. See "--Restrictions on Transfer of the Offered Certificates" and "ERISA Considerations" herein. No service charge will be imposed for any registration of transfer or exchange, but the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge imposed in connection therewith. All distributions to holders of the Certificates, other than the final distribution on any class of Certificates, will be made on each Distribution Date by or on behalf of the Trustee to the persons in whose names such Certificates are registered at the close of business on the related Record Date, which will be the last business day of the month preceding the month in which such Distribution Date occurs. Such distributions will be made either (a) by check mailed to the address of each such Certificateholder as it appears in the Certificate Register or (b) upon written request to the Trustee at least five business days prior to the relevant Record Date by any holder of Certificates having an aggregate initial Certificate Balance that is in excess of the lesser of (i) $5,000,000 or (ii) two-thirds of the initial aggregate Certificate Balance of such class of Certificates, by wire transfer in immediately available funds to the account of such Certificateholder specified in the request. The final distribution on any class of Certificates will be made in like manner, but only upon presentment and surrender of such Certificates at the corporate trust office of the Trustee or such other location specified in the notice to Certificateholders of such final distribution. REGISTRATION OF THE BOOK-ENTRY CERTIFICATES 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 Securities Exchange Act of 1934, as amended. DTC was created to hold securities for its participating organizations ("Participants") and to facilitate the clearance and settlement of securities transactions between Participants through electronic book entries, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers (including the Underwriter), banks, trust companies and clearing corporations. 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 ("Indirect Participants"). Certificate Owners that are not Participants or Indirect Participants but desire to purchase, sell or otherwise transfer ownership of, or other interests in, the Book-Entry Certificates may do so only through Participants and Indirect Participants. In addition, Certificate Owners will receive all distributions of principal of and interest on the Book-Entry Certificates from the Trustee through DTC and DTC Participants. The Trustee will forward payments to DTC in same day funds and DTC will forward such payments to Participants in next day funds settled through the New York Clearing House. Each Participant will be responsible for disbursing such payments to Indirect Participants or to Certificate Owners. Unless and until Definitive Certificates are issued, it is anticipated that the only Certificateholder of the Book-Entry Certificates will be CEDE, as nominee of DTC. Certificate Owners will not be recognized by the Trustee as Certificateholders, as such term is used in the Agreements and Certificate Owners will be permitted to exercise the rights of Certificateholders only indirectly through DTC and its Participants. Under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers of Book-Entry Certificates among Participants and to receive and transmit distributions of principal of, and interest on, the Book-Entry Certificates. Participants and Indirect Participants with which Certificate Owners have accounts with respect to the Book-Entry Certificates similarly are required to make book-entry transfers and receive and transmit such payments on behalf of their respective Certificate Owners. Accordingly, although Certificate Owners will not possess Definitive Certificates, the Rules provide a mechanism by which Certificate S-47
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Owners through their Participants and Indirect Participants will receive payments and will be able to transfer their interest. Because DTC can only act on behalf of Participants, who in turn act on behalf of Indirect Participants and on behalf of certain banks, the ability of a Certificate Owner to pledge Book-Entry Certificates to persons or entities that do not participate in the DTC system, or to otherwise act with respect to such Certificates, may be limited due to the absence of physical certificates for the BookEntry Certificates. In addition, under a book-entry format, Certificate Owners may experience delays in their receipt of payments since distribution will be made by the Trustee to CEDE, as nominee for DTC. Under the Rules, DTC will take action permitted to be taken by a Certificateholder under the Agreement only at the direction of one or more Participants to whose DTC account the Book-Entry Certificates are credited. Additionally, under the Rules, DTC will take such actions with respect to specified Voting Rights only at the direction of and on behalf of Participants whose holdings of BookEntry Certificates evidenced such specified Voting Rights. DTC may take conflicting actions with respect to Voting Rights, to the extent that Participants whose holdings of Book-Entry Certificates evidenced such Voting Rights, authorize divergent action. The Depositor, the Master Servicer, the Trustee and the Fiscal Agent will have no liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Book-Entry Certificates held by CEDE, as nominee for DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. DEFINITIVE CERTIFICATES Definitive Certificates will be issued to Certificate Owners or their nominees, respectively, rather than to DTC or its nominee, only if (i) the Depositor advises the Trustee in writing that DTC is no longer willing or able to discharge properly its responsibilities as Clearing Agency with respect to the Book-Entry Certificates and the Depositor is unable to locate a qualified successor, (ii) the Depositor, at its option, elects to terminate the book-entry system through DTC, or (iii) after the occurrence of a Master Servicer event of default, Certificate Owners representing in the aggregate not less than 51% of the Voting Rights of the Book-Entry Certificates advise the Trustee and DTC through Participants, in writing, that the continuation of a book-entry system through DTC (or a successor thereto) is no longer in the Certificate Owners' best interest. Upon the occurrence of any event described in the immediately preceding paragraph, the Trustee is required to notify all Certificate Owners through Participants of the availability of Definitive Certificates. Upon surrender by DTC of the Definitive Certificates representing the Book-Entry Certificates and receipt of instructions for re-registration, the Trustee will reissue the Book-Entry Certificates as Definitive Certificates issued in the respective principal amounts owned by individual Certificate Owners, and thereafter the Trustee will recognize the holders of such Definitive Certificates as Certificateholders under the Agreement. Such Definitive Certificates will be issued in minimum denominations of $10,000, except that any beneficial ownership represented by a Book-Entry Certificate in an amount less than $10,000 immediately prior to the issuance of a Definitive Certificate shall be issued in a minimum denomination equal to the amount of such beneficial ownership. DISTRIBUTIONS ON THE CERTIFICATES Distributions on the Certificates will be made, to the extent of available funds, on the 25th day of each month (or, if any such 25th day is not a business day, then on the next succeeding business day), beginning in May 1997 (each, a "Distribution Date"). The total of all payments and other collections (or advances in lieu thereof) on or in respect of the Mortgage Loans that are available for distribution to holders of the Certificates ("Certificateholders") on any Distribution Date is the "Available Distribution Amount" for such date. S-48
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In general, on each Distribution Date, the Available Distribution Amount for such date will be distributed among the respective Classes of Certificates for the following purposes and in the following order of priority: (1) to pay interest to the holders of the Senior Certificates of each class, PRO RATA based on entitlement, up to an amount equal to the Interest Distribution Amount in respect of each such class of Certificates for such Distribution Date; (2) to pay interest to the holders of the Class B-1 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (3) to pay interest to the holders of the Class B-2 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (4) to pay interest to the holders of the Class B-3 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (5) to pay interest to the holders of the Class B-4 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (6) to pay interest to the holders of the Class B-5 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (7) to pay interest to the holders of the Class B-6 Certificates, up to an amount equal to the Interest Distribution Amount in respect of such class of Certificates for such Distribution Date; (8) to pay principal sequentially to the holders of the Senior P&I Certificates from Class A-1 to Class A-4, in the order of their numerical class designation, in each case until the related Certificate Balance is reduced to zero, up to an amount equal to the Senior Principal Distribution Amount, and to pay principal to the holders of the Class A-WAC Certificates, up to an amount equal to the Basic Class A-WAC Principal Distribution Amount, provided that if the then remaining Available Distribution Amount is less than the aggregate of the Senior Principal Distribution Amount and the Basic Class A-WAC Distribution Amount, then distributions of principal pursuant to this clause (8) will be allocated between the holders of the Senior P&I Certificates and the holders of the Class A-WAC Certificates on a PRO RATA basis in accordance with their respective entitlements; (9) to pay to the holders of the Class A-WAC Certificates, up to an amount equal to the Additional Class A-WAC Distribution Amount; (10) to pay principal to the holders of the Class B Certificates, up to an amount equal to their portion, as described herein, of the Subordinate Principal Distribution Amount for such Distribution Date; and (11) to pay any remaining amount to the holders of the Residual Certificates. The "Interest Distribution Amount" with respect to any class of P&I Certificates, the Class IO Certificates or the Class A-WAC Certificates for any Distribution Date will equal: (i) interest accrued during the related Interest Accrual Period at the applicable Pass-Through Rate accrued on the Certificate Balance of such class, in the case of any class of P&I Certificates, or the Notional Amount of such class in the case of the Class IO Certificates and Class A-WAC Certificates, in each case outstanding immediately prior to such Distribution Date; increased by (ii) the excess, if any, of the Interest Distribution Amount for such class for the immediately preceding Distribution Date, if any, over the aggregate distributions of interest made with respect to such class on such immediately preceding Distribution Date; and (iii) in the case of each such class, reduced (to not less than zero) by the allocable share for such class of Prepayment Interest Shortfalls (to the extent not covered by Compensating Interest paid by the Master Servicer) and certain other interest shortfalls described below. Any Prepayment Interest Shortfalls for any Distribution Date (to the extent not covered by Compensating Interest paid by the Master Servicer) and any shortfalls resulting from the application S-49
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of the Relief Act will be allocated among the holders of the Certificates on a PRO RATA basis, based on the respective amounts of interest accrued on such Certificates for such Distribution Date. The Pass-Through Rates for the Senior P&I Certificates (other than the Class A-4 Certificates) and for the Class IO Certificates will, in each case, be fixed at the rate per annum specified on the cover hereof. The Pass-Through Rate for the Class A-4, Class B-1, Class B-2 and Class B-3 Certificates will, in each case and for any Distribution Date, be equal to the lesser of (i) the rate per annum specified on the cover hereof and (ii) the Weighted Average Stripped Net Mortgage Rate for such Distribution Date. The Pass-Through Rate for the Class A-WAC Certificates will also be variable and, with respect to each Distribution Date, will equal the weighted average of ten variable rates: the Component A-1 Rate, the Component A-2 Rate, the Component A-3 Rate, the Component A-4 Rate, the Component B-1 Rate, the Component B-2 Rate, the Component B-3 Rate, the Component B-4 Rate, the Component B-5 Rate and the Component B-6 Rate, each weighted according to the proportion the Certificate Balance of the related class of P&I Certificates (that is, the P&I Certificate with the same alphabetical and numerical class designation) outstanding immediately prior to such Distribution Date bears to the sum of the Certificate Balances of the P&I Certificates (and, therefore, the Notional Amount of the Class A-WAC Certificates) outstanding immediately prior to such Distribution Date. Each Component Rate is, as stated above, a variable rate and, with respect to each such Distribution Date, will equal (but will not be less than zero) the Weighted Average Stripped Net Mortgage Rate for such Distribution Date minus (i) the Pass-Through Rate for the Class A-1 Certificates, in the case of the Component A-1 Rate, (ii) the Pass-Through Rate for the Class A-2 Certificates, in the case of the Component A-2 Rate, (iii) the Pass-Through Rate for the Class A-3 Certificates, in the case of the Component A-3 Rate, (iv) the Pass-Through Rate for the Class A-4 Certificates, in the case of the Component A-4 Rate, (v) the Pass-Through Rate for the Class B-1 Certificates, in the case of the Component B-1 Rate, (vi) the Pass-Through Rate for the Class B-2 Certificates, in the case of the Component B-2 Rate, (vii) the Pass-Through Rate for the Class B-3 Certificates, in the case of the Component B-3 Rate, (viii) the Pass-Through Rate for the Class B-4 Certificates, in the case of the Component B-4 Rate, (ix) the Pass-Through Rate for the Class B-5 Certificates, in the case of the Component B-5 Rate and (x) the Pass-Through Rate for the Class B-6 Certificates, in the case of the Component B-6 Rate. The Weighted Average Stripped Net Mortgage Rate for any Distribution Date is equal to (x) the weighted average of Net Mortgage Rates in effect for the Mortgage Loans as of the commencement of the related Due Period minus (y) 0.68055% per annum. The Net Mortgage Rate for each Mortgage Loan is generally equal to the Mortgage Rate minus the sum of the per annum rates at which the Master Servicer's fee and the Trustee's fee accrue. The Interest Accrual Period for any Distribution Date is the one-month period preceding the month in which such Distribution Date occurs. All distributions of interest will be based on a 360-day year consisting of twelve 30-day months. Except as otherwise described herein, on any Distribution Date, distributions of the Interest Distribution Amount for a class of Certificates will be made in respect of such class of Certificates, to the extent provided herein, on a PARI PASSU basis, based on the Certificate Balance or Notional Amount, as applicable, of the Certificates of each such class. With respect to each Distribution Date, the "Senior Principal Distribution Amount" will equal the lesser of (1) the aggregate Certificate Balance of the Senior P&I Certificates outstanding immediately prior to such Distribution Date and (2) the sum of (x) the Senior Percentage of all scheduled payments of principal due on the Mortgage Loans during the related Due Period, whether or not received, and of the aggregate principal portion of any unscheduled net collections (other than amounts described in clauses (y) or (z) hereof and other than payments allocable to Arrearage) received on or in respect of the Mortgage Loans during the related Prepayment Period, including proceeds from repurchases of Mortgage Loans, insurance proceeds, condemnation proceeds and liquidation proceeds, (y) the Senior Prepayment Percentage of all voluntary prepayments of principal received on the Mortgage Loans during the related Prepayment Period (other than the amount thereof allocable to Arrearage) and (z) with respect to the principal portion of any net liquidation proceeds received during the related Prepayment Period in connection with the final liquidation of a Mortgage Loan during such Prepayment S-50
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Period, the lesser of the Senior Percentage of the then scheduled principal balance of such Mortgage Loan and the Senior Prepayment Percentage of the principal portion of such net liquidation proceeds (other than the amount thereof allocable to Arrearage). With respect to each Distribution Date, the "Basic Class A-WAC Distribution Amount" will equal the lesser of (1) the Certificate Balance of the Class A-WAC Certificates outstanding immediately prior to such Distribution Date, and (2) the aggregate portion of (a) all Modified Scheduled Payments due on the Mortgage Loans during the related Due Period, received and to the extent allocable to Arrearage, other than the portion thereof payable as fees and expenses, and (b) any unscheduled net collections received on the Mortgage Loans during the related Prepayment Period allocable to Arrearage, including voluntary prepayments, proceeds from repurchases of Mortgage Loans, insurance proceeds, condemnation proceeds and liquidation proceeds, other than the portion thereof payable as fees and expenses. With respect to each Distribution Date, the "Additional Class A-WAC Distribution Amount" will equal the lesser of (1) the Certificate Balance of the Class A-WAC Certificates outstanding immediately prior to such Distribution Date (net of the Basic Class A-WAC Distribution Amount for such Distribution Date) and (2) with respect to the final liquidation of a Mortgage Loan during the related Prepayment Period, the amount of any Arrearage remaining unpaid with respect to such Mortgage Loan following the receipt of all related liquidation proceeds, other than the portion thereof payable as fees and expenses. As further provided herein, all payments and recoveries in respect of the Mortgage Loans (exclusive of escrow payments and "pay-aheads") will be applied by the Master Servicer first, to pay accrued interest on such Mortgage Loan; second, to pay scheduled principal on such Mortgage Loan; third, to pay any unpaid Arrearage of such Mortgage Loan; and fourth, to prepay Unpaid Principal Balance of such Mortgage Loan. This may result in an accelerated amortization of the Certificate Balance of the Class A-WAC Certificates relative to the Senior P&I Certificates. Holders of each class of Class B Certificates will be entitled to receive on each Distribution Date, to the extent of the portion of the Available Distribution Amount remaining after distribution on such date of the amounts described in clauses (1) through (9) above, distributions allocable to principal in reduction of the Certificate Balances thereof equal to the sum of the following: (i) the related Class B Percentage (as defined below) of all scheduled payments of principal due on the Mortgage Loans during the related Due Period, whether or not received, and of the aggregate principal portion of any unscheduled net collections (other than amounts described in clauses (ii) or (iii) hereof and other than payments allocable to Arrearage) received on or in respect of the Mortgage Loans during the related Prepayment Period, including proceeds from repurchases of Mortgage Loans, insurance proceeds, condemnation proceeds and liquidation proceeds, (ii) such class's PRO RATA share (if any), as described below, of the Subordinate Prepayment Percentage of all voluntary prepayments of principal received on the Mortgage Loans during the related Prepayment Period (other than the amount thereof allocable to Arrearage), (iii) with respect to the principal portion of any net liquidation proceeds received during the related Prepayment Period in connection with the final liquidation of a Mortgage Loan during such Prepayment Period, such class's PRO RATA share (if any), as described herein, of the principal portion of such net liquidation proceeds (other than the amount thereof allocable to Arrearage) to the extent not included in the Senior Principal Distribution Amount and (iv) any amounts allocable to principal for any previous Distribution Date (calculated pursuant to the three preceding clauses) that remain undistributed, to the extent that any such amounts are not attributable to Realized Losses that were allocated to Classes of Class B Certificates bearing a higher numerical class designation. With respect to any Distribution Date, the lesser of (a) the balance of the amount available after distributions pursuant to clauses (1) through (9) above and (b) the aggregate of the sum for each class of Class B Certificates of the amounts described in the preceding paragraph is hereinafter referred to as the "Subordinate Principal Distribution Amount". On any Distribution Date, the portion of (a) all principal prepayments on the Mortgage Loans and (b) net liquidation proceeds allocable to principal of any Mortgage Loan that was finally liquidated S-51
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during the related Prepayment Period in each case not included in the Senior Principal Distribution Amount will be allocated on a PRO RATA basis among the following classes of Class B Certificates in proportion to the respective outstanding Certificate Balances thereof: (i) the Class B-1 Certificates, (ii) the Class B-2 Certificates, if on such Distribution Date the aggregate percentage interest in the Trust Fund evidenced by the Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates equals or exceeds 19.25% before giving effect to distributions on such Distribution Date, (iii) the Class B-3 Certificates, if on such Distribution Date the aggregate percentage interest in the Trust Fund evidenced by the Class B-3, Class B-4, Class B-5 and Class B-6 Certificates equals or exceeds 16.50% before giving effect to distributions on such Distribution Date, (iv) the Class B-4 Certificates, if on such Distribution Date the aggregate percentage interest in the Trust Fund evidenced by the Class B-4, Class B-5 and Class B-6 Certificates equals or exceeds 11.75% before giving effect to distributions on such Distribution Date, (v) the Class B-5 Certificates, if on such Distribution Date the aggregate percentage interest in the Trust Fund evidenced by the Class B-5 and Class B-6 Certificates equals or exceeds 8.25% before giving effect to distributions on such Distribution Date and (vi) the Class B-6 Certificates, if on such Distribution Date the aggregate percentage interest in the Trust Fund evidenced by the Class B-6 Certificates equals or exceeds 5.25% before giving effect to distributions on such Distribution Date. The "Senior Percentage" initially will be approximately 72.48%. The "Class B-1 Percentage", the "Class B-2 Percentage", the "Class B-3 Percentage", the "Class B-4 Percentage", the "Class B-5 Percentage" and the "Class B-6 Percentage" (with respect to each such class, the related "Class B Percentage") initially will be approximately 4.49%, approximately 3.29%, approximately 5.68%, approximately 4.19%, approximately 3.59% and approximately 6.28%, respectively. Each such percentage will be recalculated for each Distribution Date to be a percentage (not to exceed 100%) equal to the aggregate Certificate Balance of the Senior P&I Certificates, in the case of the Senior Percentage, or of the applicable class of Class B Certificates, in the case of the Class B Percentages, in each case immediately prior to such Distribution Date divided by the aggregate scheduled principal balance of the Mortgage Loans as of the end of the Prepayment Period for the immediately preceding Distribution Date. Except as described below, the Senior Prepayment Percentage for any Distribution Date occurring prior to the Distribution Date in May 2002 will equal 100%. Except as described below, the Senior Prepayment Percentage for any Distribution Date occurring after April 2002 will be as follows: for any Distribution Date from May 2002 through April 2003, the Senior Percentage for such Distribution Date plus 70% of the sum of the Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Percentages (such sum, the "Subordinate Percentage") for such Distribution Date; for any Distribution Date during the period from May 2003 through April 2004, the Senior Percentage for such Distribution Date plus 60% of the Subordinate Percentage for such Distribution Date; for any Distribution Date during the period from May 2004 through April 2005, the Senior Percentage for such Distribution Date plus 40% of the Subordinate Percentage for such Distribution Date; for any Distribution Date during the period from May 2005 through April 2006, the Senior Percentage for such Distribution Date plus 20% of the Subordinate Percentage for such Distribution Date; and for any Distribution Date thereafter, the Senior Percentage for such Distribution Date (unless on any such Distribution Date the Senior Percentage exceeds the initial Senior Percentage, in which case the Senior Prepayment Percentage for such Distribution Date will equal 100%). Any scheduled reduction to the Senior Prepayment Percentage described above shall not be made as of any Distribution Date unless (i) the outstanding Unpaid Principal Balance of Mortgage Loans delinquent 60 days or more (including real estate owned and Mortgage Loans in foreclosure) averaged over the last six months does not exceed 50% of the sum of the then current Certificate Balance of the Class B Certificates and (ii) Realized Losses on the Mortgage Loans to date are less than the then applicable Trigger Amount. The "Trigger Amount" for any Distribution Date occurring after the first five years will be as follows: for any Distribution Date from May 2002 through April 2003, 30% of the initial Certificate Balance of the Class B Certificates; for any Distribution Date during the period from May 2003 through April 2004, 40% of the initial Certificate Balance of the Class B Certificates; for any Distribution Date during the period from May 2004 through April 2005, 45% of the initial Certificate Balance of the Class S-52
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B Certificates; and for any Distribution Date during the period from May 2005 through April 2006, 50% of the initial Certificate Balance of the Class B Certificates. Notwithstanding the foregoing, upon reduction of the Certificate Balances of the Senior P&I Certificates to zero, the Senior Prepayment Percentage will equal 0%. The "Subordinate Prepayment Percentage" for any Distribution Date will equal 100% minus the Senior Prepayment Percentage. The allocation of all prepayments on a Mortgage Loan to the Arrearage thereof prior to the Unpaid Principal Balance thereof will have the effect of accelerating the amortization of the Class A-WAC Certificates relative to the P&I Certificates. In addition, the disproportionate allocation of certain unscheduled payments in respect of principal (to the extent not paid in respect of Arrearage) will have the effect of accelerating the amortization of the Senior P&I Certificates while, in the absence of losses, increasing the respective percentage interest in the principal balance of the Mortgage Loans evidenced by the Class B Certificates. Increasing the respective percentage interest of the Class B Certificates relative to that of the Senior P&I Certificates is intended to preserve the availability of the subordination provided by the Class B Certificates. If on any Distribution Date the allocation to the Senior P&I Certificates of full and partial principal prepayments and other amounts in the percentage required above would reduce the aggregate outstanding Certificate Balance of the Senior P&I Certificates below zero, the Senior Prepayment Percentage for such Distribution Date will be limited to the percentage necessary to reduce the aggregate Certificate Balance of the Senior P&I Certificates to zero. Distributions of the Subordinate Principal Distribution Amount on each Distribution Date will be made as follows: first, to the holders of the Class B-1 Certificates; second, to the holders of the Class B-2 Certificates; third, to the holders of the Class B-3 Certificates; fourth, to the holders of the Class B-4 Certificates; fifth, to the holders of the Class B-5 Certificates; and sixth, to the holders of the Class B-6 Certificates, in each case to the extent of available funds and in each case to the extent of the portion of the Subordinate Principal Distribution Amount payable in respect of each such class of Class B Certificates for such Distribution Date. Holders of the Class IO Certificates and the Residual Certificates are not entitled to receive any distributions allocable to principal or Arrearage. P&I ADVANCES Subject to the following limitations, the Master Servicer will be obligated to advance or cause to be advanced on or before each Distribution Date its own funds, or funds in the Certificate Account that are not included in the Available Distribution Amount for such Distribution Date, in an amount equal to the aggregate of payments in respect of scheduled principal and interest, but not in respect of Modified Scheduled Payments or Arrearage (except as described in the following sentence), net of the Servicing Fee Rate, that were due during the related Due Period and that were delinquent on the related Determination Date (any such advance, a "P&I Advance"). Subject to the recoverability determination described herein, advances in respect of Arrearage will be made by the Master Servicer only if the Unpaid Principal Balance of the related Mortgage Loan has been reduced to zero, in an amount equal to the Modified Scheduled Payment existing prior to when the Unpaid Principal Balance was reduced to zero. P&I Advances are required to be made only to the extent they are deemed by the Master Servicer to be recoverable from related late collections, insurance proceeds or liquidation proceeds. The purpose of making such P&I Advances is to maintain a regular cash flow to the Certificateholders, rather than to guarantee or insure against losses. The Master Servicer will not be required to make any P&I Advances with respect to reductions in the amount of the monthly payments on the Mortgage Loans due to bankruptcy proceedings or the application of the Relief Act. All P&I Advances will be reimbursable to the Master Servicer from late collections, insurance proceeds and liquidation proceeds from the Mortgage Loan as to which such unreimbursed P&I S-53
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Advance was made. In addition, any P&I Advances previously made in respect of any Mortgage Loan that are deemed by the Master Servicer to be nonrecoverable from related late collections, insurance proceeds or liquidation proceeds may be reimbursed to the Master Servicer out of any funds in the Certificate Account prior to the distributions on the Certificates. In the event the Master Servicer fails in its obligation to make any such advance, the Trustee (and in the event of the Trustee's failure, the Fiscal Agent) will be obligated to make any such advance, to the extent required in the Agreement. ALLOCATION OF LOSSES; SUBORDINATION Any Realized Losses and Extraordinary Trust Fund Expenses (each as defined herein) will be allocated on any Distribution Date as follows: first, to the Class B-6 Certificates; second, to the Class B-5 Certificates; third, to the Class B-4 Certificates; fourth, to the Class B-3 Certificates; fifth, to the Class B-2 Certificates; and sixth, to the Class B-1 Certificates, in each case until the Certificate Balance of such class has been reduced to zero. Thereafter, such Realized Losses and Extraordinary Trust Fund Expenses will be allocated on any Distribution Date to the Senior Certificates (other than the Class IO Certificates) on a PRO RATA basis. Any allocation of a Realized Loss or Extraordinary Trust Fund Expense to a Certificate will be made by reducing the Certificate Balance thereof by the amount so allocated as of the Distribution Date in the month following the calendar month in which such Realized Loss or Extraordinary Trust Fund Expense was incurred. An allocation of a Realized Loss or Extraordinary Trust Fund Expense on a PRO RATA basis among two or more Classes of Certificates means an allocation to each such class of Certificates on the basis of its then outstanding Certificate Balance prior to giving effect to distributions to be made on such Distribution Date. With respect to any defaulted Mortgage Loan that is finally liquidated through foreclosure sale, disposition of the related Mortgaged Property if acquired on behalf of the Certificateholders by deed-inlieu of foreclosure or otherwise, the amount of loss realized, if any, will equal the portion of the unpaid principal balance remaining, if any, plus interest thereon through the last day of the month in which such Mortgage Loan was finally liquidated, after application of all amounts recovered (net of amounts reimbursable to the Master Servicer for P&I Advances and expenses, including attorneys' fees) towards interest and principal owing on the Mortgage Loan (such amount of loss realized, "Realized Losses"). In order to maximize the likelihood of distribution in full of interest, principal and Arrearage, on each Distribution Date, (i) holders of Senior Certificates have a right to distributions of the Available Distribution Amount that is prior to the rights of the holders of the Class B Certificates, (ii) holders of Class B Certificates of any class have a right to distributions of the Available Distribution Amount that is prior to the rights of the holders of Class B Certificates with a higher numerical class designation, in each case to the extent of amounts then due thereon. The application of the Senior Prepayment Percentage (when it exceeds the Senior Percentage) to determine the Senior Principal Distribution Amount will accelerate the amortization of the Senior P&I Certificates relative to the actual amortization of the Mortgage Loans. To the extent that the Senior P&I Certificates are amortized faster than the Mortgage Loans, in the absence of offsetting Realized Losses allocated to the Class B Certificates, the percentage interest evidenced by the Senior P&I Certificates in the Trust Fund will be decreased (with a corresponding increase in the percentage interest in the Trust Fund evidenced by the Class B Certificates), thereby increasing, relative to their respective Certificate Balances, the subordination afforded the Senior Certificates by the Class B Certificates. An "Extraordinary Trust Fund Expense" is an unanticipated, non-Mortgage Loan specific Trust Fund expense, including certain reimbursements to the Master Servicer or Depositor as described under "Description of the Certificates--Certain Matters Regarding the Master Servicer and the Depositor" in the Prospectus, certain reimbursements to the Trustee described under "Pooling and S-54
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Servicing Agreement--The Trustee" herein and certain taxes that may be payable by the Trust Fund as described under "Certain Federal Income Tax Consequences" herein and in the Prospectus. RESTRICTIONS ON TRANSFER OF THE OFFERED CERTIFICATES Any person acquiring the Offered Certificates (other than the Class IO Certificates) by, on behalf of or with the assets of a Plan will be deemed to have made certain representations in connection with such purchase, as provided herein. The Class IO Certificates may not be purchased by, on behalf of or with the assets of a Plan except upon the delivery of an opinion of counsel or a certification of facts, as provided herein. See "ERISA Considerations" herein. POOLING AND SERVICING AGREEMENT GENERAL The Certificates will be issued pursuant to the Agreement, a form of which is filed as an exhibit to the Registration Statement. A Current Report on Form 8-K relating to the Certificates containing a copy of the Agreement as executed will be filed by the Depositor with the Securities and Exchange Commission within fifteen days of initial issuance of the Certificates. The Trust Fund created under the Agreement will consist of (i) all of the Depositor's right, title and interest in the Mortgage Loans, the related Mortgage Notes, Mortgages and other related documents, (ii) all payments on or collections in respect of the Mortgage Loans due after the Cut-off Date, together with any proceeds thereof, (iii) any Mortgaged Properties acquired on behalf of Certificateholders by foreclosure or by deed in lieu of foreclosure, and any revenues received thereon and (iv) the rights of the Trustee under all insurance policies required to be maintained pursuant to the Agreement. Reference is made to the Prospectus for important information in addition to that set forth herein regarding the Trust Fund, the terms and conditions of the Agreement and the Offered Certificates. The Offered Certificates will be transferable and exchangeable at the corporate trust offices of the Trustee, located in Chicago, Illinois. The Depositor will provide to a prospective or actual Certificateholder without charge, on written request, a copy (without exhibits) of the Agreement. Requests should be addressed to the Secretary, Salomon Brothers Mortgage Securities VII, Inc., Seven World Trade Center, New York, New York 10048. ASSIGNMENT OF THE MORTGAGE LOANS At the time of issuance of the Certificates, the Depositor will cause the Mortgage Loans to be assigned to the Trustee, together with all principal, interest and Arrearage 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. The Trustee will, concurrently with such assignment, deliver the Certificates to the Depositor in exchange for the Trust Fund. Each Mortgage Loan will be identified in a schedule appearing as an exhibit to the Agreement. Such schedule will include information as to the outstanding principal balance of each Mortgage Loan after application of the principal portion of all Modified Scheduled Payments due on or before such date, whether or not received, as well as information regarding the Mortgage Rate, the Original Scheduled Payment, the Modified Scheduled Payment, the maturity of the Mortgage Note, the value of the Mortgaged Property, the Loan-to-Value Ratios based on a recent broker's price opinion and certain other information with respect to the Mortgage Loans. In addition, the Depositor will, with respect to each Mortgage Loan, deliver or cause to be delivered to the Trustee (i) the Mortgage Note endorsed, without recourse, to the order of the Trustee (or the original assignment and lost note affidavit in those cases where HUD did not deliver an original Mortgage Note to the Mortgage Loan Seller), (ii) the Mortgage with evidence of recording indicated thereon (or a copy of such Mortgage certified by the related recording office) and (iii) an assignment of the Mortgage to the Trustee in recordable form. The Master Servicer will promptly cause the S-55
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assignment of each related Mortgage Loan to be recorded in the appropriate public office for real property records. The Trustee, will hold such documents in trust for the benefit of the Certificateholders. The Trustee will review the Mortgage Note described in clause (i) above prior to the Closing Date. If such document is found to be missing or defective in any material respect, the Trustee shall immediately notify the Master Servicer and the Depositor and the Master Servicer shall immediately notify the Mortgage Loan Seller. If the Mortgage Loan Seller cannot cure the omission or defect, the Mortgage Loan Seller will be obligated to repurchase the related Mortgage Loan from the Trust Fund at the Purchase Price or substitute for such Mortgage Loan; provided that (i) the Mortgage Loan Seller's obligation shall only arise in the event of a material adverse effect and (ii) any substitution shall be to the same extent permitted with respect to a breach of a representation and warranty as provided under "The Mortgage Pool--Representations and Warranties". There can be no assurance that the Mortgage Loan Seller will fulfill this repurchase or substitution obligation. This repurchase or substitution obligation constitutes the sole remedy available to the Certificateholders or the Trustee for omission of, or a material defect in, a Mortgage Note. THE MASTER SERVICER The information set forth in the following paragraphs has been provided by the Master Servicer. None of the Depositor, the Trustee, the Fiscal Agent or any of their respective affiliates have made or will make any representation as to the accuracy or completeness of such information. Ocwen Federal Bank FSB, a federally-chartered savings bank, headquartered in Fort Lee, New Jersey will serve as the Master Servicer for the Mortgage Loans pursuant to the Agreement (in such capacity, the "Master Servicer"). The Master Servicer is a wholly-owned subsidiary of Ocwen Financial Corporation, a public financial services holding company. At December 31, 1996, the Master Servicer had approximately $2.402 billion in assets, approximately $2.174 billion in liabilities and approximately $228 million in equity. At December 31, 1996, the Master Servicer's tangible and leveraged capital ratio was approximately 9.33% and its risk-based capital ratio was approximately 12.85%. For the year ended December 31, 1996, the Master Servicer's income from continuing operations was approximately $49 million. The major business of the Master Servicer has been the resolution of nonperforming single-family, multi-family and commercial mortgage loan portfolios acquired from the Resolution Trust Corporation, from private investors, and most recently, from HUD through HUD's auction of defaulted FHA Loans. The Master Servicer is a market leader in the nonperforming mortgage loan acquisition business, having acquired in excess of $3.7 billion of such mortgage loans over the past five years. The following table sets forth, for the non-conforming credit mortgage loan (the "BCD Mortgage Loan") servicing portfolio serviced by the Master Servicer as of December 31, 1995, and as of December 31, 1996, certain information relating to the delinquency experience (including loans in foreclosure included in the Master Servicer's servicing portfolio (which portfolio does not include mortgage loans that are subserviced by others)) at the end of the indicated periods. The indicated periods of delinquency are based on the number of days past due on a contractual basis. No mortgage loan is considered delinquent for these purposes until it is one month past due on a contractual basis. The information contained in the monthly remittance reports which will be sent to investors will be compiled using the same methodology as that used to compile the information contained in the table below. S-56
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[Enlarge/Download Table] DELINQUENCIES AND FORECLOSURES (DOLLARS IN THOUSANDS) As of As of December 31, 1995 December 31, 1996 ------------------------------------------- ----------------------------------------------- Percent Percent Percent Percent By No. By By No. By By No. By By No. By of Dollar of Dollar of Dollar of Dollar Loans Amount Loans Amount Loans Amount Loans Amount ----- ------ ----- ------ ----- ------ ----- ------ Total Portfolio................ 1,694 $ 194,717 N/A N/A 2,834 $ 305,085 N/A N/A Period of Delinquency: 30-59 Days................ 35 3,201 2.07 1.64 107 10,554 3.78 3.46 60-89 Days................ 18 2,157 1.06 1.11 38 4,321 1.34 1.42 90 days or more........... 37 5,676 2.18 2.91 138 17,969 4.87 5.89 -- ---------- ----- ----- --- ---------- ----- ------ Total Delinquent Loans......... 90 $ 11,034 5.31% 5.67% 283 $ 32,844 9.99% 10.77% == ========== ===== ===== === ========== ===== ====== Loans in Foreclosure(1)........ 29 $ 4,292 1.71% 2.20% 136 $ 17,805 4.80% 5.84% ------------------------- (1) Loans in foreclosure are also included under the heading "Total Delinquent Loans." ------------------------------------ The following tables set forth, for the BCD Mortgage Loan servicing portfolio serviced by the Master Servicer as of December 31, 1995, and as of December 31, 1996, certain information relating to the foreclosure experience of BCD Mortgage Loans included in the Master Servicer's servicing portfolio (which portfolio does not include mortgage loans that are subserviced by others) at the end of the indicated periods. REAL ESTATE OWNED (DOLLARS IN THOUSANDS) As of As of December 31, 1995 December 31, 1996 ----------------------- ----------------------- By No. By By No. By of Dollar of Dollar Loans Amount Loans Amount ---------- ----------- ---------- ----------- Total Portfolio .......... 1,694 $194,717 2,834 $305,085 Foreclosed Loans(1) ...... 0 0 34 3,329 Foreclosure Ratio(2) ..... 0.00% 0.00% 1.20% 1.09% ------------------------ (1) For the purposes of these tables, Foreclosed Loans means the principal balance of mortgage loans secured by mortgaged properties the title to which has been acquired by the Master Servicer. (2) The Foreclosure Ratio is equal to the aggregate principal balance or number of Foreclosed Loans divided by the aggregate principal balance, or number, as applicable, of mortgage loans in the Total Portfolio at the end of the indicated period. ----------------------------------- LOAN GAIN/(LOSS) EXPERIENCE (DOLLARS IN THOUSANDS) Year Ended Year Ended December 31, 1995 December 31, 1996 ----------------- ----------------- By Dollar By Dollar Amount Amount ----------------- ----------------- Total Portfolio(1) ....................... $194,717 $305,085 Net Gain/(Losses)(2) ..................... $ 0 16 Net Gain/(Losses) as a Percentage of Total Portfolio ............................. 0.00% 0.01% ---------- (1) "Total Portfolio" on the date stated above is the principal balances of the Mortgage Loans outstanding on the last day of the period. (2) "Net Gain/(Losses)" are actual gains (losses) incurred on liquidated properties and shortfall payoffs for each respective period. Gains (losses) are calculated after repayment of all principal, prepayment penalties, foreclosure costs and accrued interest to date of liquidation. However, premiums paid to purchase the loans and other direct origination costs are not included in the calculation. S-57
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It is unlikely that the delinquency experience of the Mortgage Loans comprising the Mortgage Pool will correspond to the delinquency experience of the Master Servicer's mortgage portfolio set forth in the foregoing tables. The Mortgage Loans comprising the Mortgage Pool are not BCD Mortgage Loans but are Mortgage Loans that were the subject of the HUD Assignment Program as described herein. The Master Servicer does not have significant historical delinquency, bankruptcy, foreclosure or default experience that may be referred to for purposes of estimating the future delinquency and loss experience on mortgage loans subject to the HUD Assignment Program and the actual performance may differ substantially from the performance of the BCD Mortgage Loan servicing portfolio shown above. It should be noted that if the residential real estate market should experience an overall decline in property values, the actual rates of delinquencies and foreclosures could be higher than those previously experienced by the Master Servicer. In addition, adverse economic conditions may affect the timely payment by Mortgagors of scheduled payments of principal and interest and payments of Arrearage on the Mortgage Loans and, accordingly, the actual rates of delinquencies and foreclosures with respect to the Mortgage Pool. THE TRUSTEE LaSalle National Bank, a nationally chartered bank, will act as Trustee for the Certificates pursuant to the Agreement. The Trustee's offices for notices under the Agreement are located at 135 South LaSalle Street, Suite 1740, Chicago, Illinois 60674-4107, Attention: ABS Trust Services Group SBMS VII 1997-HUD1. The principal compensation to be paid to the Trustee in respect of its obligations under the Agreement will be equal to accrued interest at the Trustee Fee Rate of 0.00375% per annum on the Legal Balance of each Mortgage Loan. Since the Trustee's primary compensation is a percentage of the Legal Balance of each Mortgage Loan, such amounts will decrease in accordance with the amortization schedule of the Mortgage Loans. The Agreement will provide that the Trustee and any director, officer, employee or agent of the Trustee will be indemnified by the Trust Fund and will be held harmless against any loss, liability or expense (not including expenses, disbursements and advances incurred or made by the Trustee, including the compensation and the expenses and disbursements of its agents and counsel, in the ordinary course of the Trustee's performance in accordance with the provisions of the Agreement) incurred by the Trustee arising out of or in connection with the acceptance or administration of its obligations and duties under the Agreement, other than any loss, liability or expense (i) resulting from the Master Servicer's actions or omissions in connection with the Agreement and the Mortgage Loans, (ii) that constitutes a specific liability of the Trustee under the Agreement or (iii) incurred by reason of willful misfeasance, bad faith or negligence in the performance of the Trustee's duties under the Agreement or as a result of a breach, or by reason of reckless disregard, of the Trustee's obligations and duties under the Agreement. The Trustee makes no representations as to the validity or sufficiency of the Agreement, the Certificates or any Mortgage Loan or related document and is not accountable for the use or application by or on behalf of the Master Servicer of any funds paid to the Master Servicer or its designee in respect of the Certificates or the Mortgage Loans, or deposited into or withdrawn from the Certificate Account held by the Master Servicer or any other account by or on behalf of the Master Servicer. If no Master Servicer event of default has occurred and is continuing, the Trustee is required to perform only those duties specifically required under the Agreement. However, upon receipt of the various certificates, reports or other instruments required to be furnished to it, the Trustee is required to examine such documents and to determine whether they conform to the requirements of the Agreement. If the Master Servicer defaults in its obligation to make any P&I Advance, the Trustee will be obligated to terminate the Master Servicer and make any such P&I Advance required to be but not made by the Master Servicer under the Agreement, provided that the Trustee will not be obligated to make any P&I Advance that it deems to be nonrecoverable. The Trustee will be entitled to reimbursement for each P&I Advance made by it in the same manner and to the same extent, but prior to, the Master Servicer. S-58
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THE FISCAL AGENT ABN AMRO Bank N.V., a Netherlands banking corporation and the corporate parent of the Trustee, will act as Fiscal Agent for the Trust Fund and will be obligated to make any P&I Advance required to be but not made by the Trustee under the Agreement, provided that the Fiscal Agent will not be obligated to make any P&I Advance that it deems to be nonrecoverable. The Fiscal Agent will be entitled to reimbursement for each P&I Advance made by it in the same manner and to the same extent, but prior to, the Master Servicer and the Trustee. The Fiscal Agent will be entitled to various rights, protections and indemnities similar to those afforded the Trustee. See "--The Trustee" above. The Trustee will be responsible for payment of the compensation of the Fiscal Agent. As of June 30, 1996, the Fiscal Agent reported assets of approximately $385 billion. SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES The principal compensation to be paid to the Master Servicer in respect of its servicing activities for the Certificates will be equal to accrued interest at the Servicing Fee Rate of 0.50% per annum with respect to each Mortgage Loan on the Unpaid Principal Balance of such Mortgage Loan and 0.40% pre annum with respect to each Mortgage Loan on the Arrearage of such Mortgage Loan. Since the Master Servicer's primary compensation is a function of the Unpaid Principal Balance and Arrearage of each Mortgage Loan, such amounts will decrease in accordance with the amortization schedule of the Mortgage Loans. As additional servicing compensation, the Master Servicer is entitled to retain all assumption fees, prepayment penalties and late payment charges, to the extent collected from mortgagors, together with any interest earned on funds held in the Certificate Account and any escrow accounts. The Master Servicer is obligated to offset any Prepayment Interest Shortfall on any Distribution Date (payments made by the Master Servicer in satisfaction of such obligation, "Compensating Interest") to the extent of its aggregate servicing compensation for such Distribution Date described in the preceding two sentences. The Master Servicer is obligated to pay certain insurance premiums and certain ongoing expenses associated with the Mortgage Pool and incurred by the Master Servicer in connection with its responsibilities under the Agreement, including without limitation, payment of the fees and disbursements of the Trustee, any Sub-Servicer and independent accountants and, is entitled to reimbursement therefor as provided in the Agreement. With respect to any expense incurred by the Master Servicer for the protection of a Mortgage Loan or mortgaged property for which the Master Servicer is entitled to reimbursement as provided under the Agreement, if the Master Servicer determines that such reimbursement will be nonrecoverable from related Liquidation Proceeds, then the Master Servicer may reimburse itself from amounts on deposit in the Certificate Account, such right being prior to the rights of Certificateholders to receive distributions of amounts on deposit in the Certificate Account. See "Description of the Certificates--Retained Interest; Servicing or Administration Compensation and Payment of Expenses" in the Prospectus for information regarding expenses payable by the Master Servicer and "Certain Federal Income Tax Consequences" herein regarding certain taxes payable by the Master Servicer. SALE OF DEFAULTED MORTGAGE LOANS If consent to the operation of the provisions described below shall have been given by the Master Servicer, then with respect to any Mortgage Loan that is delinquent in excess of the number of days provided in the Agreement, (i) the holder of a majority in Percentage Interest of the Class B-6 Certificates, or if the Certificate Balance of the Class B-6 Certificates has been reduced to zero, the holder of a majority in Percentage Interest of the Class B-5 Certificates (the "Directing Holder"), may direct the Master Servicer to commence foreclosure and (ii) prior to commencement of foreclosure of any Mortgage Loan, the Master Servicer will notify the Directing Holder of such proposed foreclosure in order to permit the Directing Holder the right to instruct the Master Servicer to delay the proposed foreclosure. In the case of the exercise by the Directing Holder of the right to direct the Master Servicer pursuant to clause (ii) above, the Directing Holder will provide to the Master Servicer an S-59
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appraisal of the related Mortgaged Property (the "Loan Appraisal"). Within two business days of instructing the Master Servicer to commence or delay foreclosure, the Directing Holder will deposit in a segregated account maintained with the Master Servicer (the "Collateral Account") for the benefit of the Certificateholders an amount equal to 125% of the Valuation (as defined below) of the related Mortgage Loan plus three months' interest at the related Mortgage Rate. While foreclosure is delayed pursuant to the direction of the Directing Holder, the Directing Holder may direct the Master Servicer to proceed with foreclosure at anytime. With respect to any election by the Directing Holder to delay foreclosure, the "Valuation" of any Mortgage Loan shall be the greater of the outstanding principal balance thereof and the fair market value thereof as provided in the related Loan Appraisal. With respect to any election by the Directing Holder to commence foreclosure, the "Valuation" of any Mortgage Loan shall equal the outstanding principal balance thereof. Upon the liquidation of the related Mortgage Loan or the disposition of the related Mortgaged Property in accordance with the requirements set forth in the Agreement, the Master Servicer will calculate the amount, if any, by which the Valuation exceeds the actual sales price obtained for the related Mortgage Loan or the Mortgaged Property, as the case may be, and the Master Servicer will withdraw the amount of such excess from the Collateral Account and deposit such amount into the Certificate Account. If the amount realized pursuant to the above-described procedures exceeds the Valuation, the Master Servicer will deposit immediately upon realization from such proceeds such excess into the Certificate Account. The Master Servicer shall apply all such amounts as additional liquidation proceeds pursuant to the Agreement. If any election to delay foreclosure is to be extended for a period in excess of three months from the Directing Holder's direction to the Master Servicer to delay foreclosure, the Directing Holder will be required to deposit in the Collateral Account in advance the amount of each additional month's interest at the related Mortgage Rate. If the above-described procedures do not result in the Mortgage Loan being brought current within six months of the Directing Holder's direction to the Master Servicer to delay foreclosure, the Directing Holder will be required to either (i) purchase the Mortgage Loan for a purchase price equal to the fair market value thereof as shown on the Loan Appraisal or (ii) allow the Master Servicer to proceed with the commencement of foreclosure. Should the Directing Holder elect to purchase the Mortgage Loan, the Master Servicer will first apply funds on deposit in the Collateral Account towards such purchase price; any shortage will be paid by the Directing Holder and any excess will be returned to it. With respect to any Mortgage Loan as to which the Directing Holder has directed the Master Servicer to commence foreclosure or to delay foreclosure, the Master Servicer may withdraw from the Collateral Account from time to time amounts necessary to reimburse the Master Servicer for all P&I Advances and servicing advances in accordance with the Agreement. In the event that the related Mortgage Loan is brought current, the amounts so withdrawn from the Collateral Account by the Master Servicer as reimbursement for P&I Advances or servicing advances shall be redeposited therein by the Master Servicer and the Master Servicer shall be reimbursed as otherwise provided in the Agreement. Following foreclosure, liquidation, disposition or the bringing current of the related Mortgage Loan, as applicable, all amounts remaining in the Collateral Account will be released to the Directing Holder. In the event that amounts on deposit in the Collateral Account are insufficient to cover the withdrawals that the Master Servicer is entitled to make for P&I Advances, servicing advances or for deposit into the Certificate Account, the Directing Holder will be obligated to pay such amounts to the Master Servicer for deposit into the Collateral Account. The Directing Holder may direct that amounts on deposit in the Collateral Account be invested in Permitted Investments. Interest or other income earned on funds in the Collateral Account will be paid to the Directing Holder and the amount of any loss on such funds will be immediately deposited into the Collateral Account by the Directing Holder when realized. The Directing Holder will grant to the Master Servicer for the benefit of the Certificateholders a security interest in the Collateral Account, all amounts deposited therein or invested in Permitted Investments, and all proceeds of the foregoing. S-60
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VOTING RIGHTS With respect to any date of determination, (i) 98% of all the Voting Rights shall be allocated among the holders of the P&I Certificates and the Class A-WAC Certificates on a PRO RATA basis based on the then-current Certificate Balances of their respective Certificates (provided, however, that if the Certificate Balance of the Class A-WAC Certificates is reduced to zero before the Notional Amount of such class is reduced to zero, then 97% of all the Voting Rights shall be allocated among holders of the P&I Certificates on a PRO RATA basis based on the then-current Certificate Balances of their respective Certificates and 1% of all the Voting Rights shall be allocated to the holders of the Class A-WAC Certificates), (ii) 1% of all the Voting Rights shall be allocated to the holders of the Class IO Certificates and (iii) 1% of all the Voting Rights shall be allocated among the holders of the Residual Certificates. The Voting Rights allocated to each class of REMIC Regular Certificates shall be allocated among all holders of each such class in proportion to the outstanding Certificate Balance (or, in the case of the Class IO Certificates and, if the Certificate Balance of the Class A-WAC Certificates has been reduced to zero, the Class A-WAC Certificates, the outstanding Notional Amount) of such Certificates. TERMINATION The obligations created by the Agreement will terminate upon the payment to Certificateholders of all amounts held in the Certificate Account or by the Master Servicer and required to be paid to them pursuant to the Agreement following the final payment or other liquidation of the last Mortgage Loan subject thereto or the disposition of all property acquired upon foreclosure of any such Mortgage Loan. In addition, the Master Servicer will have the right to purchase all remaining Mortgage Loans and any properties acquired in respect thereof and thereby effect early retirement of the Certificates on any Distribution Date following the Due Period during which the aggregate Legal Balance of the Mortgage Loans and such properties, after taking into account all payments made in respect thereof through the last day of the month preceding such date, is less than 5% of the aggregate Legal Balance of the Mortgage Loans as of the Cut-off Date. In the event the Master Servicer exercises such option, the purchase price payable in connection therewith generally will be equal to par (including any Arrearages) plus accrued interest on the Unpaid Principal Balance for each Mortgage Loan at the related Mortgage Rate to but not including the first day of the month in which such repurchase price is distributed, and the portion of the purchase price allocable to the Offered Certificates will be, to the extent of available funds (i) in the case of the Certificates of any class, other than the Class IO Certificates, 100% of the then outstanding Certificate Balance thereof, plus (ii) in the case of the Certificates of any class, one month's interest on the then outstanding Certificate Balance or Notional Amount thereof, as applicable, at the then applicable Pass-Through Rate for such class plus any previously accrued but unpaid interest thereon. In no event will the trust created by the Agreement continue beyond the expiration of 21 years from the death of the survivor of the persons named in the Agreement. See "Description of the Certificates--Termination" in the Prospectus. CERTAIN FEDERAL INCOME TAX CONSEQUENCES Three separate elections will be made to treat designated portions of the Trust Fund as real estate mortgage investment conduits ("REMIC I", "REMIC II" and "REMIC III", respectively, and each a "REMIC") for federal income tax purposes. Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood, counsel to the Depositor, will deliver its opinion generally to the effect that, assuming compliance with all provisions of the Agreement, for federal income tax purposes, REMIC I and REMIC II will each qualify as a REMIC under Sections 860A through 860G of the Internal Revenue Code of 1986 (the "Code"). The assets of REMIC I will consist of the Mortgage Loans, any properties acquired on behalf of the Certificateholders and the Certificate Account. For federal income tax purposes, (a) the separate S-61
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non-certificated regular interests in REMIC I will be the "regular interests" in REMIC I and will constitute the assets of REMIC II, (b) the Class R-I Certificates will evidence the sole class of "residual interests" in REMIC I, (c) the separate non-certificated regular interests in REMIC II will be the "regular interests" in REMIC II and will constitute the assets of REMIC III, (d) the Class R-II Certificates will evidence the sole class of "residual interests" in REMIC II, (e) the REMIC Regular Certificates will evidence the "regular interests" in REMIC III and will be generally treated as representing ownership of debt instruments of REMIC III and (f) the Class R-III Certificates will evidence the sole class of "residual interests" in REMIC III. See "Certain Federal Income Tax Consequences--REMIC-Classification of REMICs" in the Prospectus. For federal income tax reporting purposes, the Class IO Certificates and Class A-WAC will, but the other Classes of Offered Certificates will not, be issued with "original issue discount". The prepayment assumption that will be used in determining the rate of accrual of original issue discount, premium and market discount, if any, for federal income tax purposes will be based on the assumption that subsequent to the date of any determination the Mortgage Loans will prepay at a constant rate of 8% CPR. No representation is made that the Mortgage Loans will prepay at such rate or at any other rate. See "Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount" in the Prospectus. The Internal Revenue Service (the "IRS") has issued regulations (the "OID Regulations") under Sections 1271 to 1275 of the Code generally addressing the treatment of debt instruments issued with original issue discount. Purchasers of the Class IO Certificates and the Class A-WAC Certificates should be aware that the OID Regulations do not adequately address certain issues relevant to, or are not applicable to, securities such as the Class IO Certificates and the Class A-WAC Certificates. In addition, there is considerable uncertainty concerning the application of the OID Regulations to REMIC Regular Certificates that provide for payments based on a variable rate such as the Class IO Certificates and the Class A-WAC Certificates. Because of the uncertainty concerning the application of Section 1272(a)(6) of the Code to such Certificates and because the rules of the OID Regulations relating to debt instruments having a variable rate of interest are limited in their application in ways that could preclude their application to such Certificates even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that the Class IO Certificates and the Class A-WAC Certificates should be treated as issued with original issue discount or should be governed by the rules applicable to debt instruments having contingent payments or by some other method not yet set forth in regulations. Prospective purchasers of the Class IO Certificates and the Class A-WAC Certificates are advised to consult their tax advisors concerning the tax treatment of such Certificates. The OID Regulations suggest that original issue discount with respect to securities such as the Class A-WAC Certificates that represent multiple uncertificated REMIC regular interests, in which ownership interests will be issued simultaneously to the same buyer and which are required under the Pooling Agreement to be transferred together, should be computed on an aggregate method. In the absence of further guidance from the IRS, original issue discount with respect to the uncertificated regular interests represented by the Class A-WAC Certificates will be reported to the IRS and the Certificateholders on an aggregate method based on a single overall constant yield and the prepayment assumption stated above, treating all such uncertificated regular interests as a single debt instrument as set forth in the OID Regulations. If the method of computing original issue discount described in the Prospectus results in a negative amount for any period with respect to any a REMIC Regular Certificate issued with original issue discount (in particular, a Class IO Certificate or a Class A-WAC Certificate), the amount of original issue discount allocable to such period would be zero, and such Certificateholder will be permitted to offset such amounts only against the respective future income (if any) from such Certificate. Although uncertain, a Certificateholder may be permitted to deduct a loss to the extent that his or her respective remaining basis in such Certificate exceeds the maximum amount of future payments to which such Certificateholder is entitled, assuming no further prepayments of the Mortgage Loans. Although the matter is not free from doubt, any such loss might be treated as a capital loss. S-62
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The OID Regulations in some circumstances permit the holder of a debt instrument to recognize original issue discount under a method that differs from that of the issuer. Accordingly, it is possible that holders of Offered Certificates issued with original issue discount may be able to select a method for recognizing original issue discount that differs from that used in preparing reports to Certificateholders and the IRS. Prospective purchasers of Offered Certificates issued with original issue discount are advised to consult their tax advisors concerning the tax treatment of such Certificates in this regard. Certain classes of Certificates may be treated for federal income tax purposes as having been issued with a premium. Certificateholders may elect to amortize such premium under a constant yield method in which case such amortizable premium will generally be allocated among the interest payments on such Certificates and will be applied as an offset against such interest payments. See "Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium" in the Prospectus. The Offered Certificates will be treated as assets described in Section 7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A) of the Code, generally in the same proportion that the assets of the REMIC underlying such Certificates would be so treated. In addition, interest on the Offered Certificates will be treated as "interest on obligations secured by mortgages on real property" under Section 856(c)(3)(B) of the Code, generally to the extent that the Offered Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of the Code. The Offered Certificates also will be treated as "qualified mortgages" under Section 860G(a)(3) of the Code. See "Certain Federal Income Tax Consequences-REMICs-Characterization of Investments in REMIC Certificates" in the Prospectus. It is not anticipated that REMIC I, REMIC II or REMIC III will engage in any transactions that would subject it to the prohibited transactions tax as defined in Section 860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of the Code or the tax on net income from foreclosure property as defined in Section 860G(c) of the Code. However, in the event that any such tax is imposed on REMIC I, REMIC II or REMIC III, such tax will be borne (i) by the Trustee, if the Trustee has breached its obligations with respect to REMIC compliance under the Agreement, (ii) by the Master Servicer, if the Master Servicer has breached its obligations with respect to REMIC compliance under the Agreement and (iii) otherwise by the Trust Fund, with a resulting reduction in amounts otherwise distributable to holders of the related Certificates. See "Description of the Certificates-General" and "Certain Federal Income Tax Consequences--REMICs--Prohibited Transactions and Other Possible REMIC Taxes" in the Prospectus. The responsibility for filing annual federal information returns and other reports will be borne by the Trustee. See "Certain Federal Income Tax Consequences--REMICs--Reporting and Other Administrative Matters" in the Prospectus. For further information regarding the federal income tax consequences of investing in the Offered Certificates, see "Certain Federal Income Tax Consequences--REMICs" in the Prospectus. METHOD OF DISTRIBUTION Subject to the terms and conditions set forth in the Underwriting Agreement, dated April 29, 1997 (the "Underwriting Agreement"), the Depositor has agreed to sell, and Salomon Brothers Inc (the "Underwriter") has agreed to purchase the Offered Certificates. The Underwriter is obligated to purchase all Offered Certificates of the respective classes offered hereby if they purchase any. The Underwriter is an affiliate of the Depositor. Distribution on the Offered Certificates will be made from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale. Proceeds to the Depositor from the sale of the Offered Certificates, before deducting expenses payable by the Depositor, will be S-63
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102.6895% of the aggregate initial Certificate Balance of the Offered Certificates (other than the Class IO Certificates), plus accrued interest from April 1, 1997 on the Offered Certificates. In connection with the purchase and sale of the Offered Certificates, the Underwriter may be deemed to have received compensation from the Depositor in the form of underwriting discounts. The Underwriting Agreement provides that the Depositor will indemnify the Underwriter against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended, or will contribute to payments the Underwriter may be required to make in respect thereof. SECONDARY MARKET There can be no assurance that a secondary market for the Offered Certificates will develop or, if it does develop, that it will continue. The primary source of information available to investors concerning the Offered Certificates will be the monthly statements discussed in the Prospectus under "Description of the Certificates--Reports to Certificateholders", which will include information as to the outstanding principal balance of the Offered Certificates and the status of the applicable form of credit enhancement. There can be no assurance that any additional information regarding the Offered Certificates will be available through any other source. In addition, the Depositor is not aware of any source through which price information about the Offered Certificates will be generally available on an ongoing basis. The limited nature of such information regarding the Offered Certificates may adversely affect the liquidity of the Offered Certificates, even if a secondary market for the Offered Certificates becomes available. LEGAL OPINIONS Certain legal matters relating to the Offered Certificates will be passed upon for the Depositor and the Underwriter by Thacher Proffitt & Wood, New York, New York. RATINGS It is a condition to the issuance of the Certificates that each class of Senior Certificates be rated not lower than "AAA" by Duff & Phelps Credit Rating Co. ("DCR") and "Aaa" by Moody's Investors Service, Inc. ("Moody's"), the Class B-1 Certificates be rated not lower than "AA" by DCR and "Aa2" by Moody's, the Class B-2 Certificates be rated not lower than "A" by DCR and "A2" by Moody's and the Class B-3 Certificates be rated not lower than "BBB" by DCR and "Baa2" by Moody's. The ratings of DCR and Moody's assigned to mortgage pass-through certificates address the likelihood of the receipt by Certificateholders of all distributions to which such Certificateholders are entitled. The rating process addresses structural and legal aspects associated with the Certificates, including the nature of the underlying mortgage loans. The ratings assigned to mortgage pass-through certificates do not represent any assessment of the likelihood that principal prepayments will be made by the mortgagors or the degree to which such prepayments will differ from that originally anticipated. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each security rating should be evaluated independently of any other security rating. In the event that the ratings initially assigned to the Offered Certificates are subsequently lowered for any reason, no person or entity is obligated to provide any additional credit support or credit enhancement with respect to the Offered Certificates. The Depositor has not requested that any rating agency rate any class of the Offered Certificates other than as stated above. However, there can be no assurance as to whether any other rating agency will rate any class of the Offered Certificates, or, if it does, what rating would be assigned by S-64
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any such other rating agency. A rating on any class of the Offered Certificates by another rating agency, if assigned at all, may be lower than the ratings assigned to such classes of the Offered Certificates as stated above. LEGAL INVESTMENT The Class A and B-1 Certificates will constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as they are rated not lower than the second highest rating category by a Rating Agency (as defined in the Prospectus), and, as such, will be legal investments for certain entities to the extent provided in SMMEA. SMMEA, however, provides for state limitation on the authority of such entities to invest in "mortgage related securities" provided that such restrictive legislation was enacted prior to October 3, 1991. Certain states have enacted legislation which overrides the preemption provisions of SMMEA. Institutions whose investment activities are subject to legal investment laws and regulations or to review by certain regulatory authorities may be subject to restrictions on investment in the Offered Certificates. The Federal Financial Institutions Examination Council, which includes the Board of Governors of the Federal Reserve System (the "FRB"), the Federal Deposit Insurance Corporation (the "FDIC"), the National Credit Union Administration (the "NCUA"), the Comptroller of the Currency (the "OCC") and the Office of Thrift Supervision (the "OTS"), has issued a supervisory policy statement (the "Policy Statement") that is applicable to all depository institutions (to the extent adopted by their respective federal regulators), setting forth guidelines for and imposing significant restrictions on investments in "high-risk mortgage securities". The Policy Statement generally indicates that a mortgage derivative product will be deemed to be high-risk if (i) it has a weighted average life greater than 10 years given a reasonable prepayment assumption or (ii) it exhibits greater average life volatility or greater price volatility than a benchmark fixed-rate thirty-year mortgage backed pass-through security. According to the Policy Statement, prior to purchase, a depository institution would be required to determine whether a mortgage derivative product that it is considering acquiring is high-risk, and if so that the proposed acquisition would reduce the institution's overall interest rate risk. Reliance on analysis and documentation obtained from a securities dealer or other outside party without internal analysis by the institution would be unacceptable, and a failure to adhere to the monitoring, reporting and diligence requirements would be considered an unsafe and unsound practice. There can be no assurance as to whether the Offered Certificates would be treated as high-risk under the Policy Statement. The Policy Statement has been adopted by the FRB, the FDIC, the OCC, the OTS and the NCUA. In addition, the NCUA has issued regulations governing federal credit union investments which prohibit investment in certain specified types of securities, which may include the Offered Certificates. The NCUA has indicated that its regulations will take precedence over the Policy Statement. Similar policy statements and regulations have been issued by other regulators having jurisdiction over other types of depository institutions. Any such institution should consult its own legal advisors in determining whether and to what extent there may be restrictions on its ability to invest in the Offered Certificates. See "Legal Investment" in the Prospectus. ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code impose certain requirements on employee benefit plans and on certain other retirement plans and arrangements, including individual retirement accounts and annuities, Keogh plans and bank collective investment funds and insurance company general and separate accounts in which such plans, accounts or arrangements are invested ("Plans") subject to ERISA and the Code and on persons who are fiduciaries with respect to such Plans. A fiduciary of a Plan or any person investing Plan Assets of any Plan, as defined under "ERISA Considerations" in the Prospectus, should carefully review with S-65
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its legal advisors whether the purchase, sale or holding of the Offered Certificates could give rise to or result in a transaction prohibited or not otherwise permissible under ERISA or Section 4975 of the Code. Because the purchase, sale and holding of the Offered Certificates by, on behalf of or with Plan Assets of any Plan may not qualify for exemptive relief under the Exemption (as described in the Prospectus), a Plan, a trustee or other person acting on behalf of any Plan or any person using Plan Assets to purchase the Offered Certificates (other than the Class IO Certificates) will be deemed to have represented that the purchase of such Offered Certificates is permissible under applicable law, will not constitute or result in any non-exempt prohibited transaction under ERISA or Section 4975 of the Code, will not subject the Depositor, the Master Servicer, the Trustee, the Fiscal Agent or the Trust Fund to any obligation in addition to those undertaken in the Agreement and at least one of the following has been met: (a) the source of funds used to purchase such Offered Certificates is an "insurance company general account" (as such term is defined in Prohibited Transaction Class Exemption ("PTCE") 95-60), the conditions set forth in Sections I and III of PTCE 95-60 have been satisfied and will continue to be satisfied and there is no Plan with respect to which the amount of such general account's reserves and liabilities for contracts held by or on behalf of such Plan and all other Plans maintained by the same employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by the same employee organization exceed 10% of the total of all reserves and liabilities of such general account (as determined under PTCE 95-60) as of the date of the acquisition of such Offered Certificates; (b) the purchaser is an "investment fund" described in PTCE 84-14, the conditions set forth in PTCE 84-14 have been satisfied and will continue to be satisfied and the purchase and holding of Offered Certificates by or on behalf of the purchaser are exempt under PTCE 84-14; or (c) the investment is being made by an insurance company, insurance service or insurance organization (an "Insurer") qualified to do business in the applicable state and the Insurer has issued to the Plan a "guaranteed benefit policy" within the meaning of Section 401(b)(2) of ERISA such that the assets of the Plan are deemed to include such policy but are not deemed to include any assets of such Insurer pursuant to Section 401(b)(2) of ERISA. The transfer of any Class IO Certificates to a Plan, a trustee or other person acting on behalf of any Plan or any person using Plan Assets to purchase such Class IO Certificates will not be registered by the Trustee unless the purchaser thereof provides the Depositor, the Trustee, the Fiscal Agent, the Master Servicer and the Trust Fund with either: (i) an opinion of counsel satisfactory to the Depositor, the Trustee, the Fiscal Agent, the Master Servicer and the Trust Fund, which opinion will not be at the expense of the Depositor, the Trustee, the Fiscal Agent, the Master Servicer and the Trust Fund, to the effect that the purchase of such Class IO Certificates is permissible under applicable law, will not constitute or result in any non-exempt prohibited transaction under ERISA or Section 4975 of the Code and will not subject the Depositor, the Master Servicer, the Trustee, the Fiscal Agent or the Trust Fund to any obligation in addition to those undertaken in the Agreement; or (ii) a certification of facts substantially to the effect that the purchase of such Class IO Certificates is permissible under applicable law, will not constitute or result in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code, will not subject the Depositor, the Trustee, the Fiscal Agent, the Master Servicer or the Trust Fund to any obligation in addition to those undertaken in the Agreement and at least one of the following has been met: (a) the source of funds used to purchase such Class IO Certificates is an "insurance company general account" (as such term is defined in Prohibited Transaction Class Exemption ("PTCE") 95-60), the conditions set forth in Sections I and III of PTCE 95-60 have been satisfied and will continue to be satisfied and there is no Plan with respect to which the amount of such general account's reserves and liabilities for contracts held by or on behalf of such Plan and all other Plans maintained by the same employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by the same employee organization exceed 10% of the total of all reserves and liabilities of such general account (as determined under PTCE 95-60) as of the date of the acquisition of such Offered Certificates; (b) the purchaser is an "investment fund" described in PTCE 84-14, the conditions set forth in PTCE 84-14 have been satisfied and will continue to be satisfied and the purchase and holding of Offered Certificates by or on behalf of the purchaser are exempt under PTCE S-66
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84-14; or (c) the investment is being made by an insurance company, insurance service or insurance organization (an "Insurer") qualified to do business in the applicable state and the Insurer has issued to the Plan a "guaranteed benefit policy" within the meaning of Section 401(b)(2) of ERISA such that the assets of the Plan are deemed to include such policy but are not deemed to include any assets of such Insurer pursuant to Section 401(b)(2) of ERISA. Any Plan fiduciary that proposes to cause a Plan to purchase an Offered Certificate should consult with its counsel with respect to the potential applicability to such investment of the fiduciary responsibility and prohibited transaction provisions of ERISA and the Code to the proposed investment. For further information regarding the ERISA considerations of investing in the Offered Certificates, see "ERISA Considerations" in the Prospectus. S-67
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[Enlarge/Download Table] PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION % of Aggregate Number Aggregate Original Original Range $ Of Loans Principal Balance Principal Balance ------- -------- ----------------- ----------------- 1.00 to 19,999.99 1,304 $20,076,246 6.59% 20,000.00 to 29,999.99 1,001 24,540,126 8.06 30,000.00 to 39,999.99 869 30,413,667 9.99 40,000.00 to 49,999.99 891 40,101,412 13.17 50,000.00 to 59,999.99 781 42,905,348 14.09 60,000.00 to 69,999.99 727 47,127,134 15.48 70,000.00 to 79,000.00 489 36,475,108 11.98 80,000.00 to 89,999.99 335 28,300,864 9.30 90,000.00 to 99,999.99 206 19,253,717 6.32 100,000.00 to 109,999.99 76 7,931,595 2.61 110,000.00 to 119,999.99 25 2,883,125 0.95 120,000.00 to 129,999.99 29 3,633,691 1.19 130,000.00 to 139,999.99 1 131,929 0.04 140,000.00 to 222,080.00 4 642,989 0.21 ------------- --------------------- --------------------- Total 6,738 $304,416,950 100.00% ============= ===================== ===================== A-1
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[Enlarge/Download Table] UNPAID PRINCIPAL BALANCES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Number Principal Principal Pool Pool Principal Range $ of Loans Balance Balance Arrearage Arrearage Balance ------- ---------- --------------- ----------- ------------- ----------- ------------- 1.00 to 19,999.99 1986 $19,257,904 7.1% $1,911,456 3.6% 9.9% 20,000.00 to 29,999.99 655 16,497,798 6.1 2,607,874 4.9 15.8 30,000.00 to 39,999.99 817 28,756,767 10.6 5,253,852 9.8 18.3 40,000.00 to 49,999.99 834 37,609,005 13.8 7,587,334 14.2 20.2 50,000.00 to 59,999.99 788 43,346,807 15.9 8,662,735 16.2 20.0 60,000.00 to 69,999.99 666 43,202,674 15.8 9,016,769 16.8 20.9 70,000.00 to 79,999.99 438 32,729,700 12.0 7,055,217 13.2 21.6 80,000.00 to 89,999.99 338 28,708,258 10.5 6,426,025 12.0 22.4 90,000.00 to 99,999.99 101 9,567,617 3.5 2,233,356 4.2 23.3 100,000.00 to 109,999.99 61 6,323,667 2.3 1,372,692 2.6 21.7 110,000.00 to 119,999.99 26 2,969,607 1.1 737,395 1.4 24.8 120,000.00 to 129,999.99 25 3,116,263 1.1 675,561 1.3 21.7 130,000.00 to 139,999.99 1 138,317 0.1 44,923 0.1 32.5 140,000.00 to 209,000.00 2 350,386 0.1 0 0.0 0.0 ---------- --------------- ----------- ------------- ----------- ------------- Total 6,738 $272,574,770 100.0% $53,585,190 100.0% 19.7% =========== ================ =========== ============= =========== ============= Cut-off Date % of Cut-off Weighted Weighted Pool Legal Date Pool Average Average LTV Range $ Balance Legal Balance LTV (UPB) (Legal Balance) ------- -------------- -------------- ---------- -------------- 1.00 to 19,999.99 $21,169,360 6.5% 28.976% 33.870% 20,000.00 to 29,999.99 19,105,672 5.9 54.986 65.687 30,000.00 to 39,999.99 34,010,619 10.4 72.189 87.367 40,000.00 to 49,999.99 45,196,339 13.9 78.446 95.484 50,000.00 to 59,999.99 52,009,542 15.9 82.646 100.110 60,000.00 to 69,999.99 52,219,442 16.0 85.142 104.489 70,000.00 to 79,999.99 39,784,918 12.2 88.457 108.786 80,000.00 to 89,999.99 35,134,284 10.8 91.806 113.941 90,000.00 to 99,999.99 11,800,973 3.6 95.849 119.690 100,000.00 to 109,999.99 7,696,359 2.4 100.878 124.851 110,000.00 to 119,999.99 3,707,001 1.1 132.955 167.948 120,000.00 to 129,999.99 3,791,824 1.2 103.215 128.897 130,000.00 to 139,999.99 183,240 0.1 131.730 174.510 140,000.00 to 209,000.00 350,386 0.1 133.214 133.213 -------------- -------------- ---------- -------------- Total $326,159,960 100.0% 79.315% 97.549% ============== ============== ========== ============== A-2
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[Enlarge/Download Table] ARREARAGE AS A % OF UNPAID PRINCIPAL BALANCE OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal Arrearage Range (%) Of Loans Balance Balance Arrearage Arrearage Balance Balance ------------------- ------------ ------------ ------------ ------------ ------------ -------------- ------------ 0.00 2,018 $ 43,437,458 15.9% $ 0 0.0% 0.0% $ 43,437,458 0.01 to 5.00 632 20,937,932 7.7 491,986 0.9 2.3 21,429,917 5.01 to 10.00 450 21,108,367 7.7 1,586,160 3.0 7.5 22,694,527 10.01 to 15.00 506 25,134,554 9.2 3,136,227 5.9 12.5 28,270,781 15.01 to 20.00 582 30,640,953 11.2 5,322,909 9.9 17.4 35,963,861 20.01 to 25.00 564 29,540,958 10.8 6,665,050 12.4 22.6 36,206,008 25.01 to 30.00 565 30,590,125 11.2 8,377,703 15.6 27.4 38,967,828 30.01 to 35.00 514 28,192,553 10.3 9,118,970 17.0 32.3 37,311,523 35.01 to 40.00 367 20,024,563 7.3 7,462,986 13.9 37.3 27,487,549 40.01 to 45.00 218 11,256,178 4.1 4,741,453 8.8 42.1 15,997,631 45.01 to 50.00 117 5,010,709 1.8 2,358,447 4.4 47.1 7,369,155 50.01 to 60.00 106 4,166,025 1.5 2,217,371 4.1 53.2 6,383,396 60.01 to 70.00 34 1,070,878 0.4 689,203 1.3 64.4 1,760,081 70.01 to 80.00 23 621,880 0.2 465,597 0.9 74.9 1,087,477 80.01 to 90.00 12 338,336 0.1 285,695 0.5 84.4 624,032 90.01 to 100.00 9 171,751 0.1 159,434 0.3 92.8 331,185 100.01 to 110.00 3 52,563 0.0 55,867 0.1 106.3 108,431 110.01 to 130.00 7 98,192 0.0 119,386 0.2 121.6 217,578 130.01 to 150.00 5 62,155 0.0 86,809 0.2 139.7 148,964 150.01 to 200.00 3 58,943 0.0 105,534 0.2 179.0 164,477 200.01 to 315.00 3 59,696 0.0 138,404 0.3 231.8 198,101 ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV Arrearage Range (%) Legal Balance LTV(UPB) (Legal Balance) ------------------- ------------ ---------- -------------- 0.00 13.3% 59.466% 59.466% 0.01 to 5.00 6.6 73.365 75.269 5.01 to 10.00 7.0 80.546 86.559 10.01 to 15.00 8.7 84.655 94.967 15.01 to 20.00 11.0 82.838 97.073 20.01 to 25.00 11.1 86.326 105.645 25.01 to 30.00 11.9 86.400 109.708 30.01 to 35.00 11.4 84.796 111.753 35.01 to 40.00 8.4 87.425 119.519 40.01 to 45.00 4.9 85.928 121.554 45.01 to 50.00 2.3 79.132 115.549 50.01 to 60.00 2.0 74.229 112.558 60.01 to 70.00 0.5 54.876 89.985 70.01 to 80.00 0.3 54.578 95.151 80.01 to 90.00 0.2 56.759 104.399 90.01 to 100.00 0.1 32.107 61.691 100.01 to 110.00 0.0 27.490 56.632 110.01 to 130.00 0.1 23.381 52.134 130.01 to 150.00 0.0 19.333 46.274 150.01 to 200.00 0.1 27.111 74.328 200.01 to 315.00 0.1 43.935 134.107 ------------ ---------- -------------- Total 100.0% 79.315% 97.549 ============ ========== ============== A-3
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[Enlarge/Download Table] MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal Range % of Loan Balance Balance Arrearage Arrearage Balance Balance ------- ------------ ------------ ------------ ------------ ------------ -------------- ------------ 0.01 to 7.00 844 $ 10,567,614 3.9% $ 1,209,993 2.3% 11.5% $ 11,777,607 7.01 to 8.00 527 15,837,008 5.8 1,963,054 3.7 12.4 17,800,061 8.01 to 9.00 1,573 52,065,269 19.1 8,359,284 15.6 16.1 60,424,553 9.01 to 10.00 2,042 107,172,514 39.3 20,806,751 38.8 19.4 127,979,264 10.01 to 11.00 1,048 58,135,947 21.3 13,560,569 25.3 23.3 71,696,515 11.01 to 12.00 410 17,844,028 6.5 4,486,836 8.4 25.1 22,330,864 12.01 to 13.00 181 6,944,979 2.5 1,876,549 3.5 27.0 8,821,528 13.01 to 14.00 74 2,841,213 1.0 917,297 1.7 32.3 3,758,510 14.01 to 15.00 13 449,106 0.2 149,486 0.3 33.3 598,592 15.01 to 16.00 22 630,677 0.2 226,561 0.4 35.9 857,238 16.01 to 17.00 1 17,731 0.0 7,569 0.0 42.7 25,299 17.01 to 18.00 3 68,685 0.0 21,243 0.0 30.9 89,928 ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV Range % Legal Balance LTV (UPB) (Legal Balance) ------- ------------- --------- --------------- 0.01 to 7.00 3.6% 48.487% 57.303% 7.01 to 8.00 5.5 71.726 82.455 8.01 to 9.00 18.5 73.374 88.436 9.01 to 10.00 39.2 83.276 101.663 10.01 to 11.00 22.0 87.195 109.222 11.01 to 12.00 6.8 75.188 94.815 12.01 to 13.00 2.7 76.735 97.377 13.01 to 14.00 1.2 73.603 99.829 14.01 to 15.00 0.2 65.262 85.713 15.01 to 16.00 0.3 62.369 91.475 16.01 to 17.00 0.0 36.939 52.710 17.01 to 18.00 0.0 54.029 66.997 ------------- --------- --------------- Total 100.0% 79.315% 97.549% ============= ========= =============== A-4
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[Enlarge/Download Table] LOAN-TO-VALUE RATIOS AS OF THE CUT-OFF DATE (BASED UPON LEGAL BALANCE) Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal Range % of Loans Balance Balance Arrearage Arrearage Balance Balance ------- ------------ ------------ ------------ ------------ ------------ -------------- ------------ 0.01 to 20.00 1,048 $ 7,450,209 2.7% $ 206,471 0.4% 2.8% $ 7,656,680 20.01 to 30.00 492 6,799,827 2.5 382,998 0.7 5.6 7,182,825 30.01 to 40.00 355 7,006,094 2.6 747,493 1.4 10.7 7,753,587 40.01 to 50.00 341 9,421,039 3.5 923,640 1.7 9.8 10,344,679 50.01 to 60.00 372 13,258,814 4.9 1,686,336 3.1 12.7 14,945,150 60.01 to 70.00 418 17,934,495 6.6 2,695,459 5.0 15.0 20,629,954 70.01 to 80.00 539 26,640,737 9.8 4,030,493 7.5 15.1 30,671,230 80.01 to 90.00 568 30,272,482 11.1 5,211,020 9.7 17.2 35,483,502 90.01 to 100.00 676 34,579,564 12.7 6,288,947 11.7 18.2 40,868,510 100.01 to 110.00 504 29,618,579 10.9 6,518,984 12.2 22.0 36,137,563 110.01 to 120.00 472 28,983,762 10.6 6,979,405 13.0 24.1 35,963,166 120.01 to 130.00 340 20,936,198 7.7 5,855,968 10.9 28.0 26,792,166 130.01 to 140.00 207 13,185,042 4.8 3,834,310 7.2 29.1 17,019,352 140.01 to 150.00 136 8,945,309 3.3 2,785,603 5.2 31.1 11,730,912 150.01 to 160.00 81 5,255,212 1.9 1,553,994 2.9 29.6 6,809,206 160.01 to 170.00 65 4,288,287 1.6 1,320,908 2.5 30.8 5,609,195 170.01 to 180.00 27 1,932,003 0.7 628,188 1.2 32.5 2,560,190 180.01 to 190.00 27 1,631,063 0.6 509,986 1.0 31.3 2,141,050 190.01 to 200.00 13 928,021 0.3 353,738 0.7 38.1 1,281,759 200.01 and over 57 3,508,034 1.3 1,071,250 2.0 30.5 4,579,284 ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV Range % Legal Balance LTV (UPB) (Legal Balance) ------- ------------- --------- --------------- 0.01 to 20.00 2.3% 12.800% 13.133% 20.01 to 30.00 2.2 23.999 25.109 30.01 to 40.00 2.4 32.298 35.181 40.01 to 50.00 3.2 41.761 45.031 50.01 to 60.00 4.6 50.111 55.322 60.01 to 70.00 6.3 57.722 65.317 70.01 to 80.00 9.4 66.044 75.022 80.01 to 90.00 10.9 73.446 84.975 90.01 to 100.00 12.5 83.680 95.694 100.01 to 110.00 11.1 87.153 105.215 110.01 to 120.00 11.0 93.525 115.114 120.01 to 130.00 8.2 98.186 124.551 130.01 to 140.00 5.2 105.216 134.702 140.01 to 150.00 3.6 111.337 144.712 150.01 to 160.00 2.1 120.310 154.461 160.01 to 170.00 1.7 128.169 164.582 170.01 to 180.00 0.8 132.414 174.128 180.01 to 190.00 0.7 142.217 184.937 190.01 to 200.00 0.4 141.987 195.124 200.01 and over 1.4 180.323 231.409 ------------- --------- --------------- Total 100.0% 79.315% 97.549% ============= ========= =============== A-5
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[Enlarge/Download Table] LOAN-TO-VALUE RATIOS AS OF THE CUT-OFF DATE (BASED UPON UNPAID PRINCIPAL BALANCE) Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal Range % of Loans Balance Balance Arrearage Arrearage Balance Balance ------- ------------ ------------ ------------ ------------ ------------ -------------- ------------ 0.01 to 20.00 1,111 $ 8,263,904 3.0% $ 638,144 1.2% 7.7% $ 8,902,048 20.01 to 30.00 560 8,311,413 3.0 958,961 1.8 11.5 9,270,375 30.01 to 40.00 382 8,571,953 3.1 1,378,854 2.6 16.1 9,950,807 40.01 to 50.00 442 14,602,490 5.4 2,483,011 4.6 17.0 17,085,501 50.01 to 60.00 529 22,049,689 8.1 4,260,642 8.0 19.3 26,310,332 60.01 to 70.00 675 33,046,156 12.1 6,458,124 12.1 19.5 39,504,280 70.01 to 80.00 718 38,572,357 14.2 7,437,404 13.9 19.3 46,009,761 80.01 to 90.00 731 42,197,262 15.5 8,857,961 16.5 21.0 51,055,223 90.01 to 100.00 783 44,861,495 16.5 9,349,473 17.4 20.8 54,210,968 100.01 to 110.00 371 24,665,786 9.0 5,373,354 10.0 21.8 30,039,140 110.01 to 120.00 176 11,119,942 4.1 2,576,215 4.8 23.2 13,696,157 120.01 to 130.00 97 5,818,723 2.1 1,353,058 2.5 23.3 7,171,781 130.01 to 140.00 63 4,229,663 1.6 977,875 1.8 23.1 5,207,539 140.01 to 150.00 36 2,258,485 0.8 596,626 1.1 26.4 2,855,111 150.01 to 160.00 19 1,134,321 0.4 282,469 0.5 24.9 1,416,790 160.01 to 170.00 13 920,041 0.3 186,742 0.3 20.3 1,106,782 170.01 to 180.00 9 572,194 0.2 155,170 0.3 27.1 727,364 180.01 to 190.00 7 420,275 0.2 61,237 0.1 14.6 481,513 190.01 to 200.00 4 286,606 0.1 76,810 0.1 26.8 363,416 200.01 and over 12 672,013 0.2 123,059 0.2 18.3 795,072 ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV Range % Legal Balance LTV (UPB) (Legal Balance) ------- ------------- --------- --------------- 0.01 to 20.00 2.7% 13.262% 15.336% 20.01 to 30.00 2.8 25.265 29.186 30.01 to 40.00 3.1 35.151 42.372 40.01 to 50.00 5.2 45.324 54.552 50.01 to 60.00 8.1 55.293 67.409 60.01 to 70.00 12.1 65.296 79.298 70.01 to 80.00 14.1 75.332 91.156 80.01 to 90.00 15.7 84.976 104.216 90.01 to 100.00 16.6 95.259 114.704 100.01 to 110.00 9.2 104.417 128.551 110.01 to 120.00 4.2 114.499 142.607 120.01 to 130.00 2.2 124.409 155.384 130.01 to 140.00 1.6 134.647 167.410 140.01 to 150.00 0.9 144.894 185.322 150.01 to 160.00 0.4 156.113 197.547 160.01 to 170.00 0.3 164.139 200.306 170.01 to 180.00 0.2 175.454 224.647 180.01 to 190.00 0.1 186.441 215.070 190.01 to 200.00 0.1 195.662 250.309 200.01 and over 0.2 241.435 285.591 ------------- --------- --------------- Total 100.0% 79.315% 97.549% ============= ========= =============== A-6
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[Enlarge/Download Table] GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal State of Loans Balance Balance Arrearage Arrearage Balance Balance ----- ------------ ------------ ------------ ------------ ------------ -------------- ------------ Texas 736 $ 30,006,807 11.0% $ 5,629,306 10.5% 18.8% $ 35,636,113 Arizona 569 32,043,794 11.8 7,129,009 13.3 22.2 39,172,803 Florida 413 19,168,859 7.0 3,871,588 7.2 20.2 23,040,447 Pennsylvania 361 10,051,556 3.7 3,302,189 6.2 32.9 13,353,744 California 330 18,713,577 6.9 3,699,891 6.9 19.8 22,413,469 Michigan 325 6,570,973 2.4 1,330,421 2.5 20.2 7,901,394 New York 321 11,312,700 4.2 2,535,199 4.7 22.4 13,847,899 Ohio 286 7,532,577 2.8 1,649,165 3.1 21.9 9,181,742 Oklahoma 214 7,983,469 2.9 1,256,553 2.3 15.7 9,240,023 Tennessee 170 6,979,576 2.6 1,284,447 2.4 18.4 8,264,024 Colorado 160 10,166,885 3.7 1,985,422 3.7 19.5 12,152,307 New Mexico 155 7,103,062 2.6 1,389,260 2.6 19.6 8,492,322 Wisconsin 155 4,348,827 1.6 699,861 1.3 16.1 5,048,687 Illinois 154 5,717,832 2.1 1,055,066 2.0 18.5 6,772,898 Missouri 152 5,489,442 2.0 862,953 1.6 15.7 6,352,396 Minnesota 151 7,188,189 2.6 929,238 1.7 12.9 8,117,427 Indiana 150 4,188,370 1.5 666,217 1.2 15.9 4,854,587 Utah 146 6,906,963 2.5 1,103,841 2.1 16.0 8,010,804 Maryland 143 9,068,160 3.3 2,885,244 5.4 31.8 11,953,405 North carolina 136 6,666,179 2.4 929,486 1.7 13.9 7,595,665 Kentucy 134 3,342,530 1.2 393,307 0.7 11.8 3,735,837 Louisiana 132 4,918,457 1.8 1,015,330 1.9 20.6 5,933,786 Massachusetts 120 4,822,535 1.8 1,194,823 2.2 24.8 6,017,357 Arkansas 116 3,568,017 1.3 305,659 0.6 8.6 3,873,676 New Jersey 81 3,053,532 1.1 774,191 1.4 25.4 3,827,723 Alabama 80 1,971,303 0.7 270,570 0.5 13.7 2,241,874 Georgia 73 2,181,900 0.8 309,601 0.6 14.2 2,491,501 Washington 71 2,213,921 0.8 292,764 0.5 13.2 2,506,685 Mississippi 70 2,506,306 0.9 257,622 0.5 10.3 2,763,928 Montana 63 2,348,369 0.9 123,966 0.2 5.3 2,472,335 South Carolina 62 1,585,340 0.6 211,596 0.4 13.3 1,796,935 Iowa 60 1,822,423 0.7 251,632 0.5 13.8 2,074,055 Nebraska 56 1,287,855 0.5 139,269 0.3 10.8 1,427,124 Rhode Island 51 3,430,096 1.3 1,114,991 2.1 32.5 4,545,087 Kansas 35 1,466,537 0.5 224,418 0.4 15.3 1,690,955 Oregon 34 995,297 0.4 73,571 0.1 7.4 1,068,867 Maine 33 2,141,293 0.8 507,981 0.9 23.7 2,649,274 West Virginia 33 1,063,589 0.4 212,866 0.4 20.0 1,276,455 Alaska 32 2,447,378 0.9 43,678 0.1 1.8 2,491,057 Idaho 29 1,261,083 0.5 3,369 0.0 0.3 1,264,452 Delaware 27 909,572 0.3 226,054 0.4 24.9 1,135,626 Puerto Rico 27 734,212 0.3 71,459 0.1 9.7 805,671 Nevada 19 924,703 0.3 166,940 0.3 18.1 1,091,643 New Hampshire 18 1,522,767 0.6 539,156 1.0 35.4 2,061,924 Connecticut 9 730,293 0.3 223,487 0.4 30.6 953,780 Wyoming 9 423,269 0.2 85,370 0.2 20.2 508,639 North Dakota 7 291,207 0.1 50,788 0.1 17.4 341,996 District of Columbia 6 232,070 0.1 43,062 0.1 18.6 275,132 Hawaii 6 138,065 0.1 85 0.0 0.1 138,150 Vermont 6 326,122 0.1 85,779 0.2 26.3 411,901 South Dakota 5 239,806 0.1 44,607 0.1 18.6 284,413 Virginia 5 434,954 0.2 132,840 0.2 30.5 567,793 Guam 2 32,175 0.0 0 0.0 0.0 32,175 ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV State Legal Balance LTV (UPB) (Legal Balance) ----- ------------- --------- --------------- Texas 10.9% 89.542% 107.957% Arizona 12.0 95.203 118.359 Florida 7.1 80.726 99.488 Pennsylvania 4.1 74.159 98.776 California 6.9 85.681 107.085 Michigan 2.4 60.559 76.030 New York 4.2 74.078 92.736 Ohio 2.8 71.412 91.135 Oklahoma 2.8 87.681 103.289 Tennessee 2.5 72.888 87.501 Colorado 3.7 62.564 75.620 New Mexico 2.6 62.462 75.801 Wisconsin 1.5 79.241 95.524 Illinois 2.1 69.874 85.313 Missouri 1.9 87.390 104.107 Minnesota 2.5 69.552 80.552 Indiana 1.5 72.184 87.433 Utah 2.5 48.064 57.775 Maryland 3.7 82.202 110.416 North carolina 2.3 77.746 89.964 Kentucy 1.1 59.001 69.695 Louisiana 1.8 86.178 106.459 Massachusetts 1.8 93.871 114.856 Arkansas 1.2 82.626 90.706 New Jersey 1.2 69.536 87.133 Alabama 0.7 69.293 81.620 Georgia 0.8 66.335 79.378 Washington 0.8 47.356 56.207 Mississippi 0.8 77.522 85.548 Montana 0.8 70.024 74.933 South Carolina 0.6 65.631 76.405 Iowa 0.6 62.850 73.642 Nebraska 0.4 66.324 76.813 Rhode Island 1.4 101.192 135.462 Kansas 0.5 87.166 101.945 Oregon 0.3 44.145 47.740 Maine 0.8 102.230 126.102 West Virginia 0.4 76.343 92.642 Alaska 0.8 81.944 83.565 Idaho 0.4 64.485 64.665 Delaware 0.3 72.292 96.409 Puerto Rico 0.2 67.444 72.208 Nevada 0.3 70.203 86.444 New Hampshire 0.6 105.215 138.134 Connecticut 0.3 97.470 127.410 Wyoming 0.2 77.670 90.438 North Dakota 0.1 69.825 82.295 District of Columbia 0.1 62.265 75.093 Hawaii 0.0 40.174 40.152 Vermont 0.1 76.754 90.162 South Dakota 0.1 77.328 87.438 Virginia 0.2 89.944 118.839 Guam 0.0 100.000 100.000 ------------- --------- --------------- Total 100.0% 79.315% 97.549% ============= ========= =============== A-7
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[Enlarge/Download Table] LOAN TYPE Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal Loan Type of Loans Balance Balance Arrearage Arrearage Balance Balance --------- ------------ ------------ ------------ ------------ ------------ -------------- ------------ Adjustable 129 $ 8,497,873 3.1% $ 1,086,944 2.0% 12.8% $ 9,584,817 Fixed 6,609 264,076,897 96.9 52,498,246 98.0 19.9 316,575,143 ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV Loan Type Legal Balance LTV (UPB) (Legal Balance) --------- ------------- --------- --------------- Adjustable 2.9% 85.357% 97.420% Fixed 97.1 79.121 97.553 ------------- --------- --------------- Total 100.0% 79.315% 97.549% ============= ========= =============== [Enlarge/Download Table] OCCUPANCY STATUS Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal Status of Loans Balance Balance Arrearage Arrearage Balance Balance ------ ------------ ------------ ------------ ------------ ------------ -------------- ------------ Owner Occupied 6,215 $254,317,088 93.3% $ 50,621,980 94.5% 19.9% $304,939,068 Non-Owner Occupied 265 8,340,443 3.1 1,490,151 2.8 17.9 9,830,594 Unknown 258 9,917,239 3.6 1,473,058 2.7 14.9 11,390,297 ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV Status Legal Balance LTV (UPB) (Legal Balance) ------ ------------- --------- --------------- Owner Occupied 93.5 % 79.063% 97.755% Non-Owner Occupied 3.0 73.075 89.992 Unknown 3.5 91.033 98.558 ------------- --------- --------------- Total 100.0% 79.315% 97.549% ============= ========= =============== A-8
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[Enlarge/Download Table] YEAR OF ORIGINATION Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date % of Cut-off Number Principal Principal Pool Pool Principal Pool Legal Date Pool Year of Loans Balance Balance Arrearage Arrearage Balance Balance Legal Balance ---- ------------ ------------ ------------ ------------ ------------ -------------- ------------ ------------- 1960 2 $ 10,888 0.0% $ 1,234 0.0% 11.3% $ 12,122 0.0% 1961 3 15,245 0.0 7,223 0.0 47.4 22,467 0.0 1962 2 6,556 0.0 35 0.0 0.5 6,590 0.0 1963 4 18,396 0.0 31 0.0 0.2 18,426 0.0 1964 2 9,528 0.0 0 0.0 0.0 9,528 0.0 1965 7 27,269 0.0 7,678 0.0 28.2 34,947 0.0 1966 8 89,862 0.0 38,077 0.1 42.4 127,938 0.0 1967 15 86,639 0.0 5,405 0.0 6.2 92,043 0.0 1968 48 225,610 0.1 36,926 0.1 16.4 262,535 0.1 1969 104 593,210 0.2 142,740 0.3 24.1 735,950 0.2 1970 246 1,749,559 0.6 254,027 0.5 14.5 2,003,586 0.6 1971 313 2,636,933 1.0 242,168 0.5 9.2 2,879,101 0.9 1972 299 2,561,984 0.9 221,543 0.4 8.6 2,783,526 0.9 1973 176 1,610,598 0.6 107,270 0.2 6.7 1,717,868 0.5 1974 131 1,481,810 0.5 235,436 0.4 15.9 1,717,246 0.5 1975 127 1,741,743 0.6 190,359 0.4 10.9 1,932,102 0.6 1976 155 2,208,906 0.8 173,281 0.3 7.8 2,382,187 0.7 1977 208 3,500,090 1.3 315,104 0.6 9.0 3,815,195 1.2 1978 281 6,764,409 2.5 711,759 1.3 10.5 7,476,168 2.3 1979 295 8,831,310 3.2 1,475,576 2.8 16.7 10,306,886 3.2 1980 179 6,000,770 2.2 1,386,532 2.6 23.1 7,387,302 2.3 1981 52 1,771,268 0.6 491,900 0.9 27.8 2,263,168 0.7 1982 57 2,275,097 0.8 581,392 1.1 25.6 2,856,489 0.9 1983 170 7,071,022 2.6 1,851,688 3.5 26.2 8,922,711 2.7 1984 94 4,058,957 1.5 947,523 1.8 23.3 5,006,480 1.5 1985 228 11,378,497 4.2 2,595,189 4.8 22.8 13,973,686 4.3 1986 833 48,062,819 17.6 8,985,415 16.8 18.7 57,048,234 17.5 1987 675 37,385,987 13.7 6,543,880 12.2 17.5 43,929,867 13.5 1988 561 31,077,802 11.4 6,424,188 12.0 20.7 37,501,990 11.5 1989 591 34,664,010 12.7 7,783,985 14.5 22.5 42,447,995 13.0 1990 510 31,452,770 11.5 6,921,489 12.9 22.0 38,374,259 11.8 1991 302 19,364,506 7.1 4,133,034 7.7 21.3 23,497,540 7.2 1992 56 3,662,005 1.3 720,655 1.3 19.7 4,382,660 1.3 1993 4 178,715 0.1 52,451 0.1 29.3 231,166 0.1 ------------ ------------ ------------ ------------ ------------ -------------- ------------ ------------- Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 100.0% ============ ============ ============ ============ ============ ============== ============ ============= Weighted Weighted Average Average LTV Year LTV (UPB) (Legal Balance) ---- --------- --------------- 1960 6.729% 8.087% 1961 6.241 11.476 1962 4.863 4.890 1963 6.597 6.610 1964 14.024 14.021 1965 6.261 10.368 1966 51.624 62.913 1967 8.359 9.318 1968 13.686 16.580 1969 14.383 21.285 1970 21.208 26.103 1971 22.067 26.378 1972 22.094 24.949 1973 23.641 26.989 1974 26.129 32.391 1975 29.126 35.108 1976 29.937 33.344 1977 33.763 38.390 1978 42.876 48.980 1979 52.988 63.624 1980 65.752 82.834 1981 66.337 88.254 1982 69.861 89.097 1983 72.176 93.511 1984 84.979 104.506 1985 80.457 99.606 1986 81.739 98.050 1987 82.798 99.082 1988 86.057 105.574 1989 90.314 112.701 1990 92.873 114.906 1991 94.950 116.851 1992 91.573 111.294 1993 77.455 101.118 --------- --------------- Total 79.315% 97.549% ========= =============== A-9
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[Enlarge/Download Table] STATED MATURITY OF ORIGINATION Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date % of Cut-off Number Principal Principal Pool Pool Principal Pool Legal Date Pool Year of Loans Balance Balance Arrearage Arrearage Balance Balance Legal Balance ---- ------------ ------------ ------------ ------------ ------------ -------------- ------------ ------------- 1985 1 $ 1,219 0.0% $ 428 0.0% 35.1% $ 1,647 0.0% 1988 3 14,868 0.0 8,033 0.0 54.0 22,900 0.0 1990 9 37,229 0.0 14,767 0.0 39.7 51,997 0.0 1991 8 29,698 0.0 7,223 0.0 24.3 36,920 0.0 1992 7 62,980 0.0 18,016 0.0 28.6 80,995 0.0 1993 7 39,887 0.0 498 0.0 1.2 40,385 0.0 1994 12 108,588 0.0 28,486 0.1 26.2 137,074 0.0 1995 27 177,093 0.1 50,172 0.1 28.3 227,265 0.1 1996 28 153,738 0.1 63,688 0.1 41.4 217,426 0.1 1997 31 250,287 0.1 40,782 0.1 16.3 291,069 0.1 1998 55 319,063 0.1 35,852 0.1 11.2 354,915 0.1 1999 119 838,054 0.3 171,445 0.3 20.5 1,009,499 0.3 2000 234 2,028,010 0.7 299,467 0.6 14.8 2,327,476 0.7 2001 338 3,548,018 1.3 290,762 0.5 8.2 3,838,780 1.2 2002 318 3,153,887 1.2 265,046 0.5 8.4 3,418,934 1.0 2003 218 2,402,767 0.9 201,197 0.4 8.4 2,603,964 0.8 2004 129 1,912,879 0.7 290,199 0.5 15.2 2,203,078 0.7 2005 125 2,023,866 0.7 188,168 0.4 9.3 2,212,034 0.7 2006 145 2,610,259 1.0 328,094 0.6 12.6 2,938,353 0.9 2007 187 3,280,309 1.2 269,484 0.5 8.2 3,549,793 1.1 2008 268 6,467,904 2.4 746,433 1.4 11.5 7,214,337 2.2 2009 295 8,951,469 3.3 1,375,659 2.6 15.4 10,327,128 3.2 2010 181 6,196,838 2.3 1,385,336 2.6 22.4 7,582,174 2.3 2011 73 2,711,471 1.0 688,011 1.3 25.4 3,399,482 1.0 2012 61 2,972,326 1.1 688,584 1.3 23.2 3,660,911 1.1 2013 154 6,567,878 2.4 1,793,218 3.3 27.3 8,361,096 2.6 2014 91 4,117,349 1.5 1,032,373 1.9 25.1 5,149,722 1.6 2015 192 9,695,614 3.6 2,386,140 4.5 24.6 12,081,753 3.7 2016 730 42,839,973 15.7 8,321,491 15.5 19.4 51,161,464 15.7 2017 701 39,468,129 14.5 6,862,438 12.8 17.4 46,330,567 14.2 2018 524 29,289,884 10.7 6,064,264 11.3 20.7 35,354,148 10.8 2019 554 32,621,336 12.0 7,388,695 13.8 22.6 40,010,031 12.3 2020 513 32,104,200 11.8 7,154,735 13.4 22.3 39,258,935 12.0 2021 312 19,957,811 7.3 4,176,761 7.8 20.9 24,134,572 7.4 2022 66 4,346,448 1.6 863,920 1.6 19.9 5,210,369 1.6 2023 4 168,212 0.1 21,056 0.0 12.5 189,268 0.1 2024 5 284,466 0.1 10,731 0.0 3.8 295,197 0.1 2025 3 196,299 0.1 15,921 0.0 8.1 212,220 0.1 2026 1 58,840 0.0 0 0.0 0.0 58,840 0.0 2027 2 128,748 0.0 2,339 0.0 1.8 131,087 0.0 2028 3 149,055 0.1 16,470 0.0 11.0 165,525 0.1 2029 2 130,266 0.0 8,858 0.0 6.8 139,123 0.0 2030 2 157,554 0.1 9,949 0.0 6.3 167,503 0.1 ------------ ------------ ------------ ------------ ------------ -------------- ------------ ------------- Total 6,738 $272,574,770 100.0 $ 53,585,190 100.0% 19.7% $326,159,960 100.0% ============ ============ ============ ============ ============ ============== ============ ============= Weighted Weighted Average Average LTV Year LTV (UPB) (Legal Balance) ---- --------- --------------- 1985 3.386% 4.580% 1988 17.550 28.532 1990 10.827 18.565 1991 7.875 10.740 1992 12.315 20.062 1993 20.969 20.968 1994 12.310 16.432 1995 22.539 33.099 1996 18.356 36.807 1997 22.465 27.913 1998 19.711 21.013 1999 22.023 28.629 2000 29.400 35.995 2001 29.785 33.431 2002 27.556 30.599 2003 32.010 37.622 2004 35.955 42.797 2005 44.852 49.404 2006 45.514 57.100 2007 35.909 40.582 2008 43.093 49.688 2009 53.190 63.174 2010 66.417 83.060 2011 68.418 88.213 2012 81.229 100.407 2013 72.963 94.744 2014 84.802 105.939 2015 80.488 100.461 2016 82.624 99.603 2017 81.823 97.988 2018 87.749 107.514 2019 89.884 112.165 2020 92.919 115.355 2021 95.553 117.067 2022 89.641 109.005 2023 69.307 75.406 2024 74.551 77.387 2025 84.237 91.510 2026 66.864 66.860 2027 79.645 81.185 2028 81.697 92.366 2029 88.636 94.695 2030 79.242 84.191 --------- --------------- Total 79.315% 97.549% ========= =============== A-10
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[Enlarge/Download Table] ORIGINAL TERMS TO STATED MATURITY (AT ORIGINATION) Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Number Principal Principal Pool Pool Principal Range (Months) of Loans Balance Balance Arrearage Arrearage Balance -------------- ------------ ------------ ------------ ------------ ------------ -------------- 180 to 239 months 104 $ 3,502,746 1.3% $ 410,164 0.8% 11.7% 240 to 299 months 92 2,225,707 0.8 390,832 0.7 17.6 300 to 359 months 303 6,936,742 2.5 1,256,736 2.3 18.1 360 Months 6,219 259,131,409 95.1 51,451,121 96.0 19.9 Greater than 360 months 17 741,264 0.3 75,926 0.1 10.2 Less than 180 months 3 36,901 0.0 412 0.0 1.1 ------------ ------------ ------------ ------------ ------------ -------------- Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% ============ ============ ============ ============ ============ ============== Cut-off Date % of Cut-off Weighted Weighted Pool Legal Date Pool Average Average LTV Range (Months) Balance Legal Balance LTV (UPB) (Legal Balance) -------------- ------------ ------------- --------- --------------- 180 to 239 months $ 3,912,909 1.2% 66.848% 76.416% 240 to 299 months 2,616,539 0.8 62.942 73.325 300 to 359 months 8,193,478 2.5 67.551 82.144 360 Months 310,582,530 95.2 79.948 98.458 Greater than 360 months 817,190 0.3 78.548 88.483 Less than 180 months 37,313 0.0 28.573 28.930 ------------ ------------- --------- --------------- Total $326,159,960 100.0% 79.315% 97.549% ============ ============= ========= =============== [Enlarge/Download Table] REMAINING TERMS TO STATED MATURITY AS OF THE CUT-OFF DATE Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Number Principal Principal Pool Pool Principal Range (Months) of Loans Balance Balance Arrearage Arrearage Balance -------------- ------------ ------------ ------------ ------------ ------------ -------------- 1 to 59 Months 569 $ 4,600,831 1.7% $ 632,510 1.2% 13.7% 120 to 179 months 1,050 27,489,147 10.1 4,226,952 7.9 15.4 180 to 239 monhs 611 29,014,402 10.6 6,982,394 13.0 24.1 240 to 299 months 2,961 173,050,056 63.5 35,089,641 65.5 20.3 300 to 359 months 346 22,412,262 8.2 4,627,926 8.6 20.6 60 to 119 months 1,037 12,519,620 4.6 1,238,776 2.3 9.9 Matured 164 3,488,452 1.3 786,989 1.5 22.6 ------------ ------------ ------------ ------------ ------------ -------------- Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% ============ ============ ============ ============ ============ ============== Cut-off Date % of Cut-off Weighted Weighted Pool Legal Date Pool Average Average LTV Range (Months) Balance Legal Balance LTV (UPB) (Legal Balance) -------------- ------------ ------------- --------- --------------- 1 to 59 Months $ 5,233,341 1.6% 27.486% 32.921% 120 to 179 months 31,716,099 9.7 51.645 62.754 180 to 239 monhs 35,996,796 11.0 79.662 99.475 240 to 299 months 208,139,697 63.8 86.517 105.880 300 to 359 months 27,040,189 8.3 94.292 115.391 60 to 119 months 13,758,397 4.2 33.866 38.669 Matured 4,275,442 1.3 72.450 89.636 ------------ ------------- --------- --------------- Total $326,159,960 100.0% 79.315% 97.549% ============ ============= ========= =============== A-11
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[Enlarge/Download Table] SCHEDULED PRINCIPAL AND INTEREST PAYMENT AT ORIGINATION Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal Range ($) of Loans Balance Balance Arrearage Arrearage Balance Balance --------- ------------ ------------ ------------ ------------ ------------ -------------- ------------ 0.00 to 199.99 1,800 $ 17,261,221 6.3% $ 1,908,709 3.6% 11.1% $ 19,169,930 200.00 to 399.99 1,779 56,511,225 20.7 9,542,344 17.8 16.9 66,053,569 400.00 to 599.99 1,812 98,125,467 36.0 19,603,703 36.6 20.0 117,729,170 600.00 to 799.99 941 70,113,795 25.7 15,441,571 28.8 22.0 85,555,366 800.00 to 999.99 218 20,226,568 7.4 4,717,330 8.8 23.3 24,943,898 1000.00 to 1199.99 39 4,625,847 1.7 1,105,783 2.1 23.9 5,731,630 1200.00 to 1399.99 4 515,004 0.2 83,857 0.2 16.3 598,861 1400.00 and greater 2 286,075 0.1 22,729 0.0 7.9 308,804 N/A 143 4,909,568 1.8 1,159,164 2.2 23.6 6,068,732 ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV Range ($) Legal Balance LTV (UPB) (Legal Balance) --------- ------------- --------- --------------- 0.00 to 199.99 5.9% 29.801% 35.061% 200.00 to 399.99 20.3 68.429 82.421 400.00 to 599.99 36.1 82.518 100.132 600.00 to 799.99 26.2 88.555 109.761 800.00 to 999.99 7.6 95.141 119.451 1000.00 to 1199.99 1.8 115.711 144.508 1200.00 to 1399.99 0.2 100.696 124.850 1400.00 and greater 0.1 99.050 104.597 N/A 1.9 79.848 99.893 ------------- --------- --------------- Total 100.0% 79.315% 97.549% ============= ========= =============== A-12
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[Enlarge/Download Table] PAYMENT PLAN STATUS Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal Status of Loans Balance Balance Arrearage Arrearage Balance Balance ------ ------------ ------------ ------------ ------------ ------------ -------------- ------------ Payment Plan 4,387 $217,978,716 80.0% $ 51,796,056 96.7% 23.8% $269,774,771 No Payment Plan 2,351 54,596,055 20.0 1,789,134 3.3 3.3 56,385,188 ------ ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV Status Legal Balance LTV (UPB) (Legal Balance) ------ ------------- --------- --------------- Payment Plan 82.7% 83.609% 104.189% No Payment Plan 17.3 62.171 65.778 ------ ------------- --------- --------------- Total 100.0% 79.315% 97.549% ============= ========= =============== A-13
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[Enlarge/Download Table] HISTORICAL COLLECTION EXPERIENCE OF P&I BY TOTAL LEGAL BALANCE DURING HUD SERVICING 12 MONTHS ENDING 6/30/96 Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Number Principal Principal Pool Pool Principal Range (Legal Balance $) of Loans Balance Balance Arrearage Arrearage Balance ----------------------- ------------ ------------ ------------ ------------ ------------ -------------- 1.00 to 19,999.99 1,839 $ 16,686,811 6.1% $ 854,496 1.6% 5.1% 20,000.00 to 29,999.99 554 12,492,850 4.6 1,278,894 2.4 10.2 30,000.00 to 39,999.99 602 18,924,474 6.9 2,333,854 4.4 12.3 40,000.00 to 49,999.99 630 24,461,933 9.0 3,855,232 7.2 15.8 50,000.00 to 59,999.99 682 32,020,656 11.7 5,503,063 10.3 17.2 60,000.00 to 69,999.99 645 34,993,398 12.8 6,828,180 12.7 19.5 70,000.00 to 79,999.99 530 32,743,644 12.0 6,964,470 13.0 21.3 80,000.00 to 89,999.99 437 30,318,288 11.1 6,682,436 12.5 22.0 90,000.00 to 99,999.99 307 23,267,584 8.5 5,725,411 10.7 24.6 100,000.00 to 109,999.99 202 16,640,787 6.1 4,531,577 8.5 27.2 110,000.00 to 119,999.99 150 13,243,449 4.9 3,951,652 7.4 29.8 120,000.00 to 129,999.99 68 6,575,281 2.4 1,873,049 3.5 28.5 130,000.00 to 139,999.99 40 4,204,408 1.5 1,153,957 2.2 27.4 140,000.00 to 209,000.00 52 6,001,207 2.2 2,048,918 3.8 34.1 ------------ ------------ ------------ ------------ ------------ -------------- Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% ============ ============ ============ ============ ============ ============== Cut-off Date Pool Legal 12 months % of 12 mo's Weighted Avg Range (Legal Balance $) Balance P&I Collections Collections Collections ----------------------- ------------ --------------- ------------ ------------ 1.00 to 19,999.99 $ 17,541,307 $ 3,012,002 9.6% 117% 20,000.00 to 29,999.99 13,771,744 1,615,905 5.1 111 30,000.00 to 39,999.99 21,258,328 2,298,972 7.3 101 40,000.00 to 49,999.99 28,317,164 2,835,182 9.0 93 50,000.00 to 59,999.99 37,523,719 3,580,002 11.4 85 60,000.00 to 69,999.99 41,821,578 3,838,005 12.2 80 70,000.00 to 79,999.99 39,708,115 3,567,958 11.3 79 80,000.00 to 89,999.99 37,000,724 3,268,248 10.4 72 90,000.00 to 99,999.99 28,992,996 2,516,592 8.0 68 100,000.00 to 109,999.99 21,172,364 1,776,041 5.6 56 110,000.00 to 119,999.99 17,195,101 1,432,820 4.5 54 120,000.00 to 129,999.99 8,448,330 709,906 2.3 61 130,000.00 to 139,999.99 5,358,365 442,896 1.4 55 140,000.00 to 209,000.00 8,050,126 640,998 2.0 42 ------------ --------------- ------------ ------------ Total $326,159,960 $ 31,535,527 100.0% 79% ============ =============== ============ ============ A-14
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[Enlarge/Download Table] COLLECTION HISTORY FOR 4 MONTHS AFTER TRANSFER OF SERVICING FROM HUD Cut-off Date Pool Arrearage as a % of Cut-off Date Cut-off Date Cut-off Date % of Cut-off Pool Unpaid Cut-off Date Pool Unpaid Collections as a % of Scheduled Number Pool Legal Date Pool Principal Pool Principal Principal And Interest Range (%) of Loans Balance Legal Balance Balance Arrearage Balance -------------------------------- ------------ ------------ ------------ ------------ ------------ -------------- 50 to 60 1 $ 23,409 0.0% $ 23,409 $ 0 0.0% 70 to 80 326 19,190,139 5.9 15,104,416 4,085,723 27.0 81 to 90 13 656,855 0.2 532,485 124,369 23.4 91 to 100 1,334 80,948,028 24.8 65,265,051 15,682,977 24.0 101 to 110 336 8,488,528 2.6 7,782,228 706,300 9.1 110 to 120 46 1,853,092 0.6 1,748,730 104,362 6.0 120 to 130 2,796 149,285,123 45.8 123,918,303 25,366,820 20.5 130 to 140 293 6,540,696 2.0 6,358,762 181,934 2.9 140 to 150 692 32,971,663 10.1 28,057,846 4,913,817 17.5 150 and greater 901 26,202,427 8.0 23,783,540 2,418,887 10.2 ------------ ------------ ------------ ------------ ------------ -------------- Total 6,738 $326,159,960 100.0% $272,574,770 $ 53,585,190 19.7% ============ ============ ============ ============ ============ ============== Four Months Collections as a % of Scheduled Collections as Principal And Interest Range (%) A % of P&I -------------------------------- -------------- 50 to 60 51.2% 70 to 80 75.1 81 to 90 86.5 91 to 100 99.9 101 to 110 102.0 110 to 120 114.2 120 to 130 125.5 130 to 140 133.5 140 to 150 149.2 150 and greater 207.5 -------------- Total 130.4% ============== A-15
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[Enlarge/Download Table] PAYMENT VELOCITY AS A % OF P&I DURING FOUR MONTHS SINCE TRANSFER OF SERVICING Cut-off Date Pool Arrearage % of Cut-off as a % of Cut-off Date Date Pool % of Cut-off Date Pool Unpaid Unpaid Cut-off Date Cut-off Date Pool Unpaid Cut-off Date Number Principal Principal Pool Pool Principal Pool Legal Range % of Loans Balance Balance Arrearage Arrearage Balance Balance ------- ------------ ------------ ------------ ------------ ------------ -------------- ------------ 3.00 to 3.19 325 $ 15,057,282 5.5% $ 4,078,078 7.6% 27.1% $ 19,135,360 3.20 to 3.89 21 1,028,876 0.4 155,259 0.3 15.1 1,184,135 3.90 and greater 6,392 256,488,612 94.1 49,351,853 92.1 19.2 305,840,465 ------------ ------------ ------------ ------------ ------------ -------------- ------------ Total 6,738 $272,574,770 100.0% $ 53,585,190 100.0% 19.7% $326,159,960 ============ ============ ============ ============ ============ ============== ============ % of Cut-off Weighted Weighted Date Pool Average Average LTV Range % Legal Balance LTV (UPB) (Legal Balance) ------- ------------- --------- --------------- 3.00 to 3.19 5.9 % 85.795% 110.860% 3.20 to 3.89 0.4 78.904 93.810 3.90 and greater 93.8 78.936 96.731 ------------- --------- --------------- Total 100.0 % 79.315% 97.549% ============= ========= =============== A-16
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MORTGAGE PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES) Principal and interest with respect to Certificates will be payable each month on the date specified in the related Prospectus Supplement, commencing with the month following the month in which the applicable Cut-off Date (as defined herein) occurs. SALOMON BROTHERS MORTGAGE SECURITIES VII, INC. DEPOSITOR The Certificates offered hereby and by Supplements to this Prospectus will be offered from time to time in series. Each series of Certificates will represent in the aggregate the entire beneficial ownership interest in a segregated pool of (a) various types of one- to four-family residential first and junior lien mortgage loans, multifamily residential mortgage loans, cooperative apartment loans or manufactured housing conditional sales contracts and installment loan agreements (collectively, the "Mortgage Loans"), or beneficial interests therein, (b) pass-through or participation certificates issued or guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") (any such certificates, "Agency Securities"), (c) pass-through or participation certificates or other mortgage-backed securities issued or guaranteed by private entities ("Private Mortgage-Backed Securities") or (d) funding agreements secured by Mortgage Loans, Agency Securities or Private Mortgage-Backed Securities (each, a "Funding Agreement"), or any combination thereof, together with other assets described herein (collectively, a "Trust Fund" or the "Trust Fund Assets"). Each series of Certificates will include one or more classes. Each class of Certificates of any series will represent the right, which right may be senior to the rights of one or more of the other classes of the Certificates, to receive a specified portion of payments of principal and interest on the Mortgage Loans, Agency Securities, Private Mortgage-Backed Securities or Funding Agreements in the related Trust Fund in the manner described herein and in the related Prospectus Supplement. A series may include one or more classes of Certificates entitled to principal distributions, with disproportionate, nominal or no interest distributions, or to interest distributions, with disproportionate, nominal or no principal distributions. A series may include two or more classes of Certificates that differ as to the timing, sequential order or amount of distributions of principal or interest or both. If so specified in the related Prospectus Supplement, the Trust Fund for a series of Certificates may include pool insurance policies, letters of credit, reserve funds or other types of credit support, or any combination thereof, and currency or interest rate exchange agreements and other financial assets, or any combination thereof (with respect to any series, collectively, "Cash Flow Agreements"). See "Description of the Certificates" and "Description of Credit Support". The only obligations of the Depositor with respect to a series of Certificates will be pursuant to its representations and warranties. The Master Servicer with respect to a series of Certificates evidencing interests in a Trust Fund including Mortgage Loans will be named in the related Prospectus Supplement. The principal obligations of a Master Servicer will be limited to its contractual servicing obligations, and, to the extent provided in the related Prospectus Supplement, its obligation to make certain cash advances in the event of payment delinquencies on the Mortgage Loans. The Certificates of each series will not represent an obligation of or interest in the Depositor, the Master Servicer or any of their respective affiliates, except to the limited extent described herein and in the related Prospectus Supplement. The Certificates will not be guaranteed or insured by any governmental agency or instrumentality. Although payment of principal and interest on Agency Securities will be guaranteed as described herein and in the related prospectus supplement by GNMA, FNMA or FHLMC, the Certificates of any series evidencing interests in a Trust Fund including Agency Securities will not be so guaranteed. Each Trust Fund will be held in trust for the benefit of the holders of the related series of Certificates pursuant to a Pooling and Servicing Agreement or a Trust Agreement as more fully described herein. If so provided in the related Prospectus Supplement, one or more elections may be made to treat the related Trust Fund or a designated portion thereof as a "real estate mortgage investment conduit" for federal income tax purposes. See "Certain Federal Income Tax Consequences". THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Offers of the Certificates may be made through one or more different methods, including offerings through underwriters, as more fully described under "Methods of Distribution" and in the related Prospectus Supplement. With respect to each series, all of the Certificates of each class offered hereby will be rated in one of the four highest rating categories by one or more nationally recognized statistical rating organizations. There will have been no public market for any series of Certificates prior to the offering thereof. No assurance can be given that such a market will develop as a result of such an offering. All securities will be distributed by, or sold by underwriters managed by: -------------------- SALOMON BROTHERS INC -------------------------------------------------------------------------------- RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES OFFERED HEREBY UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT. The date of this Prospectus is March 6, 1997.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS 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 OR 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; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY. ------------------------------------------- TABLE OF CONTENTS CAPTION PAGE ------- ---- Available Information....................................................... 4 Reports to Certificateholders............................................... 4 Incorporation of Certain Information by Reference........................... 4 Summary of Prospectus....................................................... 5 The Trust Funds............................................................. 15 The Mortgage Loans..................................................... 15 Agency Securities...................................................... 20 Private Mortgage-Backed Securities..................................... 25 Funding Agreements..................................................... 27 Use of Proceeds............................................................. 28 Yield Considerations........................................................ 28 Maturity and Prepayment Considerations...................................... 29 The Depositor 31 Mortgage Loan Program....................................................... 31 Underwriting Standards................................................. 31 Qualifications of Originators and Mortgage Loan Sellers................ 33 Representations by or on behalf of Mortgage Loan Sellers; Repurchases.. 33 Description of the Certificates............................................. 35 General 35 Assignment of Trust Fund Assets........................................ 37 Deposits to Certificate Account........................................ 40 Payments Mortgage Loans................................................ 41 Payments on Agency Securities and Private Mortgage-Backed Securities.....43 Distributions.......................................................... 43 Available Distribution Amount.......................................... 44 Interest on the Certificates........................................... 44 Principal of the Certificates.......................................... 45 Pre-Funding Account.................................................... 45 Allocation of Losses................................................... 46 Advances in Respect of Delinquencies................................... 46 Reports to Certificateholders.......................................... 47 Collection and Other Servicing Procedures.............................. 48 Sub-Servicing.......................................................... 49 Realization Upon Defaulted Mortgage Loans.............................. 50 Retained Interest; Servicing or Administration Compensation and Payment of Expenses.................................................. 51 Evidence as to Compliance.............................................. 52 Certain Matters Regarding the Master Servicer and the Depositor........ 53 Events of Default...................................................... 54 Rights Upon Event of Default........................................... 54 Amendment.............................................................. 55 Termination............................................................ 55 Duties of the Trustee.................................................. 56 The Trustee............................................................ 56 2
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CAPTION PAGE ------- ---- Description of Credit Support............................................... 56 Subordination.......................................................... 57 Letter of Credit....................................................... 58 Mortgage Pool Insurance Policy......................................... 59 Special Hazard Insurance Policy........................................ 61 Bankruptcy Bond........................................................ 63 Certificate Guarantee Insurance........................................ 63 Reserve Fund........................................................... 63 Cash Flow Agreements................................................... 64 Description of Primary Insurance Policies................................... 64 Primary Mortgage Insurance Policies.................................... 64 Primary Hazard Insurance Policies...................................... 64 FHA Insurance.......................................................... 66 VA Guarantees............................................................66 Certain Legal Aspects of Mortgage Loans..................................... 67 General 67 Single-Family Loans and Multifamily Loans.............................. 67 Leases and Rents....................................................... 68 Cooperative Loans...................................................... 68 Contracts.............................................................. 69 Foreclosure on Mortgages............................................... 71 Foreclosure on Cooperative Shares...................................... 73 Repossession with respect to Contracts................................. 74 Louisiana Law.......................................................... 75 Rights of Redemption with respect to Single-Family Properties and Multifamily Properties............................................. 75 Notice of Sale; Redemption Rights with respect to Manufactured Homes... 75 Anti-Deficiency Legislation and Other Limitations on Lenders........... 75 Junior Mortgages....................................................... 77 Consumer Protection Laws with respect to Contracts..................... 77 Other Limitations...................................................... 78 Enforceability of Certain Provisions................................... 78 Subordinate Financing.................................................. 80 Applicability of Usury Laws............................................ 80 Alternative Mortgage Instruments....................................... 81 Formaldehyde Litigation with respect to Contracts...................... 82 Soldiers' and Sailors' Civil Relief Act of 1940........................ 82 Environmental Legislation.............................................. 83 Forfeitures in Drug and RICO Proceedings............................... 84 Negative Amortization Loans............................................ 84 Certain Federal Income Tax Consequences..................................... 84 General 84 REMICs 85 Grantor Trust Funds.................................................... 102 Partnership Trust Funds.................................................113 State and Other Tax Consequences............................................ 119 ERISA Considerations........................................................ 119 Legal Investment............................................................ 125 Methods of Distribution..................................................... 125 Legal Matters 126 Financial Information....................................................... 126 Index of Principal Definitions.............................................. 127 UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE CERTIFICATES COVERED BY SUCH SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER SUCH SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS OF THE CERTIFICATES COVERED BY SUCH SUPPLEMENT AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 3
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AVAILABLE INFORMATION The Depositor is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information filed by the Depositor can be inspected and copied at the public reference facilities maintained by the Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional Offices located as follows: Chicago Regional Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661; New York Regional Office, Seven World Trade Center, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and electronically through the Commission's Electronic Data Gathering, Analysis and Retrieval System at the Commission's Web site (http:\\www.sec.gov). The Depositor does not intend to send any financial reports to Certificateholders. This Prospectus does not contain all of the information set forth in the Registration Statement (of which this Prospectus forms a part) and exhibits thereto which the Depositor has filed with the Commission under the Securities Act of 1933 and to which reference is hereby made. Copies of FHLMC's most recent Offering Circular for FHLMC Certificates, FHLMC's most recent Information Statement and any subsequent information statement, any supplement to any information statement relating to FHLMC and any quarterly report made available by FHLMC after December 31, 1983 can be obtained by writing or calling the FHLMC Investor Inquiry Department at 8200 Jones Branch Drive, Mail Stop 319, McLean, Virginia 22102 (800-336-3672). The Depositor did not participate in the preparation of FHLMC's Offering Circular, Information Statement or any supplement and, accordingly, makes no representation as to the accuracy or completeness of the information set forth therein. Copies of FNMA's most recent Prospectus for FNMA Certificates are available from FNMA's Mortgage Backed Securities Office, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752- 6547). FNMA's annual report and quarterly financial statements, as well as other financial information, are available from FNMA's Office of the Treasurer, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000) or the Office of the Vice President of Investor Relations, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000). The Depositor did not participate in the preparation of FNMA's Prospectus and, accordingly, makes no representations as to the accuracy or completeness of the information set forth therein. REPORTS TO CERTIFICATEHOLDERS The Trustee will mail monthly reports concerning each Trust Fund to all registered holders of Certificates of the related series. See "Description of the Certificates-Reports to Certificateholders". 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 the offering of Offered Certificates evidencing interest 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 Offered Certificates, a copy of any or all documents or reports incorporated herein by reference, in each case to the extent such documents or reports relate to one or more of such classes of such Offered Certificates, other than the exhibits to such documents (unless such exhibits are specifically incorporated by reference in such documents). Requests to the Depositor should be directed in writing to its principal executive office at Seven World Trade Center, New York, New York 10048, Attention: Secretary, or by telephone at (212) 783-5635. The Depositor has determined that its financial statements are not material to the offering of any Offered Certificates. 4
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SUMMARY OF PROSPECTUS The following summary of certain pertinent information is qualified in its entirety by reference to the more detailed information appearing elsewhere in this Prospectus and by reference to the information with respect to each series of Certificates contained in the Prospectus Supplement to be prepared and delivered in connection with the offering of such series. An Index of Principal Definitions is included at the end of this Prospectus. Title of Certificates................Mortgage Pass-Through Certificates, issuable in series (the "Certificates"). Depositor............................Salomon Brothers Mortgage Securities VII, Inc., an indirect wholly-owned subsidiary of Salomon Inc and an affiliate of Salomon Brothers Inc. See "The Depositor". Master Servicer......................The Master Servicer (the "Master Servicer") for each series of Certificates evidencing interests in a Trust Fund including Mortgage Loans will be named in the related Prospectus Supplement, which may be the Depositor or an affiliate of the Depositor. See "Description of the Certificates-Certain Matters Regarding the Master Servicer and the Depositor". Trustee..............................The Trustee (the "Trustee") for each series of Certificates will be named in the related Prospectus Supplement. Description of Certificates..........Each series of Certificates will include one or more classes. Each series of Certificates (including any class or classes of Certificates of such series not offered hereby) will represent in the aggregate the entire beneficial ownership interest in a segregated pool of Mortgage Loans, or beneficial interests therein, Agency Securities, Private Mortgage-Backed Securities or Funding Agreements, or any combination thereof (each, a "Trust Fund Asset"), and certain other assets as described below (a "Trust Fund"). Unless otherwise provided in the related Prospectus Supplement, each class of Certificates (other than certain Strip Certificates as defined below) will have a stated principal amount (a "Certificate Principal Balance") and will be entitled to payments of interest thereon based on a fixed, variable or adjustable interest rate (a "Pass-Through Rate"). The related Prospectus Supplement will specify the Pass-Through Rate for each class or, in the case of a variable or adjustable Pass-Through Rate, the method for determining the Pass-Through Rate. A series of Certificates may include one or more classes of Certificates (collectively, the "Senior Certificates") that are senior to one or more classes of Certificates (collectively, the "Subordinate Certificates") in respect of certain distributions of principal and interest and allocation of losses on the Mortgage Loans. Credit enhancement also may be provided with respect to any series by means 5
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of various pool insurance policies, letters of credit, reserve funds or other types of credit support, or any combination of the foregoing, as described herein and in the related Prospectus Supplement. See "Description of Credit Support". A series may include one or more classes of Certificates entitled (i) to principal distributions, with disproportionate, nominal or no interest distributions, or (ii) to interest distributions, with disproportionate, nominal or no principal distributions ("Strip Certificates"). In addition, a series may include two or more classes of Certificates which differ as to timing, sequential order, priority of payment, pass-through rate or amount of distributions of principal or interest or both, or as to which distributions of principal or interest or both on any class may be made upon the occurrence of specified events, in accordance with a schedule or formula, or on the basis of collections from designated portions of the Mortgage Pool, which series may include one or more classes of Certificates ("Accrual Certificates"), as to which certain accrued interest will not be distributed but rather will be added to the principal balance thereof on each Distribution Date, as hereinafter defined, in the manner described in the related Prospectus Supplement. If so provided in the related Prospectus Supplement, a series of Certificates may include one or more classes of Certificates (collectively, the "Senior Certificates") which are senior to one or more classes of Certificates (collectively, the "Subordinate Certificates") in respect of certain distributions of principal and interest allocations of losses on Mortgage Loans. In addition, certain classes of Senior (or Subordinate) Certificates may be senior to other classes of Senior (or Subordinate) Certificates in respect of such distribution or losses. With respect to each series, one or more elections may be made to treat the related Trust Fund or a designated portion thereof as a "real estate mortgage investment conduit" or "REMIC" as defined in the Internal Revenue Code of 1986 (the "Code"). If any such election is made with respect to a series, one of the classes of Certificates comprising such series will be designated as evidencing all "residual interests" in the related REMIC as defined in the Code. The Certificates will not represent an interest in or obligation of the Depositor or any affiliate thereof except as set forth herein, nor will the Certificates or any Mortgage Loans be insured or guaranteed by any governmental agency or instrumentality. Although payment of principal and interest on Agency Securities will be 6
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guaranteed as described herein and in the related Prospectus Supplement by GNMA, FNMA or FHLMC, the Certificates of any series including Agency Securities will not be so guaranteed. The Trust Funds......................Each Trust Fund will consist primarily of (a) a pool (a "Mortgage Pool") of one- to four-family residential mortgage loans, multifamily residential mortgage loans, cooperative apartment loans or manufactured housing conditional sales contracts and installment loan agreements (collectively, the "Mortgage Loans"), or beneficial interests therein, or real property acquired upon foreclosure or comparable conversion of such Mortgage Loans, (b) Agency Securities, (c) Private Mortgage-Backed Securities or (d) Funding Agreements, or any combination thereof. A. The Mortgage Loans..............As more specifically described herein, the Mortgage Loans will be secured by first or junior liens on, or security interests in, (i) one- to four-family residential properties, (ii) rental apartment buildings or projects containing five or more residential units (including apartment buildings owned by cooperative housing corporations), (iii) cooperative loans (the "Cooperative Loans") secured primarily by shares in a private cooperative housing corporation (a "Cooperative") that give the owner thereof the right to occupy a particular dwelling unit in the Cooperative or (iv) new or used manufactured homes (collectively, the "Mortgaged Properties"). The Mortgaged Properties may be located in any one of the fifty states or the District of Columbia. Unless otherwise provided in the related Prospectus Supplement, all Mortgage Loans will have individual principal balances at origination of not less than $25,000 or more than $5,000,000 and original terms to maturity of not more than 40 years. All Mortgage Loans will have been originated by persons unaffiliated with the Depositor and will have been purchased, either directly or indirectly, by the Depositor on or before the date of initial issuance of the related series of Certificates. Unless otherwise provided in the related Prospectus Supplement, each Trust Fund will contain one of the following types of Mortgage Loans: (1) Fully amortizing Mortgage Loans with a fixed rate of interest (an "Interest Rate") and level monthly payments to maturity; (2) Fully amortizing Mortgage Loans with an Interest Rate adjusted periodically (with corresponding adjustments in the amount of monthly payments) to equal the sum (which may be rounded) of a fixed percentage amount and an index ("ARM Loans"), as described in the related Prospectus Supplement; 7
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(3) ARM Loans that provide for an election, at the borrower's option, to convert the adjustable Interest Rate to a fixed interest rate, as described in the related Prospectus Supplement; (4) ARM Loans that provide for negative amortization or accelerated amortization resulting from delays in or limitations on the payment adjustments necessary to amortize fully the outstanding principal balance of the loan at its then applicable Interest Rate over its remaining term; (5) Fully amortizing Mortgage Loans with a fixed Interest Rate and level monthly payments, or payments of interest only, during the early years of the term, followed by periodically increasing monthly payments of principal and interest for the duration of the term or for a specified number of years, as described in the related Prospectus Supplement; (6) Fixed Interest Rate Mortgage Loans providing for level payments of principal and interest on the basis of an assumed amortization schedule and a balloon payment at the end of a specified term; and (7) Another type of Mortgage Loan described 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. Certain of the Mortgage Loans will be covered by primary mortgage insurance policies to the extent provided herein and in the related Prospectus Supplement and if so provided in the related Prospectus Supplement, certain of the Mortgage Loans will be insured or guaranteed by the Federal Housing Administration (the "FHA") or the United States Department of Veterans Affairs (the "VA"). See "Description of Primary Insurance Policies". 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 8
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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 Prospectus Supplement, guaranteed to the same extent as the underlying securities, (v) another type of guaranteed 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 Prospectus Supplement. The payment characteristics of the Mortgage Loans underlying the Agency Securities will be described in the related Prospectus Supplement. C. Private Mortgage-Backed Securities...................Private Mortgage-Backed Securities may include (a) mortgage participations or pass-through certificates representing beneficial interests in certain mortgage loans or (b) collateralized mortgage obligations secured by such 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. See "The Trust Funds-Private Mortgage-Backed Securities" herein. D. Funding Agreements..............Funding Agreements are obligations of a Finance Company (as defined herein) which are secured by Mortgage Loans, Agency Securities or Private Mortgage-Backed Securities. See "The Trust Funds-Funding Agreements" herein. Pre-Funding Account..................If so specified in the related Prospectus Supplement, a portion of the proceeds of the sale of one or more Classes of Certificates of a series may be deposited in a segregated account to be applied to acquire additional Mortgage Loans from the Mortgage Loan Seller, subject to the limitations set forth herein under "Description of the Certificates-PreFunding Account." Monies on deposit in the Pre-Funding Account and not applied to acquire such additional Mortgage Loans within the time set forth in the related Agreement (as defined herein) may be treated as 9
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principal and applied in the manner described in the related Prospectus Supplement. Certificate Account..................Each Trust Fund will include one or more accounts (collectively, the "Certificate Account") established and maintained on behalf of the Certificateholders into which the Master Servicer will, to the extent described herein and in the related Prospectus Supplement, deposit all payments and collections received or advanced with respect to the related Trust Fund Assets. A Certificate Account may be maintained as an interest bearing or a non-interest bearing account, or funds held therein may be invested in certain short-term high-quality obligations. See "Description of the Certificates-Deposits to Certificate Account". Credit Support.......................If so specified in the related Prospectus Supplement, one or more classes of Certificates of a series evidencing interests in a Trust Fund that includes Mortgage Loans or Private Mortgage-Backed Securities may be provided partial or full protection against certain defaults and losses on such assets in the form of subordination of one or more other classes of Certificates in such series or by one or more other types of credit support, such as a letter of credit, reserve fund, insurance policy or a combination thereof (any such coverage, "Credit Support"), and currency or interest rate exchange agreements and other financial assets, or any combination thereof (with respect to any series, collectively, "Cash Flow Agreements"). The amount and types of coverage, the identification of the entity providing the coverage (if applicable) and related information with respect to each type of Credit Support, if any, will be described in the Prospectus Supplement for a series of Certificates. See "Description of Credit Support". Interest on Certificates.............Interest on each class of Certificates (other than certain classes of Strip Certificates) of each series will accrue at the applicable Pass-Through Rate on the outstanding Certificate Principal Balance thereof and will be distributed to Certificateholders as provided in the related Prospectus Supplement (each of the specified dates on which distributions are to be made, a "Distribution Date"). Distributions with respect to interest on Strip Certificates with no or, in certain cases, a nominal Certificate Principal Balance will be made on each Distribution Date on the basis of a notional amount as described herein and in the related Prospectus Supplement. Distributions of interest with respect to one or more classes of Certificates may be reduced to the extent of certain delinquencies and other contingencies described herein and in the related Prospectus Supplement. See "Yield Considerations" and 10
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"Description of the Certificates-Interest on the Certificates". Principal of Certificates............The Certificates of each series (other than certain Strip Certificates) initially will have an aggregate Certificate Principal Balance equal to the outstanding principal balance of the Trust Fund Assets as of, unless the related Prospectus Supplement provides otherwise, the close of business on the first day of the month of formation of the related Trust Fund (the "Cut-off Date"), after application of scheduled payments due on or before such date, whether or not received. The Certificate Principal Balance of a Certificate represents the maximum amount that the holder thereof is entitled to receive in respect of principal from future cash flow on the assets in the related Trust Fund. The Prospectus Supplement will include the initial Certificate Principal Balance of each class of Certificates offered thereby. Unless otherwise provided in the related Prospectus Supplement, distributions of principal will be made on each Distribution Date to the class or classes of Certificates entitled thereto until the Certificate Principal Balance of such class has been reduced to zero. Distributions of principal of any class of Certificates will be made on a pro rata basis among all of the Certificates of such class. Strip Certificates with no Certificate Principal Balance will not receive distributions in respect of principal. See "Description of the Certificates-Principal of the Certificates". Advances.............................The Master Servicer, directly or through sub-servicers, will service and administer the Mortgage Loans included in a Trust Fund and, unless the related Prospectus Supplement provides otherwise, in connection therewith will be obligated to make certain advances with respect to delinquent scheduled payments on the Mortgage Loans. Advances made by the Master Servicer are reimbursable to the extent described herein and in the related Prospectus Supplement. The Prospectus Supplement with respect to any series may provide that the Master Servicer will obtain a cash advance surety bond, or maintain a cash advance reserve fund, to cover any obligation of the Master Servicer to make advances. The obligor on any such surety bond will be named, and the terms applicable to any such cash advance reserve fund will be described in the related Prospectus Supplement. See "Description of the Certificates-Advances in respect of Delinquencies". Optional Termination.................If so specified in the related Prospectus Supplement, a series of Certificates may be subject to optional early termination through the repurchase of the assets in the related Trust Fund by the party specified therein, under 11
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the circumstances and in the manner set forth herein under "Description of the Certificates-Termination". Tax Status of the Certificates.......The Certificates of each series offered hereby will constitute either (i) "regular interests" ("REMIC Regular Certificates") and "residual interests" ("REMIC Residual Certificates") in a Trust Fund treated as a REMIC under Sections 860A through 860G of the Code, (ii) interests ("Grantor Trust Certificates") in a Trust Fund treated as a grantor trust under applicable provisions of the Code, (iii) interests ("Partnership Certificates") in a Trust Fund treated as a partnership under applicable provisions of the Code or (iv) evidences of indebtedness ("Debt Certificates") of a Trust Fund treated as debt instruments for federal income tax purposes. In general, to the extent the assets and income of the Trust Fund are treated as qualifying assets and income under the following sections of the Code, REMIC Regular Certificates and REMIC Residual Certificates (i) owned by a "domestic building and loan association" will be treated as "loans secured by an interest in real property" within the meaning of Code Section 7701(a)(19)(C) and (ii) owned by a real estate investment trust will be treated as "real estate assets" for purposes of Section 856(c)(5)(A) of the Code and interest income therefrom will be treated as "interest on obligations secured by mortgages on real property" for purposes of Section 856(c)(3)(B) of the Code. In addition, REMIC Regular Certificates will be "obligation[s]. . .which. . .[are] principally secured by an interest in real property" within the meaning of Section 860G(a)(3)(C) of the Code. Moreover, if 95% or more of the assets and the income of the Trust Fund qualify for any of the foregoing treatments, the REMIC Regular Certificates and (with the exception of Section 860G(a)(3)(C) of the Code) REMIC Residual Certificates will qualify for the foregoing treatments in their entirety. REMIC Residual Certificates generally will be treated as representing an interest in qualifying assets and income to the same extent described above for institutions subject to Sections 7701(a)(19)(C), 856(c)(5)(A) and 856(c)(3)(B) of the Code. A portion (or, in certain cases, all) of the income from REMIC Residual Certificates (i) may not be offset by any losses from other activities of the holder of such REMIC Residual Certificates, (ii) may be treated as unrelated business taxable income, for holders of REMIC Residual Certificates that are subject to tax on unrelated business taxable income (as defined in Section 511 of the Code), and (iii) may be subject to foreign withholding rules. In addition, transfers of certain REMIC Residual Certificates may be disregarded under some 12
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circumstances for all federal income tax purposes. See "Certain Federal Income Tax Consequences-REMICs-Taxation of Owners of REMIC Residual Certificates-Excess Inclusions," and "-Noneconomic REMIC Residual Certificates" herein. Unless otherwise provided in the related Prospectus Supplement, Grantor Trust Certificates may be either Certificates having a Certificate Principal Balance and a Pass-Through Rate ("Grantor Trust Fractional Interest Certificates") or Strip Certificates ("Grantor Trust Strip Certificates"). Holders of Grantor Trust Fractional Interest Certificates generally will be treated as owning an interest in qualifying assets and income under Sections 7701(a)(19)(C), 856(c)(5)(A), 856(c)(3)(B) and 860G(a)(3)(A) of the Code. It is unclear whether Grantor Trust Strip Certificates will be treated as representing an ownership interest in qualifying assets and income under Sections 7701(a)(19)(C), 856(c)(5)(A) and 856(c)(3)(B) of the Code, although the policy considerations underlying those Sections suggest that such treatment should be available. Partnership Certificates will be treated as partnership interests for purposes of federal income taxation, and accordingly, will not represent an interest in qualifying assets for purposes of Section 7701(a)(19)(C) of the Code, but will represent qualifying assets and income under Sections 856(c)(5)(A) and 856(c)(3)(B) of the Code to the extent their proportionate share of the assets of the related Trust Fund so qualify. Debt Certificates will not represent qualifying assets or income for purposes of any of the preceding Sections. Investors are advised to consult their tax advisors and to review "Certain Federal Income Tax Consequences" herein and in the related Prospectus Supplement. Rating...............................At the date of issuance, as to each series, each class of Certificates offered hereby will be rated in one of the four highest rating categories by one or more nationally recognized statistical rating agencies. See "Rating" in the related Prospectus Supplement. Legal Investment.....................The Prospectus Supplement for each series of Certificates will specify which classes of Certificates of such series, if any, will constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Any class of Certificates that is not rated in one of the two highest rating categories by one or more nationally recognized statistical rating agencies or that represents an interest in a Trust Fund that includes junior mortgage loans will not constitute "mortgage related securities" for purposes of SMMEA. See "Legal Investment". 13
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ERISA Considerations.................A fiduciary of an employee benefit plan and certain other retirement plans and arrangements, including individual retirement accounts, annuities, Keogh plans, and bank collective investment funds and insurance company general and separate accounts in which such plans, accounts, annuities or arrangements are invested, that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code (each, a "Plan") should carefully review with its legal advisors whether the purchase or holding of Certificates could give rise to a transaction that is prohibited or is not otherwise permissible either under ERISA or Section 4975 of the Code. The U.S. Department of Labor has issued an individual exemption, Prohibited Transaction Exemption 89- 89 (the "Exemption"), to Salomon Brothers Inc ("Salomon") that generally exempts from the application of certain of the prohibited transaction provisions of Section 406 of ERISA and the excise taxes imposed on such prohibited transactions by Section 4975(a) and (b) of the Code, transactions relating to the purchase, sale and holding of pass-through certificates underwritten by Salomon and the servicing and operation of asset pools such as certain of the Trust Funds, provided that certain conditions are satisfied. If the conditions of the Exemption will not be satisfied, the Certificates may not be acquired by or on behalf of, or with the assets of, a Plan unless the party acquiring such Certificates provides the Depositor, the Trustee and the Master Servicer with an opinion of counsel, or a certification in lieu of such opinion of counsel, that the purchase of such Certificates is permissible under applicable law, will not constitute or result in any non-exempt prohibited transaction under ERISA or Section 4975 of the Code and will not subject the Depositor, the Trustee or the Master Servicer to any obligation in addition to those undertaken in the related Agreement. See "ERISA Considerations" herein. 14
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THE TRUST FUNDS THE MORTGAGE LOANS GENERAL The Mortgage Loans may consist of mortgage loans secured by first or junior liens on by oneto four-family residential properties ("Single Family Properties" and the related loans, "Single Family Loans"), mortgage loans secured by rental apartments or projects (including apartment buildings owned by cooperative housing corporations) containing five or more dwelling units ("Multifamily Properties" and the related loans, "Multifamily Loans"), mortgage loans secured by shares in a private cooperative housing corporation (a "Cooperative" and the related loans, "Cooperative Loans") that give the owner thereof the right to occupy a particular dwelling unit (each, a "Cooperative Unit") in the Cooperative or conditional sales contracts and installment loan agreements with respect to new or used Manufactured Homes (as defined herein, and the related contracts or agreements, the "Contracts"), or beneficial interests therein, or real property acquired upon foreclosure or comparable conversion of such Mortgage Loans. The Single-Family Properties, Cooperative shares (together with the right to occupy a particular Cooperative Unit evidenced thereby) and Manufactured Homes (collectively, the "Mortgaged Properties") may be located in any one of the fifty states or the District of Columbia. The Mortgaged Properties may include leasehold interests in residential properties, the title to which is held by third party lessors. The term of any such leasehold will exceed the term of the Mortgage Note by at least five years. Each Mortgage Loan will have been originated by a person (the "Originator") not affiliated with Salomon Brothers Mortgage Securities VII, Inc. (the "Depositor"). Each Mortgage Loan will be selected by the Depositor for inclusion in a Mortgage Pool from among those purchased, either directly or indirectly, from a prior holder thereof (a "Mortgage Loan Seller"), which prior holder may not be the Originator thereof and may be an affiliate of the Depositor. See "Mortgage Loan Program-Underwriting Standards". Unless otherwise specified below or in the related Prospectus Supplement, all of the Mortgage Loans in a Mortgage Pool will (i) have individual principal balances at origination of not less than $25,000 or more than $5,000,000, (ii) have monthly payments due on the first day of each month, (iii) have original terms to maturity of not more than 40 years and (iv) be one of the following types of mortgage loans: (1) Fully amortizing Mortgage Loans with a fixed rate of interest (an "Interest Rate") and level monthly payments to maturity; (2) Fully amortizing Mortgage Loans with an Interest Rate adjusted periodically (with corresponding adjustments in the amount of monthly payments) to equal the sum (which may be rounded) of a fixed percentage amount and an index ("ARM Loans"), as described in the related Prospectus Supplement; (3) ARM Loans that provide for an election, at the borrower's option, to convert the adjustable Interest Rate to a fixed interest rate, as described in the related Prospectus Supplement; (4) ARM Loans that provide for negative amortization or accelerated amortization resulting from delays in or limitations on the payment adjustments necessary to amortize fully the outstanding principal balance of the loan at its then applicable Interest Rate over its remaining term; (5) Fully amortizing Mortgage Loans with a fixed Interest Rate and level monthly payments, or payments of interest only, during the early years of the term, followed by periodically increasing monthly payments of principal and interest for the duration of the term or for a specified number of years, as described in the related Prospectus Supplement; 15
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(6) Fixed Interest Rate Mortgage Loans providing for level payment of principal and interest on the basis of an assumed amortization schedule and a balloon payment at the end of a specified term; and (7) Another type of Mortgage Loan described in the related Prospectus Supplement. If provided in the related Prospectus Supplement, certain of the Mortgage Pools may contain Mortgage Loans secured by junior liens, and the related senior liens ("Senior Liens") may not be included in the Mortgage Pool. The primary risk to holders of Mortgage Loans secured by junior liens is the possibility that adequate funds will not be received in connection with a foreclosure of the related Senior Liens to satisfy fully both the Senior Liens and the Mortgage Loan. In the event that a holder of a Senior Lien forecloses on a Mortgaged Property, the proceeds of the foreclosure or similar sale will be applied first to the payment of court costs and fees in connection with the foreclosure, second to real estate taxes, third in satisfaction of all principal, interest, prepayment or acceleration penalties, if any, and any other sums due and owing to the holder of the Senior Liens. The claims of the holders of the Senior Liens will be satisfied in full out of proceeds of the liquidation of the Mortgage Loan, if such proceeds are sufficient, before the Trust Fund as holder of the junior lien receives any payments in respect of the Mortgage Loan. If the Master Servicer were to foreclose on any Mortgage Loan, it would do so subject to any related Senior Liens. In order for the debt related to the Mortgage Loan to be paid in full at such sale, a bidder at the foreclosure sale of such Mortgage Loan would have to bid an amount sufficient to pay off all sums due under the Mortgage Loan and the Senior Liens or purchase the Mortgaged Property subject to the Senior Liens. In the event that such proceeds from a foreclosure or similar sale of the related Mortgaged Property are insufficient to satisfy all Senior Liens and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of the junior lien, and, accordingly, holders of one or more classes of the Certificates bear (i) the risk of delay in distributions while a deficiency judgment against the borrower is obtained and (ii) the risk of loss if the deficiency judgment is not realized upon. Moreover, deficiency judgments may not be available in certain jurisdictions. In addition, a junior mortgagee may not foreclose on the property securing a junior mortgage unless it forecloses subject to the senior mortgages. Liquidation expenses with respect to defaulted junior mortgage loans do not vary directly with the outstanding principal balance of the loan at the time of default. Therefore, assuming that the Master Servicer took the same steps in realizing upon a defaulted junior mortgage loan having a small remaining principal balance as it would in the case of a defaulted junior mortgage loan having a large remaining principal balance, the amount realized after expenses of liquidation would be smaller as a percentage of the outstanding principal balance of the small junior mortgage loan than would be the case with the defaulted junior mortgage loan having a large remaining principal balance. Because the average outstanding principal balance of the Mortgage Loans is smaller relative to the size of the average outstanding principal balance of the loans in a typical pool of first priority mortgage loans, liquidation proceeds may also be smaller as a percentage of the principal balance of a Mortgage Loan than would be the case in a typical pool of first priority mortgage loans. Unless otherwise specified in the related Prospectus Supplement, the following requirements as to the Loan-to-Value Ratio of each Mortgage Loan of the type described above shall apply. The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio (expressed as a percentage) of the then outstanding principal balance of the Mortgage Loan, plus, in the case of a Mortgage Loan secured by a junior lien, the outstanding principal balance of the related Senior Liens, to the Value of the related Mortgaged Property. The Value of a Single-Family Property, Multifamily Property or Cooperative Unit, other than with respect to Refinance Loans, is the lesser of (a) the appraised value determined in an appraisal obtained by the originator at origination of such loan and (b) the sales price for such property. Refinance Loans are loans made to refinance existing loans. The Value of the Mortgaged Property securing a Refinance Loan is the appraised value thereof determined in an appraisal obtained at the time of origination of the Refinance Loan. 16
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Unless otherwise specified in the related Prospectus Supplement, for purposes of calculating the Loan-to-Value Ratio of a Contract relating to a new Manufactured Home, the Value is no greater than the sum of a fixed percentage of the list price of the unit actually billed by the manufacturer to the dealer (exclusive of freight to the dealer site) including "accessories" identified in the invoice (the "Manufacturer's Invoice Price"), plus the actual cost of any accessories purchased from the dealer, a delivery and set-up allowance, depending on the size of the unit, and the cost of state and local taxes, filing fees and up to three years prepaid hazard insurance premiums. Unless otherwise specified in the related Prospectus Supplement, with respect to a used Manufactured Home, the Value is the least of the sale price, the appraised value, and the National Automobile Dealer's Association book value plus prepaid taxes and hazard insurance premiums. The appraised value of a Manufactured Home is based upon the age and condition of the manufactured housing unit and the quality and condition of the mobile home park in which it is situated, if applicable. A Mortgaged Property may have been subject to secondary financing at origination of the Mortgage Loan, but, unless otherwise specified in the related Prospectus Supplement, the total amount of primary and secondary financing at the time of origination of the Mortgage Loan did not produce a combined Loan-to-Value Ratio in excess of (i) 90% in the case of a Mortgage Loan secured by an owner-occupied primary residence or (ii) 80% in the case of a Mortgage Loan secured by a vacation or second home. With respect to each Mortgaged Property, unless otherwise provided in the related Prospectus Supplement, the borrower will have represented that the dwelling is either (a) an owner-occupied primary residence or (b) a vacation or second home that (i) is not part of a mandatory rental pool and (ii) is suitable for year-round occupancy. With respect to a vacation or second home, no income derived from the property will be considered for underwriting purposes. Unless otherwise specified in the related Prospectus Supplement, the aggregate principal balance on the Cut-off Date of Mortgage Loans secured by condominium units will not exceed 30% of the aggregate principal balance of the Mortgage Loans in the related Mortgage Pool. A Mortgage Loan secured by a condominium unit will not be included in a Mortgage Pool unless, at the time of sale of such Mortgage Loan by the Mortgage Loan Seller, certain representations and warranties as to the condominium project are made by the Mortgage Loan Seller or an affiliate thereof or by such other person acceptable to the Depositor having knowledge regarding the subject matter of such representations and warranties. Unless otherwise specified in the related Prospectus Supplement, such Mortgage Loan Seller, or another party on its behalf, will have made the following representations and warranties. If a condominium project is subject to developer control or to incomplete phasing or add-ons, at least 70% of the units have been sold to bona fide purchasers and are occupied as primary residences or vacation or second homes. If a condominium project has been controlled by the unit owners (other than the developer) for less than two years and is not subject to incomplete phasing or add-ons, at least 70% of the units have been sold to bona fide purchasers and at least 60% of the units are occupied as primary residences or vacation or second homes. The foregoing percentages may be modified in the case of a particular project upon proof of demonstrated market acceptance but in no event will any such percentage be reduced below 51%. If a condominium project has been controlled by the unit owners (other than the developer) for at least two years, has all common elements completed and is not subject to phasing or add-ons, the Mortgage Loan Seller, or another party on its behalf, must represent and warrant, unless otherwise specified in the related Prospectus Supplement, that the marketability of the project has been proven and that at least 90% of the units have been sold to bona fide purchasers. See "Mortgage Loan Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases" herein for a description of certain other representations made by or on behalf of Mortgage Loan Sellers at the time Mortgage Loans are sold. If provided in the related Prospectus Supplement, certain of the Mortgage Pools may contain Mortgage Loans subject to temporary buydown plans ("Buydown Mortgage Loans"), pursuant to 17
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which the monthly payments made by the borrower in the early years of the Mortgage Loan (the "Buydown Period") will be less than the scheduled monthly payments on the Mortgage Loan, the resulting difference to be made up from (i) an amount contributed by the borrower, the seller of the Mortgaged Property, or another source (such amount, exclusive of investment earnings thereon, being hereinafter referred to as "Buydown Funds") and placed in a custodial account and (ii) unless otherwise specified in the Prospectus Supplement, investment earnings on the Buydown Funds. See "Description of the Certificates-Payments on Mortgage Loans. Generally, the borrower under each Buydown Mortgage Loan will be qualified at the applicable Buydown Mortgage Rate. Accordingly, the repayment of a Buydown Mortgage Loan is dependent on the ability of the borrower to make larger level monthly payments after the Buydown Funds have been depleted and, for certain Buydown Mortgage Loans, during the Buydown Period. See "Mortgage Loan Program-Underwriting Standards" for a discussion of loss and delinquency considerations relating to Buydown Mortgage Loans. Unless otherwise specified in the related Prospectus Supplement, each Mortgage Loan having a Loan-to-Value Ratio at origination in excess of 80%, is required to be covered by a primary mortgage guaranty insurance policy insuring against default on such Mortgage Loan as to at least the principal amount thereof exceeding 75% of the Value of the Mortgaged Property at origination of the Mortgage Loan. Such insurance must remain in force at least until the Mortgage Loan amortizes to a level that would produce a Loan-to-Value Ratio lower than 80%. See "Description of Primary Insurance Policies-Primary Mortgage Insurance Policies". 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, Agency Securities, Private Mortgage-Backed Securities or Funding Agreements contained in the related Trust Fund, including (i) the aggregate outstanding principal balance, the largest, smallest and average outstanding principal balance of the Trust Fund Assets as of the applicable Cut-off Date, and, with respect to Mortgage Loans secured by a junior lien, the amount of the related Senior Liens, (ii) the type of property securing the Mortgage Loans (e.g., one- to four-family houses, multifamily residential dwellings, shares in Cooperatives and the related proprietary leases or occupancy agreements, condominium units and other attached units, new or used Manufactured Homes and vacation and second homes), (iii) the original terms to maturity of the Mortgage Loans, (iv) the earliest origination date and latest maturity date, (v) the aggregate principal balance of Mortgage Loans having Loan-to-Value Ratios at origination exceeding 80%, or, with respect to Mortgage Loans secured by a junior lien, the aggregate principal balance of Mortgage Loans having combined Loan-to-Value Ratios exceeding 80%, (vi) the Interest Rates or range of Interest Rates borne by the Mortgage Loans or mortgage loans underlying the Agency Securities, Private Mortgage-Backed Securities or Funding Agreements, (vii) the geographical distribution of the Mortgage Loans on a state-by-state basis, (viii) the number and aggregate principal balance of Buydown Mortgage Loans, if any, (ix) the weighted average Retained Interest, if any, (x) with respect to ARM Loans, the adjustment dates, the highest, lowest and weighted average margin, and the maximum Interest Rate variation at the time of any adjustment and over the life of the ARM Loan, and (xi) with respect to Mortgage Loans of the type described in (5) above, whether such loans provide for payments of interest only for any period and the frequency and amount by which, and the term during which, monthly payments adjust. If specific information respecting the Trust Fund Assets is not known to the Depositor at the time Certificates are initially offered, more general information of the nature described above will be provided in the Prospectus Supplement, and specific information will be set forth in a report which will be available to purchasers of the related Certificates at or before the initial issuance thereof and will be filed as part of a report on Form 8-K with the Securities and Exchange Commission within fifteen days after such initial issuance. No assurance can be given that values of the Mortgaged Properties have remained or will remain at their levels on the respective dates of origination of the related Mortgage Loans. If the 18
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residential real estate market should experience an overall decline in property values such that the outstanding principal balances of the Mortgage Loans, and any secondary financing on the Mortgaged Properties, in a particular Mortgage Pool become equal to or greater than the value of the Mortgaged Properties, the rates of delinquencies, foreclosures or repossessions and losses could be higher than those now generally experienced by institutional lenders. Manufactured Homes are less likely to experience appreciation in value and more likely to experience depreciation in value over time than other types of housing properties. 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 rates of delinquencies, foreclosures or repossessions and losses with respect to any Mortgage Pool. To the extent that such losses are not covered by Credit Support, such losses will be borne, at least in part, by the holders of one or more classes of the Certificates of the related series offered hereby. The Depositor will cause the Mortgage Loans comprising each Trust Fund 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. The Master Servicer named in the related Prospectus Supplement will service the Mortgage Loans, either directly or through other loan servicing institutions pursuant to a Pooling and Servicing Agreement among the Depositor, itself and the Trustee, and will receive a fee for such services. See "Mortgage Loan Program" and "Description of the Certificates". 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 Pooling and Servicing Agreement as if the Master Servicer alone were servicing such Mortgage Loans. The Depositor will make certain representations and warranties regarding the Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will be without recourse. See "Description of the Certificates-Assignment of Trust Fund Assets". The obligations of the Master Servicer with respect to the Mortgage Loans will consist principally of its contractual servicing obligations under the related Pooling and Servicing Agreement (including its obligation to enforce certain purchase and other obligations of Sub-Servicers or Mortgage Loan Sellers, or both, as more fully described herein under "Mortgage Loan Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases" and "Description of the Certificates-Sub-Servicing" and "-Assignment of Trust Fund Assets") and, unless otherwise provided in the related Prospectus Supplement, its obligation to make certain cash advances in the event of delinquencies in payments on or with respect to the Mortgage Loans in amounts described herein under "Description of the Certificates-Advances in respect of Delinquencies". Any obligation 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 LOANS The Single-Family Loans will be evidenced by promissory notes (the "Mortgage Notes") secured by first mortgages or first deeds of trust (the "Mortgages") creating a first lien on the Single-Family Properties. The Single-Family Properties will consist of one- to four-family residences, including detached and attached dwellings, townhouses, rowhouses, individual condominium units, individual units in planned-unit developments and individual units in de minimis planned-unit developments. Single-Family loans may be conventional loans, FHA-insured loans or VA-guaranteed loans as specified in the related Prospectus Supplement. MULTIFAMILY LOANS The Multifamily Loans will be evidenced by Mortgage Notes secured by Mortgages creating a first lien on the Multifamily Properties. The Multifamily Properties will consist of rental 19
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apartments or projects (including apartment buildings owned by cooperative housing cooperatives) containing five or more dwelling units. Multifamily Properties may include high-rise, mid-rise and garden apartments. Multifamily Loans may be conventional loans or FHA insured loans as specified in the related Prospectus Supplement. COOPERATIVE LOANS The Cooperative Loans will be evidenced by promissory notes (the "Cooperative Notes") secured by security interests in shares issued by Cooperatives and in the related proprietary leases or occupancy agreements granting exclusive rights to occupy specific Cooperative Units in the related buildings. CONTRACTS The Contracts will consist of manufactured housing conditional sales contracts and installment loan agreements each secured by a Manufactured Home. The Manufactured Homes securing the Contracts will consist of manufactured homes within the meaning of 42 United States Code, Section 5402(6), which defines a "manufactured home" as "a structure, transportable in one or more sections, which in the traveling mode, is eight body feet or more in width or forty body feet or more in length, or, when erected on site, is three hundred twenty or more square feet, and which is built on a permanent chassis and designed to be used as a dwelling with or without a permanent foundation when connected to the required utilities, and includes the plumbing, heating, air conditioning, and electrical systems contained therein; except that such term shall include any structure which meets all the requirements of this paragraph except the size requirements and with respect to which the manufacturer voluntarily files a certification required by the Secretary of Housing and Urban Development and complies with the standards established under this chapter." 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 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 guarantee 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 amount which is at anytime sufficient to enable GNMA, with no limitations as to amount, 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" mortgaged-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 20
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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. 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 30 years (but may have original maturities of substantially less than 30 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 is 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 21
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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 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. If specified in a Prospectus Supplement, GNMA Certificates may be backed by multifamily mortgage loans having the characteristics specified in such 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. 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 in 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 22
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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 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 guarantee 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 which it has purchased but not sold. The length of time necessary for FHLMC to determine that a mortgage loan 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, nor 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 23
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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 (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. 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 in 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 other servicers 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 in 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 Prospectus Supplement, FNMA Certificates may be backed by adjustable rate mortgages. 24
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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, nor 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. 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 another trustee named in the related Prospectus Supplement. FHLMC, FNMA or GNMA will guarantee 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 evidencing an undivided interest in a pool of mortgage loans or (b) collateralized mortgage obligations secured by mortgage loans. Private Mortgage-Backed Securities will have been issued pursuant to a pooling and servicing agreement, an indenture or similar agreement (a "PMBS Agreement"). The seller/servicer of the underlying mortgage loans will have entered into the 25
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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 Security. 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 PMBS Servicer will be a FNMA or FHLMC approved servicer and, if FHA Loans underlie the Private Mortgage-Backed Securities, approved by HUD as an FHA mortgagee. 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 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, buy-down loans, adjustable rate mortgage loans, or loans having balloon or other special payment features. Such Mortgage Loans may be secured by single family property, multifamily property, manufactured homes 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. Except as otherwise specified in the related Prospectus Supplement, (i) no mortgage loan will have had a Loan-to-Value Ratio at origination in excess of 95%, (ii) each single family loan secured by a mortgaged property having a loan-to-value ratio in excess of 80% at origination will be covered by a primary mortgage insurance policy, (iii) each mortgage loan will have had an original term to stated maturity of not less than 5 years and not more than 40 years, (iv) no mortgage loan that was more than 30 days delinquent as to the payment of principal or interest will have been eligible for inclusion in the assets under the related PMBS Agreement, (v) each mortgage loan (other than a cooperative loan) will be required to be covered by a standard hazard insurance policy (which may be a blanket policy) and (vi) each mortgage loan (other than a cooperative loan or a Contract secured by a manufactured home) will be covered by a title insurance policy. CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES Credit support in the form of reserve funds, subordination of other private mortgage-backed securities issued under the PMBS Agreement, letters of credit, insurance policies or other types of credit support may be provided with respect to the mortgage loans underlying the Private 26
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Mortgage-Backed Securities or with respect to the Private Mortgage-Backed Securities themselves. ADDITIONAL INFORMATION The Prospectus Supplement for a series for which the Trust Fund includes Private MortgageBacked Securities will specify (i) the aggregate approximate principal amount and type of the Private Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain 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, if known, 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, letters of credit or guarantees 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. FUNDING AGREEMENTS If specified in the Prospectus Supplement for a series, the Depositor may enter into a funding agreement with a limited-purpose subsidiary or affiliate of a Mortgage Loan Seller (a "Finance Company") pursuant to which (i) the Depositor will lend the net proceeds of the sale of the Certificates to such Finance Company, (ii) the Finance Company will pledge Trust Fund Assets owned by it to secure the loan from the Depositor, and (iii) the Depositor will assign the Funding Agreement, as so secured, to the Trust Fund for a series (a "Funding Agreement"). No Finance Company will be authorized to engage in any business activities other than the financing and sale of Trust Fund Assets. Pursuant to a Funding Agreement (i) the Depositor will lend a Finance Company the proceeds from the sale of a series of Certificates and such Finance Company will pledge to the Depositor as security therefor Trust Fund Assets having an aggregate unpaid principal balance as of any date of determination equal to at least the amount of the loan, and (ii) the Finance Company will agree to repay such loan by causing payments on the Trust Fund Assets to be made to the Trustee as assignee of the Depositor in such amounts as are necessary (together with payments from the related Reserve Fund or other funds or accounts) to pay accrued interest on such loan and to amortize the entire principal amount of such loan. A Finance Company is not obligated to provide additional collateral to secure the loan pursuant to a Funding Agreement subsequent to the issuance of the Certificates of the series by the Trust Fund. Unless the Depositor, the Master Servicer or other entity designated in the Prospectus Supplement exercises its option to terminate the Trust Fund and retire the Certificates of a series, or a Finance Company defaults under its Funding Agreement, such Finance Company's loan may not be prepaid other than as a result of prepayments on the pledged Trust Fund Assets. If the Finance Company, nevertheless, were to attempt to prepay its loan, the loan would not be 27
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deemed prepaid in full unless the Finance Company paid the Depositor an amount sufficient to enable the Depositor to purchase other Trust Fund Assets comparable in yield and maturity to the Finance Company's Trust Fund Assets pledged under the Funding Agreement. The Trustee then could either (i) purchase such other Trust Fund Assets and substitute them for the Trust Fund Assets pledged by the Finance Company, to the extent that such purchase and substitution did not adversely affect the tax treatment of the related series, or (ii) deposit the amount of the Finance Company's prepayment in the Certificate Account. In the event of a default under a Funding Agreement, the Trustee will have recourse to the related Finance Company for the benefit of the holders of the Certificates, including the right to foreclose upon the Trust Fund Assets securing that Funding Agreement. The participating Finance Companies will be limited-purpose finance entities and, therefore, it is unlikely that a defaulting Finance Company will have any significant assets except those pledged to the Trust Fund for the series and those that secure other mortgage-backed securities and collateralized mortgage obligations. The Trustee has no recourse to assets pledged to secure other securities except to the limited extent that funds generated by such assets exceed the amount required to pay those securities and are released from the lien securing such other securities and returned to a Finance Company. For that reason, prospective purchasers of Certificates should make their investment decisions on the basis that the Certificates of a series have rights solely with respect to the assets transferred to the Trust Fund for that series of Certificates. In the event of a default under a Funding Agreement and the sale by the Trustee of the Trust Fund Assets securing the obligations of the Finance Company under the Funding Agreement, the Trustee may distribute principal in an amount equal to the unpaid principal balance of the Trust Fund Assets so liquidated ratably among all classes of Certificates within the series, or in such other manner as may be specified in the related Prospectus Supplement. USE OF PROCEEDS The net proceeds to be received from the sale of the Certificates will be applied by the Depositor to the purchase of Trust Fund Assets or will be used by the Depositor for general corporate purposes. The Depositor expects that it will make additional sales of securities similar to the Certificates from time to time, but the timing and amount of offerings of Certificates will depend on a number of factors, including the volume of Trust Fund Assets acquired by the Depositor, prevailing interest rates, availability of funds and general market conditions. YIELD CONSIDERATIONS Unless otherwise provided in the related Prospectus Supplement, each monthly interest payment on a Trust Fund Asset is calculated as one-twelfth of the applicable Interest Rate multiplied by the unpaid principal balance thereof. Interest to be distributed on each Distribution Date to the holders of the various classes of Certificates (other than certain classes of Strip Certificates) of each series will be similarly calculated for the applicable period, as one-twelfth of the applicable Pass-Through Rate multiplied by the outstanding Certificate Principal Balance thereof, except as provided below with respect to prepayments. In the case of Strip Certificates with no or, in certain cases, a nominal Certificate Principal Balance, such distributions of interest will be in an amount (as to any Distribution Date, "Stripped Interest") described in the related Prospectus Supplement. The effective yield to Certificateholders will be lower than the yield otherwise produced by the applicable Pass-Through Rate (or, as to a Strip Certificate, the distributions of Stripped Interest thereon) and purchase price, because although interest accrued on each Trust Fund Asset during each month is due and payable on the first day of the following month (unless otherwise provided 28
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in the related Prospectus Supplement), the distribution of interest on the Certificates will not be made until the Distribution Date occurring in the month following the month of accrual of interest in the case of Mortgage Loans, and in later months in the case of Agency Securities, Private Mortgage-Backed Securities or Funding Agreements and in the case of a series of Certificates having Distribution Dates occurring at intervals less frequently than monthly. Unless otherwise specified in the related Prospectus Supplement, when a principal prepayment in full is made on a Mortgage Loan or a mortgage loan underlying a Private Mortgage-Backed Security, the borrower is charged interest only for the period from the due date of the preceding monthly payment up to the date of such prepayment, instead of for a full month. Accordingly, the effect of principal prepayments in full during any month will be to reduce the aggregate amount of interest collected that is available for distribution to Certificateholders. If so provided in the related Prospectus Supplement, certain of the Mortgage Loans or the mortgage loans underlying a Private Mortgage-Backed Security may contain provisions limiting prepayments hereof or requiring the payment of a prepayment penalty upon prepayment in full or in part. Unless otherwise provided in the related Prospectus Supplement, any such penalty will be applied to offset the above-described shortfalls in interest collections on the related Distribution Date. Unless otherwise specified in the related Prospectus Supplement, partial principal prepayments are applied on the first day of the month following receipt, with no resulting reduction in interest payable for the period in which the partial principal prepayment is made. Unless specified otherwise in the related Prospectus Supplement, neither the Trustee, the Master Servicer nor the Depositor will be obligated to fund shortfalls in interest collections resulting from prepayments. Holders of Agency Securities are entitled to a full month's interest in connection with prepayments in full of the underlying mortgage loans. Full and partial principal prepayments collected during the applicable Prepayment Period will be available for distribution to Certificateholders on the related Distribution Date. Unless otherwise provided in the related Prospectus Supplement, a "Prepayment Period" in respect of any Distribution Date will commence on the first day of the month in which the preceding Distribution Date occurs (or, as to the first Prepayment Period, the day after the Cut-off Date) and will end on the last day of the month prior to the month in which the related Distribution Date occurs. See "Maturity and Prepayment Considerations" and "Description of the Certificates-General". The Prospectus Supplement for each series of Certificates may set forth additional information regarding yield considerations. MATURITY AND PREPAYMENT CONSIDERATIONS The original terms to maturity of the Trust Fund Assets in a particular Trust Fund will vary depending upon the type of mortgage loans underlying or comprising the Trust Fund Assets in such Trust Fund. Each Prospectus Supplement will contain information with respect to the type and maturities of the Trust Fund Assets in the related Trust Fund. Unless otherwise specified in the related Prospectus Supplement, all of the Single-Family Loans, Cooperative Loans and Contracts and all of the mortgage loans underlying the Agency Securities, Private Mortgage-Backed Securities and Funding Agreements may be prepaid without penalty in full or in part at any time. If so provided in the related Prospectus Supplement, certain of the Mortgage Loans may contain provisions prohibiting prepayment for a specified period after the origination date (a "Lockout Period"), prohibiting partial prepayments entirely or prohibiting prepayment in full or in part without a prepayment penalty. The prepayment experience on the mortgage loans underlying or comprising the Trust Fund Assets in a Trust Fund will affect the weighted average life of the related series of Certificates. Weighted average life refers to the average amount of time that will elapse from the date of issuance of a security until each dollar of principal of such security will be repaid to the investor. 29
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The weighted average life of the Certificates of a series will be influenced by the rate at which principal on the mortgage loans underlying or comprising the Trust Fund Assets included in the related Trust Fund is paid, which payments may be in the form of scheduled amortization or prepayments (for this purpose, the term "prepayment" includes prepayments, in whole or in part, and liquidations due to default and hazard or condemnation losses). The rate of prepayment with respect to fixed rate mortgage loans has fluctuated significantly in recent years. In general, if interest rates fall below the Interest Rates on the mortgage loans underlying or comprising the Trust Fund Assets, the rate of prepayment would be expected to increase. There can be no assurance as to the rate of prepayment of the mortgage loans underlying or comprising the Trust Fund Assets in any Trust Fund. The Depositor is not aware of any publicly available statistics relating to the principal prepayment experience of diverse portfolios of mortgage loans over an extended period of time. All statistics known to the Depositor that have been compiled with respect to prepayment experience on mortgage loans indicates that while some mortgage loans may remain outstanding until their stated maturities, a substantial number will be paid prior to their respective stated maturities. A number of factors, including homeowner mobility, economic conditions, enforceability of due-on-sale clauses, mortgage market interest rates, the terms of the mortgage loans (as affected by the existence of lockout provisions, due-on-sale and due-on-encumbrance clauses and prepayment fees), the quality of management of the mortgaged properties, possible changes in tax laws and the availability of mortgage funds, may affect prepayment experience. Unless otherwise provided in the related Prospectus Supplement, all Mortgage Loans, mortgage loans underlying Private Mortgage-Backed Securities or mortgage loans secured by Funding Agreements will contain due-on-sale provisions permitting the lender to accelerate the maturity of such mortgage loan upon sale or certain transfers by the borrower of the underlying Mortgaged Property. The Multifamily Loans may contain due-on-encumbrance provisions (permitting the lender to accelerate the maturity of the Multifamily Loan upon further encumbrance by the borrower of the underlying Multifamily Property). Conventional mortgage loans that underlie FHLMC Certificates and FNMA Certificates may contain, and in certain instances must contain, such due-on-sale provisions. FHA Loans, VA Loans and other mortgage loans underlying GNMA Certificates contain no such clause and may be assumed by the purchaser of the mortgaged property. Thus, the rate of prepayments on FHA Loans, VA Loans and other mortgage loans underlying GNMA Certificates may be lower than that of conventional Mortgage Loans bearing comparable interest rates. With respect to a series of Certificates evidencing interests in the Trust Fund including Mortgage Loans, unless otherwise provided in the related Prospectus Supplement, the Master Servicer generally will enforce any due-on-sale clause or due-on-encumbrance clause, to the extent it has knowledge of the conveyance or encumbrance or the proposed conveyance or encumbrance of the underlying Mortgaged Property and reasonably believes that it is entitled to do so under applicable law; provided, however, that the Master Servicer will not take any enforcement action that would impair or threaten to impair any recovery under any related insurance policy. See "Description of the Certificates-Collection and Other Servicing Procedures" and "Certain Legal Aspects of Mortgage Loans-Enforceability of Certain Provisions" and "-Prepayment Charges and Prepayments" for a description of certain provisions of each Agreement and certain legal developments that may affect the prepayment experience on the Mortgage Loans. See "Description of the Certificates-Termination" for a description of the possible early termination of any series of Certificates. See also "Mortgage Loan Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases" and "Description of the Certificates-Assignment of Trust Fund Assets" for a description of the obligation of the Mortgage Loan Sellers, the Master Servicer and the Depositor to repurchase Mortgage Loans under certain circumstances. In addition, if the applicable Agreement for a series of Certificates provides for a Pre-Funding Account or other means of funding the transfer of additional Mortgage Loans to the related Trust Fund, as described under "Description of the 30
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Certificates-Pre-Funding Account" herein, and the Trust Fund is unable to acquire such additional Mortgage Loans within any applicable time limit, the amounts set aside for such purpose may be applied as principal payments on one or more classes of Certificates of such series. THE DEPOSITOR The Depositor was incorporated in the State of Delaware on January 27, 1987 as an indirect wholly-owned subsidiary of Salomon Inc. The Depositor was organized for the purpose of serving as a private secondary mortgage market conduit. The Depositor maintains its principal office at Seven World Trade Center, New York, New York 10048. Its telephone number is (212) 783-7228. The Depositor does not have, nor is it expected in the future to have, any significant assets. MORTGAGE LOAN PROGRAM The Mortgage Loans will be purchased by the Depositor, either directly or indirectly, from the Mortgage Loan Sellers. The Mortgage Loans so acquired by the Depositor will have been originated by the Originators in accordance with the underwriting criteria specified below under "Underwriting Standards". UNDERWRITING STANDARDS All Mortgage Loans will have been subject to underwriting standards acceptable to the Depositor and applied as described below. Each Mortgage Loan Seller, or another party on its behalf, will represent and warrant that Mortgage Loans purchased by or on behalf of the Depositor from it have been originated by the related Originators in accordance with such underwriting standards. Unless otherwise specified in the related Prospectus Supplement, the underwriting standards are applied by the Originators to evaluate the borrower's credit standing and repayment ability, and the value and adequacy of the Mortgaged Property as collateral. Initially, a prospective borrower is required to fill out a detailed application regarding pertinent credit information. As part of the description of the borrower's financial condition, the borrower is required to provide a current balance sheet describing assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a credit report that summarizes the borrower's credit history with local merchants and lenders and any record of bankruptcy. In addition, an employment verification is obtained that reports the borrower's current salary and may contain information regarding length of employment and whether it is expected that the borrower will continue such employment in the future. If a prospective borrower is self-employed, the borrower is required to submit copies of signed tax returns. The borrower may also be required to authorize verification of deposits at financial institutions where the borrower has demand or savings accounts. In the case of a Multifamily Loan, the borrower is also required to provide certain information regarding the related Multifamily Property, including a current rent schedule, the type and length of leases and pro forma operating income statements. In addition, the Depositor will consider the location of the Multifamily Property, the availability of competitive lease space and rental income of comparable properties in the relevant market area, the overall economy and demographic features of the geographic area and the mortgagor's prior experience in owning and operating properties similar to the Multifamily Properties. In determining the adequacy of the property as collateral, an appraisal is made of each property considered for financing, except in the case of new Manufactured Homes, as described under "The Trust Funds". Each appraiser is selected in accordance with predetermined guidelines established for appraisers. The appraiser is required to inspect the property and verify that it is 31
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in good condition and that construction, if new, has been completed. With respect to properties other than Multifamily Properties, 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. With respect to Multifamily Properties, the appraisal must specify whether an income analysis, a market analysis or a cost analysis was used. An appraisal employing the income approach to value analyzes a property's cash flow, expenses, capitalization and other operational information in determining the property's value. The market approach to value analyzes the prices paid for the purchase of similar properties in the property's area, with adjustments made for variations between these other properties and the property being appraised. The cost approach requires the appraiser to make an estimate of land value and then determine the current cost of reproducing the building less any accrued depreciation. In any case, the value of the property being financed, as indicated by the appraisal, must be such that it currently supports, and is anticipated to support in the future, the outstanding loan balance. In the case of Single Family Loans and Contracts, once all applicable employment, credit and property information is received, a determination 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 (determined on the basis of the monthly payments due in the year of origination) and other expenses related to the home (such as property taxes and hazard insurance) and (ii) to meet monthly housing expenses and other financial obligations and monthly living expenses. Unless otherwise provided in the related Prospectus Supplement, the underwriting standards to be applied to the Single Family Loans will be generally similar to the traditional underwriting guidelines used by FNMA and FHLMC which are in effect at the time of origination of each Single Family Loan, except that the ratios at origination of the amounts described in (i) and (ii) above to the applicant's stable monthly gross income may exceed in certain cases the then applicable FNMA and FHLMC guidelines, but such ratios in general may not exceed 33% and 38%, respectively, of the applicant's stable monthly gross income. Such underwriting standards may be varied in appropriate cases. In the case of a Single Family Loan or Multifamily Loan secured by a leasehold interest in a residential property, the title to which is held by a third party lessor, the Mortgage Loan Seller, or another party on its behalf, is required to warrant, among other things, that the remaining term of the lease and any sublease be at least five years longer than the remaining term of the Mortgage Loan. The Mortgaged Properties may be located in states where, in general, a lender providing credit on a residential property may not seek a deficiency judgment against the mortgagor but rather must look solely to the property for repayment in the event of foreclosure. The underwriting standards to be applied to the Mortgage Loans in all states (including anti-deficiency states) require that the value of the property being financed, as indicated by the appraisal, currently supports and is anticipated to support in the future the outstanding principal balance of the Mortgage Loan. With respect to any FHA Loan the Mortgage Loan Seller is required to represent that the FHA Loan complies with the applicable underwriting policies of the FHA. See "Description of Primary Insurance Policies-FHA Insurance". With respect to any VA Loan, the Mortgage Loan Seller is required to represent that the VA Loan complies with the applicable underwriting policies of the VA. See "Description of Primary Insurance Policies-VA Guarantee". The recent foreclosure or repossession and delinquency experience with respect to loans serviced by the Master Servicer or, if applicable, a significant Sub-Servicer will be provided in the related Prospectus Supplement. Certain of the types of loans that may be included in the Mortgage Pools 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 32
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borrower. These types of Mortgage Loans are underwritten on the basis of a judgment that borrowers will have the ability to make larger monthly payments in subsequent years. In some instances, however, a borrower's income may not be sufficient to make loan payments as such payments increase. Unless otherwise specified in the related Prospectus Supplement, the Multifamily Loans will be nonrecourse loans, as to which, in the event of mortgagor default, recourse may only be had against the specific Multifamily Property pledged to secure that Multifamily Loan, and not against the mortgagor's assets. QUALIFICATIONS OF ORIGINATORS AND MORTGAGE LOAN SELLERS Unless otherwise specified in the related Prospectus Supplement, each Originator and Mortgage Loan Seller will be required to satisfy the qualifications set forth herein. Each Originator must be an institution experienced in originating and servicing conventional mortgage loans in accordance with accepted practices and prudent guidelines, and must maintain satisfactory facilities to originate and service those loans. Each Originator and Mortgage Loan Seller must be a seller/servicer approved by either FNMA or FHLMC. Each Originator and Mortgage Loan Seller must be a HUD-approved mortgagee or an institution the deposit accounts in which are insured by the Bank Insurance Fund ("BIF") or Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation (the "FDIC"). In addition, with respect to FHA Loans or VA Loans, each Originator must be approved to originate such Mortgage Loans by the FHA or VA, as applicable. In addition, each Originator and Mortgage Loan Seller must satisfy certain criteria as to financial stability evaluated on a case by case basis by the Depositor. REPRESENTATIONS BY OR ON BEHALF OF MORTGAGE LOAN SELLERS; REPURCHASES Each Mortgage Loan Seller, or a party on its behalf, will have made representations and warranties in respect of the Mortgage Loans sold by such Mortgage Loan Seller. Such representations and warranties include, among other things: (i) that any required hazard insurance was effective at the origination of each Mortgage Loan, and that each such policy remained in effect on the date of purchase of the Mortgage Loan from the Mortgage Loan Seller by or on behalf of the Depositor; (ii) that, in the case of Single-Family Loans and Multifamily Loans, either (A) title insurance insuring (subject only to permissible title insurance exceptions) the lien status of the Mortgage was effective at the origination of each Mortgage Loan and such policy remained in effect on the date of purchase of the Mortgage Loan from the Mortgage Loan Seller by or on behalf of the Depositor or (B) if the Mortgaged Property securing any Mortgage Loan is located in an area where such policies are generally not available, there is in the related mortgage file an attorney's certificate of title indicating (subject to such permissible exceptions set forth therein) the first lien status of the mortgage; (iii) that the Mortgage Loan Seller had good title to each Mortgage Loan and each Mortgage Loan was subject to no offsets, defenses, counterclaims or rights of rescission except to the extent that any buydown agreement described herein may forgive certain indebtedness of a borrower; (iv) that each Mortgage constituted a valid first lien on, or security interest in, the Mortgaged Property (subject only to permissible title insurance exceptions and Senior Liens, if any) and that the Mortgaged Property was free from damage and was in good repair; (v) that there were no delinquent tax or assessment liens against the Mortgaged Property; (vi) that each Mortgage Loan was current as to all required payments; and (vii) that each Mortgage Loan was made in compliance with, and is enforceable under, all applicable local, state and federal laws and regulations in all material respects. If a person other than a Mortgage Loan Seller makes any of the foregoing representations and warranties on behalf of such Mortgage Loan Seller, the identity of such person will be specified in the related Prospectus Supplement. Any person making representations and warranties on behalf of a Mortgage Loan Seller shall be an affiliate thereof or such other person acceptable to the Depositor having knowledge regarding the subject matter of such representations and warranties. 33
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All of the representations and warranties made by or on behalf of a Mortgage Loan Seller in respect of a Mortgage Loan will have been made as of the date on which such Mortgage Loan Seller sold the Mortgage Loan to or on behalf of the Depositor. 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. Unless otherwise specified in the related Prospectus Supplement, in the event of a breach of any such representation or warranty, the Mortgage Loan Seller will be obligated to cure such breach or repurchase or replace the affected Mortgage Loan as described below. Since the representations and warranties made by or on behalf of such Mortgage Loan Seller do not address events that may occur following the sale of a Mortgage Loan by such Mortgage Loan Seller, it will have a cure, repurchase or substitution obligation in connection with a breach of such a representation and warranty only if the relevant event that causes such breach occurs prior to the date of such sale. A Mortgage Loan Seller would have no such obligations if the relevant event that causes such breach occurs after the date of such sale. However, the Depositor will not include any Mortgage Loan in the Trust Fund for any series of Certificates if anything has come to the Depositor's attention that would cause it to believe that the representations and warranties made in respect of such Mortgage Loan will not be accurate and complete in all material respects as of the date of initial issuance of the related series of Certificates. The only representations and warranties to be made for the benefit of holders of Certificates in respect of any Mortgage Loan relating to the period commencing on the date of sale of such Mortgage Loan by the Mortgage Loan Seller to or on behalf of the Depositor will be certain limited representations of the Depositor and of the Master Servicer described below under "Description of the Certificates-Assignment of Trust Fund Assets". If the Master Servicer is also a Mortgage Loan Seller 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 Mortgage Loan Seller. The Master Servicer and/or Trustee will promptly notify the relevant Mortgage Loan Seller of any breach of any representation or warranty made by or on behalf of it in respect of a Mortgage Loan that materially and adversely affects the value of such Mortgage Loan or the interests therein of the Certificateholders. If such Mortgage Loan Seller cannot cure such breach within 60 days from the date on which the Mortgage Loan Seller was notified of such breach, then such Mortgage Loan Seller will be obligated to repurchase such Mortgage Loan from the Trustee within 90 days from the date on which the Mortgage Loan Seller was notified of such breach, at the Purchase Price therefor. As to any Mortgage Loan, unless otherwise specified in the related Prospectus Supplement, the "Purchase Price" is equal to the sum of (i) the unpaid principal balance thereof, (ii) unpaid accrued interest on the Stated Principal Balance (as defined below) at the Net Interest Rate from the date as to which interest was last paid to the end of the calendar month in which the relevant purchase is to occur, (iii) any unpaid servicing fees and certain unreimbursed servicing expenses payable or reimbursable to the Master Servicer with respect to such Mortgage Loan, (iv) any unpaid Retained Interest with respect to such Mortgage Loan, (v) any Realized Losses, as described below under "Description of the Certificates-Allocation of Losses", incurred with respect to such Mortgage Loan, and (vi) if applicable, any expenses reasonably incurred or to be incurred by the Master Servicer or the Trustee in respect of the breach or defect giving rise to a purchase obligation. Unless otherwise provided in the related Prospectus Supplement, a Mortgage Loan Seller, rather than repurchase a Mortgage Loan as to which a breach has occurred, will have the option, within a specified period after initial issuance of the related series of Certificates, to cause the removal of such Mortgage Loan from the Trust Fund and substitute in its place one or more other Mortgage Loans, in accordance with the standards described below under "Description of the Certificates-Assignment of the Mortgage Loans". The Master Servicer will be required under the applicable Pooling and Servicing Agreement to use its best efforts to enforce such obligations of the Mortgage Loan Seller for the benefit of the Trustee and the holders of the Certificates, following the practices it would employ 34
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in its good faith business judgment were it the owner of such Mortgage Loan. This repurchase or substitution obligation will constitute the sole remedy available to holders of Certificates or the Trustee for a breach of representation by a Mortgage Loan Seller. See "Description of the Certificates-General". The "Stated Principal Balance" of any Mortgage Loan as of any date of determination is equal to the principal balance thereof as of the Cut-off Date, after application of all scheduled principal payments due on or before the Cut-off Date, whether or not received, reduced by all amounts, including advances by the Master Servicer, allocable to principal that are distributed to Certificateholders on or before the date of determination, and as further reduced to the extent that any Realized Loss (as defined below) thereon has been (or, if it had not been covered by any form of Credit Support, would have been) allocated to one or more classes of Certificates on or before the date of determination. Neither the Depositor nor the Master Servicer will be obligated to purchase or substitute for a Mortgage Loan if a Mortgage Loan Seller defaults on its obligation to do so, and no assurance can be given that Mortgage Loan Sellers will carry out such obligations with respect to Mortgage Loans. To the extent that a breach of the representations and warranties of a Mortgage Loan Seller may also constitute a breach of a representation made by the Depositor, the Depositor may have a repurchase or substitution obligation as described below under "Description of the Certificates-Assignment of Trust Fund Assets". DESCRIPTION OF THE CERTIFICATES The Certificates of each series evidencing interests in a Trust Fund consisting of Mortgage Loans will be issued pursuant to a Pooling and Servicing Agreement among the Depositor, the Master Servicer (if the Depositor is not acting as Master Servicer) and the Trustee named in the Prospectus Supplement. The Certificates of each series evidencing interests in a Trust Fund consisting exclusively of Agency Securities or Private Mortgage-Backed Securities will be issued pursuant to a Trust Agreement between the Depositor and the Trustee (each Trust Agreement or Pooling and Servicing Agreement, an "Agreement"). 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. Various forms of Pooling and Servicing Agreement have been filed as exhibits to the Registration Statement of which this Prospectus is a part. The following summaries describe certain provisions which 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 Trust Fund and the related Prospectus Supplement. Whenever particular sections or defined terms of the Agreement are referred to, such sections or defined terms are incorporated herein by reference. Article and section numbers cited herein refer to articles and sections common to each Pooling and Servicing Agreement. As used herein with respect to any series, the term "Certificate" refers to all of the Certificates of that series, whether or not offered hereby and by the related Prospectus Supplement, unless the context otherwise requires. GENERAL The Certificates of each series (including any class of Certificates not offered hereby) will be issued in fully registered form only and will represent the entire beneficial ownership interest in the Trust Fund created pursuant to the related Agreement. (Section 5.01) If so provided in the Prospectus Supplement, any class of Certificates of any series may be represented by a 35
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certificate registered in the name of a nominee of The Depository Trust Company ("DTC"). The interests of beneficial owners of such Certificates will be represented by such entries on the records of participating members of DTC. Definitive certificates will be available for such Certificates only under limited circumstances as provided in the related Prospectus Supplement. Unless otherwise provided in the related Prospectus Supplement, each Trust Fund will consist of (i) such Trust Fund Assets, or interests therein, exclusive of any portion of interest payments (the "Retained Interest") on a Trust Fund Asset retained by the Depositor or any previous owner thereof, as from time to time are subject to the Agreement; (ii) such assets as from time to time are identified as deposited in the Certificate Account or any other account maintained for the benefit of the Certificateholders; (iii) with respect to Trust Funds that include Mortgage Loans, (a) property acquired on behalf of Certificateholders by foreclosure, deed in lieu of foreclosure or repossession and any revenues received thereon; (b) the rights of the Depositor under any hazard insurance policies, FHA insurance policies, VA guarantees and primary mortgage insurance policies, as described under "Description of Primary Insurance Policies"; (c) the rights of the Depositor under the agreement or agreements pursuant to which it acquired the Mortgage Loans in such Trust Fund; and (d) the rights of the Trustee in any cash advance reserve fund or surety bond as described under "Advances in respect of Delinquencies" and (iv) any letter of credit, mortgage pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve fund or other type of credit support provided with respect to the related series, as described under "Description of Credit Support". Subject to any limitations described in the related Prospectus Supplement, the Certificates will be transferable and exchangeable for like Certificates of the same class and series in authorized denominations at the corporate trust office of the Trustee specified in the related Prospectus Supplement. No service charge will be made for any registration of exchange or transfer of Certificates, but the Depositor or the Trustee or any agent thereof may require payment of a sum sufficient to cover any tax or other governmental charge. (Section 5.02) Each series of Certificates may consist of either (i) a single class of Certificates evidencing the entire beneficial ownership of the related Trust Fund; (ii) two or more classes of Certificates evidencing the entire beneficial ownership of the related Trust Fund, one or more classes of which ("Senior Certificates") will be senior in right of payment to one or more of the other classes ("Subordinate Certificates") to the extent described in the related Prospectus Supplement (any such series, a "Senior/Subordinate Series"); or (iii) other types of classes of Certificates, as described in the related Prospectus Supplement. A series may include one or more classes of Certificates entitled to (i) principal distributions, with disproportionate, nominal or no interest distributions or (ii) interest distributions, with disproportionate, nominal or no principal distributions ("Strip Certificates"). If so specified in the related Prospectus Supplement, partial or full protection against certain Mortgage Loan defaults and losses may be provided to a series of Certificates or to one or more classes of Certificates in such series in the form of subordination of one or more other classes of Certificates in such series or by one or more other types of credit support, such as a letter of credit, reserve fund, insurance policy or a combination thereof (any such coverage, "Credit Support"). See "Description of Credit Support". Each class of Certificates (other than certain Strip Certificates) will have a Certificate Principal Balance and, unless otherwise provided in the related Prospectus Supplement, will be entitled to payments of interest thereon based on a specified Pass-Through Rate. See "Interest on the Certificates" and "Principal of the Certificates" below. The specific percentage ownership interest of each class of Certificates and the minimum denomination for each Certificate will be set forth in the related Prospectus Supplement. As to each series, one or more elections may be made to treat the related Trust Fund or designated portions thereof as a "real estate mortgage investment conduit" or "REMIC" as defined in the Internal Revenue Code of 1986 (the "Code"). The related Prospectus Supplement will specify whether a REMIC election is to be made and the terms and conditions applicable to the 36
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making of a REMIC election, as well as any material federal income tax consequences to Certificateholders not otherwise described herein. If such an election is made with respect to a series, one of the classes of Certificates comprising such series will be designated as evidencing all "residual interests" in the related REMIC as defined under 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, all of the Certificates of each class offered hereby will be rated in one of the four highest rating categories by one or more nationally recognized statistical rating organizations (each, a "Rating Agency"). As to each series with respect to which a REMIC election is to be made, the Master Servicer or the Trustee will be obligated to take all actions required in order to comply with applicable laws and regulations and, unless otherwise provided in the related Prospectus Supplement, will be obligated to pay any Prohibited Transaction Taxes or Contribution Taxes arising out of a breach of its obligations with respect to such compliance without any right of reimbursement therefor from the Trust Fund or from any Certificateholder. Unless otherwise provided in the related Prospectus Supplement, a Prohibited Transaction Tax or Contribution Tax resulting from any other cause will be charged against the related Trust Fund, resulting in a reduction in amounts otherwise distributable to Certificateholders. See "Certain Federal Income Tax Consequences-REMICs-Prohibited Transactions Tax and Other Taxes". ASSIGNMENT OF TRUST FUND ASSETS ASSIGNMENT OF MORTGAGE LOANS At the time of issuance of any series of Certificates, the Depositor will cause the Mortgage Loans comprising the Mortgage Pool included in 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. (Section 2.01) The Trustee will, concurrently with such assignment, deliver the Certificates to the Depositor in exchange for the Trust Fund. (Section 2.06) 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 Interest Rate, the Net Interest Rate, the Retained Interest, if any, the current scheduled monthly payment of principal and interest, the maturity of the Mortgage Note, the Value of the Mortgaged Property, the Loan-to-Value Ratio at origination and certain other information with respect to the Mortgage Loans. As to any Mortgage Loan, the "Net Interest Rate" is equal to the Interest Rate minus the sum of the rates at which the servicing fees and the Retained Interest, if any, are calculated. (Article I) In addition, the Depositor will, with respect to each Mortgage Loan, deliver or cause to be delivered to the Trustee (or to the custodian hereinafter referred to): (1) With respect to each Single-Family Loan and Multifamily Loan, the Mortgage Note endorsed, without recourse, to the order of the Trustee, the Mortgage with evidence of recording indicated thereon (except for any Mortgage not returned from the public recording office, in which case the Depositor will deliver or cause to be delivered a copy of such Mortgage together with its certificate that the original of such Mortgage was delivered to such recording office) and an assignment of the Mortgage to the Trustee in recordable form. Unless otherwise provided in the related Prospectus Supplement, the Depositor will promptly cause the assignment of each related Mortgage Loan to be recorded in the appropriate public office for real property records, except in the State of California or in other states where, in the opinion of counsel acceptable to the Trustee, such recording is not required to protect the Trustee's interest in the Mortgage Loan against the claim of any subsequent transferee or any successor to or creditor of the Depositor, the Master Servicer, the relevant Mortgage Loan Seller or any other prior holder of the Mortgage Loan. (Section 2.01) 37
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(2) With respect to each Cooperative Loan, the Cooperative Note, the original security agreement, the proprietary lease or occupancy agreement, the related stock certificate and related stock powers endorsed in blank, and a copy of the original filed financing statement together with an assignment thereof to the Trustee in a form sufficient for filing. Unless otherwise provided in the related Prospectus Supplement, the Depositor will promptly cause the assignment and financing statement of each related Cooperative Loan to be filed in the appropriate public office, except in states where in the opinion of counsel acceptable to the Trustee, such filing is not required to protect the Trustee's interest in the Cooperative Loan against the claim of any subsequent transferee or any successor to or creditor of the Depositor, the Master Servicer, the relevant Mortgage Loan Seller or any prior holder of the Cooperative Loan (Section 2.01). (3) With respect to each Contract, the original Contract endorsed, without recourse, to the order of the Trustee and copies of documents and instruments related to the Contract and the security interest in the Manufactured Home securing the Contract, together with a blanket assignment to the Trustee of all Contracts in the related Trust Fund and such documents and instruments. In order to give notice of the right, title and interest of the Certificateholders to the Contracts, the Depositor will cause to be executed and delivered to the Trustee a UCC-1 financing statement identifying the Trustee as the secured party and identifying all Contracts as collateral. (Section 2.01) The Trustee (or the custodian hereinafter referred to) will review such Mortgage Loan documents within 45 days after receipt thereof, and the Trustee (or such custodian) 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) shall immediately notify the Master Servicer and the Depositor, and the Master Servicer shall immediately notify the relevant Mortgage Loan Seller. If the Mortgage Loan Seller cannot cure the omission or defect within 60 days after receipt of such notice, the Mortgage Loan Seller will be obligated, within 90 days of receipt of such notice, to repurchase the related Mortgage Loan from the Trustee at the Purchase Price or substitute for such Mortgage Loan. There can be no assurance that a Mortgage Loan Seller will fulfill this repurchase or substitution obligation. Although the Master Servicer is obligated to use its best efforts to enforce such obligation to the extent described above under "Mortgage Loan Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases", neither the Master Servicer nor the Depositor will be obligated to repurchase or substitute for such Mortgage Loan if the Mortgage Loan Seller defaults on its obligation. Unless otherwise specified in the related Prospectus Supplement, this repurchase or substitution obligation constitutes the sole remedy available to the Certificateholders or the Trustee for omission of, or a material defect in, a constituent document. (Section 2.03) With respect to the Mortgage Loans in a Mortgage Pool, the Depositor will make representations and warranties as to the types and geographical concentration of such Mortgage Loans and as to the accuracy in all material respects of certain identifying information furnished to the Trustee in respect of each such Mortgage Loan (e.g., original Loan-to-Value Ratio, principal balance as of the Cut-off Date, Interest Rate, Net Interest Rate and maturity). In addition, unless otherwise specified in the related Prospectus Supplement, the Depositor will represent and warrant that, as of the Cut-off Date for the related series of Certificates, no Mortgage Loan was currently more than 30 days delinquent as to payment of principal and interest and no Mortgage Loan was more than 30 days delinquent more than once during the previous 12 months. Upon a breach of any such representation of the Depositor that materially and adversely affects the value of a Mortgage Loan or the interests of the Certificateholders therein, the Depositor will be obligated either to cure the breach in all material respects, repurchase the Mortgage Loan at the Purchase Price or substitute for such Mortgage Loan as described below. 38
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Unless otherwise provided in the related Prospectus Supplement, if the Depositor discovers or receives notice of any breach of its representations or warranties with respect to a Mortgage Loan, the Depositor may, rather than repurchase the Mortgage Loan as provided above, remove such Mortgage Loan from the Trust Fund (a "Deleted Mortgage Loan") and substitute in its place one or more Mortgage Loans (each, a "Substitute Mortgage Loan"), but only if (i) with respect to a Trust Fund for which a REMIC election is to be made, such substitution is effected within two years of the date of initial issuance of the Certificates (plus permissible extensions) or (ii) with respect to a Trust Fund for which no REMIC election is to be made, such substitution is effected within 120 days of the date of initial issuance of the Certificates. Except as otherwise provided in the related Prospectus Supplement, any Substitute Mortgage Loan will, on the date of substitution, (i) have an outstanding principal balance, after deduction of all scheduled payments due in the month of substitution, not in excess of (and not more than $10,000 less than) the outstanding principal balance, after deduction of all unpaid scheduled payments due as of the date of substitution, of the Deleted Mortgage Loan, (ii) have an Interest Rate not less than (and not more than 1% greater than) the Interest Rate of the Deleted Mortgage Loan, (iii) have a Net Interest Rate equal to the Net Interest Rate of the Deleted Mortgage Loan, (iv) have a remaining term to maturity not greater than (and not more than one year less than) that of the Deleted Mortgage Loan (v) have a Lockout Date, if applicable, not earlier than the Lockout Date on the Deleted Mortgage Loan and (vi) comply with all of the representations and warranties set forth in the Agreement as of the date of substitution. In connection with any substitution, an amount equal to the difference between the Purchase Price of the Deleted Mortgage Loan and the outstanding principal balance of the Substitute Mortgage Loan (after deduction of all scheduled payments due in the month of substitution), together with one month's interest at the applicable Net Mortgage Rate on such balance, will be deposited in the Certificate Account and distributed to Certificateholders on the first Distribution Date following the Prepayment Period in which the substitution occurred. In the event that one mortgage loan is substituted for more than one Deleted Mortgage Loan, or more than one mortgage loan is substituted for one or more Deleted Mortgage Loans, then the amount described in clause (i) will be determined on the basis of aggregate principal balances, the rates described in clauses (ii) and (iii) with respect to Deleted Mortgage Loans will be determined on the basis of weighted average Interest Rates and Net Interest Rates, as the case may be, and the terms described in clause (iv) will be determined on the basis of weighted average remaining terms to maturity and the Lockout Dates described in clause (v) will be determined on the basis of weighted average Lockout Dates. With respect to any series as to which credit support is provided by means of a mortgage pool insurance policy, in addition to making the representations and warranties described above, the Depositor or the related Mortgage Loan Seller (or another party on behalf of the related Mortgage Loan Seller), as specified in the related Prospectus Supplement, will represent and warrant to the Trustee that no action has been taken or failed to be taken, no event has occurred and no state of facts exists or has existed on or prior to the date of the initial issuance of the Certificates which has resulted or will result in the exclusion from, denial of or defense to coverage under any applicable primary mortgage insurance policy, FHA insurance policy, mortgage pool insurance policy, special hazard insurance policy or bankruptcy bond, irrespective of the cause of such failure of coverage but excluding any failure of an insurer to pay by reason of the insurer's own breach of its insurance policy or its financial inability to pay (such representation being referred to herein as the "insurability representation"). See "Description of Primary Insurance Policies" and "Description of Credit Support" herein and in the related Prospectus Supplement for information regarding the extent of coverage under the aforementioned insurance policies. Upon a breach of the insurability representation which materially and adversely affects the interests of the Certificateholders in a Mortgage Loan, the Depositor or the Mortgage Loan Seller, as the case may be, will be obligated either to cure the breach in all material respects or to purchase such Mortgage Loan at the Purchase Price, subject to the limitations specified in the related Prospectus Supplement. The related Prospectus Supplement may provide that the performance of an 39
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obligation to repurchase Mortgage Loans following a breach of an insurability representation will be ensured in the manner specified therein. The obligation to repurchase or, other than with respect to the insurability representation if applicable, to substitute Mortgage Loans as described above constitutes the sole remedy available to the Certificateholders or the Trustee for any breach of the above described representations. (Section 2.03) The Master Servicer will make certain representations and warranties regarding its authority to enter into, and its ability to perform its obligations under, the Agreement. Upon a breach of any such representation of the Master Servicer which materially and adversely affects the interests of the Certificateholders, the Master Servicer will be obligated to cure the breach in all material respects. (Section 2.05) 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 Funds-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 for each Private Mortgage-Backed Security conveyed to the Trustee. ASSIGNMENT OF FUNDING AGREEMENTS The Depositor will cause Funding Agreements to be registered in the name of the Trustee. The Trustee (or the custodian) will have possession of any Funding Agreement. Unless otherwise specified in the related Prospectus Supplement, the Trustee will be in possession of or be assignee of record of any underlying assets for Funding Agreements. See "The Trust Funds-Funding Agreements" herein. Each Funding Agreement 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 for each underlying asset secured by the Funding Agreements. DEPOSITS TO CERTIFICATE ACCOUNT The Master Servicer and/or the Trustee will, as to each Trust Fund, establish and maintain or cause to be established and maintained one or more separate accounts for the collection of payments on the related Trust Fund Assets (collectively, the "Certificate Account"), which must be either (i) maintained with a bank or trust company, and in a manner, satisfactory to the Rating Agency or Agencies rating any class of Certificates of such series or (ii) an account or accounts the deposits in which are insured by the BIF or the SAIF (to the limits established by the FDIC) and the uninsured deposits in which are otherwise secured such that the Certificateholders have 40
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a claim with respect to the funds in the Certificate 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 institution with which the Certificate Account is maintained. The collateral eligible to secure amounts in the Certificate Account is limited to United States government securities and other high-quality investments specified in the Agreement ("Permitted Investments"). (Section 3.12) A Certificate Account may be maintained as an interest bearing or a non-interest bearing account, or the funds held therein may be invested pending each succeeding Distribution Date in Permitted Investments. Unless otherwise provided in the related Prospectus Supplement, any interest or other income earned on funds in the Certificate Account will be paid to the Master Servicer or the Trustee or their designee as additional compensation. The Certificate Account may be maintained with an institution that is an affiliate of the Master Servicer or the Trustee, provided that such institution meets the standards set forth above. If permitted by the Rating Agency or Agencies and so specified in the related Prospectus Supplement, a Certificate Account may contain funds relating to more than one series of pass-through certificates and may, if applicable, contain other funds respecting payments on mortgage loans belonging to the Master Servicer or serviced or master serviced by it on behalf of others. (Article I; Section 3.10) Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing Agreement will establish and maintain one or more separate accounts which may be interest bearing and which will comply with the standards with respect to Certificate Accounts set forth above or such other standards as may be acceptable to the Master Servicer (collectively, the "Sub-Servicing Account"). The Sub-Servicer is required to credit to the related Sub-Servicing Account on a daily basis the amount of all proceeds of Mortgage Loans received by the Sub-Servicer, less its servicing compensation. The Sub-Servicer shall remit to the Master Servicer by wire transfer of immediately available funds all funds held in the Sub-Servicing Account with respect to each Mortgage Loan on the monthly remittance date or dates specified in the related Agreement. (Section 3.08) PAYMENTS ON MORTGAGE LOANS The Master Servicer will deposit or cause to be deposited in the Certificate Account for each Trust Fund including Mortgage Loans on a daily basis, unless otherwise provided in the Agreement and described in the related Prospectus Supplement, the following payments and collections received, or advances made, by the Master Servicer or on its behalf subsequent to the Cut-off Date (other than payments due on or before the Cut-off Date, and exclusive of any amounts representing a Retained Interest): (i) all payments on account of principal, including principal prepayments, on the Mortgage Loans; (ii) all payments on account of interest on the Mortgage Loans, net of any portion thereof retained by the Master Servicer or by a Sub-Servicer as its servicing compensation and net of any Retained Interest; (iii) all proceeds of the hazard insurance policies and any special hazard insurance policy (to the extent such proceeds are not applied to the restoration of the property or released to the mortgagor in accordance with the normal servicing procedures of the Master Servicer or the related Sub-Servicer, subject to the terms and conditions of the related Mortgage and Mortgage Note), any primary mortgage insurance policy, any FHA insurance policy, any VA guarantee, any bankruptcy bond and any mortgage pool insurance policy (collectively, "Insurance Proceeds") and all other amounts received and retained in connection with the liquidation of defaulted Mortgage Loans, by foreclosure or otherwise ("Liquidation Proceeds"), together with the net proceeds on a monthly basis with respect to any Mortgaged 41
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Properties acquired for the benefit of Certificateholders by foreclosure or by deed in lieu of foreclosure or otherwise; (iv) any amounts required to be paid under any letter of credit, as described below under "Description of Credit Support-Letter of Credit"; (v) any advances made as described below under "Advances in respect of Delinquencies"; (vi) if applicable, all amounts required to be transferred to the Certificate Account from a reserve fund, as described below under "Description of Credit Support-Reserve Funds"; (vii) any Buydown Funds (and, if applicable, investment earnings thereon) required to be deposited in the Certificate Account as described below; (viii) all proceeds of any Mortgage Loan or property in respect thereof purchased by the Master Servicer, the Depositor, any Sub-Servicer or any Mortgage Loan Seller as described under "Mortgage Loan Program-Representations by or on behalf of Mortgage Loan Sellers; Repurchases" or "-Assignment of Trust Fund Assets" above, exclusive of the Retained Interest, if any, in respect of such Mortgage Loan, and all proceeds of any Mortgage Loan repurchased as described under "Termination" below; (ix) all payments required to be deposited in the Certificate Account with respect to any deductible clause in any blanket insurance policy described under "Description of Primary Insurance Policies-Primary Hazard Insurance Policies"; and (x) 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 Certificate Account. (Section 3.10) With respect to each Buydown Mortgage Loan, the Master Servicer, or a Sub-Servicer, will deposit related Buydown Funds in a custodial account, which may be interest bearing, and that otherwise meets the standards for Certificate Accounts set forth above (a "Buydown Account"). Unless otherwise specified in the related Prospectus Supplement, the terms of all Buydown Mortgage Loans provide for the contribution of Buydown Funds in an amount not less than either (i) the total payments to be made from such funds pursuant to the related buydown plan or (ii) if such Buydown Funds are present valued, that amount that, together with investment earnings thereon at a specified rate, compounded monthly, will support the scheduled level of payments due under the Buydown Mortgage Loan. Neither the Master Servicer, the Sub-Servicer nor the Depositor will be obligated to add to such Buydown Funds any of its own funds should investment earnings prove insufficient to maintain the scheduled level of payments. To the extent that any such insufficiency is not recoverable from the borrower, distributions to Certificateholders will be affected. With respect to each Buydown Mortgage Loan, the Master Servicer will deposit in the Certificate Account the amount, if any, of the Buydown Funds (and, if applicable, investment earnings thereon) for each Buydown Mortgage Loan that, when added to the amount due from the borrower on such Buydown Mortgage Loan, equals the full monthly payment which would be due on the Buydown Mortgage Loan if it were not subject to the buydown plan. Unless otherwise specified in the related Prospectus Supplement, in the event a Buydown Mortgage Loan is prepaid in full or liquidated, the related Buydown Funds will be applied as follows. If the mortgagor on a Buydown Mortgage Loan prepays such loan in its entirety during the Buydown Period, the Master Servicer will withdraw from the Buydown Account and remit to the mortgagor in accordance with the related buydown plan any Buydown Funds remaining in the Buydown Account. If a prepayment by a mortgagor during the Buydown Period together with Buydown Funds will result in a prepayment in full, the Master Servicer will withdraw from the Buydown Account for deposit in the Certificate Account the Buydown Funds and investment earnings thereon, if any, which together with such prepayment will result in a prepayment in full. If the mortgagor defaults during the Buydown Period with respect to a Buydown Mortgage Loan 42
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and the Mortgaged Property is sold in liquidation (either by the Master Servicer or the insurer under any related insurance policy), the Master Servicer will withdraw from the Buydown Account the Buydown Funds and all investment earnings thereon, if any, for deposit in the Certificate Account or remit the same to the insurer if the Mortgaged Property is transferred to such insurer and such insurer pays all of the loss incurred in respect of such default. In the case of any such prepaid or defaulted Buydown Mortgage Loan the Buydown Funds in respect of which were supplemented by investment earnings, the Master Servicer will withdraw from the Buydown Account and either deposit in the Certificate Account or remit to the borrower, depending upon the terms of the buydown plan, any investment earnings remaining in the related Buydown Account. Any Buydown Funds, and any investment earnings thereon, deposited in the Certificate Account in connection with a full prepayment of the related Mortgage Loan will be deemed to reduce the amount that would be required to be paid by the borrower to repay fully the related Mortgage Loan if the Mortgage Loan were not subject to the buydown plan. (Section 3.25) PAYMENTS ON AGENCY SECURITIES AND PRIVATE MORTGAGE-BACKED SECURITIES The Agency Securities and Private Mortgage-Backed Securities included in a Trust Fund will be registered in the name of the Trustee so that all distributions thereon will be made directly to the Trustee. The Trustee will deposit or cause to be deposited into the Certificate Account for each Trust Fund including Agency Securities and Private Mortgage-Backed Securities as and when received, unless otherwise provided in the Agreement, all distributions received by the Trustee with respect to the related Agency Securities and Private Mortgage-Backed Securities (other than payments due on or before the Cut-off Date and exclusive of any trust administration fee and amounts representing the Retained Interest, if any). DISTRIBUTIONS Distributions allocable to principal and interest on the Certificates of each series will be made by or on behalf of the Trustee on each Distribution Date as specified in the related Prospectus Supplement. Except as otherwise 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 last business day of the month preceding the month in which the Distribution Date occurs (the "Record Date"), and the amount of each distribution will be determined as of the close of business on the date specified in the related Prospectus Supplement (the "Determination Date"). All distributions with respect to each class of Certificates on each Distribution Date will be allocated pro rata among the outstanding Certificates in such class. Payments to the holders of Certificates of any class on each Distribution Date will be made to the Certificateholders of the respective class of record on the next preceding Record Date (other than in respect of the final distribution), based on the aggregate fractional undivided interests in that class represented by their respective Certificates. Payments will be made either by wire transfer in immediately available funds to the account of a Certificateholder at a bank or other entity having appropriate facilities therefor, if such Certificateholder has so notified the Depositor or its designee no later than the date specified in the related Prospectus Supplement (and, if so provided in the related Prospectus Supplement, holds Certificates in the requisite amount specified therein), or by check mailed to the address of the person entitled thereto as it appears on the Certificate Register; 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 Depositor or its agent specified in the notice to Certificateholders of such final distribution. (Sections 4.01 and 9.01) 43
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AVAILABLE DISTRIBUTION AMOUNT All distributions on the Certificates of each series on each Distribution Date will be made from the Available Distribution Amount described below, in accordance with the terms described in the related Prospectus Supplement. Unless provided otherwise in the related Prospectus Supplement, the "Available Distribution Amount" for each Distribution Date equals the sum of the following amounts: (i) the total amount of all cash on deposit in the related Certificate Account as of the corresponding Determination Date, exclusive of: (a) all scheduled payments of principal and interest collected but due on a date subsequent to the related Due Period (unless the related Prospectus Supplement provides otherwise, a "Due Period" with respect to any Distribution Date will commence on the second day of the month in which the immediately preceding Distribution Date occurs, or the day after the Cut-off Date in the case of the first Due Period, and will end on the first day of the month of the related Distribution Date), (b) all prepayments, together with related payments of the interest thereon, Liquidation Proceeds, Insurance Proceeds and other unscheduled recoveries received subsequent to the related Prepayment Period, and (c) all amounts in the Certificate Account that are due or reimbursable to the Depositor, the Trustee, a Mortgage Loan Seller, a Sub-Servicer or the Master Servicer or that are payable in respect of certain expenses of the related Trust Fund; (ii) if the related Prospectus Supplement so provides, interest or investment income on amounts on deposit in the Certificate Account; (iii) all advances with respect to such Distribution Date; (iv) if and to the extent the related Prospectus Supplement so provides, amounts paid with respect to interest shortfalls resulting from prepayments during the related Prepayment Period; and (v) to the extent not on deposit in the related Certificate Account as of the corresponding Determination Date, any amounts collected under, from or in respect of any Credit Support with respect to such Distribution Date. As described below, the entire Available Distribution Amount will be distributed among the related Certificates (including any Certificates not offered hereby) on each Distribution Date, and accordingly will be released from the Trust Fund and will not be available for any future distributions. INTEREST ON THE CERTIFICATES Each class of Certificates (other than certain classes of Strip Certificates) may have a different Pass-Through Rate, which may be a fixed, variable or adjustable Pass-Through Rate. The related Prospectus Supplement will specify the Pass-Through Rate for each class, or, in the case of a variable or adjustable Pass-Through Rate, the method for determining the Pass-Through Rate. Unless otherwise specified in the related Prospectus Supplement, interest on the Certificates will be calculated on the basis of a 360-day year consisting of twelve 30-day months. With respect to each series of Certificates and each Distribution Date, the "Accrued Certificate Interest" distributable on each Certificate, other than certain classes of Strip Certificates, will be equal to one month's interest on the outstanding Certificate Principal Balance thereof immediately prior to the Distribution Date, at the applicable Pass-Through Rate, subject to the following. As to each Strip Certificate with no or, in certain cases, a nominal Certificate Principal Balance, the 44
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Accrued Certificate Interest with respect to any Distribution Date will equal one month's Stripped Interest. Unless otherwise specified in the related Prospectus Supplement, the Accrued Certificate Interest on each Certificate of a series will be reduced in the event of shortfalls in collections of interest resulting from prepayments on Mortgage Loans, with that shortfall allocated among all of the Certificates of that series in the manner specified in the related Prospectus Supplement. See "Yield Considerations". PRINCIPAL OF THE CERTIFICATES Unless the related Prospectus Supplement provides otherwise, each Certificate will have a "Certificate Principal Balance" which, at any time, will equal the maximum amount that the holder will be entitled to receive in respect of principal out of the future cash flow on the Trust Fund Assets and other assets included in the related Trust Fund. With respect to each such Certificate, distributions generally will be applied to undistributed accrued interest thereon, and thereafter to principal. The outstanding Certificate Principal Balance of a Certificate will be reduced to the extent of distributions of principal thereon, and in the case of Certificates evidencing an interest in Mortgage Loans, by the amount of any Realized Losses, as defined below, allocated thereto. Unless the related Prospectus Supplement provides otherwise, the initial aggregate Certificate Principal Balance of all classes of Certificates of a series will equal the outstanding aggregate principal balance of the related Trust Fund Assets as of the applicable Cut-off Date. The initial aggregate Certificate Principal Balance of a series and each class thereof will be specified in the related Prospectus Supplement. Unless otherwise provided in the related Prospectus Supplement, distributions of principal will be made on each Distribution Date to the class or classes of Certificates entitled thereto until the Certificate Principal Balance of such class has been reduced to zero. With respect to a Senior/Subordinate Series, unless otherwise provided in the related Prospectus Supplement, distributions allocable to principal of a class of Certificates will be based on the percentage interest in the related Trust Fund evidenced by such class (with respect to the Senior Certificates, the "Senior Percentage"), which in turn will be based on the Certificate Principal Balance of such class as compared to the Certificate Principal Balance of all classes of Certificates of such series. Distributions of principal of any class of Certificates will be made on a pro rata basis among all of the Certificates of such class. Strip Certificates with no Certificate Principal Balance will not receive distributions of principal. PRE-FUNDING ACCOUNT If so specified in the related Prospectus Supplement, the related Agreement may provide for the transfer by the Mortgage Loan Seller of additional Mortgage Loans to the related Trust Fund after the Closing Date. Such additional Mortgage Loans will be required to conform to the requirements set forth in the related Agreement or other agreement providing for such transfer, and will generally be underwritten to the same standards as the Mortgage Loans initially included in the Trust Fund. 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 to be released as additional Mortgage Loans are transferred. A Pre-Funding Account will be required to be maintained as an eligible account under the related agreement, all amounts therein will be required to be invested in Permitted Investments and the amount held therein shall at no time exceed 25% of the aggregate outstanding principal balance of the Certificates. The related Agreement or other agreement providing for the transfer of additional Mortgage Loans will generally provide that all such transfers must be made within 3 months after the Closing Date, and that amounts set aside to fund such transfers (whether in a Pre-Funding Account or otherwise) and not so applied within the required period of time will be deemed to be principal prepayments and applied in the manner set forth in such Prospectus Supplement. 45
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The Depositor will be required to provide data regarding the additional Mortgage Loans to the Rating Agencies and the certificate insurer, if any, sufficiently in advance of the scheduled transfer to permit review by such parties. Transfer of the additional Mortgage Loans will be further conditioned upon confirmation by the Rating Agencies that the addition of such Mortgage Loans to the Trust Fund will not result in the downgrading of the Certificates or, in the case of a series guaranteed or supported by a certificate insurer, will not adversely affect the capital requirements of such certificate insurer. Finally, a legal opinion to the effect that the conditions to the transfer of the additional Mortgage Loans have been satisfied. ALLOCATION OF LOSSES With respect to any defaulted Mortgage Loan that is finally liquidated, through foreclosure sale or otherwise (a "Liquidated Loan"), the amount of the Realized Loss incurred in connection with such liquidation will equal the excess, if any, of the unpaid principal balance of the Liquidated Loan immediately prior to liquidation, over the aggregate amount of Liquidation Proceeds derived from such liquidation remaining after application of such proceeds to unpaid accrued interest on the Liquidated Loan and to reimburse the Master Servicer or any Sub-Servicer for related unreimbursed servicing expenses. With respect to certain Mortgage Loans the principal balances of which have been reduced in connection with bankruptcy proceedings, the amount of such reduction (a "Deficient Valuation") also will be treated as a Realized Loss. As to any series of Certificates other than a Senior/Subordinate Series, unless specified otherwise in the related Prospectus Supplement, any Realized Loss not covered as described under "Description of Credit Support" will be allocated among all of the Certificates on a pro rata basis. ADVANCES IN RESPECT OF DELINQUENCIES With respect to any series of Certificates evidencing interests in a Trust Fund consisting of Mortgage Loans, other than a Senior/Subordinate Series, unless otherwise provided in the related Prospectus Supplement, the Master Servicer will advance on or before each Distribution Date its own funds or funds held in the Certificate Account that are not included in the Available Distribution Amount for such Distribution Date, in an amount equal to the aggregate of payments of principal and interest (net of related servicing fees and Retained Interest) that were due during the related Due Period and were delinquent on the related Determination Date, subject to the Master Servicer's good faith determination that such advances will be reimbursable from Related Proceeds (as defined below). See "Description of Primary Insurance Policies" and "Description of Credit Support". With respect to any Senior/Subordinate Series, unless otherwise provided in the related Prospectus Supplement, the Master Servicer will advance on each Distribution Date its own funds or funds held in the Certificate Account which are not included in the Available Distribution Amount for such Distribution Date, in an aggregate amount equal to the lesser of (a) the total of all amounts required to be distributed on each class of Senior Certificates and Strip Certificates, if any, on such Distribution Date which remain after applying towards such payment the entire Available Distribution Amount, including funds otherwise payable to the Subordinate Certificateholders but excluding such advance, and (b) the aggregate of payments of principal and interest (net of related servicing fees and Retained Interest) that were due during the related Due Period and were delinquent on the related Determination Date. Alternatively, for a Senior/Subordinate Series, the Master Servicer may be obligated to make advances in the manner provided in the preceding paragraph. In either case, the Master Servicer will, unless the related Prospectus Supplement provides otherwise, be obligated to make such advances regardless of recoverability from the related Mortgage Loans to the extent that the Certificate Principal Balance of the Subordinate Certificates is greater than zero. Thereafter, such advances are required to be made only to the extent they are deemed by the Master Servicer to be 46
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recoverable from Related Proceeds, unless otherwise specified in the related Prospectus Supplement. See "Description of Primary Insurance Policies" and "Description of Credit Support". Advances are intended to maintain a regular flow of scheduled interest and principal payments to holders of the class or classes of Certificates entitled thereto, rather than to guarantee or insure against losses. Unless otherwise provided in the related Prospectus Supplement, advances of the Master Servicer's funds will be reimbursable only out of related recoveries on the Mortgage Loans (including amounts received under any form of Credit Support) respecting which such advances were made (as to any Mortgage Loan, "Related Proceeds") and, in the case of a Senior/Subordinate Series, out of any amounts otherwise distributable on the Subordinate Certificates of such series; provided, however, that any such advance will be reimbursable from any amounts in the Certificate Account to the extent that the Master Servicer shall determine that such advance (a "Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds and, in the case of a Senior/Subordinate Series, the Certificate Principal Balance of the Subordinate Certificates has been reduced to zero. If advances have been made by the Master Servicer from excess funds in the Certificate Account, the Master Servicer will replace such funds in the Certificate Account on any future Distribution Date to the extent that funds in the Certificate Account on such Distribution Date are less than payments required to be made to Certificateholders on such date. (Section 4.03) If so specified in the related Prospectus Supplement, the obligations of the Master Servicer to make advances may be secured by a cash advance reserve fund or a surety bond. If applicable, information regarding the characteristics of, and the identity of any obligor on, any such surety bond, will be set forth in the related Prospectus Supplement. REPORTS TO CERTIFICATEHOLDERS With each distribution to holders of any class of Certificates of a series, the Master Servicer or the Trustee, will forward or cause to be forwarded to each such holder, to the Depositor and to such other parties as may be specified in the related Agreement, a statement setting forth: (i) the amount of such distribution to holders of Certificates of such class applied to reduce the Certificate Principal Balance thereof; (ii) the amount of such distribution to holders of Certificates of such class allocable to Accrued Certificate Interest; (iii) the amount of related administration or servicing compensation received by the Trustee or the Master Servicer and any Sub-Servicer and such other customary information as the Master Servicer deems necessary or desirable, or that a Certificateholder reasonably requests, to enable Certificateholders to prepare their tax returns; (iv) if applicable, the aggregate amount of advances included in such distribution, and the aggregate amount of unreimbursed advances at the close of business on such Distribution Date; (v) the aggregate Stated Principal Balance of the Mortgage Loans at the close of business on such Distribution Date; (vi) the number and aggregate Stated Principal Balance of Mortgage Loans (a) delinquent one month, (b) delinquent two or more months, and (c) as to which foreclosure proceedings have been commenced; (vii) with respect to any Mortgaged Property acquired on behalf of Certificateholders through foreclosure or deed in lieu of foreclosure during the preceding calendar month, the Stated Principal Balance of the related Mortgage Loan as of the close of business on the Distribution Date in such month; 47
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(viii) the book value of any Mortgaged Property acquired on behalf of Certificateholders through foreclosure or deed in lieu of foreclosure as of the close of business on the last business day of the calendar month preceding the Distribution Date; (ix) the aggregate Certificate Principal Balance of each class of Certificates (including any class of Certificates not offered hereby) at the close of business on such Distribution Date, separately identifying any reduction in such Certificate Principal Balance due to the allocation of any Realized Loss; (x) the Special Hazard Subordination Amount, if any, at the close of business on such Distribution Date; (xi) the aggregate amount of principal prepayments made and Realized Losses incurred during the related Prepayment Period; (xii) the amount deposited in the Reserve Fund, if any, on such Distribution Date; (xiii) the amount remaining in the Reserve Fund, if any, as of the close of business on such Distribution Date; (xiv) the aggregate unpaid Accrued Certificate Interest, if any, on each class of Certificates at the close of business on such Distribution Date; (xv) in the case of Certificates with a variable Pass-Through Rate, the Pass-Through Rate applicable to such Distribution Date, as calculated in accordance with the method specified in the related Prospectus Supplement; (xvi) in the case of Certificates with an adjustable Pass-Through Rate, for statements to be distributed in any month in which an adjustment date occurs, the adjustable PassThrough Rate applicable to the next succeeding Distribution Date as calculated in accordance with the method specified in the related Prospectus Supplement; and (xvii) as to any series which includes Credit Support, the amount of coverage of each instrument of Credit Support included therein as of the close of business on such Distribution Date. In the case of information furnished pursuant to subclauses (i)-(iii) above, the amounts shall be expressed as a dollar amount per minimum denomination of Certificates or for such other specified portion thereof. Within a reasonable period of time after the end of each calendar year, the Master Servicer or the Trustee, as provided in the related Prospectus Supplement, shall furnish to each person who at any time during the calendar year was a holder of a Certificate a statement containing the information set forth in subclauses (i)-(iii) above, aggregated for such calendar year or the applicable portion thereof during which such person was a Certificateholder. Such obligation of the Master Servicer or the Trustee shall be deemed to have been satisfied to the extent that substantially comparable information shall be provided by the Master Servicer or the Trustee pursuant to any requirements of the Code as are from time to time in force. (Section 4.02) COLLECTION AND OTHER SERVICING PROCEDURES The Master Servicer, directly or through Sub-Servicers, will make reasonable efforts to collect all scheduled payments under the Mortgage Loans and will follow or cause to be followed such collection procedures as it would follow with respect to mortgage loans that are comparable to the Mortgage Loans and held for its own account, provided such procedures are consistent with the Agreement and any related insurance policy, bankruptcy bond, letter of credit or other instrument described under "Description of Primary Insurance Policies" or "Description of Credit Support" (any such instrument providing coverage as to losses resulting from physical damage, a "Hazard Insurance Instrument", any such instrument providing coverage as to credit or other risks, a 48
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"Credit Insurance Instrument", and collectively, the "Insurance Instruments"). Consistent with the above, the Master Servicer may, in its discretion, waive any late payment charge in respect of a late Mortgage Loan payment and, only upon determining that the coverage under any related Insurance Instrument will not be affected, extend or cause to be extended the due dates for payments due on a Mortgage Note for a period not greater than 125 days. (Section 3.07) In any case in which property securing a Mortgage Loan, other than a Multifamily Loan, has been, or is about to be, conveyed by the borrower, or in any case in which property securing a Multifamily Loan has been, or is about to be encumbered by the borrower, the Master Servicer will, to the extent it has knowledge of such conveyance, encumbrance, proposed conveyance or encumbrance, exercise or cause to be exercised on behalf of the related Trust Fund the lender's rights to accelerate the maturity of such Mortgage Loan under any due-on-sale or due-on-encumbrance clause applicable thereto, but only if the exercise of any such rights is permitted by applicable law and will not impair or threaten to impair any recovery under any related Insurance Instrument. 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 or due-on-encumbrance clause, the Master Servicer will enter into or cause to be entered into an assumption and modification agreement with the person to whom such property has been or is about to be conveyed or encumbered, pursuant to which such person becomes liable under the Mortgage Note, Cooperative Note or Contract and, to the extent permitted by applicable law, the borrower remains liable thereon. 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 Mortgage Loans-Enforceability of Certain Provisions". In connection with any such assumption, the terms of the related Mortgage Loan may not be changed. (Section 3.15) With respect to Multifamily Loans, the related mortgagor's failure to make required payments may reflect inadequate operating income or the diversion of that income from the service of payments due under the Multifamily Loan, and may call into question such mortgagor's ability to make timely payment of taxes and to pay for necessary maintenance of the related Mortgaged Property. The Master Servicer will monitor any Multifamily Loan which is in default, contact the mortgagor concerning the default, evaluate whether the causes of the default can be cured over a reasonable period without significant impairment of the value of the Mortgaged Property, initiate corrective action in cooperation with the mortgagor if cure is likely, inspect the Mortgaged Property and take such other actions as it would normally take with respect to similar loans serviced for its own portfolio. A significant period of time may elapse before the Master Servicer is able to assess the success of such corrective action or the need for additional initiatives. Alternatively, the Master Servicer may determine to institute foreclosure proceedings with respect to a Multifamily Loan soon after default. SUB-SERVICING Any Master Servicer may delegate its servicing obligations in respect of the Mortgage Loans to third-party servicers (each, a "Sub-Servicer"), but such Master Servicer will remain obligated under the related Agreement. Each Sub-Servicer will be required to perform the customary functions of a servicer of comparable loans, including collecting payments from borrowers and remitting such collections to the Master Servicer; maintaining primary hazard insurance as described herein and in any related Prospectus Supplement, and filing and settling claims thereunder, subject in certain cases to the right of the Master Servicer to approve in advance any such settlement; maintaining escrow or impoundment accounts of borrowers for payment of taxes, insurance and other items required to be paid by any borrower pursuant to the Mortgage Loan; processing assumptions or substitutions, although, unless otherwise specified in the related Prospectus Supplement, the Master Servicer is generally required to exercise due-on-sale clauses to the extent such exercise is permitted by law and would not adversely affect insurance 49
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coverage; attempting to cure delinquencies; supervising foreclosures or repossessions; inspecting and managing Mortgaged Properties under certain circumstances; and maintaining accounting records relating to the Mortgage Loans. Unless otherwise specified in the related Prospectus Supplement, the Master Servicer will be responsible for filing and settling claims in respect of Mortgage Loans in a particular Mortgage Pool under any applicable mortgage pool insurance policy, bankruptcy bond, special hazard insurance policy or letter of credit. See "Description of Credit Support". The sub-servicing agreement between any Master Servicer and a Sub-Servicer (a "SubServicing Agreement") will be consistent with the terms of the related Pooling and Servicing Agreement and will not result in a withdrawal or downgrading of any class of Certificates issued pursuant to such Pooling and Servicing Agreement. Although each Sub-Servicing Agreement will be a contract solely between the Master Servicer and the Sub-Servicer, the Agreement pursuant to which a series of Certificates is issued will provide that, if for any reason the Master Servicer for such series of Certificates is no longer acting in such capacity, the Trustee or any successor Master Servicer must recognize the Sub-Servicer's rights and obligations under such Sub-Servicing Agreement. The Master Servicer will be solely liable for all fees owed by it to any Sub-Servicer, irrespective of whether the Master Servicer's compensation pursuant to the related Agreement is sufficient to pay such fees. However, a Sub-Servicer may be entitled to a Retained Interest in certain Mortgage Loans. Each Sub-Servicer will be reimbursed by the Master Servicer for certain expenditures which it makes, generally to the same extent the Master Servicer would be reimbursed under a Pooling and Servicing Agreement. See "Description of the Certificates-Retained Interest, Servicing Compensation and Payment of Expenses". The Master Servicer may require any Sub-Servicer to agree to indemnify the Master Servicer for any liability or obligation sustained by the Master Servicer in connection with any act or failure to act by the Sub-Servicer in its servicing capacity. Unless otherwise provided in the related Prospectus Supplement, each Sub-Servicer is required to maintain a fidelity bond and an errors and omissions policy with respect to its officers, employees and other persons acting on its behalf or on behalf of the Master Servicer. REALIZATION UPON DEFAULTED MORTGAGE LOANS As servicer of the Mortgage Loans, the Master Servicer, on behalf of itself, the Trustee and the Certificateholders, will present claims to the insurer under each Insurance Instrument, 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 Insurance Instrument, other than amounts to be applied to the restoration of a Mortgaged Property or released to the mortgagor, are to be deposited in the Certificate Account for the related Trust Fund, subject to withdrawal as heretofore described. Unless otherwise provided in the Prospectus Supplement relating to a series of Certificates, the Master Servicer or its designee will not receive payment under any letter of credit included as an Insurance Instrument with respect to a defaulted Mortgage Loan unless all Liquidation Proceeds and Insurance Proceeds which it deems to be finally recoverable have been realized; however, the Master Servicer will be entitled to reimbursement for any unreimbursed advances and reimbursable expenses thereunder. (Section 3.16) If any property securing a defaulted Mortgage Loan is damaged and proceeds, if any, from the related Hazard Insurance Instrument are insufficient to restore the damaged property to a condition sufficient to permit recovery under the related Credit Insurance Instrument, if any, the Master Servicer is not required to expend its own funds to restore the damaged 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 50
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such expenses will be recoverable by it from related Insurance Proceeds or Liquidation Proceeds. (Section 3.16) If recovery on a defaulted Mortgage Loan under any related Credit Insurance Instrument is not available for the reasons set forth in the preceding paragraph, the Master Servicer nevertheless 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. (Section 3.16) If the proceeds of any liquidation of the property securing the defaulted Mortgage Loan are less than the outstanding principal balance of the defaulted Mortgage Loan plus interest accrued thereon at the Interest Rate plus the aggregate amount of expenses incurred by the Master Servicer in connection with such proceedings and which are reimbursable under the Agreement, the Trust Fund will realize a loss in the amount of such difference. The Master Servicer will be entitled to withdraw or cause to be withdrawn from the Certificate Account out of the Liquidation Proceeds recovered on any defaulted Mortgage Loan, prior to the distribution of such Liquidation Proceeds to Certificateholders, amounts representing its normal servicing compensation on the Mortgage Loan, unreimbursed servicing expenses incurred with respect to the Mortgage Loan and any unreimbursed advances of delinquent monthly payments made with respect to the Mortgage Loan. (Section 3.11) If the Master Servicer or its designee recovers Insurance Proceeds with respect to any defaulted Mortgage Loan, the Master Servicer will be entitled to withdraw or cause to be withdrawn from the Certificate Account out of such proceeds, prior to distribution thereof to Certificateholders, amounts representing its normal servicing compensation on such Mortgage Loan, unreimbursed servicing expenses incurred with respect to the Mortgage Loan and any unreimbursed advances of delinquent monthly payments made with respect to the Mortgage Loan. (Section 3.11) In the event that the Master Servicer has expended its own funds to restore damaged property and such funds have not been reimbursed under any Insurance Instrument, it will be entitled to withdraw from the Certificate 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. (Section 3.11) Because Insurance Proceeds cannot exceed deficiency claims and certain expenses incurred by the Master Servicer, no such payment or recovery will result in a recovery to the Trust Fund which exceeds the principal balance of the defaulted Mortgage Loan together with accrued interest thereon at the Net Interest Rate. In addition, when property securing a defaulted Mortgage Loan can be resold for an amount exceeding the outstanding principal balance of the related Mortgage Loan together with accrued interest and expenses, it may be expected that, if retention of any such amount is legally permissible, the insurer will exercise its right under any related mortgage pool insurance policy to purchase such property and realize for itself any excess proceeds. See "Description of Primary Insurance Policies" and "Description of Credit Support". With respect to collateral securing a Cooperative Loan, 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 proprietary lease or occupancy agreement securing the Cooperative Loan. See "Certain Legal Aspects of Mortgage Loans-Foreclosure on Cooperatives". This approval is usually based on the purchaser's income and net worth and numerous other factors. The necessity of acquiring such approval could limit the number of potential purchasers for those shares and otherwise limit the Master Servicer's ability to sell, and realize the value of, those shares. RETAINED INTEREST; SERVICING OR ADMINISTRATION COMPENSATION AND PAYMENT OF EXPENSES The Prospectus Supplement for a series of Certificates will specify whether there will be any Retained Interest in the Trust Fund Assets, and, if so, the owner thereof. If so, the Retained Interest will be established on a loan-by-loan basis and will be specified on an exhibit to the related Agreement. A Retained Interest in a Trust Fund Asset represents a specified portion of 51
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the interest payable thereon. The Retained Interest will be deducted from borrower payments as received and will not be part of the related Trust Fund. Any partial recovery of interest on a Mortgage Loan, after deduction of all applicable servicing fees, will be allocated between Retained Interest (if any) and interest at the Net Interest Rate on a pari passu basis. The Master Servicer's (or in the case of a Trust Fund consisting of Agency Securities or Private Mortgage-Backed Securities if specified in the related Prospectus Supplement, the Trustee's) primary compensation with respect to a series of Certificates will come from the monthly payment to it, with respect to each interest payment on a Trust Fund Asset, of an amount equal to one-twelfth of the difference between the Interest Rate (minus the rate at which the Retained Interest, if any, is calculated) and the Net Interest Rate times the scheduled principal balance of such Trust Fund Asset. Since any Retained Interest and the Master Servicer's (or the Trustee's) primary compensation are percentages of the scheduled principal balance of each Trust Fund Asset, such amounts will decrease in accordance with the amortization schedule of the Trust Fund Assets. As additional compensation in connection with a series of Certificates relating to Mortgage Loans, the Master Servicer or the Sub-Servicers will retain all assumption fees, prepayment penalties and late payment charges, to the extent collected from mortgagors. Unless otherwise specified in the related Prospectus Supplement, any interest or other income which may be earned on funds held in the Certificate Account or any Sub-Servicing Account may be paid as additional compensation to the Trustee, the Master Servicer or the Sub-Servicers, as the case may be. Any Sub-Servicer will receive a portion of the Master Servicer's primary compensation as its sub-servicing compensation. (Section 3.18) With respect to a series of Certificates consisting of Mortgage Loans, in addition to amounts payable to any Sub-Servicer, the Master Servicer will pay from its servicing compensation certain expenses incurred in connection with its servicing of the Mortgage Loans, including, without limitation, payment of the fees and disbursements of the Trustee and independent accountants, payment of expenses incurred in connection with distributions and reports to Certificateholders, and payment of any other expenses described in the related Prospectus Supplement. (Section 3.18) The Master Servicer is entitled to reimbursement for certain expenses incurred by it in connection with the liquidation of defaulted Mortgage Loans, including under certain circumstances reimbursement of expenditures incurred by it in connection with the restoration of Mortgaged Properties, such right of reimbursement being prior to the rights of Certificateholders to receive any related Liquidation Proceeds. The Master Servicer is also entitled to reimbursement from the Certificate Account for Advances. With respect to a series of Certificates relating to Agency Securities, the Trustee shall pay all expenses incurred in administration thereof, subject to the limitations described in the related Prospectus Supplement. EVIDENCE AS TO COMPLIANCE Each Agreement with respect to a series of Certificates consisting of Mortgage Loans, will provide that on or before a specified date in each year, beginning with the first such date at least six months after the related Cut-off Date, a firm of independent public accountants will furnish a statement to the Trustee to the effect that, on the basis of the examination by such firm conducted substantially in compliance with either the Uniform Single Program for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the servicing by or on behalf of the Master Servicer of mortgage loans under pooling and servicing agreements substantially similar to each other (including the related Agreement) was conducted in compliance with the terms of such agreements except for any significant exceptions or errors in records that, in the opinion of the firm, either the Audit Program for Mortgages serviced for FHLMC, or paragraph 4 of the Uniform Single Program for Mortgage Bankers, requires it to report. In rendering its statement such firm may rely, as to matters relating to the direct servicing of mortgage loans by Sub-Servicers, upon comparable statements for examinations conducted substantially in compliance with the Uniform 52
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Single Attestation Program for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered within one year of such statement) of firms of independent public accountants with respect to the related Sub-Servicer. (Section 3.21) 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 two officers of the Master Servicer to the effect that the Master Servicer has fulfilled its obligations under the Agreement throughout the preceding year. (Section 3.20) Copies of the annual accountants' statement and the statement of officers of the Master Servicer may be obtained by Certificateholders without charge upon written request to the Master Servicer 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. The entity serving as Master Servicer may be an affiliate of the Depositor and may have other normal business relationships with the Depositor or the Depositor's affiliates. Each Agreement will provide that the Master Servicer may resign from its obligations and duties under the Agreement only if such resignation, and the appointment of a successor, will not result in a downgrading of any class of Certificates or upon a determination that its duties under the Agreement are no longer permissible under applicable law. 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. (Section 6.04) 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, that neither the Master Servicer, the Depositor nor any such person will be protected against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or gross negligence in the performance of duties thereunder or by reason of reckless disregard of obligations and duties thereunder. 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 is related to any specific Mortgage Loan or Mortgage Loans (unless any such loss, liability or expense otherwise reimbursable pursuant to the Agreement) and any loss, liability or expense incurred by reason of willful misfeasance, bad faith or gross negligence in the performance of duties thereunder or by reason of reckless disregard of obligations and duties thereunder. In addition, 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 Certificateholders, and the Master Servicer or the Depositor, as the case may be, will be entitled to be reimbursed therefor and to charge the Certificate Account. Except in the case of a series of Senior/Subordinate Certificates, any such obligation of the Certificateholders will be borne among them on a pro rata basis in proportion to the Accrued Certificate Interest payable thereto, and, notwithstanding any other provision, their respective distributions will be reduced accordingly. (Section 6.03) 53
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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, provided that such person is qualified to sell mortgage loans to, and service mortgage loans on behalf of, FNMA or FHLMC. (Section 6.02) EVENTS OF DEFAULT Unless otherwise provided in the related Prospectus Supplement for a series of Certificates that includes Mortgage Loans, Events of Default under each Agreement will consist of (i) any failure by the Master Servicer to distribute or cause to be distributed to Certificateholders, or to remit to the Trustee for distribution to Certificateholders, any required payment that continues unremedied for five 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 Voting Rights; (ii) any failure by the Master Servicer duly to observe or perform in any material respect any of its other covenants or obligations under the Agreement which continues unremedied for thirty days (fifteen days in the case of a failure to pay the premium for any insurance instrument required to be maintained pursuant to the Agreement) 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 Voting Rights; and (iii) certain events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings and certain actions by or on behalf of the Master Servicer indicating its insolvency or inability to pay its obligations. (Section 7.01) RIGHTS UPON EVENT OF DEFAULT So long as an Event of Default under an Agreement remains unremedied, the Depositor or the Trustee may, and at the direction of holders of Certificates evidencing not less than 51% of the Voting Rights, 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 (other than any Retained Interest of the Master Servicer), whereupon the Trustee will succeed to all of the responsibilities, duties and liabilities of the Master Servicer under the Agreement (except that if the Trustee is prohibited by law from obligating itself to make advances regarding delinquent mortgage loans, then the Trustee will not be so obligated) and will be entitled to similar compensation arrangements. In the event that the Trustee is unwilling or unable so to act, it may or, at the written request of the holders of Certificates entitled to at least 51% of the Voting Rights, it shall appoint, or petition a court of competent jurisdiction for the appointment of, a housing loan servicing institution acceptable to the Rating Agency with a net worth at the time of such appointment of at least $15,000,000 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. (Sections 7.01 and 7.02) No Certificateholder will have the right under any Agreement to institute any proceeding with respect thereto unless such holder previously has given to the Trustee written notice of default and unless the holders of Certificates evidencing not less than 25% of the Voting Rights 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 fifteen days has neglected or refused to institute any such proceeding. (Section 10.03) The Trustee, however, is under no obligation to exercise any of the trusts or powers vested in it by any Agreement or to make any investigation of matters arising thereunder or to institute, conduct or defend any litigation thereunder or in relation thereto at the request, order or direction of any of the holders 54
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of Certificates covered by such Agreement, unless such Certificateholders have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby. (Section 8.02) AMENDMENT Each Agreement may be amended by the Depositor, the Master Servicer, if any, and the Trustee, without the consent of any of the holders of Certificates covered by the Agreement, to cure any ambiguity, to correct, modify or supplement any provision therein, or to make any other provisions with respect to matters or questions arising under the Agreement which are not inconsistent with the provisions thereof, provided that such action will not adversely affect in any material respect the interests of any holder of Certificates covered by the Agreement. Each Agreement may also be amended by the Depositor, the Master Servicer, if any, and the Trustee, with the consent of the holders of Certificates evidencing not less than 66% of the Voting Rights, for any purpose; provided, however, that no such amendment may (i) reduce in any manner the amount of or delay the timing of, payments received on Trust Fund Assets which are required to be distributed on any Certificate without the consent of the holder of such Certificate, (ii) adversely affect in any material respect the interests of the holders of any class of Certificates in a manner other than as described in (i), without the consent of the holders of Certificates of such class evidencing not less than 66% of the aggregate Voting Rights of such class or (iii) reduce the aforesaid percentage of Voting Rights required for the consent to any such amendment without the consent of the holders of all Certificates covered by such Agreement then outstanding. However, with respect to any series of Certificates as to which a REMIC election is to be made, the Trustee will not consent to any amendment of the Agreement unless it shall first have received an opinion of counsel to the effect that such amendment will not cause the Trust Fund to fail to qualify as a REMIC at any time that the related Certificates are outstanding. (Section 10.01) The Voting Rights evidenced by any Certificate will be the portion of the voting rights of all of the Certificates in the related series allocated in the manner described in the related Prospectus Supplement. (Article I) TERMINATION The obligations created by the Agreement for each series of Certificates will terminate upon the payment to Certificateholders of that series of all amounts held in the Certificate Account or by the Master Servicer and required to be paid to them pursuant to such Agreement following the earlier of (i) the final payment or other liquidation of the last Trust Fund Asset subject thereto or the disposition of all property acquired upon foreclosure of any such Trust Fund Asset and (ii) the purchase of all of the assets of the Trust Fund by the party entitled to effect such termination, under the circumstances and in the manner set forth in the related Prospectus Supplement. In no event, however, will the trust created by the Agreement continue beyond the date specified in the related Prospectus Supplement. Written notice of termination of the Agreement will be given to each Certificateholder, and the final distribution will be made only upon surrender and cancellation of the Certificates at an office or agency appointed by the Trustee which will be specified in the notice of termination. (Section 9.01) Any such purchase of assets of the Trust Fund shall be made at a price approximately equal to (A) in the case of a series of Certificates evidencing interests in a Trust Fund that includes Mortgage Loans, the greater of (i) the sum of (a) 100% of the Stated Principal Balance of each Mortgage Loan as of the day of such purchase plus accrued interest thereon at the applicable Net Interest Rate to the first day of the month following such purchase plus (b) the appraised value of any property acquired for the benefit of Certificateholders in respect of such loans, and (ii) the aggregate fair market value of all of the assets in the Trust Fund (as determined by the Trustee, the Servicer, and, if different than both such persons, the person entitled to effect such termination), in each case taking into account accrued interest at the applicable Net Interest Rate 55
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to the first day of the month following such purchase and (B) in the case of a series of Certificates evidencing interests in a Trust Fund that includes Agency Securities or Private Mortgage-Backed Securities, the sum of 100% of the unpaid principal balance of each outstanding Trust Fund Asset as of the day of such purchase plus accrued interest thereon at the Net Interest Rate to the first day of the month of such purchase, or at such other price as may be 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 person entitled to effect such termination is subject to the aggregate principal balance of the outstanding Trust Fund Assets for such series at the time of purchase being less than the percentage of the aggregate principal balance of the Mortgage Loans at the Cut-off Date for that series specified in the related Prospectus Supplement. (Section 9.01) DUTIES OF THE TRUSTEE The Trustee makes no representations as to the validity or sufficiency of any Agreement, the Certificates or any Mortgage Loan or related document and is not accountable for the use or application by or on behalf of the Master Servicer of any funds paid to the Master Servicer or its designee in respect of the Certificates or the Mortgage Loans, or deposited into or withdrawn from the Certificate Account or any other account by or on behalf of the Master Servicer. (Section 8.03) If no Event of Default has occurred and is continuing, the Trustee is required to perform only those duties specifically required under the related Agreement. However, upon receipt of the various certificates, reports or other instruments required to be furnished to it, the Trustee is required to examine such documents and to determine whether they conform to the requirements of the Agreement. (Section 8.01) THE TRUSTEE The Trustee under each Agreement will be named in the related Prospectus Supplement. The commercial bank, national banking association or trust company serving as Trustee may have normal banking relationships with the Depositor and its affiliates and with the Master Servicer and its affiliates. DESCRIPTION OF CREDIT SUPPORT If so provided in the related Prospectus Supplement, the Trust Fund for a series of Certificates may include Credit Support for such series or for one or more classes of Certificates comprising such Series, which Credit Support may consist of any combination of the following separate components, any of which may be limited to a specified percentage of the aggregate principal balance of the Mortgage Loans covered thereby or a specified dollar amount: (i) coverage with respect to Realized Losses incurred on Liquidated Loans (the "Defaulted Mortgage Amount"); (ii) coverage with respect to Special Hazard Realized Losses, as defined below (the "Special Hazard Amount"); and (iii) coverage with respect to certain actions that may be taken by a bankruptcy court in connection with a Mortgage Loan, including a Deficient Valuation or a reduction by a bankruptcy court of the Interest Rate on a Mortgage Loan or an extension of its maturity (collectively, the "Bankruptcy Amount"). As set forth below and in the related Prospectus Supplement, such coverage may be provided by subordination of one or more other classes of Certificates, one or more insurance policies, a bankruptcy bond, a letter of credit, a reserve fund or any combination of the foregoing. The amount and type of any Credit Support with respect to a series of Certificates or with respect to one or more classes of Certificates comprising such series, and the obligors on such Credit Support, will be set forth in the related Prospectus Supplement. See "Description of the Certificates". 56
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SUBORDINATION With respect to any Senior/Subordinate Series, in the event of any Realized Losses on Mortgage Loans not in excess of the limitations described below, the rights of the Subordinate Certificateholders to receive distributions with respect to the Mortgage Loans will be subordinate to the rights of the Senior Certificateholders to the extent described in the related Prospectus Supplement. All Realized Losses will be allocated to the Subordinate Certificates of the related series (or, if such series includes more than one class of Subordinated Certificates, to the outstanding class of Subordinate Certificates having the first priority for allocation of Realized Losses and then to additional outstanding classes of Subordinate Certificates, if any), until the Certificate Principal Balance thereof has been reduced to zero. Any additional Realized Losses will be allocated to the Senior Certificates (or, if such series includes more than one class of Senior Certificates, either on a pro rata basis among all of the Senior Certificates in proportion to their respective outstanding Certificate Principal Balances or as otherwise provided in the related Prospectus Supplement). However, with respect to Realized Losses that are attributable to physical damage to Mortgaged Properties of a type that is not covered by standard hazard insurance policies ("Special Hazard Realized Losses"), the amount thereof that may be allocated to the Subordinate Certificates of the related series may be limited to an amount (the "Special Hazard Subordination Amount") specified in the related Prospectus Supplement. If so, any Special Hazard Realized Losses in excess of the Special Hazard Subordination Amount will be allocated among all outstanding classes of Certificates of the related series, on a pro rata basis in proportion to their respective outstanding Certificate Principal Balances, regardless of whether any Subordinate Certificates remain outstanding, or as otherwise provided in the related Prospectus Supplement. Any allocation of a Realized Loss to a Certificate will be made by reducing the Certificate Principal Balance thereof as of the Distribution Date following the Prepayment Period in which such Realized Loss was incurred. If so provided in the related Prospectus Supplement, in the event of a Realized Loss incurred in connection with the liquidation of a defaulted Mortgage Loan, the Senior Certificateholders may be entitled to receive a distribution of principal, to be paid from and to the extent of funds otherwise distributable to the Subordinate Certificateholders, equal to the amount, if any (the "Unrecovered Senior Portion"), by which (i) the then applicable Senior Percentage times the Scheduled Principal Balance of the Liquidated Loan immediately prior to liquidation exceeds (ii) the portion of the related unscheduled recovery that is allocable to principal, reduced by the principal portion of all monthly payments due but unpaid as of the date of liquidation. Payments to the Senior Certificateholders in respect of any Unrecovered Senior Portion on any Distribution Date will only be made with respect to Realized Losses incurred in connection with Mortgage Loans that became Liquidated Loans during the preceding Prepayment Period and will not be made as to any Special Hazard Realized Losses in excess of the Special Hazard Subordination Amount, if applicable. As with any other distribution of principal, any payment to the holders of Senior Certificates attributable to an Unrecovered Senior Portion will be applied to reduce the Certificate Principal Balance thereof. Unless otherwise provided in the related Prospectus Supplement, the "Scheduled Principal Balance" of any Mortgage Loan as of any date of determination is equal to the unpaid principal balance thereof as of the date of determination, reduced by the principal portion of all monthly payments due but unpaid as of the date of determination. As set forth under "Description of the Certificates-Principal of the Certificates", the rights of holders of the various classes of Certificates of any series to receive distributions of principal and interest is determined by the aggregate Certificate Principal Balance of each such class. The Certificate Principal Balance of any Certificate will be reduced by all amounts previously distributed on such Certificate in respect of principal, and by any Realized Losses allocated thereto. If there were no Realized Losses or prepayments of principal on any of the Mortgage Loans, the respective rights of the holders of Certificates of any series to future distributions would 57
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not change. However, to the extent so provided in the related Prospectus Supplement, holders of Senior Certificates may be entitled to receive a disproportionately larger amount of prepayments received, which will have the effect of accelerating the amortization of the Senior Certificates and increasing the respective percentage interest in future distributions evidenced by the Subordinate Certificates in the related Trust Fund (with a corresponding decrease in the Senior Percentage), as well as preserving the availability of the subordination provided by the Subordinate Certificates. In addition, as set forth above, Realized Losses will be first allocated to Subordinate Certificates by reduction of the Certificate Principal Balance thereof, which will have the effect of increasing the respective interest in future distributions evidenced by the Senior Certificates in the related Trust Fund. If so provided in the related Prospectus Supplement, certain amounts otherwise payable on any Distribution Date to holders of Subordinate Certificates may be deposited into a reserve fund. Amounts held in any reserve fund may be applied as described below under "Reserve Funds" and in the related Prospectus Supplement. With respect to any Senior/Subordinate Series, the terms and provisions of the subordination may vary from those described above; any such variation will be described in the related Prospectus Supplement. If so provided in the related Prospectus Supplement, the Credit Support for the Senior Certificates of a Senior/Subordinate Series may include, in addition to the subordination of the Subordinate Certificates of such series and the establishment of a reserve fund, any of the other forms of Credit Support described below. If any of such other forms of Credit Support described below is maintained solely for the benefit of the Senior Certificates of a Senior/Subordinate Series, then the coverage described below as being provided by such Credit Support with respect to a series of Certificates may be limited to the extent necessary to make required distributions on such Senior Certificates or as otherwise specified in the related Prospectus Supplement. If so provided in the related Prospectus Supplement, the obligor on any such other forms of Credit Support maintained for the benefit of the Senior Certificates of a Senior/Subordinate Series may be reimbursed for amounts paid thereunder out of amounts otherwise payable on the Subordinate Certificates. LETTER OF CREDIT As to any series of Certificates to be covered by a Letter of Credit, a bank (the "Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of Credit. The Master Servicer or Trustee will exercise its best reasonable efforts to keep or cause to be kept the Letter of Credit in full force and effect, unless coverage thereunder has been exhausted through payment of claims. The Master Servicer will agree to pay the fees for the Letter of Credit on a timely basis unless, as described in the related Prospectus Supplement, the payment of such fees is otherwise provided for. The Master Servicer or the Trustee will make or cause to be made draws on the Letter of Credit Bank under each Letter of Credit. Subject to such differences as will be described in the related Prospectus Supplement, Letters of Credit may cover all or any of the following amounts: (i) to the extent of any Defaulted Mortgage Amount, for any Mortgage Loan that became a Liquidated Loan during the related Prepayment Period (other than Mortgage Loans as to which amounts paid or payable under any related Hazard Insurance Instrument, including the Letter of Credit as described in (ii) below, are not sufficient either to restore the Mortgaged Property or to pay the outstanding principal balance of the Mortgage Loan plus accrued interest), an amount which, together with all Liquidation Proceeds, Insurance Proceeds, and other collections on such Liquidated Loan (net of amounts payable or reimbursable therefrom to the Master Servicer for related unpaid servicing fees and unreimbursed servicing expenses), will equal the sum of (A) the unpaid principal balance of 58
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such Liquidated Loan (plus accrued interest at the applicable Net Interest Rate) plus (B) the amount of related servicing expenses, if any, not reimbursed to the Master Servicer from Liquidation Proceeds, Insurance Proceeds and other collections on such Liquidation Loan (which shall be paid to the Master Servicer); (ii) to the extent of any Special Hazard Amount, as to each Mortgage Loan that is delinquent and as to which the Mortgaged Property has suffered damage (other than physical damage caused by hostile or warlike action in time of war or peace, by any weapons of war, by any insurrection or rebellion, or by any nuclear reaction or nuclear radiation or nuclear contamination whether controlled or uncontrolled, or by any action taken by any governmental authority in response to any of the foregoing) and for which any amounts paid or payable under the related primary hazard insurance policy or any Special Hazard Insurance Policy are not sufficient to pay either of the following amounts, an amount which, together with all Insurance Proceeds paid or payable under the related primary hazard insurance policy or any Special Hazard Insurance Policy (net, if such proceeds are not to be applied to restore such Mortgaged Property, of all amounts payable or reimbursable therefrom to the Master Servicer for related unpaid servicing fees and unreimbursed servicing expenses), will be equal to the lesser of (A) the amount required to restore such Mortgaged Property and (B) the sum of (1) the unpaid principal balance of such Mortgage Loan (plus accrued interest at the applicable Net Interest Rate) plus (2) the amount of related servicing expenses, if any, not reimbursed to the Master Servicer from Insurance Proceeds paid under the related primary hazard insurance policy or any Special Hazard Insurance Policy; and (iii) to the extent of any Bankruptcy Amount, with respect to any Mortgage Loan that has been subject to bankruptcy proceedings as described above, the amount of any debt service reduction or Deficient Valuation. If the related Prospectus Supplement so provides, at such time as the Letter of Credit Bank makes a payment as described above with respect to a Liquidated Loan, or a payment of the full amount owing on a Mortgage Loan as to which the Mortgaged Property has been damaged (as described in (ii)(B) above), the Liquidated Loan will be removed from the related Trust Fund in accordance with the terms set forth in the related Prospectus Supplement and will no longer be subject to the Agreement. Unless otherwise provided in the related Prospectus Supplement, Mortgage Loans that have been subject to bankruptcy proceedings as described above, or as to which payment under the Letter of Credit has been made for the purpose of restoring the related Mortgaged Property (as described in (ii)(A) above), will remain part of the related Trust Fund. Any Defaulted Mortgage Amount, Special Hazard Amount and Bankruptcy Amount covered by any Letter of Credit will each be reduced to the extent of related unreimbursed draws thereunder. In the event that the Letter of Credit Bank ceases to be a duly organized commercial bank, or its debt obligations are rated lower than the highest rating on any class of the Certificates on the date of issuance by the Rating Agency or Agencies, the Master Servicer or Trustee will use its best reasonable efforts to obtain or cause to be obtained, as to each Letter of Credit, a substitute Letter of Credit issued by a commercial bank that meets such requirements and providing the same coverage; provided, however, that, unless otherwise provided in the related Prospectus Supplement, if the fees charged or collateral required by such successor Letter of Credit Bank shall be more than the fees charged or collateral required by such predecessor Letter of Credit Bank, each component of coverage thereunder may be reduced proportionately to such a level as results in such fees and collateral being not more than the fees then charged and collateral then required by such predecessor Letter of Credit Bank. MORTGAGE POOL INSURANCE POLICY As to any series of Certificates to be covered by a Mortgage Pool Insurance Policy with respect to any Defaulted Mortgage Amount, the Master Servicer will exercise its best reasonable 59
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efforts to maintain or cause to be maintained the Mortgage Pool Insurance Policy in full force and effect, unless coverage thereunder has been exhausted through payment of claims. The Master Servicer will agree to pay the premiums for each Mortgage Pool Insurance Policy on a timely basis unless, as described in the related Prospectus Supplement, the payment of such fees is otherwise provided. The Master Servicer will present or cause to be presented claims to the insurer under each Mortgage Pool Insurance Policy. Mortgage Pool Insurance Policies, however, are not blanket policies against loss, since claims thereunder may be made only upon satisfaction of certain conditions, as described below and, if applicable, in the related Prospectus Supplement. Mortgage Pool Insurance Policies do not cover losses arising out of the matters excluded from coverage under the primary mortgage insurance policy, or losses due to a failure to pay or denial of a claim under a primary mortgage insurance policy, irrespective of the reason therefor. Mortgage Pool Insurance Policies in general provide that no claim may validly be presented thereunder with respect to a Mortgage Loan unless (i) an acceptable primary mortgage insurance policy, if the initial Loan-to-Value Ratio of the Mortgage Loan exceeded 80%, has been kept in force until such Loan-to-Value Ratio is reduced to 80%; (ii) premiums on the primary hazard insurance policy have been paid by the insured and real estate taxes and foreclosure, protection and preservation expenses have been advanced by or on behalf of the insured, as approved by the insurer; (iii) if there has been physical loss or damage to the Mortgaged Property, it has been restored to its physical condition at the time the Mortgage Loan became insured under the Mortgage Pool Insurance Policy, subject to reasonable wear and tear; and (iv) the insured has acquired good and merchantable title to the Mortgaged Property, free and clear of all liens and encumbrances, except permitted encumbrances, including any right of redemption by or on behalf of the mortgagor, and if required by the insurer, has sold the property with the approval of the insurer. Assuming the satisfaction of these conditions, the insurer has the option to either (i) acquire the property securing the defaulted Mortgage Loan for a payment equal to the principal balance thereof plus accrued and unpaid interest at the Interest Rate to the date of acquisition and certain expenses described above advanced by or on behalf of the insured, on condition that the insurer must be provided with good and merchantable title to the Mortgaged Property (unless the property has been conveyed pursuant to the terms of the applicable primary mortgage insurance policy) or (ii) pay the amount by which the sum of the principal balance of the defaulted Mortgage Loan and accrued and unpaid interest at the Interest Rate to the date of the payment of the claim and such expenses exceed the proceeds received from a sale of the Mortgaged Property which the insurer has approved. In both (i) and (ii), the amount of payment under a Mortgage Pool Insurance Policy will be reduced by the amount of such loss paid under the primary mortgage insurance policy. Unless earlier directed by the insurer, a claim under a Mortgage Pool Insurance Policy must be filed (i) in the case when a primary mortgage insurance policy is in force, within a specified number of days (typically, 60 days) after the claim for loss has been settled or paid thereunder, or after acquisition by the insured or a sale of the property approved by the insurer, whichever is later, or (ii) in the case when a primary mortgage insurance policy is not in force, within a specified number of days (typically, 60 days) after acquisition by the insured or a sale of the property approved by the insurer. A claim must be paid within a specified period (typically, 30 days) after the claim is made by the insured. Unless otherwise specified in the Prospectus Supplement relating to a series of Certificates, the amount of coverage under each Mortgage Pool Insurance Policy will be reduced over the life of the Certificates of any series by the aggregate dollar amount of claims paid less the aggregate of the net amounts realized by the insurer upon disposition of all acquired properties. The amount of claims paid includes certain expenses incurred by the Master Servicer as well as accrued 60
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interest on delinquent Mortgage Loans to the date of payment of the claim. See "Certain Legal Aspects of Mortgage Loans-Foreclosure on Mortgages" and "-Repossession with respect to Contracts". Accordingly, if aggregate net claims paid under a Mortgage Pool Insurance Policy reach the applicable policy limit, coverage thereunder will be exhausted and any further losses will be borne by Certificateholders of the related series. In the event that an insurer under a Mortgage Pool Insurance Policy ceases to be a Qualified Insurer (such term being defined to mean a private mortgage guaranty insurance company duly qualified as such under applicable laws and approved as an insurer by FHLMC, FNMA, or any successor entity, and having a claims-paying ability acceptable to the Rating Agency or Agencies), the Master Servicer will use its best reasonable efforts to obtain or cause to be obtained from another Qualified Insurer a replacement insurance policy comparable to the Mortgage Pool Insurance Policy with a total coverage equal to the then outstanding coverage of such Mortgage Pool Insurance Policy; provided, however, that, unless otherwise provided in the related Prospectus Supplement, if the cost of the replacement policy is greater than the cost of such Mortgage Pool Insurance Policy, the coverage of the replacement policy may be reduced to the level such that its premium rate does not exceed the premium rate on such Mortgage Pool Insurance Policy. However, in the event that the insurer ceases to be a Qualified Insurer solely because it ceases to be approved as an insurer by FHLMC, FNMA, or any successor entity, the Master Servicer will review, or cause to be reviewed, the financial condition of the insurer with a view towards determining whether recoveries under the Mortgage Pool Insurance Policy are jeopardized for reasons related to the financial condition of the insurer. If the Master Servicer determines that recoveries are so jeopardized, it will exercise its best reasonable efforts to obtain from another Qualified Insurer a replacement policy as described above, subject to the same cost limitation. Because each Mortgage Pool Insurance Policy will require that the property subject to a defaulted Mortgage Loan be restored to its original condition prior to claiming against the insurer, such policy will not provide coverage against hazard losses. As set forth below, the primary hazard insurance policies covering the Mortgage Loans typically exclude from coverage physical damage resulting from a number of causes and, even when the damage is covered, may afford recoveries that are significantly less than the full replacement cost of such losses. Further, a special hazard insurance policy (or a Letter of Credit to the extent of the Special Hazard Amount) will not cover all risks, and the coverage thereunder will be limited in amount. Certain hazard risks will, as a result, be uninsured and will therefore be borne by Certificateholders. (Section 3.13) SPECIAL HAZARD INSURANCE POLICY As to any series of Certificates to be covered by an Insurance Instrument that does not cover any Special Hazard Amount, unless otherwise provided in the related Prospectus Supplement, the Master Servicer will exercise its best reasonable efforts to maintain or cause to be maintained a Special Hazard Insurance Policy in full force and effect covering the Special Hazard Amount, unless coverage thereunder has been exhausted through payment of claims; provided, however, that the Master Servicer is under no obligation to maintain such policy in the event that any Insurance Instrument covering such series as to any Defaulted Mortgage Amount is no longer in effect. The Master Servicer will agree to pay the premiums on each Special Hazard Insurance Policy on a timely basis unless, as described in the related Prospectus Supplement, payment of such premiums is otherwise provided for. Each Special Hazard Insurance Policy will, subject to the limitations described below, protect holders of Certificates of the related series from (i) loss by reason of damage to Mortgaged Properties caused by certain hazards (including earthquakes and mudflows) not insured against under the primary hazard insurance policies or a flood insurance policy if the property is in a designated flood area and (ii) loss from partial damage caused by reason of the application of the co-insurance clause contained in the primary hazard insurance policies. Special Hazard Insurance 61
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Policies will not cover losses occasioned by normal wear and tear, war, civil insurrection, certain governmental actions, errors in design, nuclear or chemical reaction or contamination, faulty workmanship or materials (except under certain circumstances), flood (if the property is located in a designated flood area) and certain other risks. Subject to the foregoing limitations, each Special Hazard Insurance Policy will provide that, when there has been damage to property securing a defaulted Mortgage Loan acquired by the insured and to the extent the damage is not covered by the related primary hazard insurance policy or flood insurance policy, the insurer will pay the lesser of (i) the cost of repair to the property and (ii) upon transfer of the property to the insurer, the unpaid principal balance of such Mortgage Loan at the time of acquisition of the property by foreclosure, deed in lieu of foreclosure or repossession, plus accrued interest to the date of claim settlement and certain expenses incurred by or on behalf of the Master Servicer with respect to the property. The amount of coverage under the Special Hazard Insurance Policy will be reduced by the sum of (a) the unpaid principal balance plus accrued interest and certain expenses paid by the insurer, less any net proceeds realized by the insurer from the sale of the property, plus (b) any amount paid as the cost of repair of the property. Restoration of the property with the proceeds described under clause (i) of the immediately preceding paragraph will satisfy the condition under a Credit Insurance Instrument that the property be restored before a claim thereunder may be validly presented with respect to the defaulted Mortgage Loan secured by such property. The payment described under clause (ii) of the immediately preceding paragraph will render unnecessary presentation of a claim in respect of such Mortgage Loan under a Credit Insurance Instrument as to any Defaulted Mortgage Amount. Therefore, so long as the Credit Insurance Instrument remains in effect, the payment by the insurer of either of the above alternative amounts will not affect the total insurance proceeds paid to Certificateholders, but will affect the relative amounts of coverage remaining under any Special Hazard Insurance Policy and any Credit Insurance Instrument. The sale of a Mortgaged Property must be approved by the insurer under any Special Hazard Insurance Policy and funds received by the insured in excess of the unpaid principal balance of the Mortgage Loan plus interest thereon to the date of sale plus certain expenses incurred by or on behalf of the Master Servicer with respect to the property (not to exceed the amount actually paid by the insurer) must be refunded to such insurer and, to that extent, coverage under the Special Hazard Insurance Policy will be restored. If aggregate claim payments under a Special Hazard Insurance Policy reach the policy limit, coverage thereunder will be exhausted and any further losses will be borne by Certificateholders. A claim under a Special Hazard Insurance Policy generally must be filed within a specified number of days (typically, 60 days) after the insured has acquired good and merchantable title to the property, and a claim payment is payable within a specified number of days (typically, 30 days) after a claim is accepted by the insurer. Special Hazard Insurance Policies provide that no claim may be paid unless primary hazard insurance policy premiums, flood insurance premiums (if the property is located in a federally designated flood area) and, as approved by the insurer, real estate property taxes, property protection and preservation expenses and foreclosure or repossession costs have been paid by or on behalf of the insured, and unless the insured has maintained the primary hazard insurance policy and, if the property is located in a federally designated flood area, flood insurance, as required by the Special Hazard Insurance Policy. If a Special Hazard Insurance Policy is cancelled or terminated for any reason (other than the exhaustion of total policy coverage), the Master Servicer will use its best reasonable efforts to obtain or cause to be obtained from another Insurer a replacement policy comparable to such Special Hazard Insurance Policy with a total coverage that is equal to the then existing coverage of such Special Hazard Insurance Policy; provided, however, that, unless otherwise provided in the related Prospectus Supplement, if the cost of the replacement policy is greater than the cost 62
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of such Special Hazard Insurance Policy, the coverage of the replacement policy may be reduced to a level such that its premium rate does not exceed the premium rate on such Special Hazard Insurance Policy. Since each Special Hazard Insurance Policy is designed to permit full recoveries as to any Defaulted Mortgage Amount under a Credit Insurance Instrument in circumstances in which such recoveries would otherwise be unavailable because property has been damaged by a cause not insured against by a primary hazard insurance policy and thus would not be restored, each Agreement provides that, if the related Credit Insurance Instrument shall have lapsed or terminated or been exhausted through payment of claims, the Master Servicer will be under no further obligation to maintain the Special Hazard Insurance Policy. BANKRUPTCY BOND As to any series of Certificates to be covered by a Bankruptcy Bond with respect to any Bankruptcy Amount, the Master Servicer will exercise its best reasonable efforts to maintain or cause to be maintained the Bankruptcy Bond in full force and effect, unless coverage thereunder has been exhausted through payment of claims. The Master Servicer will pay or cause to be paid the premiums for each Bankruptcy Bond on a timely basis, unless, as described in the related Prospectus Supplement, payment of such premiums is otherwise provided for. Subject to the limit of the dollar amount of coverage provided, each Bankruptcy Bond will cover certain losses resulting from an extension of the maturity of a Mortgage Loan, or a reduction by the bankruptcy court of the principal balance of or the Interest Rate on a Mortgage Loan, and the unpaid interest on the amount of a principal reduction during the pendency of a proceeding under the Bankruptcy Code. See "Certain Legal Aspects of Mortgage Loans-Foreclosure on Mortgages" and "-Repossession with respect to Contracts". CERTIFICATE GUARANTEE INSURANCE Certificate guarantee insurance ("Certificate Guarantee Insurance"), if any, with respect to a series of Certificates will be provided by one or more insurance companies. Such Certificate Guarantee Insurance will guarantee, with respect to one or more classes of Certificates of the related series, timely distributions of interest and full distributions of principal on the basis of a schedule of principal distributions set forth in or determined in the manner specified in the related Prospectus Supplement. If so specified in the related Prospectus Supplement, the Certificate Guarantee Insurance will also guarantee against any payment made to a Certificateholder that is subsequently recovered as a "voidable preference" payment under federal bankruptcy law. A copy of the Certificate Guarantee Insurance policy for a series, if any, will be filed with the Commission as an exhibit to a Current Report on Form 8-K to be filed with the Commission within 15 days of issuance of the Certificates of the related series. RESERVE FUND If so provided in the related Prospectus Supplement, the Depositor will deposit or cause to be deposited in an account (a "Reserve Fund") any combination of cash, one or more irrevocable letters of credit or one or more Permitted Investments in specified amounts, or any other instrument satisfactory to the Rating Agency or Agencies, which will be applied and maintained in the manner and under the conditions specified in such Prospectus Supplement. In the alternative or in addition to such deposit, to the extent described in the Prospectus Supplement for a Senior/Subordinate Series, a Reserve Fund may be funded through application of all or a portion of amounts otherwise payable on the Subordinate Certificates. Amounts in a Reserve Fund may be distributed to Certificateholders, or applied to reimburse the Master Servicer for outstanding advances, or may be used for other purposes, in the manner and to the extent specified in the related Prospectus Supplement. Unless otherwise provided in the related 63
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Prospectus Supplement, any such Reserve Fund will not be deemed to be part of the related Trust Fund. Amounts deposited in any Reserve Fund for a series will be invested in Permitted Investments by, or at the direction of, the Master Servicer or any other person named in the related Prospectus Supplement. CASH FLOW AGREEMENTS If so provided in the related Prospectus Supplement, the Trust Fund may include guaranteed investment contracts pursuant to which moneys held in the funds and accounts established for the related series will be invested at a specified rate. The Trust Fund may also include certain other agreements, such as interest rate exchange agreements, interest rate cap or floor agreements, currency exchange agreements or similar agreements designed to reduce the effects of interest rate or currency exchange rate fluctuations on the Trust Fund Assets on one or more classes of Certificates. The principal terms of any such guaranteed investment contract or other agreement (any such agreement a "Cash Flow Agreement"), and the identity of the Cash Flow Agreement obligor, will be described in the Prospectus Supplement for a series of Offered Certificates. DESCRIPTION OF PRIMARY INSURANCE POLICIES Each Mortgage Loan will be covered by a primary hazard insurance policy and, if required as described below, a primary mortgage insurance policy. PRIMARY MORTGAGE INSURANCE POLICIES As set forth under "Description of the Certificates-Realization Upon Defaulted Mortgage Loans", the Master Servicer will maintain or cause to be maintained with respect to each Mortgage Loan, other than a Multifamily Loan, a primary mortgage insurance policy in accordance with the underwriting standards described herein and in the related Prospectus Supplement. Although the terms and conditions of primary mortgage insurance policies differ, each primary mortgage insurance policy will generally cover losses up to an amount equal to the excess of the unpaid principal amount of a defaulted Mortgage Loan (plus accrued and unpaid interest thereon and certain approved expenses) over a specified percentage of the Value of the related Mortgaged Property. As conditions precedent to the filing or payment of a claim under a primary mortgage insurance policy, the insured will typically be required, in the event of default by the borrower, among other things, to: (i) advance or discharge (a) hazard insurance premiums and (b) as necessary and approved in advance by the insurer, real estate taxes, protection and preservation expenses and foreclosure and related costs; (ii) in the event of any physical loss or damage to the Mortgaged Property, have the Mortgaged Property restored to at least its condition at the effective date of the primary mortgage insurance policy (ordinary wear and tear excepted); and (iii) tender to the insurer good and merchantable title to, and possession of, the Mortgaged Property. PRIMARY HAZARD INSURANCE POLICIES Each Agreement will require the Master Servicer to cause the borrower on each Mortgage Loan to maintain a primary hazard insurance policy providing for coverage of the standard form of fire insurance policy with extended coverage customary in the state in which the Mortgaged Property is located. Unless otherwise specified in the related Prospectus Supplement, such coverage will be in general in an amount equal to the lesser of the principal balance owing on 64
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such Mortgage Loan and the amount necessary to fully compensate for any damage or loss to the improvements on the Mortgaged Property on a replacement cost basis, but in either case not less than the amount necessary to avoid the application of any co-insurance clause contained in the hazard insurance policy. The ability of the Master Servicer to assure that hazard insurance proceeds are appropriately applied may be dependent upon its being named as an additional insured under any primary hazard insurance policy and under any flood insurance policy referred to below, or upon the extent to which information in this regard is furnished by borrowers. All amounts collected by the Master Servicer under any such policy (except for amounts to be applied to the restoration or repair of the Mortgaged Property or released to the borrower in accordance with the Master Servicer's normal servicing procedures, subject to the terms and conditions of the related Mortgage and Mortgage Note) will be deposited in the Certificate Account. The Agreement provides that the Master Servicer may satisfy its obligation to cause each borrower to maintain such a hazard insurance policy by the Master Servicer's maintaining a blanket policy insuring against hazard losses on the Mortgage Loans. If such blanket policy contains a deductible clause, the Master Servicer will deposit in the Certificate Account all sums that would have been deposited therein but for such clause. The Master Servicer also is required to maintain a fidelity bond and errors and omissions policy with respect to its officers and employees that provides coverage against losses that may be sustained as a result of an officer's or employee's misappropriation of funds or errors and omissions in failing to maintain insurance, subject to certain limitations as to amount of coverage, deductible amounts, conditions, exclusions and exceptions. In general, the standard form of fire and extended coverage policy covers physical damage to or destruction of the improvements of the property by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and civil commotion, subject to the conditions and exclusions specified in each policy. Although the policies relating to the Mortgage Loans will be underwritten by different insurers under different state laws in accordance with different applicable state forms, and therefore will 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 mudflows), 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. When a Mortgaged Property is located at origination in a federally designated flood area, each Agreement requires the Master Servicer to cause the borrower to acquire and maintain flood insurance in an amount equal in general to the lesser of (i) the amount necessary to fully compensate for any damage or loss to the improvements which are part of the Mortgaged Property on a replacement cost basis and (ii) the maximum amount of insurance available under the federal flood insurance program, whether or not the area is participating in the program. The hazard insurance policies covering the Mortgaged Properties typically contain a co-insurance clause that in effect requires the insured at all times to carry insurance of a specified percentage (generally 80% to 90%) of the full replacement value of the improvements on the property in order to recover the full amount of any partial loss. If the insured's coverage falls below this specified percentage, such clause generally provides that the insurer's liability in the event of partial loss does not exceed the lesser of (i) the replacement cost of the improvements less physical depreciation and (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. The Master Servicer will not require that a hazard or flood insurance policy be maintained for any Cooperative Loan. Generally, the Cooperative 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 Note do not maintain such insurance or 65
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do not maintain adequate coverage or any insurance proceeds are not applied to the restoration of the damaged property, damage to such borrower's Cooperative apartment or such Cooperative's building could significantly reduce the value of the collateral securing such Cooperative Note. Since the amount of hazard insurance the Master Servicer will cause to be maintained on the improvements securing the Mortgage Loans declines as the principal balances owing thereon decrease, and since residential properties have historically appreciated in value over time, in the event of partial loss hazard insurance proceeds may be insufficient to restore fully the damaged property. Under the terms of the Mortgage Loans, borrowers are required to present claims to insurers under hazard insurance policies maintained on the Mortgaged Properties. The Master Servicer, on behalf of the Trustee and Certificateholders, is obligated to present or cause to be presented claims under any blanket insurance policy insuring against hazard losses on Mortgaged Properties. However, the ability of the Master Servicer to present or cause to be presented such claims is dependent upon the extent to which information in this regard is furnished to the Master Servicer by borrowers. (Section 3.14) FHA INSURANCE The FHA is responsible for administering various federal programs, including mortgage insurance, authorized under The Housing Act and the United States Housing Act of 1937, as amended. There are two primary FHA insurance programs that are available for multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow the Department of Housing and Urban Development ("HUD") to insure mortgage loans that are secured by newly constructed and substantially rehabilitated multifamily rental projects. Section 244 of the Housing Act provides for co-insurance of such mortgage loans made under Sections 221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of such a mortgage loan may be up to 40 years and the ratio of the loan amount to property replacement cost can be up to 90%. Section 223(f) of the Housing Act allows HUD to insure mortgage loans made for the purchase or refinancing of existing apartment projects which are at least three years old. Section 244 also provides for co-insurance of mortgage loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot be used for substantial rehabilitation work, but repairs may be made for up to, in general, the greater of 15% of the value of the project or a dollar amount per apartment unit established from time to time by HUD. In general the loan term may not exceed 35 years and a loan to value ratio of no more than 85% is required for the purchase of a project and 70% for the refinancing of a project. HUD has the option, in most cases, to pay insurance claims in cash or in debentures issued by HUD. Presently, 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 debenture interest rate. Unless otherwise provided in the related Prospectus Supplement, the Master Servicer will be obligated to purchase any such debenture issued in satisfaction of a defaulted FHA insured Mortgage Loan serviced by it for an amount equal to the principal amount of any such debenture. The Master Servicer will be required to take such steps as are reasonably necessary to keep FHA insurance in full force and effect. VA GUARANTEES The VA is an Executive Branch Department of the United States, headed by the Secretary of Veterans Affairs. VA currently administers a variety of federal assistance programs on behalf 66
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of eligible veterans and their dependents and beneficiaries. VA administers a loan guaranty program pursuant to which VA guarantees a portion of loans made to eligible veterans. Under the VA loan guaranty program, a VA Loan may be made to any eligible veteran by an approved private sector mortgage lender. VA guarantees payment to the holder of that loan of a fixed percentage of the loan indebtedness, up to a maximum dollar amount, in the event of default by the veteran borrower. When a delinquency is reported to VA and no realistic alternative to foreclosure is developed by the loan holder or through VA's supplemental servicing of the loan, VA determines, through an economic analysis, whether VA will (a) authorize the holder to convey the property securing the VA Loan to the Secretary of Veterans Affairs following termination or (b) pay the loan guaranty amount to the holder. The decision as to disposition of properties securing defaulted VA Loans is made on a case-by-case basis using the procedures set forth in 38 U.S.C. Section 3732(c), as amended. The Master Servicer will be required to take such steps as are reasonably necessary to keep the VA guarantees in full force and effect. CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS The following discussion contains general summaries of certain legal aspects of loans secured by residential properties. Because such legal aspects are governed in part 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 applicable federal and state laws governing the Mortgage Loans. See "The Trust Funds-The Mortgage Loans". GENERAL All of the Mortgage Loans, except as described below, are loans to homeowners and all of the Single-Family Loans and Multifamily Loans are evidenced by notes or bonds and secured by instruments which may be mortgages, deeds of trust, security deeds or deeds to secure debt, depending upon the type of security instrument customary to grant a security interest in real property in the state in which the Single-Family Property or Multifamily Property, as the case may be, is located. If specified in the Prospectus Supplement relating to a series of Certificates, a Trust Fund may also contain (i) Cooperative Loans evidenced by promissory notes secured by security interests in shares issued by private cooperative housing corporations and in the related proprietary leases or occupancy agreements granting exclusive rights to occupy specific dwelling units in the related buildings or (ii) Contracts evidencing both (a) the obligation of the obligor to repay the loan evidenced thereby and (b) the grant of a security interest in the related Manufactured Home to secure repayment of such loan. Any of the foregoing types of encumbrance will create a lien upon, or grant a title interest in, the subject property, the priority of which will depend on the terms of the particular security instrument as well as the order of recordation or filing of the instrument in the appropriate public office. Such a lien is not prior to the lien for real estate taxes and assessments. SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS The Single-Family Loans and Multifamily Loans will be secured by either mortgages, deeds of trust, security deeds or deeds to secure debt depending upon the type of security instrument customary to grant a security interest according to the prevailing practice in the state in which the property subject to a Single-Family Loan or Multifamily Loan is located. The filing of a mortgage or a deed of trust creates a lien upon or conveys title to the real property encumbered by such 67
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instrument and represents the security for the repayment of an obligation that is customarily evidenced by a promissory note. It is not prior to the lien for real estate taxes and assessments. Priority with respect to mortgages and deeds of trust depends on their terms and generally on the order of recording with the applicable state, county or municipal office. There are two parties to a mortgage, the mortgagor, who is the borrower/homeowner or the land trustee (as described below), and the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond and the mortgage. (In the case of a land trust, title to the property is held by a land trustee under a land trust agreement, while the borrower/homeowner is the beneficiary of the land trust; at origination of a mortgage loan, the borrower executes a separate undertaking to make payments on the mortgage note.) Although a deed of trust is similar to a mortgage, a deed of trust normally has three parties, the trustor (similar to a mortgagor), who may or may not be the borrower, the beneficiary (similar to a mortgagee), who is the lender, and the trustee, a third-party grantee. Under a deed of trust, the trustor grants the property, irrevocably until the debt is paid, in trust, generally with a power of sale, to the trustee to secure payment of the obligation. A security deed and a deed to secure debt are special types of deeds which indicate on their face that they are granted to secure an underlying debt. By executing a security deed or deed to secure debt, the grantor conveys title to, as opposed to merely creating a lien upon, the subject property to the grantee until such time as the underlying debt is repaid. The mortgagee's authority under a mortgage and the trustee's authority under a deed of trust, security deed or deed to secure debt are governed by the law of the state in which the real property is located, the express provisions of the mortgage, deed of trust, security deed or deed to secure debt and, in some cases, the directions of the beneficiary. LEASES AND RENTS Mortgages and deeds of trust which encumber Multifamily Property often contain an assignment of rents and leases, pursuant to which the borrower assigns its right, title and interest as landlord under each lease and the income derived therefrom to the lender, while retaining a license to collect the rents for so long as there is no default. If the borrower defaults, the license terminates and the lender is entitled to collect the rents. Local law may require that the lender take possession of the property and appoint a receiver before becoming entitled to collect the rents. Even after a foreclosure or the enforcement of an assignment of rents and leases, the potential rent payments from the property may not be sufficient to service the mortgage debt. For instance, the net income that would otherwise be generated from the property may be insufficient to service the mortgage debt if the leases on the property are at below-market rents, or as the result of excessive maintenance, repair or other obligations inherited by the lender as landlord. In the event of a borrower's default, the amount of rent the lender is able to collect from the tenants can significantly affect the value of the lender's security interest. COOPERATIVE LOANS The Cooperative owns or has a leasehold interest in all the real property and owns in fee or leases the building and all separate dwelling units therein. The Cooperative is directly responsible for project management and, in most cases, payment of real estate taxes, other governmental impositions and hazard and liability insurance. If there is a blanket mortgage on the cooperative apartment building and/or underlying land, as is generally the case, or an underlying lease of the land, as is the case in some instances, the Cooperative, as project mortgagor, or lessee, as the case may be, is also responsible for meeting these blanket mortgage or rental obligations. A blanket mortgage is ordinarily incurred by the Cooperative in connection with either the construction or purchase of the Cooperative's apartment building or the obtaining of capital by the Cooperative. The interests of the occupants under proprietary leases or occupancy agreements as to which the Cooperative is the landlord are generally subordinate to the interests of the holder 68
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of the blanket mortgage and to the interest of the holder of a land lease. If the Cooperative is unable to meet the payment obligations (i) 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 or (ii) arising under its land lease, the holder of the landlord's interest under the land lease could terminate it and all subordinate proprietary leases and occupancy agreements. Also, 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 final payment 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. Similarly, a land lease has an expiration date and the inability of the Cooperative to extend its term or, in the alternative, to purchase the land could lead to termination of the Cooperative's interest in the property and termination of all proprietary leases and occupancy agreements. In either event, foreclosure by the holder of the blanket mortgage or the termination of the underlying lease could eliminate or significantly diminish the value of any collateral held by the lender that financed the purchase by an individual tenant-stockholder of Cooperative shares or, in the case of the Trust Fund, the collateral securing the Cooperative Loans. The Cooperative is owned by tenant-stockholders who, through ownership of stock, shares or membership certificates in the corporation, receive proprietary leases or occupancy agreements which confer exclusive rights to occupy specific units. Generally, a tenant-stockholder of a Cooperative must make a monthly payment to the Cooperative representing such tenantstockholder'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 occupancy rights is financed through a Cooperative share loan evidenced by a promissory note and secured by an assignment of and a security interest in the occupancy agreement or proprietary lease and a security interest in the related Cooperative shares. The lender generally 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 tenantstockholder 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. See "Foreclosure on Cooperative Shares" below. CONTRACTS Under the laws of most states, manufactured housing constitutes personal property and is subject to the motor vehicle registration laws of the state or other jurisdiction in which the unit is located. In a few states, where certificates of title are not required for manufactured homes, security interests are perfected by the filing of a financing statement under Article 9 of the UCC which has been adopted by all states. Such financing statements are effective for five years and must be renewed at the end of each five years. The certificate of title laws adopted by the majority of states provide that ownership of motor vehicles and manufactured housing shall be evidenced by a certificate of title issued by the motor vehicles department (or a similar entity) of such state. In the states that have enacted certificate of title laws, a security interest in a unit of manufactured housing, so long as it is not attached to land in so permanent a fashion as to become a fixture, is generally perfected by the recording of such interest on the certificate of title to the unit in the appropriate motor vehicle registration office or by delivery of the required documents and payment of a fee to such office, depending on state law. The Master Servicer will be required under the related Agreement to effect such notation or delivery of the required documents and fees, and to obtain possession of the certificate of title, 69
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as appropriate under the laws of the state in which any Manufactured Home is registered. In the event the Master Servicer fails, due to clerical errors or otherwise, to effect such notation or delivery, or files the security interest under the wrong law (for example, under a motor vehicle title statute rather than under the UCC, in a few states), the Trustee may not have a first priority security interest in the Manufactured Home securing a Contract. As manufactured homes have become larger and often have been attached to their sites without any apparent intention by the borrowers to move them, courts in many states have held that manufactured homes may, under certain circumstances, become subject to real estate title and recording laws. As a result, a security interest in a manufactured home could be rendered subordinate to the interests of other parties claiming an interest in the home under applicable state real estate law. In order to perfect a security interest in a manufactured home under real estate laws, the holder of the security interest must file either a "fixture filing" under the provisions of the UCC or a real estate mortgage under the real estate laws of the state where the home is located. These filings must be made in the real estate records office of the county where the home is located. Generally, Contracts will contain provisions prohibiting the obligor from permanently attaching the Manufactured Home to its site. So long as the obligor does not violate this agreement, a security interest in the Manufactured Home will be governed by the certificate of title laws or the UCC, and the notation of the security interest on the certificate of title or the filing of a UCC financing statement will be effective to maintain the priority of the security interest in the Manufactured Home. If, however, a Manufactured Home is permanently attached to its site, other parties could obtain an interest in the Manufactured Home that is prior to the security interest originally retained by the seller and transferred to the Depositor. The Depositor will assign or cause to be assigned a security interest in the Manufactured Homes to the Trustee, on behalf of the Certificateholders. Unless otherwise specified in the related Prospectus Supplement, neither the Depositor, the Master Servicer nor the Trustee will amend the certificates of title to identify the Trustee, on behalf of the Certificateholders, as the new secured party and, accordingly, the Depositor or the Mortgage Loan Seller will continue to be named as the secured party on the certificates of title relating to the Manufactured Homes. In most states, such assignment is an effective conveyance of such security interest without amendment of any lien noted on the related certificate of title and the new secured party succeeds to the Depositor's rights as the secured party. However, in some states there exists a risk that, in the absence of an amendment to the certificate of title, such assignment of the security interest might not be held effective against creditors of the Depositor or Mortgage Loan Seller. In the absence of fraud, forgery or permanent affixation of the Manufactured Home to its site by the Manufactured Home owner, or administrative error by state recording officials, the notation of the lien of the Depositor on the certificate of title or delivery of the required documents and fees will be sufficient to protect the Trustee against the rights of subsequent purchasers of a Manufactured Home or subsequent lenders who take a security interest in the Manufactured Home. If there are any Manufactured Homes as to which the Depositor has failed to perfect or cause to be perfected the security interest assigned to the Trust Fund, such security interest would be subordinate to, among others, subsequent purchasers for value of Manufactured Homes and holders of perfected security interests. There also exists a risk in not identifying the Trustee, on behalf of the Certificateholders, as the new secured party on the certificate of title that, through fraud or negligence, the security interest of the Trustee could be released. In the event that the owner of a Manufactured Home moves it to a state other than the state in which such Manufactured Home initially is registered, under the laws of most states the perfected security interest in the Manufactured Home would continue for four months after such relocation and thereafter until the owner re-registers the Manufactured Home in such state. If the owner were to relocate a Manufactured Home to another state and re-register the Manufactured Home in such state, and if the Depositor did not take steps to re-perfect its security interest in 70
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such state, the security interest in the Manufactured Home would cease to be perfected. A majority of states generally require surrender of a certificate of title to re-register a Manufactured Home; accordingly, the Depositor must surrender possession if it holds the certificate of title to such Manufactured Home or, in the case of Manufactured Homes registered in states that provide for notation of lien, the Depositor would receive notice of surrender if the security interest in the Manufactured Home is noted on the certificate of title. Accordingly, the Depositor would have the opportunity to re-perfect its security interest in the Manufactured Home in the state of relocation. In states that do not require a certificate of title for registration of a manufactured home, reregistration could defeat perfection. Similarly, when an obligor under a manufactured housing conditional sales contract sells a manufactured home, the obligee must surrender possession of the certificate of title or it will receive notice as a result of its lien noted thereon and accordingly will have an opportunity to require satisfaction of the related manufactured housing conditional sales contract before release of the lien. Under each related Agreement, the Master Servicer will be obligated to take such steps, at the Master Servicer's expense, as are necessary to maintain perfection of security interests in the Manufactured Homes. Under the laws of most states, liens for repairs performed on a Manufactured Home take priority even over a perfected security interest. The Depositor will obtain the representation of the Mortgage Loan Seller that it has no knowledge of any such liens with respect to any Manufactured Home securing a Contract. However, such liens could arise at any time during the term of a Contract. No notice will be given to the Trustee or Certificateholders in the event such a lien arises. FORECLOSURE ON MORTGAGES Foreclosure of a deed of trust is generally accomplished by a non-judicial trustee's sale under a specific provision in the deed of trust, which authorizes the trustee to sell the property upon any default by the borrower under the terms of the note or deed of trust. In some states, the trustee must record a notice of default and send a copy to the borrower-trustor and to any person who has recorded a request for a copy of a notice of default and notice of sale. In addition, the trustee in some states must provide notice to any other individual having an interest in the real property, including any junior lienholder. The trustor, borrower, or any 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. Generally, state law controls the amount of foreclosure expenses and costs, including attorneys' fees, that may be recovered by a lender. 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, recorded and sent to all parties having an interest in the real property. An action to foreclose a mortgage is an action to recover the mortgage debt by enforcing the mortgagee's rights under the mortgage and in the mortgaged property. It is regulated by statutes and rules and subject throughout to the court's equitable powers. Generally, a mortgagor is bound by the terms of the mortgage note and the mortgage as made and cannot be relieved from its own default. However, since a foreclosure action is equitable in nature and is addressed to a court of equity, the court may relieve a mortgagor of a default and deny the mortgagee foreclosure on proof that the mortgagor's default was neither willful nor in bad faith and that the mortgagee's action was such as to establish a waiver, or fraud, bad faith, oppressive or unconscionable conduct as to warrant a court of equity to refuse affirmative relief to the mortgagee. Under certain circumstances a court of equity may relieve the mortgagor from an entirely technical default where such default was not willful. A foreclosure action or sale pursuant to a power of sale is subject to most of the delays and expenses of other lawsuits if defenses or counterclaims are interposed, sometimes requiring up to several years to complete. Moreover, recent judicial decisions suggest that a non-collusive, 71
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regularly conducted foreclosure sale or sale pursuant to a power of sale may be challenged as a fraudulent conveyance, regardless of the parties' intent, if a court determines that the sale was for less than fair consideration and such sale occurred while the mortgagor was insolvent and within one year (or within the state statute of limitations if the trustee in bankruptcy elects to proceed under state fraudulent conveyance law) of the filing of bankruptcy. Similarly, a suit against the debtor on the mortgage note may take several years. In case of foreclosure under either a mortgage or a deed of trust, the sale by the referee or other designated officer or by the trustee is a public sale. However, because of the difficulty potential third party purchasers at the sale have in determining the exact status of title and because the physical condition of the property may have deteriorated during the foreclosure proceedings, it is uncommon for a third party to purchase the property at the foreclosure sale. Rather, it is common for the lender to purchase the property from the trustee or referee for an amount equal to the principal amount of the mortgage or deed of trust plus accrued and unpaid interest and the expenses of foreclosure. Thereafter, the lender will assume the burdens of ownership, including obtaining casualty insurance, paying taxes and making such repairs at its own expense as are necessary to render the property suitable for sale. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender's investment in the property. Any loss may be reduced by the receipt of any mortgage insurance proceeds. 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 prior to or at the time of the foreclosure sale or undertake the obligation to make payments on the senior mortgages in the event the mortgagor is in default thereunder, in either event adding the amounts expended to the balance due on the junior loan, and may be subrogated to the rights of the senior mortgagees. In addition, in the event that the foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale" clause in a senior mortgage, the junior mortgagee may be required to pay the full amount of the senior mortgages to the senior mortgagees. Accordingly, with respect to those Mortgage Loans which are junior mortgage loans, if the lender purchases the property, the lender's title will be subject to all senior liens and claims and certain governmental liens. The proceeds received by the referee or trustee from the sale are applied first to the costs, fees and expenses of sale and then in satisfaction of the indebtedness secured by the mortgage or deed of trust under which the sale was conducted. Any remaining proceeds are generally payable to the holders of junior mortgages or deeds of trust and other liens and claims in order of their priority, whether or not the borrower is in default. Any additional proceeds are generally payable to the mortgagor or trustor. The payment of the proceeds to the holders of junior mortgages may occur in the foreclosure action of the senior mortgagee or may require the institution of separate legal proceeds. In foreclosure, courts have imposed general equitable principles. The equitable principles are generally designed to relieve the borrower from the legal effect of its 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 a lender to foreclose if the default under the mortgage instrument is not monetary, such as the borrower's failure to adequately maintain the property or the borrower's execution of a second mortgage or deed of trust affecting the property. Finally, some courts have been faced with the issue of whether or not federal or state constitutional provisions reflecting due process concerns for adequate notice require that borrowers under deeds of trust or mortgages receive notices in addition to the statutorily-prescribed minimums. 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 72
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trust, or under a mortgage having a power of sale, does not involve sufficient state action to afford constitutional protection to the borrower. FORECLOSURE ON COOPERATIVE SHARES The Cooperative shares and proprietary lease or occupancy agreement owned by the tenantstockholder and pledged to the lender are, in almost all cases, subject to restrictions on transfer as set forth in the Cooperative's certificate of incorporation and by-laws, as well as in the proprietary lease or occupancy agreement, and may be cancelled by the Cooperative for failure by the tenant-stockholder to pay rent or other obligations or charges owed by such tenantstockholder, including mechanics' liens against the Cooperative apartment building incurred by such tenant-stockholder. Typically, rent and other obligations and charges arising under a proprietary lease or occupancy agreement that are owed to the Cooperative are made liens upon the shares to which the proprietary lease or occupancy agreement relates. In addition, the proprietary lease or occupancy agreement generally permits the Cooperative to terminate such lease or agreement in the event the tenant-stockholder fails to make payments or defaults in the performance of covenants required thereunder. Typically, the lender and the Cooperative enter into a recognition agreement that, together with any lender protection provisions contained in the proprietary lease, 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 notice of and an opportunity to cure the default. The recognition agreement typically provides that if the proprietary lease or occupancy agreement is terminated, the Cooperative will recognize the lender's lien against proceeds from a sale of the Cooperative apartment, subject, however, to the Cooperative's right to sums due under such proprietary lease or occupancy agreement or that have become liens on the shares relating to the 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. Under the laws applicable in most 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 corporation to receive sums due under the proprietary lease or occupancy agreement. If there are proceeds remaining, the lender must 73
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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. REPOSSESSION WITH RESPECT TO CONTRACTS Repossession of manufactured housing is governed by state law. A few states have enacted legislation that requires that the debtor be given an opportunity to cure its default (typically 30 days to bring the account current) before repossession can commence. So long as a manufactured home has not become so attached to real estate that it would be treated as a part of the real estate under the law of the state where it is located, repossession of such home in the event of a default by the obligor will generally be governed by the UCC (except in Louisiana). Article 9 of the UCC provides the statutory framework for the repossession of manufactured housing. While the UCC as adopted by the various states may vary in certain small particulars, the general repossession procedure established by the UCC is as follows: (i) Except in those states where the debtor must receive notice of the right to cure a default, repossession can commence immediately upon default without prior notice. Repossession may be effected either through self-help (peaceable retaking without court order), voluntary repossession or through judicial process (repossession pursuant to courtissued writ of replevin). The self-help and/or voluntary repossession methods are more commonly employed, and are accomplished simply by retaking possession of the manufactured home. In cases in which the debtor objects or raises a defense to repossession, a court order must be obtained from the appropriate state court, and the manufactured home must then be repossessed in accordance with that order. Whether the method employed is self-help, voluntary repossession or judicial repossession, the repossession can be accomplished either by an actual physical removal of the manufactured home to a secure location for refurbishment and resale or by removing the occupants and their belongings from the manufactured home and maintaining possession of the manufactured home on the location where the occupants were residing. Various factors may affect whether the manufactured home is physically removed or left on location, such as the nature and term of the lease of the site on which it is located and the condition of the unit. In many cases, leaving the manufactured home on location is preferable, in the event that the home is already set up, because the expenses of retaking and redelivery will be saved. However, in those cases where the home is left on location, expenses for site rentals will usually be incurred. (ii) Once repossession has been achieved, preparation for the subsequent disposition of the manufactured home can commence. The disposition may be by public or private sale provided the method, manner, time, place and terms of the sale are commercially reasonable. (iii) Sale proceeds are to be applied first to repossession expenses (expenses incurred in retaking, storage, preparing for sale to include refurbishing costs and selling) and then to satisfaction of the indebtedness. While some states impose prohibitions or limitations on deficiency judgments if the net proceeds from resale do not cover the full amount of the indebtedness, the remainder may be sought from the debtor in the form of a deficiency judgment in those states that do not prohibit or limit such judgments. The deficiency judgment is a personal judgment against the debtor for the shortfall. Occasionally, after resale of a manufactured home and payment of all expenses and indebtedness, there is a surplus of funds. In that case, the UCC requires the party suing for the deficiency judgment to remit the surplus to the debtor. Because the defaulting owner of a manufactured home generally has very little capital or income available following repossession, a deficiency judgment may not be sought in many cases or, if obtained, will be settled at a significant discount in light of the defaulting owner's strained financial condition. 74
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LOUISIANA LAW Any contract secured by a manufactured home located in Louisiana will be governed by Louisiana law rather than Article 9 of the UCC. Louisiana laws provide similar mechanisms for perfection and enforcement of security interests in manufactured housing used as collateral for an installment sale contract or installment loan agreement. Under Louisiana law, a manufactured home that has been permanently affixed to real estate will nevertheless remain subject to the motor vehicle registration laws unless the obligor and any holder of a security interest in the property execute and file in the real estate records for the parish in which the property is located a document converting the unit into real property. A manufactured home that is converted into real property but is then removed from its site can be converted back to personal property governed by the motor vehicle registration laws if the obligor executes and files various documents in the appropriate real estate records and all mortgagees under real estate mortgages on the property and the land to which it was affixed file releases with the motor vehicle commission. So long as a manufactured home remains subject to the Louisiana motor vehicle laws, liens are recorded on the certificate of title by the motor vehicle commissioner and repossession can be accomplished by voluntary consent of the obligor, executory process (repossession proceedings which must be initiated through the courts but which involve minimal court supervision) or a civil suit for possession. In connection with a voluntary surrender, the obligor must be given a full release from liability for all amounts due under the contract. In executory process repossessions, a sheriff's sale (without court supervision) is permitted, unless the obligor brings suit to enjoin the sale, and the lender is prohibited from seeking a deficiency judgment against the obligor unless the lender obtained an appraisal of the manufactured home prior to the sale and the property was sold for at least two-thirds of its appraised value. RIGHTS OF REDEMPTION WITH RESPECT TO SINGLE-FAMILY PROPERTIES AND MULTIFAMILY PROPERTIES In some states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the trustor or mortgagor and certain foreclosed junior lienors are given a statutory period in which to redeem the property from the foreclosure sale. The right of redemption should be distinguished from the equity of redemption, which is a nonstatutory right that must be exercised prior to the foreclosure sale. In some states, redemption may occur only upon payment of the entire principal balance of the loan, accrued interest and expenses of foreclosure. In other states, redemption may be authorized if the former borrower pays only a portion of the sums due. The effect of a statutory right of redemption is to diminish the ability of the lender to sell the foreclosed property. The right of redemption would defeat the title of any purchaser acquired at a public sale. Consequently, the practical effect of a right of redemption is to force the lender to retain the property and pay the expenses of ownership and maintenance of the property until the redemption period has expired. In some states, there is no right to redeem property after a trustee's sale under a deed of trust. NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES While state laws do not usually require notice to be given to debtors prior to repossession, many states do require delivery of a notice of default and of the debtor's right to cure defaults before repossession. The law in most states also requires that the debtor be given notice of sale prior to the resale of the home so that the owner may redeem at or before resale. In addition, the sale must comply with the requirements of the UCC. ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS Certain states have imposed statutory prohibitions that limit the remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some states, statutes limit the right 75
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of the beneficiary or mortgagee to obtain a deficiency judgment against the borrower following foreclosure or sale under a deed of trust. A deficiency judgment is a personal judgment against the former borrower equal in most cases to the difference between the net amount realized upon the public sale of the real property and the amount due to the lender. Other statutes require the beneficiary or mortgagee to exhaust the security afforded under a deed of trust or mortgage by foreclosure in an attempt to satisfy the full debt before bringing a personal action against the borrower. Finally, other statutory provisions limit any deficiency judgment against the former borrower following a judicial sale to the excess of the outstanding debt over the fair market value of the property at the time of the public sale. The purpose of these statutes is generally to prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment against the former borrower as a result of low or no bids at the judicial sale. In addition to laws limiting or prohibiting deficiency judgments, numerous other statutory provisions, including the federal bankruptcy laws and state laws affording relief to debtors, may interfere with or affect the ability of the secured mortgage lender to realize upon collateral and/or enforce a deficiency judgment. For example, with respect to federal bankruptcy law, the filing of a petition acts as a stay against the enforcement of remedies of collection of a debt. Moreover, a court with federal bankruptcy jurisdiction may permit a debtor through his or her Chapter 13 rehabilitative plan to cure a monetary default with respect to a mortgage loan on a debtor's residence by paying arrearages within a reasonable time period and reinstating the original mortgage loan payment schedule even though the lender accelerated the mortgage loan and final judgment of a foreclosure had been entered in state court (provided no sale of the property had yet occurred) prior to the filing of the debtor's Chapter 13 petition. Some courts with federal bankruptcy jurisdiction have approved plans, based on the particular facts of the reorganization case, that effected the curing of a mortgage loan default by paying arrearages over a number of years. Courts with federal bankruptcy jurisdiction have also indicated that the terms of a mortgage loan secured by property of the debtor may be modified if the borrower has filed a petition under Chapter 13. These courts have suggested that such modifications may include reducing the amount of each monthly payment, changing the rate of interest, altering the repayment schedule and reducing the lender's security interest to the value of the residence, thus leaving the lender a general unsecured creditor for the difference between the value of the residence and the outstanding balance of the loan. Federal bankruptcy law and limited case law indicate that the foregoing modifications could not be applied to the terms of a loan secured by property that is the principal residence of the debtor. In all cases, the secured creditor is entitled to the value of its security plus post-petition interest, attorneys' fees and costs to the extent the value of the security exceeds the debt. The Code provides priority to certain tax liens over the lien of the mortgage. This may have the effect of delaying or interfering with the enforcement of rights in respect of a defaulted Mortgage Loan. In addition, substantive requirements are imposed upon mortgage lenders in connection with the origination and the servicing of mortgage loans by numerous federal and some state consumer protection laws. The laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and related statutes. These federal laws impose specific statutory liabilities upon lenders who originate mortgage loans and who fail to comply with the provisions of the law. In some cases, this liability may affect assignees of the mortgage loans. FOR COOPERATIVE LOANS 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 76
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(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. JUNIOR MORTGAGES Some of the Mortgage Loans may be secured by junior mortgages or deeds of trust, which are junior to senior mortgages or deeds of trust which are not part of the Trust Fund. The rights of the Certificateholders as the holders of a junior deed of trust or a junior mortgage are subordinate in lien priority and in payment priority to those of the holder of the senior mortgage or deed of trust, including the prior rights of the senior mortgagee or beneficiary to receive and apply hazard insurance and condemnation proceeds and, upon default of the mortgagor, to cause a foreclosure on the property. Upon completion of the foreclosure proceedings by the holder of the senior mortgage or the sale pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's lien will be extinguished unless the junior lienholder satisfies the defaulted senior loan or asserts its subordinate interest in a property in foreclosure proceedings. See "-Foreclosure on Mortgages" herein. Furthermore, the terms of the junior mortgage or deed of trust are subordinate to the terms of the senior mortgage or deed of trust. In the event of a conflict between the terms of the senior mortgage or deed of trust and the junior mortgage or deed of trust, the terms of the senior mortgage or deed of trust will govern generally. Upon a failure of the mortgagor or trustor to perform any of its obligations, the senior mortgagee or beneficiary, subject to the terms of the senior mortgage or deed of trust, may have the right to perform the obligation itself. Generally, all sums so expended by the mortgagee or beneficiary become part of the indebtedness secured by the mortgage or deed of trust. To the extent a senior mortgagee expends such sums, such sums will generally have priority over all sums due under the junior mortgage. CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS Numerous federal and state consumer protection laws impose substantial requirements upon creditors involved in consumer finance. These laws include the federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws can impose specific statutory liabilities upon creditors who fail to comply with their provisions. In some cases, this liability may affect an assignee's ability to enforce a contract. In addition, certain of the Mortgage Loans may be subject to special rules, disclosure requirements and other provisions that were added to the federal Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994 (such Mortgage Loans, "High Cost Loans"), if such Mortgage Loans were originated on or after October 1, 1995, are not mortgage loans made to finance the purchase of the mortgaged property and have interest rates or origination costs in excess of certain prescribed levels. Purchasers or assignees of any High Cost Loan could be liable for all claims and subject to all defenses arising under such provisions that the mortgagor could assert against the originator thereof. Remedies available to the mortgagor include monetary penalties, as well as rescission rights if the appropriate disclosures were not given as required. See "Mortgage Loan Program-Representations by or on Behalf of Mortgage Loan Sellers; Repurchases." Manufactured housing contracts often contain provisions obligating the obligor to pay late charges if payments are not timely made. In certain cases, federal and state law may specifically limit the amount of late charges that may be collected. Unless otherwise provided in the related Prospectus Supplement, under the Agreement, late charges will be retained by the Master Servicer as additional servicing compensation, and any inability to collect these amounts will not affect payments to Certificateholders. 77
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Courts have imposed general equitable principles upon repossession and litigation involving deficiency balances. These equitable principles are generally designed to relieve a consumer from the legal consequences of a default. In several cases, consumers have asserted that the remedies provided to secured parties under the UCC and related laws violate the due process protections provided under the 14th Amendment to the Constitution of the United States. For the most part, courts have upheld the notice provisions of the UCC and related laws as reasonable or have found that the repossession and resale by the creditor does not involve sufficient state action to afford constitutional protection to consumers. The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission (the "FTC Rule") has the effect of subjecting a seller (and certain related creditors and their assignees) in a consumer credit transaction and any assignee of the creditor to all claims and defenses which the debtor in the transaction could assert against the seller of the goods. Liability under the FTC Rule is limited to the amounts paid by a debtor on the contract, and the holder of the contract may also be unable to collect amounts still due thereunder. Most of the Contracts in a Trust Fund will be subject to the requirements of the FTC Rule. Accordingly, the Trustee, as holder of the Contracts, will be subject to any claims or defenses that the purchaser of the related manufactured home may assert against the seller of the manufactured home, subject to a maximum liability equal to the amounts paid by the obligor on the Contract. If an obligor is successful in asserting any such claim or defense, and if the Mortgage Loan Seller had or should have had knowledge of such claim or defense, the Master Servicer will have the right to require the Mortgage Loan Seller to repurchase the Contract because of a breach of its Mortgage Loan Seller's representation and warranty that no claims or defenses exist that would affect the obligor's obligation to make the required payments under the Contract. The Mortgage Loan Seller would then have the right to require the originating dealer to repurchase the Contract from it and might also have the right to recover from the dealer for any losses suffered by the Mortgage Loan Seller with respect to which the dealer would have been primarily liable to the obligor. OTHER LIMITATIONS In addition to the laws limiting or prohibiting deficiency judgments, numerous other statutory provisions, including federal bankruptcy laws and related state laws, may interfere with or affect the ability of a lender to realize upon collateral and/or enforce a deficiency judgment. For example, in a Chapter 13 proceeding under the federal bankruptcy law, a court may prevent a lender from repossessing a home, and, as part of the rehabilitation plan, reduce the amount of the secured indebtedness to the market value of the home at the time of bankruptcy (as determined by the court), leaving the party providing financing as a general unsecured creditor for the remainder of the indebtedness. A bankruptcy court may also reduce the monthly payments due under a contract or change the rate of interest and time of repayment of the indebtedness. ENFORCEABILITY OF CERTAIN PROVISIONS Unless the Prospectus Supplement indicates otherwise, all the related Mortgage Loans will contain due-on-sale clauses. These clauses permit the lender to accelerate the maturity of the loan if the borrower sells, transfers, or conveys the property without the prior consent of the lender. The enforceability of these clauses has been impaired in various ways in certain states by statute or decisional law. The ability of lenders and their assignees and transferees to enforce due-on-sale clauses was addressed by the Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"), which was enacted on October 15, 1982. This legislation, subject to certain exceptions, preempts state constitutional, statutory and case law that prohibits the enforcement of due-on-sale clauses. The Garn-St Germain Act does "encourage" lenders to 78
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permit assumptions of loans at the original rate of interest or at some other rate less than the average of the original rate and the market rate. SINGLE-FAMILY LOANS AND MULTIFAMILY LOANS Exempted from this preemption pursuant to the Garn-St Germain Act are mortgage loans (originated other than by federal savings and loan associations and federal savings banks) that were made or assumed during the period beginning on the date a state, by statute or final appellate court decision having statewide effect, prohibited the exercise of due-on-sale clauses and ending on October 15, 1982 ("Window Period Loans"). However, this exception applies only to transfers of property underlying Window Period Loans occurring between October 15, 1982 and October 15, 1985 and does not restrict enforcement of a due-on-sale clause in connection with current transfers of property underlying Window Period Loans unless the property underlying such Window Period Loan is located in one of the five "window period states" identified below. Due-on-sale clauses contained in mortgage loans originated by federal savings and loan associations or federal savings banks are fully enforceable pursuant to regulations of the Federal Home Loan Bank Board, predecessor to the Office of Thrift Supervision, which preempt state law restrictions on the enforcement of due-on-sale clauses. Mortgage Loans originated by such institutions are therefore not deemed to be Window Period Loans. With the expiration of the exemption for Window Period Loans on October 15, 1985, due-on-sale clauses have become generally enforceable except in those states whose legislatures exercised their authority to regulate the enforceability of such clauses with respect to mortgage loans that were (i) originated or assumed during the "window period", which ended in all cases not later than October 15, 1982, and (ii) originated by lenders other than national banks, federal savings institutions and federal credit unions. FHLMC has taken the position in its published mortgage servicing standards that, out of a total of eleven "window period states", five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes extending, on various terms and for varying periods, the prohibition on enforcement of due-on-sale clauses with respect to certain categories of Window Period Loans. The Garn-St Germain Act also sets forth nine specific instances in which a mortgage lender covered by the Garn-St Germain Act (including federal savings and loan associations and federal savings banks) may not exercise a due-on-sale clause, notwithstanding the fact that a transfer of the property may have occurred. These include intra-family transfers, certain transfers by operation of law, leases of fewer than three years and the creation of a junior encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit the imposition of a prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale clause. The inability to enforce a due-on-sale clause may result in a Mortgage Loan bearing an interest rate below the current market rate being assumed by a new home buyer rather than being paid off, which may have an impact upon the average life of the Mortgage Loans related to a series and the number of such Mortgage Loans which may be outstanding until maturity. TRANSFER OF MANUFACTURED HOMES Generally, manufactured housing contracts contain provisions prohibiting the sale or transfer of the related manufactured homes without the consent of the obligee on the contract and permitting the acceleration of the maturity of such contracts by the obligee on the contract upon any such sale or transfer that is not consented to. Unless otherwise provided in the related Prospectus Supplement, 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 the related Contracts through enforcement of due-on-sale clauses, subject to applicable state law. In certain cases, the transfer may be made by a delinquent obligor in order to avoid a repossession proceeding with respect to a Manufactured Home. 79
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In the case of a transfer of a Manufactured Home as to which the Master Servicer desires to accelerate the maturity of the related Contract, the Master Servicer's ability to do so will depend on the enforceability under state law of the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain exceptions and conditions, state laws prohibiting enforcement of due-on-sale clauses applicable to the Manufactured Homes. Consequently, in some cases the Master Servicer may be prohibited from enforcing a due-on-sale clause in respect of certain Manufactured Homes. PREPAYMENT CHARGES AND PREPAYMENTS Generally, Mortgage Loans may be prepaid in full or in part without penalty. Generally, Multifamily Loans may contain provisions limiting prepayments on such loans, including prohibiting prepayment for a specified period after origination, prohibiting partial prepayments entirely or requiring the payment of a prepayment penalty upon prepayment in full or in part. The regulations of the Federal Home Loan Bank Board, predecessor to the Office of Thrift Supervision, prohibit the imposition of a prepayment penalty or equivalent fee for or in connection with the acceleration of a loan by exercise of a due-on-sale clause. A mortgagee to whom a prepayment in full has been tendered may be compelled to give either a release of the mortgage or an instrument assigning the existing mortgage to a refinancing lender. SUBORDINATE FINANCING When the mortgagor encumbers mortgaged property with one or more junior liens, the senior lender is subjected to additional risk. First, the mortgagor may have difficulty servicing and repaying multiple loans. In addition, if the junior loan permits recourse to the mortgagor (as junior loans often do) and the senior loan does not, a mortgagor may be more likely to repay sums due on the junior loan than those on the senior loan. Second, acts of the senior lender that prejudice the junior lender or impair the junior lender's security may create a superior equity in favor of the junior lender. For example, if the mortgagor and the senior lender agree to an increase in the principal amount of or the interest rate payable on the senior loan, the senior lender may lose its priority to the extent an existing junior lender is harmed or the mortgagor is additionally burdened. Third, if the mortgagor defaults on the senior loan and/or any junior loan or loans, the existence of junior loans and actions taken by junior lenders can impair the security available to the senior lender and can interfere with or delay the taking of action by the senior lender. Moreover, the bankruptcy of a junior lender may operate to stay foreclosure or similar proceeds by the senior lender. APPLICABILITY OF USURY LAWS Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title V"), provides that state usury limitations shall not apply to certain types of residential first mortgage loans originated by certain lenders after March 31, 1980. A similar federal statute was in effect with respect to mortgage loans made during the first three months of 1980. The statute authorized any state to reimpose interest rate limits by adopting, before April 1, 1983, a law or constitutional provision that expressly rejects application of the federal law. In addition, even where Title V is not so rejected, any state is authorized by the law to adopt a provision limiting discount points or other charges on mortgage loans covered by Title V. Certain states have taken action to reimpose interest rate limits and/or to limit discount points or other charges. The Depositor has been advised by counsel that a court interpreting Title V would hold that mortgage loans originated on or after January 1, 1980 are subject to federal preemption. Therefore, in a state that has not taken the requisite action to reject application of Title V or to 80
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adopt a provision limiting discount points or other charges prior to origination of such mortgage loans, any such limitation under such state's usury law would not apply to such mortgage loans. In any state in which application of Title V has been expressly rejected or a provision limiting discount points or other charges is adopted, no Mortgage Loans originated after the date of such state action will be eligible for inclusion in a Trust Fund if such Mortgage Loans bear interest or provide for discount points or charges in excess of permitted levels. No Mortgage Loan originated prior to January 1, 1980 will bear interest or provide for discount points or charges in excess of permitted levels. Title V also provides that, subject to the following conditions, state usury limitations shall not apply to any loan that is secured by a first lien on certain kinds of manufactured housing. The Contracts would be covered if they satisfy certain conditions, among other things, governing the terms of any prepayments, late charges and deferral fees and requiring a 30-day notice period prior to instituting any action leading to repossession of or foreclosure with respect to the related unit. Title V authorized any state to reimpose limitations on interest rates and finance charges by adopting before April 1, 1983 a law or constitutional provision which expressly rejects application of the federal law. Fifteen states adopted such a law prior to the April 1, 1983 deadline. In addition, even where Title V was not so rejected, any state is authorized by the law to adopt a provision limiting discount points or other charges on loans covered by Title V. In any state in which application of Title V was expressly rejected or a provision limiting discount points or other charges has been adopted, no Contract which imposes finance charges or provides for discount points or charges in excess of permitted levels has been included in the Trust Fund. ALTERNATIVE MORTGAGE INSTRUMENTS ARM Loans originated by non-federally chartered lenders have historically been subject to a variety of restrictions. Such restrictions differed from state to state, resulting in difficulties in determining whether a particular alternative mortgage instrument originated by a state-chartered lender complied with applicable law. These difficulties were simplified substantially as a result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding any state law to the contrary, (i) state-chartered banks may originate "alternative mortgage instruments" (including ARM Loans) in accordance with regulations promulgated by the Comptroller of the Currency with respect to origination of alternative mortgage instruments by national banks, (ii) state-chartered credit unions may originate alternative mortgage instruments in accordance with regulations promulgated by the National Credit Union Administration with respect to origination of alternative mortgage instruments by federal credit unions and (iii) all other non-federally chartered housing creditors, including, without limitation, state-chartered savings and loan associations, savings banks and mutual savings banks and mortgage banking companies may originate alternative mortgage instruments in accordance with the regulations promulgated by the Federal Home Loan Bank Board, predecessor to the Office of Thrift Supervision with respect to origination of alternative mortgage instruments by federal savings and loan associations. Title VIII further provides that any state may reject applicability of the provisions of Title VIII by adopting, prior to October 15, 1985, a law or constitutional provision expressly rejecting the applicability of such provisions. Certain states have taken such action. The Depositor has been advised by its counsel that it is their opinion that a court interpreting Title VIII would hold that ARM Loans that were originated by state-chartered lenders before the date of enactment of any state law or constitutional provision rejecting applicability of Title VIII would not be subject to state laws imposing restrictions or prohibitions on the ability of state-chartered lenders to originate alternative mortgage instruments. All of the ARM Loans that were originated by a state-chartered lender after the enactment of a state law or constitutional provision rejecting the applicability of Title VIII complied with applicable state law. All of the ARM Loans that were originated by federally chartered lenders or 81
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that were originated by state-chartered lenders prior to enactment of a state law or constitutional provision rejecting the applicability of Title VIII were originated in compliance with all applicable federal regulations. FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS A number of lawsuits are pending in the United States alleging personal injury from exposure to the chemical formaldehyde, which is present in many building materials, including such components of manufactured housing as plywood flooring and wall paneling. Some of these lawsuits are pending against manufacturers of manufactured housing, suppliers of component parts, and related persons in the distribution process. The Depositor is aware of a limited number of cases in which plaintiffs have won judgments in these lawsuits. Under the FTC Rule, which is described above under "Consumer Protection Laws", the holder of any Contract secured by a Manufactured Home with respect to which a formaldehyde claim has been successfully asserted may be liable to the obligor for the amount paid by the obligor on the related Contract and may be unable to collect amounts still due under the Contract. The successful assertion of such claim constitutes a breach of a representation or warranty of the Mortgage Loan Seller, and the Certificateholders would suffer a loss only to the extent that (i) the Mortgage Loan Seller breached its obligation to repurchase the Contract in the event an obligor is successful in asserting such a claim, and (ii) the Mortgage Loan Seller, the Depositor or the Trustee were unsuccessful in asserting any claim of contribution or subrogation on behalf of the Certificateholders against the manufacturer or other persons who were directly liable to the plaintiff for the damages. Typical products liability insurance policies held by manufacturers and component suppliers of manufactured homes may not cover liabilities arising from formaldehyde in manufactured housing, with the result that recoveries from such manufacturers, suppliers or other persons may be limited to their corporate assets without the benefit of insurance. SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940 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 was in reserve status and is called to active duty after origination of the Mortgage Loan), may not be charged interest (including fees and charges) 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. The Relief Act applies to borrowers who are members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service assigned to duty with the military. Because the Relief Act applies to borrowers who enter military service (including reservists who are called to active duty) after origination of the related Mortgage Loan, no information can be provided as to the number of loans that may be affected by the Relief Act. Application of the Relief Act would adversely affect, for an indeterminate period of time, the ability of the Master Servicer to collect full amounts of interest on certain of the Mortgage Loans. Any shortfalls in interest collections resulting from the application of the Relief Act would result in a reduction of the amounts distributable to the holders of the related series of Certificates, and would not be covered by advances or, unless otherwise specified in the related Prospectus Supplement, any form of Credit Support provided in connection with such Certificates. In addition, the Relief Act imposes limitations that would impair the ability of the Master Servicer to foreclose on an affected Single-Family Loan or enforce rights under a Contract during the borrower's period of active duty status, and, under certain circumstances, during an additional three month period thereafter. Thus, in the event that such a Mortgage Loan goes into default, there may be delays and losses occasioned thereby. 82
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ENVIRONMENTAL LEGISLATION Under the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), and under state law in certain states, a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a foreclosure sale, or operates a mortgaged property may become liable in certain circumstances for the costs of cleaning up hazardous substances regardless of whether they have contaminated the property. CERCLA imposes strict, as well as joint and several, liability on several classes of potentially responsible parties, including current owners and operators of the property who did not cause or contribute to the contamination. Furthermore, liability under CERCLA is not limited to the original or unamortized principal balance of a loan or to the value of the property securing a loan. Lenders may be held liable under CERCLA as owners or operators unless they qualify for the secured creditor exemption to CERCLA. This exemption exempts from the definition of owners and operators those who, without participating in the management of a facility, hold indicia of ownership primarily to protect a security interest in the facility. What constitutes sufficient participation in the management of a property securing a loan or the business of a borrower to render the exemption unavailable to a lender has been a matter of interpretation by the courts. CERCLA has been interpreted to impose liability on a secured party, even absent foreclosure, where the party participated in the financial management of the borrower's business to a degree indicating a capacity to influence waste disposal decisions. However, court interpretations of the secured creditor exemption have been inconsistent. In addition, when lenders foreclose and thereupon become owners of collateral property, courts are inconsistent as to whether such ownership renders the secured creditor exemption unavailable. Other federal and state laws in certain circumstances may impose liability on a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged property at a foreclosure sale, or operates a mortgaged property on which contaminants other than CERCLA hazardous substances are present, including petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be substantial. It is possible that such cleanup costs could become a liability of a Trust Fund and reduce the amounts otherwise distributable to the holders of the related series of Certificates. Moreover, certain federal statutes and certain states by statute impose a lien for any cleanup costs incurred by such state on the property that is the subject of such cleanup costs (an "environmental lien"). All subsequent liens on such property generally are subordinated to such an environmental lien and, in some states, even prior recorded liens are subordinated to environmental liens. In the latter states, the security interest of the Trust in a related parcel of real property that is subject to such an environmental lien could be adversely affected. Traditionally, many residential mortgage lenders have not taken steps to evaluate whether contaminants are present with respect to any mortgaged property prior to the origination of the mortgage loan or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, the Master Servicer has not made and will not make such evaluations prior to the origination of the Mortgage Loans. Neither the Master Servicer nor any replacement Servicer will be required by any Agreement to undertake any such evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure. The Master Servicer does not make any representations or warranties or assume any liability with respect to the absence or effect of contaminants on any related real property or any casualty resulting from the presence or effect of contaminants. However, the Master Servicer will not be obligated to foreclose on related real property or accept a deed-in-lieu of foreclosure if it knows or reasonably believes that there are material contaminated conditions on such property. A failure so to foreclose may reduce the amounts otherwise available to Certificateholders of the related Series. 83
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FORFEITURES IN DRUG AND RICO PROCEEDINGS Federal law provides that property owned by persons convicted of drug-related crimes or of criminal violations of the Racketeer Influenced and Corrupt Organizations ("RICO") statute can be seized by the government if the property was used in, or purchased with the proceeds of, such crimes. Under procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime Control Act"), the government may seize the property even before conviction. The government must publish notice of the forfeiture proceeding and may give notice to all parties "known to have an alleged interest in the property", including the holders of mortgage loans. A lender may avoid forfeiture of its interest in the property if it establishes that: (i) its mortgage was executed and recorded before commission of the crime upon which the forfeiture is based, or (ii) the lender was, at the time of execution of the mortgage, "reasonably without cause to believe" that the property was used in, or purchase with the proceeds of, illegal drug or RICO activities. NEGATIVE AMORTIZATION LOANS A recent case decided by the United States Court of Appeals, First Circuit, held that state restrictions on the compounding of interest are not preempted by the provisions of the Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDMC") and as a result, a mortgage loan that provided for negative amortization violated New Hampshire's requirement that first mortgage loans provide for computation of interest on a simple interest basis. The holding was limited to the effect of DIDMC on state laws regarding the compounding of interest and the court did not address the applicability of the Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender to make residential mortgage loans that provide for negative amortization. The First Circuit's decision is binding authority only on Federal District Courts in Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico. CERTAIN FEDERAL INCOME TAX CONSEQUENCES GENERAL The following is a general discussion of the anticipated material federal income tax consequences of