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Bank of America Mortgage Securities Inc – ‘424B5’ on 2/22/99

As of:  Monday, 2/22/99   ·   Accession #:  950109-99-562   ·   File #:  333-67267

Previous ‘424B5’:  ‘424B5’ on 12/22/98   ·   Next:  ‘424B5’ on 3/24/99   ·   Latest:  ‘424B5’ on 11/18/02

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

 2/22/99  Bank of America Mortgage Secs Inc 424B5                  1:754K                                   Donnelley R R & S… 01/FA

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

Document/Exhibit                   Description                      Pages   Size 

 1: 424B5       424B5 Filing                                         193   1.04M 


Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Bank of America Mortgage Securities, Inc
2Important Notice About Information Presented in this Prospectus Supplement and the Prospectus
4Non-Offered Certificates
6Summary of Terms
"Distribution Date
"Depositor
"Closing Date
"Cut-off Date
"Sellers
7Mortgage Pool
8Optional Termination
"Priority of Distributions
10Credit Support
"Class B-1
"Class B-2
"Class B-3
"Class B-4
"Class B-5
"Class B-6
"Prepayment and Yield Considerations
12Federal Income Tax Consequences
13Legal Investment
"ERISA Considerations
14Risk Factors
"The Rate of Principal Payments on the Mortgage Loans Will Affect the Yield on the Offered Certificates
16Subordination of Class B Certificates Increases Risk of Loss
"Limited Liquidity
17Geographic Concentration May Increase Risk of Loss Due to Adverse Economic Conditions or Natural Disaster
"Rights of Beneficial Owners May Be Limited by Book-Entry System
"Tax Consequences of Residual Certificates
18Risk Associated with Year 2000 Compliance
19The Mortgage Pool
21Mortgage Loan Data
25Underwriting Standards of NationsBanc Mortgage Corporation
26Underwriting Standards of Bank of America, FSB
28NationsBanc Mortgage Corporation
"Bank of America, FSB
"Servicing of Mortgage Loans
29Foreclosure and Delinquency Experience of NationsBanc Mortgage Corporation
30Foreclosure and Delinquency Experience of Bank of America, FSB
31The Pooling and Servicing Agreement
"Assignment of Mortgage Loans
32Repurchases of Mortgage Loans
"Optional Repurchases of Certain Mortgage Loans
33Payments on Mortgage Loans; Accounts
"Servicing Compensation and Payment of Expenses
"Compensating Interest
34Advances
35Special Servicing Agreements
"The Trustee
"Voting Rights
36Description of the Certificates
"Denominations and Form
"Book-Entry Certificates
38Distributions
39Pool Distribution Amount
40Interest
41Libor
42Class A-17 Reserve Fund
43Principal
"Non-PO Principal Amount
44Senior Principal Distribution Amount
48Class A-24 Principal Distribution Amount
"Class A-24
"Class A-PO Principal Distribution Amount
49Subordinate Principal Distribution Amount
50Residual Certificates
"Distributions in Reduction of the Class A-14 and Class A-16 Certificates
52Priority of Requested Distributions
53Procedure for Requesting Distributions
54Mandatory Distributions of Principal on the Special Retail Certificates
"Deceased Holder
55Allocation of Losses
57Restrictions on Transfer of the Class A-R and Class A-LR Certificates
58Restrictions on Transfer of the Class B Certificates
59Prepayment Considerations and Risks
62Assumptions Relating to Tables
"Weighted Average Lives of the Offered Certificates
79Yield on the Class A-7 and Class A-19 Certificates
80Yield on the Class A-PO Certificates
81Yield on the Class A-R and Class A-LR Certificates
"Yield on the Subordinate Certificates
85Use of Proceeds
86Regular Certificates
87Backup Withholding and Reporting Requirements
88State Taxes
89Method of Distribution
"Legal Matters
90Certificate Ratings
91Index of Significant Prospectus Supplement Definitions
94Prospectus
95Important Notice About Information Presented in This Prospectus and the Prospectus Supplement
96Table of Contents
99Summary of Prospectus
"Issuer
"Master Servicer
102Tax Status
"Rating
103Limited Assets for Payment of Certificates
"Credit Enhancement is Limited in Amount and Coverage
104Real Estate Market Conditions Affect Mortgage Loan Performance
"Geographic Concentration May Increase Risk of Loss
105General Economic Conditions May Increase Risk of Loss
"Yield is Sensitive to Rate of Principal Prepayment
106Bankruptcy of the Depositor or a Seller May Delay or Reduce Collections on Mortgage Loans
"Book-Entry System for Certain Classes of Certificates May Decrease Liquidity and Delay Payment
"Cash Flow Agreements are Subject to Counterparty Risk
107The Trust Estates
"General
"Mortgage Loans
112The Mortgage Loan Programs
"Mortgage Loan Underwriting
114Representations and Warranties
115Definitive Form
116Book-Entry Form
118Distributions to Certificateholders
119Distributions of Interest
"Distributions of Principal
121Categories of Classes of Certificates
122Companion Class
124Other Credit Enhancement
"Limited Guarantee
"Financial Guaranty Insurance Policy or Surety Bond
"Letter of Credit
125Pool Insurance Policy
"Special Hazard Insurance Policy
"Mortgagor Bankruptcy Bond
"Reserve Fund
"Cross Support
"Cash Flow Agreements
126Pass-Through Rates
"Scheduled Delays in Distributions
"Effect of Principal Prepayments
127Weighted Average Life of Certificates
128Servicing of the Mortgage Loans
129The Servicers
130Payments on Mortgage Loans
132Periodic Advances and Limitations Thereon
133Collection and Other Servicing Procedures
134Enforcement of "Due-on-Sale Clauses"; Realization Upon Defaulted Mortgage Loans
135Insurance Policies
136Fixed Retained Yield, Servicing Compensation and Payment of Expenses
137Evidence as to Compliance
138Certain Matters Regarding the Master Servicer
139Assignment of Mortgage Loans to the Trustee
141Optional Purchases
"Reports to Certificateholders
142List of Certificateholders
"Events of Default
"Rights Upon Event of Default
143Amendment
144Termination; Optional Purchase of Mortgage Loans
145Certain Legal Aspects of the Mortgage Loans
"Foreclosure
146Foreclosure on Shares of Cooperatives
147Rights of Redemption
"Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders
150Soldiers' and Sailors' Civil Relief Act and Similar Laws
"Environmental Considerations
153Applicability of Usury Laws
"Enforceability of Certain Provisions
154Federal Income Tax Consequences for REMIC Certificates
"Status of REMIC Certificates
155Qualification as a REMIC
157Taxation of Regular Certificates
"Original Issue Discount
159Acquisition Premium
"Variable Rate Regular Certificates
161Market Discount
"Premium
162Election to Treat All Interest Under the Constant Yield Method
"Treatment of Losses
163Sale or Exchange of Regular Certificates
"Taxation of Residual Certificates
"Taxation of REMIC Income
164Basis and Losses
165Treatment of Certain Items of REMIC Income and Expense
166Limitations on Offset or Exemption of REMIC Income
167Tax-Related Restrictions on Transfer of Residual Certificates
"Disqualified Organizations
169Foreign Investors
"Sale or Exchange of a Residual Certificate
170Mark to Market Regulations
"Taxes That May Be Imposed on the REMIC Pool
"Prohibited Transactions
"Contributions to the REMIC Pool After the Startup Day
"Net Income from Foreclosure Property
171Liquidation of the REMIC Pool
"Administrative Matters
"Limitations on Deduction of Certain Expenses
172Taxation of Certain Foreign Investors
173Backup Withholding
"Reporting Requirements
174Federal Income Tax Consequences for Certificates as to Which No REMIC Election Is Made
175Premium and Discount
176Recharacterization of Servicing Fees
"Sale or Exchange of Certificates
177Stripped Certificates
178Status of Stripped Certificates
"Taxation of Stripped Certificates
179Possible Alternative Characterizations
180Reporting Requirements and Backup Withholding
181Certain Requirements Under ERISA and the Code
"Parties in Interest/Disqualified Persons
182Delegation of Fiduciary Duty
"Applicability to Non-ERISA Plans
"Administrative Exemptions
"Individual Administrative Exemptions
184Pte 83-1
"Non-ERISA Plans and Exempt Plans
185Unrelated Business Taxable Income -- Residual Certificates
186Plan of Distribution
188Incorporation of Certain Information by Reference
189Where You Can Find More Information
190Index of Significant Definitions
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FILED PURSUANT TO RULE 424B5 UNDER REGISTRATION NO.333-65481 PROSPECTUS SUPPLEMENT (To Prospectus Dated February 18, 1999) Bank of America Mortgage Securities, Inc. Depositor NationsBanc Mortgage Corporation Bank of America, FSB Sellers and Servicers $595,583,832 (Approximate) Mortgage Pass-Through Certificates, Series 1999-1 Principal and interest payable monthly, commencing in March 1999 ------------------ The Trust will Issue-- You should carefully . Twenty-seven classes of senior Class A Certificates consider the risk factors . Six classes of Class B Certificates, all of which are beginning on subordinated to, and provide credit enhancement for, the page S-14 of Class A Certificates. Each class of Class B Certificates this prospectus is also subordinated to each class of Class B supplement. Certificates, if any, with a lower number. Neither the The classes of Offered Certificates are listed under the offered heading "Offered Certificates" in the table beginning on certificates page S-4. nor the underlying The yield to maturity of the Class A-7 Certificates, mortgage loans which are interest-only certificates, will be are insured or particularly sensitive to the rate of principal payments guaranteed by on the mortgage loans in the Trust. The yield to maturity any of the Class A-PO Certificates, which are principal-only governmental certificates, will be particularly sensitive to the rate agency or of principal payments on the mortgage loans with net instrumentality. mortgage interest rates less than 6.500%. If you are purchasing the Class A-7 Certificates, you should The offered consider the risk that a faster than anticipated rate of certificates principal payments on the mortgage loans will result in will represent an actual yield that is lower than your expected yield interests in and could result in the loss of all or part of your the Trust only initial investment. If you are purchasing the Class A-PO and will not Certificates you should consider the risk that a slower represent than anticipated rate of principal payments on the interests in or mortgage loans with net mortgage interest rates less than obligations of 6.500% will result in an actual yield that is lower than Bank of America your expected yield. Mortgage Securities, The Assets of the Trust will Include-- Inc. or any other entity. . A pool of fully amortizing, one- to four-family, residential first mortgage loans, substantially all of This prospectus which have original terms to stated maturity of supplement may approximately 30 years. be used to offer and sell the Offered Certificates only if accompanied by the prospectus. ------------------ Neither the Securities and Exchange Commission nor any state securities commission has approved the Offered Certificates or determined that this prospectus supplement or the prospectus is accurate or complete. Any representation to the contrary is a criminal offense. The Offered Certificates will be offered by NationsBanc Montgomery Securities LLC, as underwriter, at varying prices to be determined at the time of sale to investors. The anticipated delivery date for the Offered Certificates is February 23, 1999. NationsBanc Montgomery Securities LLC February 18, 1999
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Important Notice About Information Presented in this Prospectus Supplement and the Prospectus The Offered Certificates are described in two separate documents that progressively provide more detail: (i) the accompanying Prospectus, which provides general information, some of which may not apply to a particular series of Certificates such as your Certificates; and (ii) this Prospectus Supplement, which describes the specific terms of your Certificates and may differ from information in the Prospectus. If the description of the terms of your Certificates vary between this Prospectus Supplement and the Prospectus, you should rely on the information in this Prospectus Supplement. Cross-references are included in this Prospectus Supplement and the Prospectus to captions in these materials where you can find additional information. The following Table of Contents and the Table of Contents in the Prospectus provide the locations of these captions. The Index of Significant Prospectus Supplement Definitions beginning on page S-91 of this Prospectus Supplement and the Index of Significant Definitions beginning on page 97 of the Prospectus direct you to the locations of the definitions of capitalized terms used in each of the documents. Any capitalized terms that are not defined in this Prospectus Supplement and that do not have obvious meanings are defined in the Prospectus. Bank of America Mortgage Securities, Inc.'s principal offices are located at 345 Montgomery Street, Lower Level #2, Unit #8152, San Francisco, California 94104 and its phone number is (415) 622-3676. -------------- This Prospectus Supplement and the accompanying Prospectus contain forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Specifically, forward- looking statements, together with related qualifying language and assumptions, are found in the material (including tables) under the headings "Risk Factors" and "Prepayment and Yield Considerations." Forward-looking statements are also found in other places throughout this Prospectus Supplement and the Prospectus, and may be identified by, among other things, accompanying language such as "expects," "intends," "anticipates," "estimates" or analogous expressions, or by qualifying language or assumptions. These statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results or performance to differ materially from the forward-looking statements. These risks, uncertainties and other factors include, among others, general economic and business conditions, competition, changes in political, social and economic conditions, regulatory initiatives and compliance with governmental regulations, customer preference and various other matters, many of which are beyond the Depositor's control. These forward-looking statements speak only as of the date of this Prospectus Supplement. The Depositor expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements to reflect changes in the Depositor's expectations with regard to those statements or any change in events, conditions or circumstances on which any forward-looking statement is based. S-2
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-------------------------------------------------------------------------------- TABLE OF CONTENTS -------------------------------------------------------------------------------- [Download Table] Important Notice About Information Presented in this Prospectus Supplement and the Prospectus....................................................... S-2 Summary of Terms.......................................................... S-6 Risk Factors.............................................................. S-14 The Rate of Principal Payments on the Mortgage Loans Will Affect the Yield on the Offered Certificates....................................... S-14 Distributions of Principal to the Class A-14 and Class A-16 Certificates............................................................ S-15 Subordination of Class B Certificates Increases Risk of Loss............. S-16 Limited Source of Payments -- No Recourse to Depositor, Sellers, Servicers or Trustee.................................................... S-16 Limited Liquidity........................................................ S-16 Geographic Concentration May Increase Risk of Loss Due to Adverse Economic Conditions or Natural Disaster................................. S-17 Rights of Beneficial Owners May Be Limited by Book-Entry System.......... S-17 Tax Consequences of Residual Certificates................................ S-17 Risk Associated with Year 2000 Compliance................................ S-18 The Mortgage Pool......................................................... S-19 Mortgage Loan Data....................................................... S-21 Underwriting Standards of NationsBanc Mortgage Corporation............... S-25 Underwriting Standards of Bank of America, FSB........................... S-26 NationsBanc Mortgage Corporation.......................................... S-28 Bank of America, FSB...................................................... S-28 Servicing of Mortgage Loans............................................... S-28 Foreclosure and Delinquency Experience of NationsBanc Mortgage Corporation............................................................. S-29 Foreclosure and Delinquency Experience of Bank of America, FSB........... S-30 The Pooling and Servicing Agreement....................................... S-31 Assignment of Mortgage Loans............................................. S-31 Repurchases of Mortgage Loans............................................ S-32 Optional Repurchases of Certain Mortgage Loans........................... S-32 Payments on Mortgage Loans; Accounts..................................... S-33 Servicing Compensation and Payment of Expenses........................... S-33 Compensating Interest.................................................... S-33 Advances................................................................. S-34 [Download Table] Optional Termination..................................................... S-34 Special Servicing Agreements............................................. S-35 The Trustee.............................................................. S-35 Voting Rights............................................................ S-35 Description of the Certificates........................................... S-36 Denominations and Form................................................... S-36 Book-Entry Certificates.................................................. S-36 Distributions............................................................ S-38 Pool Distribution Amount................................................. S-39 Priority of Distributions................................................ S-39 Interest................................................................. S-40 LIBOR.................................................................... S-41 Class A-17 Reserve Fund.................................................. S-42 Principal................................................................ S-43 Distributions in Reduction of the Class A-14 and Class A-16 Certificates............................................................ S-50 Allocation of Losses..................................................... S-55 Restrictions on Transfer of the Class A-R and Class A-LR Certificates.... S-57 Restrictions on Transfer of the Class B Certificates..................... S-58 Prepayment and Yield Considerations....................................... S-59 Prepayment Considerations and Risks...................................... S-59 Assumptions Relating to Tables........................................... S-62 Weighted Average Lives of the Offered Certificates....................... S-62 Yield on the Class A-7 and Class A-19 Certificates....................... S-79 Yield on the Class A-PO Certificates..................................... S-80 Yield on the Class A-R and Class A-LR Certificates....................................................... S-81 Yield on the Subordinate Certificates.................................... S-81 Yield Considerations with Respect to the Class B-2 and Class B-3 Certificates............................................................ S-82 Credit Support............................................................ S-84 Use of Proceeds........................................................... S-85 Federal Income Tax Consequences........................................... S-86 Regular Certificates..................................................... S-86 Residual Certificates.................................................... S-87 Backup Withholding and Reporting Requirements............................ S-87 State Taxes............................................................... S-88 ERISA Considerations...................................................... S-88 Method of Distribution.................................................... S-89 Legal Matters............................................................. S-89 Certificate Ratings....................................................... S-90 Index of Significant Prospectus Supplement Definitions.................... S-91 S-3
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THE SERIES 1999-1 CERTIFICATES [Enlarge/Download Table] Initial Rating of Certificates(3) Initial Class Pass-Through ----------------- Class Balance(1) Rate Principal Types(2) Interest Types(2) Fitch S&P ----- --------------- ------------ ----------------------- ---------------------- -------- -------- Offered Certificates Class A-1............... $166,404,000.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-2............... $ 66,459,200.00 6.000% Senior, Sequential Pay Fixed Rate AAA AAA Class A-3............... $100,000,000.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-4............... $ 1,917,000.00 6.250% Senior, Sequential Pay Fixed Rate AAA AAA Class A-5............... $ 25,000,000.00 6.250% Senior, Sequential Pay Fixed Rate AAA AAA Class A-6............... $ 19,516,911.00 (4) Senior, Sequential Pay Floating Rate AAA AAA Class A-7............... (5) (6) Senior, Notional Amount Inverse Floating Rate, AAA AAAr Interest Only Class A-8............... $ 7,068,000.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-9............... $ 3,556,666.00 6.400% Senior, Sequential Pay Fixed Rate AAA AAA Class A-10.............. $ 17,755,000.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-11.............. $ 4,843,000.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-12.............. $ 2,183,000.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-13.............. $ 1,136,000.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-14.............. $ 1,578,000.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-15.............. $ 1,868,444.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-16.............. $ 2,000,000.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-17.............. $ 1,000,000.00 (7) Senior, Sequential Pay Step Coupon AAA AAA Class A-18.............. $ 1,625,000.00 (8) Senior, Sequential Pay Floating Rate AAA AAA Class A-19.............. $ 375,000.00 (9) Senior, Sequential Pay Inverse Floating Rate AAA AAAr Class A-20.............. $ 50,000,000.00 6.400% Senior, Sequential Pay Fixed Rate AAA AAA Class A-21.............. $ 25,770,000.00 7.000% Senior, Sequential Pay Fixed Rate AAA AAA Class A-22.............. $ 11,608,445.00 6.000% Senior, Sequential Pay Fixed Rate AAA AAA Class A-23.............. $ 3,200,334.00 6.250% Senior, Sequential Pay Fixed Rate AAA AAA Class A-24.............. $ 60,000,000.00 6.500% Senior, Lockout Fixed Rate AAA AAA Class A-PO.............. $ 1,216,881.00 (10) Senior, Ratio Strip Principal Only AAA AAAr Class A-R............... $ 100.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class A-LR.............. $ 100.00 6.500% Senior, Sequential Pay Fixed Rate AAA AAA Class B-1............... $ 12,901,819.00 6.500% Subordinated Fixed Rate AA N/A Class B-2............... $ 4,500,635.00 6.500% Subordinated Fixed Rate A N/A Class B-3............... $ 2,100,297.00 6.500% Subordinated Fixed Rate BBB N/A Non-Offered Certificates Class B-4............... $ 2,100,297.00 6.500% Subordinated Fixed Rate BB N/A Class B-5............... $ 1,200,170.00 6.500% Subordinated Fixed Rate B N/A Class B-6............... $ 1,200,277.62 6.500% Subordinated Fixed Rate N/R N/A -------------------- (1) The initial class balance of the Offered Certificates may vary by a total of plus or minus 5%. (2) See "Description of the Certificates -- Categories of Classes of Certificates" in the Prospectus for a description of these principal and interest types and see "Description of the Certificates -- Priority of Distributions" and "-- Allocation of Losses" in this Prospectus Supplement for a description of the effects of subordination. S-4
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(3) See "Certificate Ratings" in this Prospectus Supplement. The Depositor has requested ratings of the Class B Certificates only from Fitch IBCA, Inc. (4) During the initial LIBOR Based Interest Accrual Period, interest will accrue on the Class A-6 Certificates at the rate of 5.45% per annum. During each LIBOR Based Interest Accrual Period thereafter, interest will accrue on the Class A-6 Certificates at a per annum rate equal to (i) 0.50% plus (ii) the arithmetic mean of the London interbank offered rate quotations for one-month Eurodollar deposits ("LIBOR") determined monthly as set forth in this Prospectus Supplement subject to a minimum rate of 0.50% and a maximum rate of 8.50%. See "Description of the Certificates--Interest" in this Prospectus Supplement. (5) The Class A-7 Certificates are interest-only certificates, have no class balance and will bear interest on the Class A-7 Notional Amount (initially approximately $19,516,911) as described in this Prospectus Supplement under "Description of the Certificates--Interest." (6) During the initial LIBOR Based Interest Accrual Period, interest will accrue on the Class A-7 Certificates at the rate of 3.05% per annum. During each LIBOR Based Interest Accrual Period thereafter, interest will accrue on the Class A-7 Certificates at a per annum rate equal to (i) 8.00% minus (ii) LIBOR subject to a minimum rate of 0.00% and a maximum rate of 8.00%. See "Description of the Certificates--Interest" in this Prospectus Supplement. (7) For the first twelve Regular Interest Accrual Periods, the Class A-17 Certificates will bear interest at 7.50% per annum. For the next twelve Regular Interest Accrual Periods, the Class A-17 Certificates will bear interest at 7.000% per annum. After that time, the Class A-17 Certificates will bear interest at 6.50% per annum. (8) During the initial Regular Interest Accrual Period, interest will accrue on the Class A-18 Certificates at the rate of 5.95% per annum. During each Regular Interest Accrual Period thereafter, interest will accrue on the Class A-18 Certificates at a per annum rate equal to (i) 1.00% plus (ii) LIBOR, subject to a minimum rate of 1.00% and a maximum rate of 8.00%. See "Description of the Certificates--Interest" in this Prospectus Supplement. (9) During the initial Regular Interest Accrual Period, interest will accrue on the Class A-19 Certificates at the rate of approximately 8.8833% per annum. During each Regular Interest Accrual Period thereafter, interest will accrue on the Class A-19 Certificates at a per annum rate equal to (i) approximately 30.3333% minus (ii) the product of approximately 4.3333 and LIBOR, subject to a minimum rate of 0.000% and a maximum rate of approximately 30.3333%. See "Description of the Certificates--Interest" in this Prospectus Supplement. (10) The Class A-PO Certificates are principal-only certificates and will not be entitled to distributions in respect of interest. S-5
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SUMMARY OF TERMS This summary highlights selected information from this Prospectus Supplement. It does not contain all of the information that you need to consider in making your investment decision. To understand the terms of the Offered Certificates, you should read this entire Prospectus Supplement and the Prospectus carefully. Bank of America The Bank of New Mortgage York Securities, Inc., Mortgage Pass- Through Certificates, Series 1999-1 (the "Certificates") Title of Series: Trustee: Distribution Date: The 25th day of each month (or, if not a business day, the next business day) beginning March 25, 1999 Depositor: Bank of America Mortgage Securities, Inc. Closing Date: On or about Issuer: Bank of America February 23, 1999 Mortgage 1999-1 Trust (the "Trust") Cut-off Date: February 1, 1999 Sellers: NationsBanc Record Date: Mortgage Corporation and The last business Bank of America, day of the month FSB preceding a Distribution Date Servicers: NationsBanc Mortgage Corporation and Bank of America, FSB ---------------------------- The Certificates The Certificates will be issued pursuant to a Pooling and Servicing Agreement to be dated February 23, 1999 (the "Pooling Agreement"), among the Depositor, the Servicers and the Trustee. A summary chart of the initial class balances, principal types, pass-through rates, interest types and ratings of the Certificates is set forth beginning on page S-4. The Certificates represent all of the beneficial ownership interest in the Trust. -------------------------------------------------------------------------------- Classifications of Classes of Certificates ------------------------------------------------------------------------------ Offered Certificates: A-1, A-2, A-3, A-4, A-5, A-6, A-7, A-8, A-9, A-10, A-11, A-12, A-13, A-14, A-15, A-16, A-17, A-18, A-19, A-20, A-21, A-22, A-23, A-24, A-PO, A-R, A-LR, B-1, B-2 and B-3 ------------------------------------------------------------------------------ Non-Offered Certificates: B-4, B-5 and B-6 ------------------------------------------------------------------------------ Senior Certificates: A-1, A-2, A-3, A-4, A-5, A-6, A-7, A-8, A-9, A-10, A-11, A-12, A-13, A-14, A-15, A-16, A- 17, A-18, A-19, A-20, A-21, A-22, A-23, A-24, A-PO, A-R and A-LR ------------------------------------------------------------------------------ Subordinate Certificates: B-1, B-2, B-3, B-4, B-5 and B-6 ------------------------------------------------------------------------------ Class A Certificates: A-1, A-2, A-3, A-4, A-5, A-6, A-7, A-8, A-9, A-10, A-11, A-12, A-13, A-14, A-15, A-16, A- 17, A-18, A-19, A-20, A-21, A-22, A-23, A-24, A-PO, A-R and A-LR ------------------------------------------------------------------------------ Class B Certificates: B-1, B-2, B-3, B-4, B-5 and B-6 ------------------------------------------------------------------------------ Interest-Only Certificates: A-7 ------------------------------------------------------------------------------ Principal-Only Certificates: A-PO ------------------------------------------------------------------------------ Residual Certificates: A-R and A-LR ------------------------------------------------------------------------------ S-6
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Only the Class A, Class B-1, Class B-2 and Class B-3 Certificates are being offered by this Prospectus Supplement. The Class B-4, Class B-5 and Class B-6 Certificates are not offered by this Prospectus Supplement. These Non-Offered Certificates are subordinated to the Offered Certificates for distributions of principal and interest and for allocations of losses on the Mortgage Loans. Information provided with respect to the Non-Offered Certificates is included solely to aid your understanding of the Offered Certificates. Mortgage Pool The "Mortgage Pool" will consist of fixed-rate, conventional, fully- amortizing mortgage loans (the "Mortgage Loans") secured by first liens on one- to four-family properties. All of the Mortgage Loans were originated or acquired by NationsBanc Mortgage Corporation or Bank of America, FSB, both of which are affiliates of the Depositor and the Underwriter. The Depositor expects the Mortgage Loans to have the following approximate characteristics: Selected Mortgage Loan Data as of February 1, 1999 -------------------------------------------------------------------------------- [Download Table] Range or Total Weighted Average -------------------------------------------------------------------------------- Number of Mortgage Loans 1,777 -- -------------------------------------------------------------------------------- Aggregate Unpaid Principal Balance $600,084,577.00 -- -------------------------------------------------------------------------------- Unpaid Principal Balance $66,416.65 to $1,164,681.92 $337,695.32 -------------------------------------------------------------------------------- Interest Rates 6.375% to 8.125% 7.085% -------------------------------------------------------------------------------- Expense Fee Rate 0.2535% to 1.6250% 0.5978% -------------------------------------------------------------------------------- Remaining Terms to Stated Maturity 190 months to 360 months 356 months -------------------------------------------------------------------------------- Original Term 192 months to 360 months 358 months -------------------------------------------------------------------------------- Loan Age 0 months to 23 months 2 months -------------------------------------------------------------------------------- Original Loan-to-Value Ratio 20.10% to 95.00% 72.86% -------------------------------------------------------------------------------- Latest Maturity Date February 1, 2029 -- -------------------------------------------------------------------------------- Geographic Concentration of Mortgaged Properties in Excess of 5% of the Aggregate Unpaid Principal Balance California.......................................... 29.36% Illinois............................................. 7.03% Colorado............................................. 6.29% Texas................................................ 6.26% -------------------------------------------------------------------------------- Maximum Single Zip Code Concentration 0.60% -- -------------------------------------------------------------------------------- (/1/) The balance shown is the average unpaid principal balance of the Mortgage Loans. The characteristics of the Mortgage Pool may change because: .Prior to the issuance of the Certificates, the Depositor may remove Mortgage Loans from the Mortgage Pool. The Depositor also may substitute new Mortgage Loans for Mortgage Loans in the Mortgage Pool prior to the Closing Date. S-7
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.After the issuance of the Certificates, Mortgage Loans may be removed from the Trust because of repurchases by the Depositor for breaches of representations or failure to deliver required documents. Under certain circumstances, the Depositor may make substitutions for repurchased Mortgage Loans. These removals and/or substitutions may result in changes in the Mortgage Pool characteristics shown above. These changes may affect the weighted average lives and yields to maturity of the Offered Certificates. Additional information on the Mortgage Pool appears under "The Mortgage Pool" in this Prospectus Supplement. Optional Termination At its option, the Depositor may purchase all remaining Mortgage Loans in the Trust and effect early retirement of the Certificates on any Distribution Date on which the scheduled balance of the Mortgage Pool is less than 10% of the initial scheduled balance of the Mortgage Pool. See "The Pooling and Servicing Agreement -- Optional Termination" in this Prospectus Supplement. If the Depositor exercises its right to repurchase all of the Mortgage Loans, the Certificates outstanding at that time will be retired earlier than would otherwise be the case. See "Prepayment and Yield Considerations" in this Prospectus Supplement. Priority of Distributions Distributions will be made on each Distribution Date from the Pool Distribution Amount in the following order of priority: .First, to the Trustee an amount in payment for its services for such Distribution Date; .Second, to each class of Senior Certificates (other than the Class A-PO Certificates) to pay interest; .Third, to the classes of Senior Certificates entitled to receive distributions of principal, as set forth in this Prospectus Supplement under "Description of the Certificates -- Principal," to pay principal; .Fourth, to the Class A-PO Certificates, to pay any Class A-PO Deferred Amounts, but only from amounts that would otherwise be distributable on such Distribution Date as principal of the Subordinate Certificates; .Fifth, to each class of Subordinate Certificates, first to pay interest and then to pay principal in the order of numerical class designations, beginning with the Class B-1 Certificates; and .Sixth, to the Class A-LR Certificate, any remaining amounts. All of the distributions described above are subject to the limitations set forth in this Prospectus Supplement under "Description of the Certificates -- Interest" and "-- Principal." Under certain circumstances described in this Prospectus Supplement, distributions that would otherwise be made on the Subordinate Certificates may be made on the Senior Certificates instead. See "Description of the Certificates -- Allocation of Losses" in this Prospectus Supplement. S-8
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Interest Distributions The amount of interest that will accrue on your Certificates each month (unless you own a Class A-PO Certificate) is equal to: .one-twelfth of the pass-through rate for your class (as set forth or described beginning on page S-4) multiplied by the principal balance or notional amount of your Certificate on the Distribution Date, minus .the amount of certain interest shortfalls arising from the timing of prepayments on the Mortgage Loans and interest losses allocated to your class, as described under "Description of the Certificates -- Allocation of Losses" in this Prospectus Supplement. The Class A-PO Certificates are principal-only certificates and are not entitled to distributions of interest. See "Description of the Certificates -- Distributions" and "-- Interest" in this Prospectus Supplement. Principal Distributions On each Distribution Date, principal distributions to the Certificates will be made in the order and priority described under "Description of the Certificates -- Priority of Distributions" in this Prospectus Supplement. The Class A-7 Certificates are interest-only certificates and are not entitled to distributions of principal. Distributions on the Class A-14 and Class A-16 Certificates If you are purchasing a Class A-14 or Class A-16 Certificate (the "Special Retail Certificates"), you should consider the fact that the timing of principal distributions on these classes is dependent on both: .the priority of the class to receive distributions of principal relative to other classes of Class A Certificates; and .the special procedures for allocation of principal among the holders of each class of Special Retail Certificates. As described under "Description of the Certificates -- Distributions in Reduction of the Class A-14 and Class A-16 Certificates" in this Prospectus Supplement, if you own a Special Retail Certificate you or your heirs may request that your Certificate be repaid on a particular date. These requests will be paid in the following priority: .Representatives of deceased holders will be paid first (up to a limit of approximately $25,000 per holder) out of principal distributions on the entire class. .Living holders will be paid second (up to a limit of approximately $10,000 per holder) out of principal distributions on the entire class. Whether a Special Retail Certificate will be paid in full on a requested date is highly uncertain. Principal distributions on a class of Special Retail Certificates may not be sufficient to satisfy all requested distributions. Conversely, principal distributions may exceed requests, in which case the excess amounts will be distributed by random lot. Because of these procedures, you may not receive distributions when requested or you may receive distributions even when you have not made requests for distributions. S-9
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Credit Support Credit support for the Offered Certificates is provided by subordination as follows: Subordination of Class B Certificates Priority of ------------------------- Payment Class A (Credit Support 4.00%)1 ------------------------- Class B-1 (Credit Support 1.85%) ------------------------- Class B-2 (Credit Support 1.10%) ------------------------- Class B-3 (Credit Support 0.75%) ------------------------- Class B-4 (Credit Support 0.40%) ------------------------- Class B-5 (Credit Support 0.20%) ------------------------- Class B-6 (Credit Support 0.00%) Order of ------------------------- Loss Allocation (2) ---------- (1) The credit support percentage set forth in this chart shows the initial balance of the classes of Certificates subordinate to a class or classes as a percentage of the scheduled balance of the initial Mortgage Pool. (2) This order of loss allocation does not apply to losses due to fraud, borrower bankruptcies or special hazards that are in excess of certain amounts. These "Excess Losses" will be allocated to all of the Certificates pro rata on the basis of their outstanding balances. See "Description of the Certificates -- Priority of Distributions" and "-- Allocation of Losses" and "Credit Support" in this Prospectus Supplement. Shifting Interest in Prepayments Additional credit enhancement is provided by the allocation of all principal prepayments to the Senior Certificates (other than Class A-PO) for the first five years and the disproportionately greater allocation of prepayments to the Senior Certificates over the following four years. The disproportionate allocation of prepayments will accelerate the amortization of those Senior Certificates relative to the amortization of the Subordinate Certificates. As a result, the credit support percentage for the Class A Certificates should be maintained and may be increased during the first nine years. See "Description of the Certificates -- Principal" in this Prospectus Supplement. Prepayment and Yield Considerations The yield to maturity on your Offered Certificates will be sensitive to the rate and timing of principal payments (which will be affected by prepayments, defaults and liquidations) on the Mortgage Loans. As a result, your yield may fluctuate significantly. .In general, if you purchased your Offered Certificate at a premium or if you purchased a Class A-7 Certificate (which class has no principal balance) and principal distributions occur at a rate faster than you assumed, your actual yield to maturity will be lower than anticipated. S-10
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.Conversely, if you purchased your Offered Certificate at a discount and principal distributions occur at a rate slower than you assumed, your actual yield to maturity will be lower than anticipated. Because the Class A-PO Certificates represent the right to receive only a portion of the principal received with respect to the Mortgage Loans with Net Mortgage Interest Rates less than 6.500% (the "Discount Mortgage Loans"), the yield to maturity on the Class A-PO Certificates will be extremely sensitive to the rate and timing of principal payments on the Discount Mortgage Loans. The yield to maturity on the Class A-6 and Class A-18 Certificates will be sensitive to changes in the rate of LIBOR. The yield to maturity on the Class A-7 and Class A-19 Certificates will be extremely sensitive to changes in the rate of LIBOR and increases in LIBOR may result in a lower yield than you expected. In particular, if you purchase Class A-7 Certificates, which have no principal balance, you should consider carefully the risk that a rapid rate of prepayment on the Mortgage Loans or a high level of LIBOR could result in the loss of all or part of your initial investment. The yield to maturity of the Class B-1, Class B-2 and Class B-3 Certificates will be increasingly sensitive to the amounts and timing of losses on the Mortgage Loans due to the fact that, once the aggregate balance of the Class B- 4, Class B-5 and Class B-6 Certificates has been reduced to zero, all losses (other than the portion of Excess Losses allocated to more senior classes of Certificates) will be allocated to the Class B-3, Class B-2 and Class B-1 Certificates, in that order, until the balance of each class has been reduced to zero. Because the Mortgage Loans may be prepaid at any time, it is not possible to predict the rate at which you will receive distributions of principal or the rate at which your notional amount will be reduced. Since prevailing interest rates are subject to fluctuation, you may not be able to reinvest your distributions at yields equaling or exceeding the yields on the Offered Certificates. Yields on any reinvestments may be lower, and could be significantly lower, than the yields on your Offered Certificates. See "Prepayment and Yield Considerations" in this Prospectus Supplement and in the Prospectus. S-11
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Weighted Average Lives (in years)(/1/) [Download Table] PSA(/2/) ---------------------------- Class 0% 100% 275% 400% 500% ----- ----- ----- ----- ----- ---- A-1.......................................... 17.49 7.84 3.57 2.71 2.33 A-2.......................................... 17.49 7.84 3.57 2.71 2.33 A-3.......................................... 19.08 10.00 4.58 3.28 2.75 A-4.......................................... 2.73 1.04 0.65 0.54 0.48 A-5.......................................... 20.14 10.26 4.59 3.35 2.83 A-6.......................................... 19.08 10.00 4.58 3.28 2.75 A-7.......................................... 19.08 10.00 4.58 3.28 2.75 A-8.......................................... 28.17 22.39 10.40 6.52 5.12 A-9.......................................... 28.88 25.17 12.90 7.57 5.75 A-10......................................... 29.43 28.05 18.63 11.42 6.74 A-11......................................... 27.59 20.20 8.61 5.76 4.66 A-12......................................... 28.21 22.34 10.11 6.41 5.06 A-13......................................... 28.62 24.02 11.62 7.02 5.45 A-14......................................... 28.62 24.02 11.62 7.02 5.45 A-15......................................... 29.00 25.74 13.57 7.87 5.90 A-16......................................... 29.43 28.05 18.63 11.42 6.74 A-17......................................... 29.43 28.05 18.63 11.42 6.74 A-18......................................... 29.43 28.05 18.63 11.42 6.74 A-19......................................... 29.43 28.05 18.63 11.42 6.74 A-20......................................... 19.31 10.19 4.59 3.30 2.77 A-21......................................... 19.95 11.18 5.14 3.59 2.97 A-22......................................... 28.18 22.39 10.40 6.52 5.12 A-23......................................... 28.71 24.44 12.13 7.25 5.57 A-24......................................... 21.26 15.81 11.40 9.87 8.82 A-PO......................................... 19.48 11.37 6.02 4.48 3.74 A-R.......................................... 0.09 0.09 0.09 0.09 0.09 A-LR......................................... 0.09 0.09 0.09 0.09 0.09 B-1.......................................... 19.72 14.78 10.81 9.46 8.76 B-2.......................................... 19.72 14.78 10.81 9.46 8.76 B-3.......................................... 19.72 14.78 10.81 9.46 8.76 ---------- (/1/Determined)as described under "Prepayment and Yield Considerations -- Weighted Average Lives of the Offered Certificates" in this Prospectus Supplement. Prepayments will not occur at any assumed rate shown or any other constant rate, and the actual weighted average lives of any or all of the classes of Offered Certificates are likely to differ from those shown, perhaps significantly. (/2/"PSA")is the Prepayment Standard Assumption which is described under "Prepayment and Yield Considerations -- Weighted Average Lives of the Offered Certificates" in this Prospectus Supplement. Federal Income Tax Consequences For federal income tax purposes, an election will be made to treat the Trust as two separate "real estate mortgage investment conduits" (the "Upper-Tier REMIC" and the "Lower-Tier REMIC," and each, a "REMIC" ). .The Offered Certificates (other than the Class A-R and Class A-LR Certificates) will constitute "regular interests" in the Upper-Tier REMIC and will be treated as debt instruments for federal income tax purposes. .The Class A-R and Class A-LR Certificates will constitute the sole class of "residual interests" in the Upper-Tier REMIC and Lower-Tier REMIC, respectively. S-12
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Interest on the Offered Certificates must be included in your income under an accrual method of tax accounting, even if you are otherwise a cash method taxpayer. The Class A-7 and Class A-PO Certificates will, and certain other Classes may, be issued with original issue discount for federal income tax purposes. If you hold such a Certificate, you will be required to include original issue discount in income as it accrues on a constant yield method, regardless of whether you receive concurrently the cash attributable to such original issue discount. Holders of Class A-R and Class A-LR Certificates will be required to report as ordinary income or loss their pro rata share of the net income or the net loss of the Upper-Tier REMIC and Lower-Tier REMIC, respectively, and will be required to fund tax liabilities with respect to any such net income although no cash distributions are expected to be made with respect to the Class A-R and Class A-LR Certificates. See "Federal Income Tax Consequences" in this Prospectus Supplement and in the Prospectus. Legal Investment If your investment activities are subject to legal investment laws and regulations, regulatory capital requirements or review by regulatory authorities, then you may be subject to restrictions on investment in the Offered Certificates. You should consult your legal, tax and accounting advisers for assistance in determining the suitability of and consequences to you of the purchase, ownership and sale of Offered Certificates. .The Senior Certificates and the Class B-1 Certificates will constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA"), so long as they are rated in one of the two highest rating categories by at least one nationally recognized rating agency. .The Class B-2 and Class B-3 Certificates will not constitute "mortgage related securities" under SMMEA. See "Legal Investment" in the Prospectus. ERISA Considerations If you are a fiduciary or other person acting on behalf of any employee benefit plan or arrangement, including an individual retirement account (an "IRA"), subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Internal Revenue Code of 1986, as amended (the "Code"), or any federal, state or local law ("Similar Law") which is similar to ERISA or the Code (collectively, a "Plan"), you should carefully review with your legal advisors whether the purchase or holding of an Offered Certificate could give rise to a transaction prohibited or not otherwise permissible under ERISA, the Code or Similar Law. Subject to the considerations and conditions described under "ERISA Considerations" in this Prospectus Supplement, it is expected that the Senior Certificates (other than the Class A-R and Class A-LR Certificates) may be purchased by Plans. The Class A-R and Class A-LR Certificates may not be acquired by Plans and the Class B Certificates may not be acquired by Plans except upon satisfaction of certain conditions. See "ERISA Considerations" in this Prospectus Supplement and in the Prospectus. S-13
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-------------------------------------------------------------------------------- RISK FACTORS -------------------------------------------------------------------------------- .The Offered Certificates are not suitable investments for all investors. .The Offered Certificates are complex financial instruments, so you should not purchase any Offered Certificates unless you or your financial advisor possess the necessary expertise to analyze the potential risks associated with an investment in mortgage-backed securities. .You should not purchase any Offered Certificates unless you understand, and are able to bear, the prepayment, credit, liquidity and market risks associated with those Offered Certificates. .You should carefully consider the risk factors discussed below in addition to the other information contained in this Prospectus Supplement and the Prospectus. The Rate of Principal Payments on the Mortgage Loans Will Affect the Yield on the Offered Certificates The rate of distributions of principal and the yield to maturity on your Certificates will be directly related to (i) the rate of payments of principal on the Mortgage Loans and (ii) the amount and timing of defaults by borrowers that result in losses on the Mortgage Loans. Borrowers are permitted to prepay their Mortgage Loans, in whole or in part, at any time without penalty. The rate of principal payments on the Mortgage Loans mainly will be affected by the following: .the amortization schedules of the Mortgage Loans; .the rate of partial prepayments and full prepayments by borrowers due to refinancing, job transfer, changes in property values or other factors; .liquidations of the properties that secure defaulted Mortgage Loans; .repurchases of Mortgage Loans by the Depositor as a result of defective documentation or breaches of representations or warranties; and .the optional repurchase of all the Mortgage Loans by the Depositor to effect a termination of the trust. For a more detailed discussion of these factors, see "The Pooling and Servicing Agreement --Optional Termination" and "Prepayment and Yield Considerations" in this Prospectus Supplement and "The Pooling and Servicing Agreement -- Assignment of Mortgage Loans to the Trustee" and "-- Termination; Optional Purchase of Mortgage Loans" and "Prepayment and Yield Considerations" in the Prospectus. The rate of payments (including prepayments) on mortgage loans is influenced by a variety of economic, geographic, social and other factors, but depends greatly on the level of mortgage interest rates: .If prevailing interest rates for similar mortgage loans fall below the interest rates on the Mortgage Loans, the rate of prepayment would generally be expected to increase due to refinancings. .Conversely, if prevailing interest rates for similar mortgage loans rise above the interest rates on the Mortgage Loans, the rate of prepayment would generally be expected to decrease. S-14
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Mortgage originators (including NationsBanc Mortgage Corporation and Bank of America, FSB) make general and targeted solicitations for refinancings. Any such solicited refinancings may result in a rate of prepayment that is higher than you might otherwise expect. If you are purchasing Offered Certificates at a discount, and specifically if you are purchasing the Class A-PO Certificates, you should consider the risk that if principal payments on the Mortgage Loans, or, in the case of the Class A-PO Certificates, Mortgage Loans having Net Mortgage Interest Rates below 6.500%, occur at a rate slower than you expected, your yield will be lower than you expected. See "Prepayment and Yield Considerations -- Yield on the Class A- PO Certificates" in this Prospectus Supplement for a more detailed description of risks associated with the purchase of the Class A-PO Certificates, including a table demonstrating the particular sensitivity of the Class A-PO Certificate to the rate of prepayments. If you are purchasing Offered Certificates at a premium, or are purchasing the Class A-7 Certificates (which have no principal balance), you should consider the risk that if principal payments on the Mortgage Loans occur at a rate faster than you expected, your yield may be lower than you expected. If you are purchasing Class A-7 Certificates, you should consider the risk that a rapid rate of principal payments on the Mortgage Loans could result in your failure to recover your initial investment. If you are purchasing the Class A-7 or Class A-19 Certificates, you should also consider the risk that a high rate of LIBOR may result in a lower actual yield than you expected and, in the case of the Class A-7 Certificates, that a high rate of LIBOR combined with high constant prepayment rates may result in a loss on your investment. The particular sensitivities of the Class A-7 and Class A-19 Certificates are separately displayed in the tables appearing under the heading "Prepayment and Yield Considerations--Yield on the Class A-7 and Class A-19 Certificates" in this Prospectus Supplement. See "Summary of Terms -- Prepayment and Yield Considerations" and "Prepayment and Yield Considerations" in this Prospectus Supplement. Distributions of Principal to the Class A-14 and Class A-16 Certificates Although, as described herein, there can be no assurance as to the rate at which principal distributions will be made on any class of Offered Certificates, the Class A-14 and A-16 Certificates, in particular, may be inappropriate investments for you if you require a distribution of a particular amount of principal on a specific date or an otherwise predictable stream of distributions. If you own Class A-14 or Class A-16 Certificates, funds available for distributions of principal may not be sufficient to permit the distributions you request within any specific period of time after your request. During periods in which prevailing interest rates are generally higher than the pass-through rate for the Class A-14 or Class A-16 Certificates, greater numbers of beneficial owners may request distributions of principal in respect of their Class A-14 or Class A-16 Certificates to take advantage of higher interest rates. During such periods there may, however, be a concurrent reduction in the rate of prepayments of the Mortgage Loans, thus limiting the funds available for such distributions. In addition, because of the random lot procedure for distributing principal, you may receive a principal distribution on your Class A-14 or Class A-16 Certificates on a Distribution Date (even if you S-15
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have not requested such a distribution) if the amount available for distribution in respect of principal on such Distribution Date exceeds the aggregate amount requested for distribution of principal by all holders of the Class A-14 or Class A-16 Certificates. It is more likely that amounts will be distributed by random lot during the periods of relatively low interest rates and, correspondingly, higher prepayment rates. Under such circumstances you may have difficulty reinvesting these principal distributions at rates as high as the pass-through rate of your Certificates or your expected yield. Subordination of Class B Certificates Increases Risk of Loss If you purchase Class B Certificates, you are more likely to suffer losses as a result of losses or delinquencies on the Mortgage Loans than are holders of the Class A Certificates. .The rights of the holders of each class of Class B Certificates to receive distributions of interest and principal are subordinated to the rights of the holders of the Class A Certificates and the holders of each class of Class B Certificates with a lower numerical designation. For example, the holders of the Class B-2 Certificates will not receive principal or interest on a Distribution Date until the holders of the Class A and Class B-1 Certificates have received the amounts to which they are entitled on that Distribution Date. .Losses that are realized on the Mortgage Loans (other than Excess Losses) will be allocated first to the Class B-6 Certificates, then to the Class B-5 Certificates and so on, in reverse of the numerical order of the Class B Certificates, until the outstanding balances of those classes have been reduced to zero. After the outstanding balances of the Class B Certificates have been reduced to zero, all losses will be allocated to the Class A Certificates. For a more detailed description of the subordination feature of the Class B Certificates, see "Description of the Certificates -- Allocation of Losses" and "Credit Support" in this Prospectus Supplement. Limited Source of Payments - No Recourse to Depositor, Sellers, Servicers or Trustee Proceeds of the Mortgage Loans will be the sole source of payments on the Certificates. The Certificates do not represent an interest in or obligation of the Depositor, either Seller, either Servicer, the Trustee or any of their affiliates. There are, however, limited obligations of the Depositor with respect to certain breaches of its representations and warranties, and limited obligations of the Servicers with respect to their servicing obligations. Neither the Certificates nor the Mortgage Loans will be guaranteed by or insured by any governmental agency or instrumentality, the Depositor, either Seller, either Servicer, the Trustee or any of their affiliates. Consequently, if payments on the Mortgage Loans are insufficient or otherwise unavailable to make all payments required on the Certificates, there will be no recourse to the Depositor, either Seller, either Servicer, the Trustee or any of their affiliates. Limited Liquidity The Underwriter intends to make a market for purchase and sale of the Offered Certificates after their initial issuance, but the Underwriter has no obligation to do so. There is no assurance that such a secondary market will develop or, if it does develop, that it will provide you with liquidity of investment or that it will continue for the life of the Offered Certificates. As a result, you may not be able to sell your Certificates or you may not be able to sell your Certificates at a high enough price to produce your desired return on investment. S-16
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The secondary market for mortgage-backed securities has experienced periods of illiquidity and can be expected to do so in the future. Illiquidity means that there may not be any purchasers for your class of Certificates. Although any class of Certificates may experience illiquidity, it is more likely that classes of Certificates that are more sensitive to prepayment, credit or interest rate risk (like the Class A-7, Class A-19, Class A-PO or Class B Certificates) will experience illiquidity. Geographic Concentration May Increase Risk of Loss Due to Adverse Economic Conditions or Natural Disaster At various times, certain geographic regions will experience weaker economic conditions and housing markets and, consequently, will experience higher rates of delinquency and loss on mortgage loans generally. In addition, California, Florida and several other states have experienced natural disasters, including earthquakes, fires, floods and hurricanes, which may adversely affect property values. Any concentration of mortgaged properties in a state or region may present unique risk considerations. See the chart on page S-22 for a listing of the locations and concentrations of mortgaged properties. Any deterioration in housing prices in a state or region due to adverse economic conditions, natural disaster or other factors, and any deterioration of economic conditions in a state or region that adversely affects the ability of borrowers to make payments on the Mortgage Loans, may result in losses on the Mortgage Loans. Any losses may adversely affect the yield to maturity of the Offered Certificates. See "The Mortgage Pool" in this Prospectus Supplement for further information regarding the geographic concentration of the Mortgage Loans. Rights of Beneficial Owners May Be Limited by Book-Entry System All of the Offered Certificates, other than the Class A-R and Class A-LR Certificates, are Book-Entry Certificates and will be held through the book- entry system of The Depository Trust Company. Transactions in the Book-Entry Certificates generally can be effected only through DTC and DTC Participants. As a result: .your ability to pledge Book-Entry Certificates to entities that do not participate in the DTC system, or to otherwise act with respect to Book- Entry Certificates, may be limited due to the lack of a physical certificate for your Certificates; and .under a book-entry format, you may experience delays in the receipt of payments, since distributions will be made by the Trustee to DTC, and not directly to you. For a more detailed discussion of the Book-Entry Certificates, see "Description of the Certificates --Book-Entry Certificates" in this Prospectus Supplement. Tax Consequences of Residual Certificates .The Class A-R and Class A-LR Certificates will be the sole "residual interests" in the Upper-Tier REMIC and Lower-Tier REMIC, respectively, for federal income tax purposes. .Holders of Class A-R and Class A-LR Certificates must report as ordinary income or loss their pro rata share of the net income or the net loss of the respective REMIC whether or not any S-17
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cash distributions are made to them. This allocation of income or loss may result in a zero or negative after-tax return. No cash distributions are expected to be made with respect to the Class A-R and Class A-LR Certificates. .Due to their tax consequences, the Class A-R and Class A-LR Certificates will be subject to restrictions on transfer that may affect their liquidity. In addition, the Class A-R and Class A-LR Certificates may not be acquired by Plans. See "Description of the Certificates -- Restrictions on Transfer of the Class A-R and Class A-LR Certificates," "Prepayment and Yield Considerations -- Yield on the Class A-R and Class A-LR Certificates," "ERISA Considerations" and "Federal Income Tax Consequences" in this Prospectus Supplement. Risk Associated with Year 2000 Compliance The following is a Year 2000 readiness disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act. Each of the Servicers and their ultimate corporate parent, BankAmerica Corporation (the "Corporation"), like all financial institutions, are faced with the challenge of correctly stating and processing data containing dates from the Year 2000 and beyond, i.e. becoming Year 2000 ready. Computers programmed with a two-digit field for identifying the year interpret "98" as "1998," but may interpret "00" as "1900" rather than "2000." If not remedied, this problem could create system errors and failures resulting in the disruption of normal business operations. The Corporation has established project teams to address these Year 2000 issues. For additional information on the Corporation's Year 2000 remediation efforts, readers of this Prospectus Supplement are referred to the Corporation's Quarterly Report on Form 10-Q for the period ended September 30, 1998, which is incorporated herein by reference, and any subsequent reports filed by the Corporation under the Securities Exchange Act of 1934, as amended. The Servicers and their major vendors of mortgage servicing software are preparing contingency plans which will be implemented, if required, to minimize interruptions to mortgage servicing operations. However, due to the size and complexity of some systems, some of which are provided by outside vendors, and the necessity for these systems to interface correctly, both within and outside the Servicers, there is the possibility that some systems may not handle date-related data correctly after January 1, 2000. Nevertheless, based on their efforts and those of their major vendors and the information available to date, and assuming the continued availability to the Servicers and to their significant vendors of staff and other technical resources and no unexpected difficulty in implementing system enhancements, each Servicer believes that it will not incur significant operational disruptions to mortgage servicing operations as a result of the Year 2000 problem. Each Servicer has made its mission critical mortgage servicing systems Year 2000 ready, and expects the mission critical systems provided by vendors will be Year 2000 ready before January 1, 2000. However, the Servicers are heavily dependent on their outside vendors and the systems of third parties. There can be no assurance that the systems of third parties with which the Servicers deal will be timely converted. Likewise, the Servicers do not have the same ability to monitor and control their outside vendors as they have for their internal systems. The Trustee has informed the Depositor and the Servicers that it will use commercially reasonable efforts to (i) make the computer hardware and software owned by the Trustee and used to provide its services under the Pooling Agreement Year 2000 ready before December 31, 1999, (ii) test software that the Trustee licenses from third parties to provide services under the Pooling Agreement and subject to certain conditions, if any such software is not Year 2000 ready by September 30, 1999, obtain replacement software that is warranted by its vendor as Year 2000 ready and (iii) contact third party S-18
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service providers that the Trustee may use to provide services under the Pooling Agreement to obtain assurances from them that the computer hardware and software used to provide services under the Pooling Agreement are Year 2000 ready. However, there can be no assurance that the systems of the Trustee or third parties with which the Trustee deals will be Year 2000 ready. If either of the Servicers or any of their vendors or third party service providers is not Year 2000 ready, that Servicer most likely will not be able to process payments on the Mortgage Loans on a timely basis or accurately. These problems could lead to the occurrence of an event of default under the Pooling Agreement. For the remedies available upon the occurrence of an event of default, see "The Pooling and Servicing Agreement -- Rights Upon Event of Default" in the Prospectus. If the Trustee or any of its vendors or third party service providers is not Year 2000 ready, the Trustee may not be able to make timely or accurate payments to certificateholders. The Pooling Agreement provides that the holders of Certificates evidencing at least 50% of the voting rights have the right to remove the Trustee by providing written notice to the Servicers and the Trustee. Replacement of a Servicer or the Trustee could lead to payment delays on the Certificates during any transition period. The forward-looking statements contained in this Year 2000 discussion should be read in conjunction with the continuing statement included in the last paragraph on page S-2 of this Prospectus Supplement. -------------------------------------------------------------------------------- THE MORTGAGE POOL -------------------------------------------------------------------------------- The following descriptions of the Mortgage Loans and the mortgaged properties are based upon the expected characteristics of the Mortgage Loans as of the close of business on the Cut-off Date. The balances shown have been adjusted for the scheduled principal payments due on or before the Cut-off Date. Prior to the Closing Date, Mortgage Loans may be removed from the Mortgage Pool and other Mortgage Loans may be substituted for them. The Depositor believes that the information set forth in this Prospectus Supplement is representative of the characteristics of the Mortgage Pool as it will be constituted on the Closing Date. Unless the context requires otherwise, references below to percentages of the Mortgage Loans are approximate percentages of the aggregate scheduled balance of the Mortgage Loans as of the Cut-off Date. The Trust will consist primarily of a pool (the "Mortgage Pool") of fixed- rate, conventional, fully-amortizing mortgage loans (the "Mortgage Loans") secured by first liens on one- to four-family residential properties. As of the Cut-off Date, the Mortgage Pool is expected to include 1,777 Mortgage Loans with an aggregate Stated Principal Balance of approximately $600,084,577.00. The Mortgage Loans will have original terms to stated maturity ranging from 192 to 360 months. The Mortgage Loans will have scheduled monthly payments of interest and principal due on the first day of each month. Each Mortgage Loan bears interest at a fixed rate. The Mortgage Pool consists of Mortgage Loans either (i) originated by one of the Sellers or (ii) purchased by one of the Sellers from various entities that either originated the Mortgage Loans or acquired the Mortgage Loans pursuant to mortgage loan purchase programs operated by such entities. The Mortgage Loans will be sold by the Sellers to the Depositor on the Closing Date pursuant to two mortgage loan purchase agreements, each between one of the Sellers and the Depositor (the "Mortgage Loan Purchase Agreements"). The Mortgage Loan Purchase Agreements will provide the Depositor S-19
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with remedies against the Sellers for breaches of representations and warranties made by the Depositor with respect to the Mortgage Loans in the Pooling Agreement and for the failure to deliver documentation with respect to the Mortgage Loans under the Pooling Agreement. As of the Cut-off Date, each Mortgage Loan is expected to have a Stated Principal Balance of at least approximately $66,416.65 and of not more than approximately $1,164,681.92 and the average Stated Principal Balance of the Mortgage Loans is expected to be approximately $337,695.32. The latest stated maturity date of any of the Mortgage Loans is expected to be February 1, 2029; however, borrowers may prepay their Mortgage Loans at any time without penalty. Accordingly, the actual date on which any Mortgage Loan is paid in full may be earlier than the stated maturity date due to unscheduled payments of principal. As of the Cut-off Date, no Mortgage Loan was delinquent and no Mortgage Loan has been more than 30 days delinquent more than once during the preceding twelve months. None of the Mortgage Loans will be subject to any buydown agreement. As of the Cut-off Date, no Mortgage Loan will have a Loan-to-Value Ratio of more than 95.00%. For more information on the Loan-to-Value Ratios of the Mortgage Loans, see the "Original Loan-to- Value Ratios" table below. Subject to minor exceptions permitted in each Seller's discretion, each Mortgage Loan with a Loan-to-Value Ratio at origination in excess of 80% will be covered by a primary mortgage guaranty insurance policy which shall conform to the standards of Fannie Mae ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). No such primary mortgage insurance policy will be required with respect to any such Mortgage Loan after the date on which the related Loan- to-Value Ratio is less than 80%. The "Loan-to-Value Ratio" of a Mortgage Loan at any time is the percentage equal to (i) the principal balance of the related Mortgage Loan divided by (ii) the lesser of (a) the appraised value of the related mortgaged property determined in an appraisal obtained by the originator at origination of the Mortgage Loan and (b) except for Mortgage Loans made for refinancing purposes, the sales price for the mortgaged property. The value of any mortgaged property generally will change from the level that existed on the appraisal or sales date. If residential real estate values generally or in a particular geographic area decline, the Loan-to-Value Ratios might not be a reliable indicator of the rates of delinquencies, foreclosures and losses that could occur with respect to the Mortgage Loans. S-20
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Mortgage Loan Data The following tables set forth certain characteristics of the Mortgage Loans as of the Cut-off Date. The balances and percentages may not be exact due to rounding. Occupancy of Mortgaged Properties(/1/) [Download Table] Aggregate % of Stated Principal Cut-off Date Number of Balance as of Pool Principal Occupancy Mortgage Loans Cut-off Date Balance --------- -------------- ---------------- -------------- Primary Residence................ 1,734 $583,405,581.40 97.22% Second Home...................... 35 14,202,030.80 2.37 Investor Property................ 8 2,476,964.80 0.41 ----- --------------- ------ Total.......................... 1,777 $600,084,577.00 100.00% ===== =============== ====== -------- (/1/Based)solely on representations of the mortgagor at the time of origination of the related Mortgage Loan. Property Types Aggregate % of Number of Stated Principal Cut-off Date Mortgage Balance as of Pool Principal Property Type Loans Cut-off Date Balance ------------- -------------- ---------------- -------------- Single Family Detached........... 1,334 $454,618,113.17 75.76% PUD.............................. 397 129,040,594.03 21.50 Condominium...................... 32 11,372,655.33 1.90 2-Family......................... 9 3,165,318.54 0.53 4-Family......................... 3 1,396,584.17 0.23 3-Family......................... 1 396,047.75 0.07 Co-Op............................ 1 95,264.01 0.02 ----- --------------- ------ Total.......................... 1,777 $600,084,577.00 100.00% ===== =============== ====== Mortgage Loan Purpose Aggregate % of Number of Stated Principal Cut-off Date Mortgage Balance as of Pool Principal Purpose Loans Cut-off Date Balance ------- -------------- ---------------- -------------- Refinance--Rate/Term............. 817 $280,277,064.44 46.71% Purchase......................... 692 228,543,354.85 38.09 Refinance--Cashout............... 268 91,264,157.71 15.21 ----- --------------- ------ Total.......................... 1,777 $600,084,577.00 100.00% ===== =============== ====== S-21
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Geographical Distribution of the Mortgaged Properties(/1/) [Download Table] Aggregate % of Number of Stated Principal Cut-off Date Mortgage Balance as of Pool Principal Geographic Area Loans Cut-off Date Balance --------------- --------- ---------------- -------------- Alabama............................... 20 $ 7,011,262.29 1.17% Arizona............................... 44 15,499,128.29 2.58 Arkansas.............................. 6 1,950,604.60 0.33 California............................ 509 176,206,216.16 29.36 Colorado.............................. 113 37,751,480.90 6.29 Connecticut........................... 7 2,056,655.09 0.34 Delaware.............................. 4 1,140,230.95 0.19 District of Columbia.................. 10 3,961,761.52 0.66 Florida............................... 21 7,852,709.42 1.31 Georgia............................... 67 22,210,354.88 3.70 Hawaii................................ 3 1,354,657.02 0.23 Idaho................................. 4 1,643,767.56 0.27 Illinois.............................. 121 42,208,047.06 7.03 Indiana............................... 10 3,685,522.75 0.61 Iowa.................................. 5 1,563,244.85 0.26 Kansas................................ 15 5,972,350.65 1.00 Kentucky.............................. 14 5,068,192.07 0.84 Louisiana............................. 3 854,618.17 0.14 Maine................................. 4 1,239,488.50 0.21 Maryland.............................. 78 26,576,924.84 4.43 Massachusetts......................... 74 25,144,335.68 4.19 Michigan.............................. 21 6,228,472.72 1.04 Minnesota............................. 59 20,285,147.24 3.38 Mississippi........................... 2 668,982.98 0.11 Missouri.............................. 18 5,785,190.40 0.96 Nebraska.............................. 7 2,235,087.84 0.37 Nevada................................ 8 2,468,376.97 0.41 New Hampshire......................... 5 1,586,432.95 0.26 New Jersey............................ 32 11,299,869.07 1.88 New Mexico............................ 10 3,289,647.39 0.55 New York.............................. 19 5,769,448.73 0.96 North Carolina........................ 39 13,552,263.41 2.26 North Dakota.......................... 1 271,782.48 0.05 Ohio.................................. 17 5,749,532.54 0.96 Oklahoma.............................. 1 341,683.24 0.06 Oregon................................ 21 6,571,261.81 1.10 Pennsylvania.......................... 39 12,337,050.26 2.06 Rhode Island.......................... 2 566,667.52 0.09 South Carolina........................ 15 4,830,786.27 0.81 South Dakota.......................... 2 580,473.10 0.10 Tennessee............................. 30 9,884,705.25 1.65 Texas................................. 117 37,564,148.29 6.26 Utah.................................. 14 4,785,535.37 0.80 Virginia.............................. 87 27,555,166.60 4.59 Washington............................ 62 19,593,060.69 3.27 Wisconsin............................. 17 5,332,250.63 0.89 ----- --------------- ------ Total............................. 1,777 $600,084,577.00 100.00% ===== =============== ====== -------- (1) As of the Cut-off Date, no more than approximately 0.60% of the Mortgage Loans are expected to be secured by mortgaged properties located in any one five-digit postal zip code. S-22
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Current Mortgage Loan Principal Balances(/1/) [Download Table] Aggregate % of Number of Stated Principal Cut-off Date Mortgage Balance as of Pool Principal Current Mortgage Loan Principal Balances Loans Cut-off Date Balance ---------------------------------------- --------- ---------------- -------------- $0.01 to $200,000.00................... 25 $ 3,083,884.38 0.51% $200,000.01 to $250,000.00............. 125 30,648,766.75 5.11 $250,000.01 to $300,000.00............. 669 184,226,018.22 30.70 $300,000.01 to $350,000.00............. 397 128,299,410.94 21.38 $350,000.01 to $400,000.00............. 236 88,809,336.75 14.80 $400,000.01 to $450,000.00............. 113 48,045,525.35 8.01 $450,000.01 to $500,000.00............. 80 38,340,284.06 6.39 $500,000.01 to $550,000.00............. 47 24,836,463.58 4.14 $550,000.01 to $600,000.00............. 35 20,143,663.33 3.36 $600,000.01 to $650,000.00............. 43 27,389,150.23 4.56 $650,000.01 to $700,000.00............. 1 663,823.32 0.11 $700,000.01 to $750,000.00............. 1 743,918.14 0.12 $750,000.01 to $800,000.00............. 1 762,842.64 0.13 $900,000.01 to $950,000.00............. 1 939,883.17 0.16 $950,000.01 to $1,000,000.00........... 2 1,986,924.22 0.33 $1,150,000.01 to $1,200,000.00......... 1 1,164,681.92 0.19 ----- --------------- ------ Total................................ 1,777 $600,084,577.00 100.00% ===== =============== ====== -------- (1) As of the Cut-off Date, the average outstanding principal balance of the Mortgage Loans is expected to be approximately $337,695.32. Original Loan-to-Value Ratios(/1/) [Download Table] Aggregate % of Number of Stated Principal Cut-off Date Mortgage Balance as of Pool Principal Original Loan-to-Value Ratios Loans Cut-off Date Balance ----------------------------- --------- ---------------- -------------- 20.01% to 25.00%...................... 3 $ 920,181.50 0.15% 25.01% to 30.00%...................... 5 1,990,334.37 0.33 30.01% to 35.00%...................... 6 2,039,914.56 0.34 35.01% to 40.00%...................... 11 4,516,585.57 0.75 40.01% to 45.00%...................... 28 10,851,182.72 1.81 45.01% to 50.00%...................... 34 13,130,979.59 2.19 50.01% to 55.00%...................... 50 17,526,810.03 2.92 55.01% to 60.00%...................... 90 33,576,647.28 5.60 60.01% to 65.00%...................... 114 40,156,770.71 6.69 65.01% to 70.00%...................... 187 69,715,653.61 11.62 70.01% to 75.00%...................... 318 105,224,248.77 17.53 75.01% to 80.00%...................... 689 229,767,574.19 38.29 80.01% to 85.00%...................... 32 9,638,506.59 1.61 85.01% to 90.00%...................... 165 48,785,671.73 8.13 90.01% to 95.00%...................... 45 12,243,515.78 2.04 ----- --------------- ------ Total............................... 1,777 $600,084,577.00 100.00% ===== =============== ====== -------- (1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at origination of the Mortgage Loans is expected to be approximately 72.86%. S-23
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Mortgage Interest Rates(/1/) [Download Table] Aggregate % of Number of Stated Principal Cut-off Date Mortgage Balance as of Pool Principal Mortgage Interest Rates Loans Cut-off Date Balance ----------------------- --------- ---------------- -------------- 6.251% to 6.500%...................... 55 $ 18,310,229.21 3.05% 6.501% to 6.750%...................... 305 104,905,310.55 17.48 6.751% to 7.000%...................... 477 162,822,203.94 27.13 7.001% to 7.250%...................... 557 187,784,503.57 31.29 7.251% to 7.500%...................... 268 87,840,546.51 14.64 7.501% to 7.750%...................... 92 30,844,574.12 5.14 7.751% to 8.000%...................... 20 6,690,947.44 1.12 8.001% to 8.250%...................... 3 886,261.66 0.15 ----- --------------- ------ Total............................... 1,777 $600,084,577.00 100.00% ===== =============== ====== -------- (1) As of the Cut-off Date, the weighted average mortgage interest rate of the Mortgage Loans is expected to be approximately 7.085% per annum. Remaining Terms(/1/) Aggregate % of Number of Stated Principal Cut-off Date Mortgage Balance as of Pool Principal Remaining Term Loans Cut-off Date Balance -------------- --------- ---------------- -------------- 181 to 240 months..................... 18 $ 5,723,974.32 0.95% 241 to 300 months..................... 17 3,728,062.80 0.62 301 to 360 months..................... 1,742 590,632,539.88 98.42 ----- --------------- ------ Total............................... 1,777 $600,084,577.00 100.00% ===== =============== ====== -------- (1) As of the Cut-off Date, the weighted average stated remaining term of the Mortgage Loans is expected to be approximately 356 months. Credit Scoring of Mortgagors(/1/) Aggregate % of Number of Stated Principal Cut-off Date Mortgage Balance as of Pool Principal Credit Scores Loans Cut-off Date Balance ------------- --------- ---------------- -------------- 1 - 550............................. 1 $ 262,777.79 0.04% 551 - 600............................. 8 2,327,123.64 0.39 601 - 650............................. 84 28,128,032.43 4.69 651 - 700............................. 289 98,642,344.05 16.44 701 - 750............................. 642 219,402,125.22 36.56 751 - 800............................. 660 220,933,975.80 36.82 801 - 850............................. 32 10,893,958.32 1.82 Unknown Scores........................ 61 19,494,239.75 3.25 ----- --------------- ------ Total............................... 1,777 $600,084,577.00 100.00% ===== =============== ====== -------- (1) The scores shown are Bureau Credit Scores from Experian (FICO), Equifax (Beacon) and TransUnion (Empirica) ("Credit Scores"). Credit Scores generally range from approximately 250 to approximately 900 with a higher score indicating an individual with a more favorable credit history than an individual with a lower score. Credit Scores are statistical credit scores designed to assess a borrower's creditworthiness and likelihood to default on a consumer obligation over a two-year period. Credit Scores were not developed to predict the likelihood of default on mortgage loans and, accordingly, may not be indicative of the ability of a mortgagor to repay its Mortgage Loan. S-24
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Underwriting Standards of NationsBanc Mortgage Corporation Each Mortgage Loan originated or acquired by NationsBanc Mortgage Corporation has satisfied the credit, appraisal and underwriting guidelines established by NationsBanc Mortgage Corporation which may be varied in cases deemed appropriate by NationsBanc Mortgage Corporation. NationsBanc Mortgage Corporation's underwriting guidelines are intended to evaluate the mortgagor's credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. These underwriting guidelines are applied in a standard procedure which is intended to comply with applicable federal and state laws and regulations. With respect to NationsBanc Mortgage Corporation's underwriting guidelines, such underwriting standards generally include a set of specific criteria pursuant to which the underwriting evaluation is made. However, the application of such underwriting guidelines does not imply that each specific criteria was satisfied individually. NationsBanc Mortgage Corporation will have considered a Mortgage Loan to be originated in accordance with a given set of underwriting guidelines if, based on an overall qualitative evaluation, the loan is in substantial compliance with such underwriting guidelines. A Mortgage Loan may be considered to comply with a set of underwriting standards, even if one or more specific criteria included in such underwriting standards were not satisfied, if other factors compensated for the criteria that were not satisfied or the Mortgage Loan is considered to be in substantial compliance with the underwriting standards. Initially, a prospective mortgagor is required to fill out a detailed industry standard application designed to provide pertinent credit information. As part of the description of the prospective mortgagor's financial condition, the applicant is required to provide current information describing assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a credit report which summarizes the applicant's credit history with merchants and lenders and any record of bankruptcy. In most cases, an employment verification is obtained either from the applicant's employer wherein the employer reports the length of employment with that organization, the current salary and an indication as to whether it is expected that the applicant will continue such employment in the future or through analysis of copies of federal withholding (IRS W-2) forms, current payroll earnings statements and account statements of the applicant. If a prospective mortgagor is self-employed, the applicant is required to submit copies of signed tax returns. The applicant also authorizes deposit verification at all financial institutions where the applicant has accounts. The Seller may, as part of its overall evaluation of the applicant's creditworthiness, use a credit scoring system or mortgage scoring system to evaluate in a statistical manner the expected performance of a Mortgage Loan based on the pertinent credit information concerning the applicant provided through national credit bureaus, certain other information provided by the applicant and an assessment of specific mortgage loan characteristics, including loan-to-value ratio and type of loan product. NationsBanc Mortgage Corporation has employed alternative underwriting guidelines (the "Limited or Reduced Documentation Guidelines") for certain qualifying mortgage loans underwritten by NationsBanc Mortgage Corporation through an underwriting program designed to streamline the loan review process. Certain reduced loan documentation programs may not require income, employment or asset verifications. Generally, in order to be eligible for a reduced loan documentation program, the mortgaged property must have a loan-to-value ratio which supports the amount of the mortgage loan and the mortgagor must have a good credit history. Eligibility for such program may be determined by use of a credit scoring model. No more than 7.0% of the Mortgage Loans acquired from NationsBanc Mortgage Corporation have been originated under the Limited or Reduced Documentation Guidelines. Once all applicable employment and deposit documentation and the credit report are received, a determination is made as to whether the prospective mortgagor has sufficient monthly income available S-25
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(i) to meet the mortgagor's monthly obligations on the proposed mortgage loan and other expenses related to the mortgaged property (such as property taxes, hazard insurance and maintenance and utility costs) and (ii) to meet other financial obligations and monthly living expenses. To determine the adequacy of the mortgaged property as collateral, an independent appraisal is made of each mortgaged property considered for financing. The appraiser is required to inspect the mortgaged property and verify that it is in acceptable condition and that construction, if recent, has been completed. The appraisal is based on the appraiser's estimate of values, giving appropriate weight to both the market value of comparable housing, as well as the cost of replacing the mortgaged property. Certain states where the mortgaged properties securing the Mortgage Loans are located are "anti- deficiency" states where, in general, lenders providing credit on one- to four-family properties must look solely to the property for repayment in the event of foreclosure. See "Certain Legal Aspects of the Mortgage Loans -- Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders" in the Prospectus. NationsBanc Mortgage Corporation's underwriting guidelines in all states (including anti-deficiency states) require that the value of the mortgaged property being financed, as indicated by the independent appraisal, currently supports and is anticipated to support in the future the outstanding loan balance and provides sufficient value to mitigate the effects of adverse shifts in real estate values, although there can be no assurance that such value will support the outstanding loan balance in the future. Underwriting Standards of Bank of America, FSB Bank of America, FSB and certain affiliated sellers (the "Affiliated Sellers") have written, and are continuously updating, underwriting guides for the origination of one- to four-family residential first mortgage loans (as modified from time to time, the "Guides"). The underwriting standards as set forth in the Guides are continuously revised based on prevailing conditions in the residential mortgage market, evolving credit standards of the affiliated Sellers and the investment market for residential mortgage loans. Each Mortgage Loan originated or acquired by Bank of America, FSB has satisfied the underwriting standards set forth in the Guides. The underwriting standards set forth in the Guides are intended to assess the prospective borrower's ability and willingness to repay the debt and the adequacy of the property as collateral for the loan requested. Credit policies of the Affiliated Sellers require that loan underwriters be satisfied that the value of the property being financed supports the outstanding loan balance with sufficient value at loan origination to mitigate the effects of adverse shifts in real estate values. The emphasis, however, remains on the borrowers' ability to repay debt. The real estate lending processes of the Affiliated Sellers for one- to four-family mortgage loans follow standard procedures, designed to comply with applicable federal and state laws and regulations. Initially, a prospective borrower is required to complete a detailed application designed to provide to the underwriter pertinent information about the prospective borrower, the property to be financed and the type of loan desired. Information regarding the property to be financed may be provided by the prospective borrower after the applicable Affiliated Seller has approved, subject to review of the property to be financed, a loan to the prospective borrower. As part of the description of the prospective borrower's financial condition, the Affiliated Sellers generally require a description of assets and liabilities and income and expenses and obtain a credit report which summarizes the prospective borrower's credit history with merchants and lenders and any public records, such as bankruptcy. In most cases, employment verification is obtained providing current and historical income information. Such S-26
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employment verification is obtained either through the applicable affiliated Seller's analysis of the prospective borrower's W-2 forms for the most recent two years and year-to-date earnings statement or most recent two years' tax returns, or from the prospective borrower's employer, wherein the employer reports the length of employment and current salary with that organization. Self-employed prospective borrowers generally are required to submit their federal tax returns for the past two years plus year-to- date financial statements if the loan application is made 120 days or longer after the end of the most recent tax year for which a federal tax return was provided. In general, an employment verification is obtained, and with respect to certain loans, a telephonic employment confirmation is obtained by the affiliated Seller. Beginning in April 1994, the Affiliated Sellers began using an automated process to assist in making credit decisions on certain residential real estate loans. A prospective borrower's credit history is assigned a score based on standard criteria designed to predict the possibility of a default by the prospective borrower on a mortgage loan. An application from a prospective borrower whose score indicates a high probability of a default will receive scrutiny from a senior underwriter who may override a decision based on the credit score. An application from a prospective borrower whose score indicates a low probability of default is eligible for the Affiliated Sellers' rapid processing program (the "Rapid Processing Program"). Loans in the Rapid Processing Program are subject to less stringent underwriting guidelines and documentation standards to verify the information in the application. Approximately 53.5% of the Mortgage Loans acquired from Bank of America, FSB have been originated under the Rapid Processing Program. With respect to most mortgage loans originated by the Affiliated Sellers, once the employment verification (or confirmation) and the credit report are received by the underwriter considering the loan application, a determination is made as to whether the prospective borrower has sufficient monthly income available to meet the borrower's monthly obligations on the proposed loan and other expenses related to the residence as well as to meet other financial obligations and monthly living expenses. Where there are two individuals co- signing any mortgage note, the income and payment obligations of both may be included in the computation. Prior to final loan approval a prospective borrower generally is expected to have liquid assets sufficient to cover the down-payment, closing costs and cash reserves that could be used to pay future housing expenses in a depository or related account of the borrower. However, the Affiliated Sellers generally do not require prospective borrowers to have such liquid assets when they originate refinance loans. An appraisal is made of each property to be financed. The appraisal is conducted by either a staff appraiser of the applicable Affiliated Seller, or in some instances, an independent fee appraiser licensed in the jurisdiction where such property is located. Generally, as part of the loan origination process, the appraiser personally visits the property and estimates its market value on the basis of comparable properties and other factors. The Affiliated Sellers have generally not made one- to four-family mortgage loans having Loan-to Value Ratios above 80% unless they have obtained or caused the borrowers to obtain primary mortgage insurance policies. The mortgaged properties may be located in states where, in general, a lender providing credit on a single-family 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. See "Certain Legal Aspects of the Mortgage Loans -- Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders" in the Prospectus. S-27
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The underwriting standards contained in the Guides applicable to all states (including anti-deficiency states) require that the value of the property being financed, as indicated by the appraisal, currently supports and is anticipated to support in the future the outstanding loan balance, although there can be no assurance that such value will support the loan balance in the future. -------------------------------------------------------------------------------- NATIONSBANC MORTGAGE CORPORATION -------------------------------------------------------------------------------- NationsBanc Mortgage Corporation is a wholly-owned subsidiary of NationsBank, N.A., which is an indirect, wholly-owned subsidiary of BankAmerica Corporation. NationsBanc Mortgage Corporation is primarily engaged in the business of (i) originating and purchasing residential mortgage loans in its own name and (ii) servicing residential mortgage loans for its own account or for the account of others. NationsBanc Mortgage Corporation's principal executive offices are located at 201 North Tryon Street, 14th Floor, Charlotte, North Carolina 28255 and the telephone number is (704) 388-4545, and NationsBanc Mortgage Corporation's operations offices are located at 101 East Main Street, Suite 400, Louisville, Kentucky 40202 and the telephone number is (502) 566-5100. NationsBanc Mortgage Corporation is approved by the Government National Mortgage Association, FNMA and FHLMC as a seller/servicer. -------------------------------------------------------------------------------- BANK OF AMERICA, FSB -------------------------------------------------------------------------------- Bank of America, FSB is a wholly-owned subsidiary of BankAmerica Corporation. Bank of America, FSB originates and services home loans nationwide through retail, wholesale, and other specialized channels. Bank of America, FSB's headquarters is located in Portland, Oregon, and its administrative offices are located at 555 California Street, San Francisco, California 94104, and the telephone number is (415) 622-2220. Bank of America, FSB has been approved as a mortgagee and seller/servicer by the Department of Housing and Urban Development, the Veterans Administration, the Government National Mortgage Association, FNMA and FHLMC. -------------------------------------------------------------------------------- SERVICING OF MORTGAGE LOANS -------------------------------------------------------------------------------- All of the Mortgage Loans acquired from NationsBanc Mortgage Corporation will be serviced by NationsBanc Mortgage Corporation. All of the Mortgage Loans acquired from Bank of America, FSB will be serviced by Bank of America, FSB. NationsBanc Mortgage Corporation and Bank of America, FSB (together, in their capacity as servicers, the "Servicers") will service the Mortgage Loans in accordance with the terms of the Pooling Agreement. The Servicers may perform any of their obligations under the Pooling Agreement through one or more subservicers. Despite the existence of subservicing arrangements, each Servicer will be liable for its servicing duties and obligations under the Pooling Agreement as if that Servicer alone were servicing the Mortgage Loans. See "The Pooling and Servicing Agreement" in the Prospectus. S-28
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Foreclosure and Delinquency Experience of NationsBanc Mortgage Corporation Historically, a variety of factors, including the appreciation of real estate values, have limited NationsBanc Mortgage Corporation's foreclosure and delinquency experience on its portfolio of mortgage loans. Factors beyond NationsBanc Mortgage Corporation's control, such as national or local economic conditions or downturns in the real estate markets in its lending areas, may result in increased rates of delinquencies and foreclosure losses in the future. The information in the table below has not been adjusted to eliminate the effect of the significant growth in the size of the portfolio of mortgage loans originated by NationsBanc Mortgage Corporation during the periods shown. Accordingly, foreclosures and delinquencies as percentages of aggregate principal balance of mortgage loans serviced for each period may be higher than those that would be shown if a group of mortgage loans were artificially isolated at a point in time and the information disclosed the activity only in that isolated group. However, since most of the mortgage loans in the portfolio of jumbo mortgage loans serviced by NationsBanc Mortgage Corporation during the periods shown are not fully seasoned, the foreclosure and delinquency information for such an isolated group would also be distorted to some degree. The following table summarizes the delinquency and foreclosure experience on the dates indicated on non-conforming and FHLMC- and FNMA-conforming first deed of trust or mortgage loans serviced by NationsBanc Mortgage Corporation (excluding certain recent bulk acquisitions of servicing rights) at its Louisville servicing center and which were originated in a manner consistent with the underwriting criteria of NationsBanc Mortgage Corporation described in this Prospectus Supplement under "The Mortgage Pool -- Underwriting Standards of NationsBanc Mortgage Corporation." NationsBanc Mortgage Corporation's portfolio of non-conforming and FHLMC- and FNMA-conforming, first deed of trust and mortgage loans described below contains fixed- and adjustable-rate mortgage loans having a variety of original terms to maturity and payment characteristics. Accordingly, this portfolio may differ significantly from the Mortgage Loans at any time in terms of interest rates, principal balances, geographic distribution, loan-to-value ratios and other possibly relevant characteristics. It is highly likely that the delinquency and foreclosure experience with respect to the Mortgage Loans will differ from that reflected in the table below. Likewise, it is highly likely that any losses experienced on liquidation of defaulted Mortgage Loans will occur at different rates than those shown below. The actual delinquency and foreclosure experience on the Mortgage Loans, substantially all of which are non-conforming loans, will depend, among other things, upon the value of the real estate securing such Mortgage Loans and the ability and willingness of mortgagors to make required payments. S-29
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NationsBanc Mortgage Corporation Delinquency and Foreclosure Experience on Mortgage Loans [Enlarge/Download Table] At December 31, 1998 At December 31, 1997 At December 31, 1996 ------------------------- ------------------------- ------------------------- Number/% Number/% Number/% of Outstanding of Outstanding of Outstanding Mortgage Principal Mortgage Principal Mortgage Principal Loans Amount Loans Amount Loans Amount -------- --------------- -------- --------------- -------- --------------- Total Portfolio......... 403,100 $44,023,656,001 339,638 $36,056,082,222 304,921 $32,561,189,618 Delinquencies* One installment delinquent............ 7,413 $ 612,817,429 7,241 $ 574,492,392 6,261 $ 477,968,358 Percent Delinquent..... 1.8% 1.4% 2.1% 1.6% 2.1% 1.5% Two installments delinquent............ 1,427 $ 103,559,513 1,530 $ 107,777,563 1,249 $ 90,683,948 Percent Delinquent..... 0.4% 0.2% 0.5% 0.3% 0.4% 0.3% Three or more installments delinquent............ 1,632 $ 115,900,383 1,811 $ 132,979,230 1,465 $ 105,654,522 Percent Delinquent..... 0.4% 0.3% 0.5% 0.4% 0.5% 0.3% In Foreclosure.......... 1,480 $ 117,709,652 1,435 $ 110,815,100 1,358 $ 112,445,453 Percent in Foreclosure........... 0.4% 0.3% 0.4% 0.3% 0.4% 0.3% Delinquent and in Foreclosure............ 11,952 $ 949,988,977 12,017 $ 926,064,285 10,333 $ 786,752,281 Percent Delinquent and in Foreclosure**...... 3.0% 2.2% 3.5% 2.6% 3.4% 2.4% ---------- * A mortgage loan is deemed to have "one installment delinquent" if any scheduled payment of principal or interest is delinquent past the end of the month in which such payment was due, "two installments delinquent" if such delinquency persists past the end of the month following the month in which such payment was due, and so forth. ** The sums of the Percent Delinquent and Percent in Foreclosure set forth in this table may not equal the Percent Delinquent and in Foreclosure due to rounding. Foreclosure and Delinquency Experienceof Bank of America, FSB The delinquency, foreclosure and loss experience on the portfolios of one- to four-family first mortgage loans owned by Bank of America, FSB and its affiliate, Bank of America NT&SA, and serviced or subserviced by Bank of America, FSB are set forth in the following table. The delinquency, foreclosure and loss experience indicated excludes certain loans originated by private banking units of Bank of America, FSB's affiliates. The portfolio of mortgage loans serviced or subserviced by Bank of America, FSB includes both fixed and adjustable interest rate mortgage loans, including "buydown" mortgage loans, loans with stated maturities of 15 to 40 years and other types of mortgage loans having a variety of payment characteristics, and includes mortgage loans secured by mortgaged properties in geographic locations that may not be representative of the geographic distribution or concentration of the mortgaged properties securing the Mortgage Loans. There can be no assurance that the delinquency, foreclosure and loss experience set forth below will be similar to the results that may be experienced with respect to the Mortgage Loans. S-30
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Bank of America, FSB Delinquency and Foreclosure Experience on Mortgage Loans [Enlarge/Download Table] At or for the year ended December 31, ---------------------------------------------------------------------------- 1998 1997 1996 ---------------------- ---------------------- ---------------------- By Dollar By Dollar By Dollar By Amount of By Amount of By Amount of No. of Loans No. of Loans No. of Loans Loans (In Millions) Loans (In Millions) Loans (In Millions) ------- ------------- ------- ------------- ------- ------------- Total Portfolio......... 119,017 $28,219.8 150,688 $28,721.2 149,178 $27,832.2 Average Portfolio Balance(1)............. 122,659 26,312.0 178,809 32,381.2 160,712 27,105.7 Period of Delinquency 31 to 59 days............. 2,512 346.6 3,180 415.8 2,613 366.2 60 to 89 days........... 637 86.4 817 113.1 662 96.7 90 days or more(2)...... 458 65.1 780 107.0 613 98.3 ------- --------- ------- --------- ------- --------- Total Delinquent Loans.. 3,607 $ 498.2 4,777 $ 635.9 3,888 $ 561.2 Delinquency Ratio....... 3.03% 1.77% 3.17% 2.21% 2.61% 2.02% Foreclosures Pending(3)............. 1,023 $ 145.9 1,082 $ 178.0 904 $ 160.4 Foreclosure Ratio....... 0.86% 0.52% 0.72% 0.62% 0.61% 0.58% ---------- (1) Average Portfolio Balance for the period indicated is based on end of month balances divided by the number of months in the period indicated. (2) Does not include Foreclosures Pending. (3) Includes mortgage loans for which foreclosure proceedings had been instituted and title to which had not been acquired by Bank of America, FSB, Bank of America NT&SA, a third party or by an insurer at the date indicated. -------------------------------------------------------------------------------- THE POOLING AND SERVICING AGREEMENT -------------------------------------------------------------------------------- The Certificates will be issued pursuant to a Pooling and Servicing Agreement to be dated February 23, 1999 (the "Pooling Agreement"), among the Depositor, the Servicers and the Trustee. The Prospectus contains important additional information regarding the terms and conditions of the Pooling Agreement and the Certificates. See "The Pooling and Servicing Agreement" in the Prospectus. The following summaries do not purport to be complete and are subject to the provisions of the Pooling Agreement which are incorporated by reference. The Depositor plans to file a final copy of the Pooling Agreement with the Securities and Exchange Commission pursuant to a Current Report on Form 8-K after the Closing Date. Assignment of Mortgage Loans In connection with the transfer and assignment of the Mortgage Loans to the Trustee, the Depositor will deliver or cause to be delivered to the Trustee, or a custodian for the Trustee, among other things, with respect to each Mortgage Loan (collectively, the "Mortgage File"): .the original Mortgage Note endorsed without recourse in blank or to the order of the Trustee (or its nominee) or a certificate signed by an officer of the appropriate Seller certifying that the related original Mortgage Note has been lost; .the original or a certified copy of the Mortgage with evidence of recording indicated thereon (except for any Mortgage not returned from the public recording office, which will be delivered to the Trustee as soon as the same is available to the Depositor); .an assignment in recordable form of the Mortgage (or a copy, if such assignment has been submitted for recording); and .if applicable, any riders or modifications to such Mortgage Note and Mortgage. S-31
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Assignments of the Mortgage Loans to the Trustee (or its nominee) will be recorded in the appropriate public office for real property records, except in states where, in the opinion of counsel acceptable to the Trustee, such recording is not required to protect the Trustee's interests in the Mortgage Loan against the claim of any subsequent transferee or any successor to or creditor of the Depositor or the Sellers. The Trustee will promptly review each Mortgage File after the Closing Date (or promptly after the Trustee's receipt of any document permitted to be delivered after the Closing Date) to determine if any of the foregoing documents is missing. Repurchases of Mortgage Loans If any portion of the Mortgage File is not delivered to the Trustee or if a Mortgage Loan breaches any of the representations made by the Depositor in the Pooling Agreement in any material respect and the Depositor does not cure such omission or defect within 90 days, the Depositor will be required on the Distribution Date in the month following the expiration of the 90-day period either (i) to repurchase the related Mortgage Loan (or any property acquired in respect thereof) at a price (the "Purchase Price") equal to 100% of the unpaid principal balance of such Mortgage Loan plus accrued and unpaid interest on such principal balance at the related mortgage interest rate, or (ii) to substitute an Eligible Substitute Mortgage Loan; however, such substitution generally is permitted only within two years of the Closing Date. Any Mortgage Loan repurchased or subject to a substitution as described in this paragraph is referred to as a "Deleted Mortgage Loan." An "Eligible Substitute Mortgage Loan" generally will: .have a principal balance, after deduction of all Monthly Payments due in the month of substitution, not in excess of, and not more than 10% less than, the Stated Principal Balance of the Deleted Mortgage Loan (the amount of any shortfall to be deposited by the Seller and held for distribution to the certificateholders on the related Distribution Date (a "Substitution Adjustment Amount")); .have a Net Mortgage Interest Rate equal to that of the Deleted Mortgage Loan; .have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage Loan; .have a remaining term to maturity not greater than (and not more than one year less than) that of the Deleted Mortgage Loan; and .comply with all of the representations and warranties in the Pooling Agreement as of the date of substitution. This cure, repurchase or substitution obligation constitutes the sole remedy available to certificateholders or the Trustee for omission of, or a material defect in, a Mortgage Loan document. Optional Repurchases of Certain Mortgage Loans The Depositor, in its sole discretion, may repurchase from the Trust: .any defaulted Mortgage Loan, or any Mortgage Loan as to which default is reasonably forseeable; and .any Mortgage Loan as to which the originator or prior owner of such Mortgage Loan has breached a representation or warranty to a Seller regarding the characteristics of such Mortgage Loan. Any such repurchase will be at the Purchase Price. S-32
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Payments on Mortgage Loans; Accounts On or prior to the Closing Date, each Servicer will establish an account (each, a "Servicer Custodial Account"), which will be maintained as a separate trust account by each Servicer in trust for the benefit of certificateholders. Funds credited to a Servicer Custodial Account may be invested for the benefit and at the risk of the related Servicer in certain eligible investments, as described in the Pooling Agreement, that are scheduled to mature on or prior to the business day preceding the next Distribution Date. On or prior to the business day immediately preceding each Distribution Date, each Servicer will withdraw from the related Servicer Custodial Account the portion of the Pool Distribution Amount related to the Mortgage Loans serviced by such Servicer and will deposit such amount in an account established and maintained with the Trustee on behalf of certificateholders (the "Certificate Account"). Funds credited to the Certificate Account may be invested for the benefit and at the risk of the Trustee in certain eligible investments, as described in the Pooling Agreement. Servicing Compensation and Payment of Expenses The Expense Fees with respect to the Trust are payable out of the interest payments received on each Mortgage Loan. The "Expense Fees" consist of (a) servicing compensation payable to the related Servicer in respect of its servicing activities (the "Servicing Fee") and (b) fees paid to the Trustee. The Expense Fees will accrue on the Stated Principal Balance of each Mortgage Loan at a rate (the "Expense Fee Rate") equal to the sum of the Servicing Fee Rate for such Mortgage Loan and the Trustee Fee Rate. The "Trustee Fee Rate" will be 0.0035% per annum. The "Servicing Fee Rate" with respect to each Mortgage Loan will be the per annum rate equal to (i) the related mortgage interest rate less (ii) the sum of 6.500% and the Trustee Fee Rate; provided, however, that the Servicing Fee Rate will not be less than 0.2500% per annum with respect to any Mortgage Loan. The Servicing Fee Rates for the Mortgage Loans are expected to range from 0.2500% to 1.6215% per annum and, as of the Cut-off Date, the weighted average Servicing Fee Rate is expected to be approximately 0.5943%. The Servicers are obligated to pay certain ongoing expenses associated with the Trust and incurred by the Servicers in connection with their responsibilities under the Pooling Agreement. Those amounts will be paid by the Servicers out of their Servicing Fee. The amount of each Servicer's Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans, as described below under "-- Compensating Interest." The Servicers are also entitled to receive all late payment fees, assumption fees and other similar charges and all investment income earned on amounts on deposit in the Servicer Custodial Accounts. The Trustee is also entitled to receive all investment income earned on amounts on deposit in the Certificate Account. In addition to its compensation, the Trustee is entitled to be reimbursed from and indemnified by the Trust for certain expenses incurred by the Trustee in connection with its responsibilities under the Pooling Agreement. Compensating Interest When a Mortgage Loan is subject to a partial prepayment or is prepaid in full between due dates, the mortgagor is required to pay interest on the amount prepaid only to the date of prepayment in the case of a prepayment in full or to the due date in the month in which a partial prepayment is made. No interest will be paid by the mortgagor on the amount prepaid after those dates. Prepayments will be distributed to certificateholders on the Distribution Date in the month following the month of receipt. Pursuant to the Pooling Agreement, the aggregate Servicing Fee payable to a Servicer for any month will be reduced by an amount equal to the lesser of (i) one-twelfth of 0.25% of the balance of the Mortgage S-33
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Loans serviced by such Servicer and (ii) the excess of (x) 30 days' interest at the mortgage interest rate (less the Servicing Fee Rate) on the amount of each prepayment of a Mortgage Loan serviced by such Servicer over (y) the amount of interest actually paid by the related mortgagors on the amount of such prepayments during the preceding month (any such reduction, "Compensating Interest"). Any such shortfalls in interest as a result of prepayments in excess of the amount of Compensating Interest for a month will reduce the amount of interest available to be distributed to certificateholders from what would have been the case in the absence of such prepayments. See "Description of the Certificates -- Interest" in this Prospectus Supplement. Advances Subject to the following limitations, the Servicers will be required to advance (any such advance, an "Advance") prior to each Distribution Date an amount equal to the aggregate of payments of principal and interest (net of the related Servicing Fee) which were due on the related due date on the Mortgage Loans serviced by that Servicer and which were delinquent on the related Determination Date. Advances by each Servicer will be made from its own funds or funds in the related Servicer Custodial Account that do not constitute a portion of the Pool Distribution Amount for such Distribution Date. The obligation to make an Advance with respect to any Mortgage Loan will continue until the ultimate disposition of the REO Property or mortgaged property relating to such Mortgage Loan. An "REO Property" is a mortgaged property that has been acquired by either Servicer on behalf of the Trust through foreclosure or grant of a deed in lieu of foreclosure. With respect to any Distribution Date, the "Determination Date" will be the sixteenth day of the month in which such Distribution Date occurs or, if such day is not a business day, the immediately preceding business day. Advances are intended to maintain a regular flow of scheduled interest and principal payments on the Certificates rather than to guarantee or insure against losses. Each Servicer is obligated to make Advances if the Advances are, in its judgment, reasonably recoverable from future payments and collections or insurance payments or proceeds of liquidation of the related Mortgage Loan. If either Servicer determines on any Determination Date to make an Advance, such Advance will be included with the distribution to certificateholders on the related Distribution Date. Any failure by either Servicer to make a required Advance will constitute an event of default and the Trustee (if it succeeds to the obligations of the defaulting Servicer under the Pooling Agreement) or the successor servicer will be obligated to make the Advance, in accordance with the terms of the Pooling Agreement. Optional Termination The circumstances under which the obligations created by the Pooling Agreement will terminate in respect of the Certificates are described in "The Pooling and Servicing Agreement -- Termination; Optional Purchase of Mortgage Loans" in the Prospectus. In addition, the Depositor will have the option to purchase all remaining Mortgage Loans and other assets in the Trust when the scheduled balance of the Mortgage Pool as of the Distribution Date on which the purchase proceeds are to be distributed is less than 10% of the initial balance of the Mortgage Pool. Distributions in respect of an optional termination will be paid to certificateholders in order of their priority of distribution as described below under "Description of the Certificates -- Priority of Distributions." The proceeds from such a distribution may not be sufficient to distribute the full amount to which each class is entitled if the purchase price is based in part on the fair market value of the REO Property and such fair market value is less than the scheduled balance of the related Mortgage Loan. S-34
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In no event will the trust created by the Pooling Agreement continue beyond the later of (a) the repurchase described above, (b) the expiration of 21 years from the death of the survivor of the person named in the Pooling Agreement and (c) the final distribution to certificateholders of amounts received in respect of the assets of the Trust. The termination of the Trust will be effected in a manner consistent with applicable federal income tax regulations and the REMIC status of the Upper-Tier REMIC and Lower-Tier REMIC. Special Servicing Agreements The Pooling Agreement will permit a Servicer to enter into a special servicing agreement with an unaffiliated holder of a class of Class B Certificates or of a class of securities representing interests in one or more classes of Class B Certificates and any other subordinated mortgage pass- through certificates. Pursuant to such an agreement, such holder may instruct such Servicer to commence or delay foreclosure proceedings with respect to delinquent Mortgage Loans serviced by such Servicer. Such commencement or delay at such holder's direction will be taken by such Servicer only after such holder deposits a specified amount of cash in the related Servicer Custodial Account. Such cash will be available for distribution to certificateholders if Liquidation Proceeds are less than they otherwise may have been had such Servicer acted pursuant to its normal servicing procedures. The Trustee The Bank of New York will be the Trustee under the Pooling Agreement. The Bank of New York is a New York banking corporation. The Bank of New York's principal office is located at 101 Barclay Street-12 E, New York, New York 10286 (the "Corporate Trust Office"). Certificate transfer services are conducted at the Corporate Trust Office. The telephone number of the Trustee is (212) 815-8727. The Trustee may make available each month, to any interested party, the monthly statement to Certificateholders via the Trustee's website located at "www.bnymbs.com." The Depositor, the Sellers and the Servicers may maintain other banking relationships in the ordinary course of business with the Trustee. The Trustee may appoint one or more co-trustees if necessary to comply with the fiduciary requirements imposed by any jurisdiction in which a mortgaged property is located. Voting Rights Voting rights for certain actions specified in the Pooling Agreement will be allocated as follows: .98% of all voting rights will be allocated among the holders of the Class A Certificates (other than the Class A-7, Class A-R and Class A-LR Certificates) and Subordinate Certificates based on the outstanding balances of their Certificates. .1% of all voting rights will be allocated to the holders of the Class A-7 Certificates. .1% of all voting rights will be allocated to the holders of the Residual Certificates in the aggregate. The voting rights allocated to each class will be allocated among the Certificates of such class based on their Percentage Interests. The "Percentage Interest" of a Certificate (other than a Class A-14 or a Class A-16 Certificate) is the percentage obtained by dividing the initial balance of such Certificate (or initial notional amount in the case of the Class A-7 Certificates) by the aggregate initial balance (or initial notional amount) of such class. The Percentage Interest represented by any Class A-14 or Class A-16 Certificate in distributions to such class will be equal to the percentage obtained by dividing the current principal balance of such Certificate by the aggregate current class balance of such class. S-35
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-------------------------------------------------------------------------------- DESCRIPTION OF THE CERTIFICATES -------------------------------------------------------------------------------- The Certificates will consist of (i) the thirty classes of Offered Certificates listed in the table beginning on page S-4 of this Prospectus Supplement and (ii) the Class B-4, Class B-5 and Class B-6 Certificates which are not offered by this Prospectus Supplement. The Senior Certificates in the aggregate will evidence an initial beneficial ownership interest of approximately 96.00% in the Trust and the Subordinate Certificates will evidence in the aggregate the remaining 4.00% undivided interest in the Trust. The Class A-PO Certificates are principal-only Certificates and are not entitled to distributions in respect of interest. The Class A-7 Certificates are interest-only Certificates and are not entitled to distributions in respect of principal. Denominations and Form The Offered Certificates (other than the Class A-R and Class A-LR Certificates) will be issuable in book-entry form only (the "Book-Entry Certificates"). The Class A-R and Class A-LR Certificates will be issued in definitive, fully-registered form (the "Definitive Certificates"). The following table sets forth the original Certificate form, the minimum denomination and the incremental denomination of the Offered Certificates. The Offered Certificates are not intended to be and should not be directly or indirectly held or beneficially owned in amounts lower than such minimum denominations. A single certificate of each class may be issued in an amount different than described above. Form and Denominations of Offered Certificates [Download Table] Original Minimum Incremental Class Certificate Form Denomination Denomination ----- ---------------- ------------ ------------ Class A-1, A-2, A-3, A-4, A-5, A-6, A-7(/1/), A-8, A-9, A-10, A-11, A-12, A-13, A-14, A-15, A-16, A-17, A-18, A-19, A-20, A-21, A-22, A-23 and A-24...... Book-Entry $1,000 $1 Class A-PO...................... Book-Entry $25,000 $1 Class A-R and A-LR.............. Definitive $100 N/A Classes B-1, B-2 and B-3........ Book-Entry $25,000 $1 -------- (/1/)Denomination expressed in initial notional amount. Book-Entry Certificates Each class of the Book-Entry Certificates initially will be represented by one or more physical certificates registered in the name of Cede & Co., as nominee of The Depository Trust Company ("DTC"), which will be the "holder" or "certificateholder" of such Certificates, as such terms are used in this Prospectus Supplement. No beneficial owner acquiring an interest in a Book- Entry Certificate will be entitled to receive a Definitive Certificate representing their interest in the Book-Entry Certificate, except as set forth below. Unless and until Definitive Certificates are issued under the limited circumstances described in this Prospectus Supplement, all references to actions taken by certificateholders or holders shall, in the case of the Book- Entry Certificates, refer to actions taken by DTC upon instructions from its DTC Participants, and all references to distributions, notices, reports and statements to certificateholders or holders shall, in the case of the Book- Entry Certificates, refer to distributions, notices, reports and statements to DTC or Cede & Co., as the registered holder of the Book-Entry Certificates, as the case may be, for distribution to beneficial owners in accordance with DTC procedures. S-36
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DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold securities for its participating organizations ("DTC Participants") and to facilitate the clearance and settlement of securities transactions among DTC Participants through electronic book-entries, thereby eliminating the need for physical movement of certificates. DTC Participants include securities brokers and dealers, banks, trust companies and clearing corporations. Indirect access to the DTC system also is available to banks, brokers, dealers, trust companies and other institutions that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly ("Indirect DTC Participants"). Under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers of Book-Entry Certificates among DTC Participants on whose behalf it acts with respect to the Book-Entry Certificates and to receive and transmit distributions of principal of and interest on the Book-Entry Certificates. DTC Participants and Indirect DTC Participants with which beneficial owners have accounts with respect to the Book-Entry Certificates similarly are required to make book-entry transfers and receive and transmit such payments on behalf of their respective beneficial owners. Beneficial owners that are not DTC Participants or Indirect DTC Participants but desire to purchase, sell or otherwise transfer ownership of, or other interests in, Book-Entry Certificates may do so only through DTC Participants and Indirect DTC Participants. In addition, beneficial owners will receive all distributions of principal and interest from the Trustee through DTC Participants. DTC will forward such distributions to its DTC Participants, which will forward them to Indirect DTC Participants or beneficial owners. Beneficial owners will not be recognized by the Trustee, the Servicers or any paying agent as certificateholders, as such term is used in the Pooling Agreement, and beneficial owners will be permitted to exercise the rights of certificateholders only indirectly through DTC and its DTC Participants. Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect DTC Participants and certain banks, the ability of a beneficial owner to pledge Book-Entry Certificates to persons or entities that do not participate in the DTC system, or to otherwise act with respect to such Book-Entry Certificates, may be limited due to the lack of a physical certificate for such Book-Entry Certificates. In addition, under a book-entry format, beneficial owners may experience delays in their receipt of payments, since distributions will be made by the Trustee to Cede & Co., as nominee for DTC. DTC has advised the Depositor that it will take any action permitted to be taken by a certificateholder under the Pooling Agreement only at the direction of one or more DTC Participants to whose accounts with DTC the Book-Entry Certificates are credited. Additionally, DTC has advised the Depositor that it will take such actions with respect to specified voting rights only at the direction of and on behalf of DTC Participants whose holdings of Book-Entry Certificates evidence such specified voting rights. DTC may take conflicting actions with respect to voting rights to the extent that DTC Participants whose holdings of Book-Entry Certificates evidence such voting rights authorize divergent action. DTC management is aware that some computer applications, systems, and the like for processing data that are dependent upon calendar dates, including dates before, on, and after January 1, 2000, may encounter "Year 2000 problems." DTC has informed its Participants and other members of the financial community (the "Industry") that it has developed and is implementing a program so that its systems, as the same relate to the timely payment of distributions (including principal and income payments) to securityholders, book-entry deliveries, and settlement of trades within DTC, continue to function S-37
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appropriately. This program includes a technical assessment and a remediation plan, each of which is complete. Additionally, DTC's plan includes a testing phase, which is expected to be completed within appropriate time frames. However, DTC's ability to perform properly its services is also dependent upon other parties, including but not limited to issuers and their agents, as well as third party vendors from whom DTC licenses software and hardware, and third party vendors on whom DTC relies for information or the provision of services, including telecommunication and electrical utility service providers, among others. DTC has informed the Industry that it is contacting (and will continue to contact) third party vendors from whom DTC acquires services to: (i) impress upon them the importance of such services being Year 2000 compliant; and (ii) determine the extent of their efforts for Year 2000 remediation (and, as appropriate, testing) of their services. In addition, DTC is in the process of developing such contingency plans as it deems appropriate. According to DTC, the foregoing information with respect to DTC has been provided to the Industry for informational purposes only and is not intended to serve as a representation, warranty, or contract modification of any kind. None of the Depositor, the Servicers or the Trustee will have any responsibility for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Book- Entry Certificates held by Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. In the event of the insolvency of DTC, a DTC Participant or an Indirect DTC Participant in whose name Book-Entry Certificates are registered, the ability of the beneficial owners of such Book-Entry Certificates to obtain timely payment and, if the limits of applicable insurance coverage by the Securities Investor Protection Corporation are exceeded or if such coverage is otherwise unavailable, ultimate payment, of amounts distributable with respect to such Book-Entry Certificates may be impaired. Definitive Certificates will be issued to beneficial owners of the Book- Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC or the Depositor advises the Trustee in writing that DTC is no longer willing, qualified or able to discharge properly its responsibilities as nominee and depository with respect to the Book-Entry Certificates and the Depositor or the Trustee is unable to locate a qualified successor; (b) the Depositor, at its sole option, elects to terminate a book-entry system through DTC; or (c) after the occurrence of an event of default under the Pooling Agreement, beneficial owners having voting rights aggregating not less than 51% of all voting rights evidenced by each class of the Book-Entry Certificates advise the Trustee through DTC, in writing, that the continuation of a book- entry system through DTC (or a successor thereto) is no longer in the best interests of beneficial owners. Upon the occurrence of any of the events described in the immediately preceding paragraph, the Trustee will be required to notify all beneficial owners of the occurrence of such event and the availability through DTC Participants of Definitive Certificates. Upon surrender by DTC of the global certificate or certificates representing the Book-Entry Certificates and instructions for re-registration, the Trustee will issue the Definitive Certificates, and thereafter the Trustee will recognize the holders of such Definitive Certificates as "certificateholders" under the Pooling Agreement. Distributions Distributions on the Certificates will be made by the Trustee on the 25th day of each month (or, if not a business day, the next business day), commencing in March 1999 (each, a "Distribution Date"), to the persons in whose names such Certificates are registered at the close of business on the last business day of the month preceding the month of such Distribution Date (the "Record Date"). S-38
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Distributions on each Distribution Date will be made by check mailed to your address as it appears on the applicable certificate register or, if you hold 100% of a class of Certificates or if you hold Certificates with an aggregate initial certificate balance (or aggregate initial notional amount) of $1,000,000 or more and have notified the Trustee in writing in accordance with the Pooling Agreement, by wire transfer in immediately available funds to your account at a bank or other depository institution having appropriate wire transfer facilities. However, the final distribution in retirement of a Certificate will be made only upon presentment and surrender of the Certificate at the Corporate Trust Office of the Trustee. Pool Distribution Amount The "Pool Distribution Amount" with respect to any Distribution Date will be equal to the sum of: (i) all scheduled installments of interest (net of the related Servicing Fee) and principal due on the due date in the month in which such Distribution Date occurs and received prior to the related Determination Date, together with any Advances in respect thereof or any Compensating Interest; (ii) all proceeds of any primary mortgage guaranty insurance policies and any other insurance policies with respect to the Mortgage Loans, to the extent such proceeds are not applied to the restoration of the related mortgaged property or released to the mortgagor in accordance with the related Servicer's normal servicing procedures and all other cash amounts received and retained in connection with the liquidation of defaulted Mortgage Loans, by foreclosure or otherwise (collectively, "Liquidation Proceeds"), during the calendar month preceding the month of such Distribution Date (in each case, net of unreimbursed expenses incurred in connection with a liquidation or foreclosure and unreimbursed Advances, if any); (iii) all partial or full prepayments received during the calendar month preceding the month of such Distribution Date; and (iv) amounts received with respect to such Distribution Date as the Substitution Adjustment Amount or Purchase Price in respect of any Deleted Mortgage Loan or amounts received in connection with the optional termination of the Trust as of such Distribution Date, reduced by amounts in reimbursement for Advances previously made and other amounts as to which the Servicers are entitled to be reimbursed pursuant to the Pooling Agreement. The Pool Distribution Amount will not include any profit received by a Servicer on the foreclosure of a Mortgage Loan. Such amounts, if any, will be retained by the applicable Servicer as additional servicing compensation. Priority of Distributions As more fully described herein, distributions will be made on each Distribution Date from the Pool Distribution Amount (and, for the first twenty-four Distribution Dates, the Class A-17 Reserve Amount) in the following order of priority: (i) to the Trustee an amount in payment for its services for such Distribution Date; (ii) to interest on each class of Senior Certificates (other than the Class A-PO Certificates); (iii) to the classes of Senior Certificates entitled to receive distributions of principal, as described below under "-- Principal," to pay principal; S-39
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(iv) to the Class A-PO Certificates, to pay any Class A-PO Deferred Amounts, but only from amounts that would otherwise be distributable on such Distribution Date as principal of the Subordinate Certificates; (v) to each class of Subordinate Certificates, first to pay interest and then to pay principal in the order of their numerical class designations, beginning with the Class B-1 Certificates; and (vi) to the Class A-R and Class A-LR Certificates, any remaining amounts in the Upper-Tier REMIC and Lower-Tier REMIC, respectively; in each case subject to the limitations set forth below under "-- Interest" and "-- Principal." Interest The pass-through rate for each class of Offered Certificates for each Distribution Date is as set forth or described in the table beginning on page S-4 of this Prospectus Supplement. On each Distribution Date, to the extent of the Pool Distribution Amount (and, for the first twenty-four Distribution Dates, the Class A-17 Reserve Amount), each class of Certificates (other than the Class A-PO Certificates) will be entitled to receive interest (as to each class, the "Interest Distribution Amount") with respect to the related Interest Accrual Period. The Interest Distribution Amount for any class of Certificates (other than the Class A-PO Certificates) will be equal to the sum of (i) interest accrued during the related Interest Accrual Period at the applicable pass-through rate on the related class balance or notional amount and (ii) the sum of the amounts, if any, by which the amount described in clause (i) above on each prior Distribution Date exceeded the amount actually distributed as interest on such prior Distribution Dates and not subsequently distributed. On each of the first twenty-four Distribution Dates, a portion of the interest accrued on the Class A-17 Certificates will be paid from the Class A-17 Reserve Fund, as described below under "-- Class A-17 Reserve Fund." The Class A-PO Certificates are principal-only certificates and will not bear interest. The interest entitlement described in clause (i) above for each class of Certificates will be reduced by the amount of Net Interest Shortfalls for such Distribution Date. With respect to any Distribution Date, the "Net Interest Shortfall" is equal to the sum of (i) the shortfall in interest received with respect to any Mortgage Loan as a result of (a) a Relief Act Reduction or (b) a Special Hazard Loss, Fraud Loss or Bankruptcy Loss, after the exhaustion of the amounts of coverage provided by the Subordinate Certificates for those types of losses and (ii) any Non-Supported Interest Shortfalls. Net Interest Shortfalls on any Distribution Date will be allocated pro rata among all classes of Certificates entitled to receive distributions of interest on such Distribution Date, based on the amount of interest each class of Certificates would otherwise be entitled to receive on such Distribution Date before taking into account any reduction in such amounts resulting from such Net Interest Shortfalls; provided, however, that for purposes of allocating any such shortfalls, interest will be deemed to accrue on the Class A-17 Certificates at a rate of 6.500% per annum. A "Relief Act Reduction" is a reduction in the amount of monthly interest payment on a Mortgage Loan pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940. See "Certain Legal Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil Relief Act and Similar Laws" in the Prospectus. With respect to any Distribution Date, the "Non-Supported Interest Shortfall" is the amount by which the aggregate of Prepayment Interest Shortfalls during the calendar month preceding the month of such Distribution Date exceeds Compensating Interest for such period. A "Prepayment Interest Shortfall" is the amount by which interest paid by a mortgagor in connection with a prepayment of principal on a Mortgage Loan is less than one month's interest at the related mortgage interest rate (net of the related Servicing Fee Rate) on the amount of such prepayment. S-40
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Accrued interest to be distributed on any Distribution Date will be calculated for each class of Certificates (other than the Class A-PO Certificates) on the basis of the related class balance or notional amount immediately prior to such Distribution Date. Interest will be calculated and payable on the basis of a 360-day year of twelve 30-day months. If on a particular Distribution Date, the Pool Distribution Amount applied in the order described above under "-- Priority of Distributions" is not sufficient to make a full distribution of the Interest Distribution Amount for each class of Certificates, interest will be distributed on each class of Certificates of equal priority pro rata based on the Interest Distribution Amount the class would otherwise have been entitled to receive in the absence of such shortfall; provided, however, that for purposes of allocating any shortfall, interest will be deemed to accrue on the Class A-17 Certificates at a rate of 6.500% per annum. Any unpaid amount will be carried forward and added to the Interest Distribution Amount that holders of that class of Certificates will be entitled to receive on the next Distribution Date. Such a shortfall could occur, for example, if Realized Losses on the Mortgage Loans were exceptionally high or were concentrated in a particular month. Any such unpaid amount will not bear interest. Interest will accrue on each class of Certificates (other than the Class A-6, Class A-7 and Class A-PO Certificates) during each one-month period ending on the last day of the month preceding the month in which each Distribution Date occurs (each, a "Regular Interest Accrual Period"). The initial Regular Interest Accrual Period will be deemed to have commenced on February 1, 1999. Interest which accrues on such class of Certificates will be calculated on the assumption that distributions in reduction of the principal balances thereof on a Distribution Date are made on the first day of the month of such Distribution Date. Interest will accrue on the Class A-6 and Class A-7 Certificates during each one-month period commencing on the 25th day of the month preceding the month in which each Distribution Date occurs and ending on the 24th day of the month in which such Distribution Date occurs (each, a "LIBOR Based Interest Accrual Period" and, together with a Regular Interest Accrual Period, an "Interest Accrual Period"). The initial LIBOR Based Interest Accrual Period will commence on February 25, 1999. The Class A-7 Certificates are interest-only certificates and have no class balance. The "Class A-7 Notional Amount" with respect to each Distribution Date will be equal to the class balance of the Class A-6 Certificates. Accordingly, any distributions in respect of principal made to, or losses in respect of principal allocated in reduction of, the class balance of the Class A-6 Certificates will result in a proportional reduction in the Class A-7 Notional Amount. See "-- Principal" and "-- Allocation of Losses" in this Prospectus Supplement. The Class A-7 Notional Amount with respect to the first Distribution Date will be approximately $19,516,911. The class balance of a class of Certificates at any time will equal its initial class balance less all distributions of principal made to such class, losses allocated to such class as described under "--Allocation of Losses" and other adjustments made to such class balance as described under "--Allocation of Losses" in this Prospectus Supplement. LIBOR The Class A-6, Class A-7, Class A-18 and Class A-19 Certificates will bear interest at their respective pass-through rates, which are each based on LIBOR determined by the Trustee as described below. The Trustee will determine LIBOR and the respective pass-through rates for the Class A-6 and Class A-7 Certificates for each LIBOR Based Interest Accrual Period, and for the Class A-18 and Class A-19 Certificates, for each Regular Interest Accrual Period, other than the initial LIBOR Based or S-41
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Regular Interest Accrual Period, on the second London business day prior to the day on which such Interest Accrual Period commences (each, a "LIBOR Determination Date"). On each LIBOR Determination Date, the Trustee will determine LIBOR for the succeeding Interest Accrual Period on the basis of the British Bankers' Association ("BBA") "Interest Settlement Rate" for one-month deposits in U.S. dollars as found on Telerate page 3750 as of 11:00 A.M. London time on such LIBOR Determination Date. Such Interest Settlement Rates currently are based on rates quoted by 16 BBA designated banks as being in the view of such banks, the offered rate at which deposits are being quoted to prime banks in the London interbank market. Such Interest Settlement Rates are calculated by eliminating the four highest rates and the four lowest rates, averaging the eight remaining rates, carrying the result (expressed as a percentage) out to six decimal places, and rounding to five decimal places. As used herein "Telerate page 3750" means the display designated as page 3750 on the Dow Jones Telerate Service. If on any LIBOR Determination Date the Trustee is unable to determine LIBOR on the basis of the method set forth in the preceding paragraph, LIBOR for the next Interest Accrual Period will be the higher of (i) LIBOR as determined on the previous LIBOR Determination Date or (ii) the Reserve Interest Rate. The "Reserve Interest Rate" will be the rate per annum which the Trustee determines to be either (a) the arithmetic mean (rounding such arithmetic mean upwards if necessary to the nearest whole multiple of 1/16%) of the one-month Eurodollar lending rate that New York City banks selected by the Trustee are quoting on the relevant LIBOR Determination Date, to the principal London offices of at least two leading banks in the London interbank market or (b) in the event that the Trustee can determine no such arithmetic mean, the lowest one-month Eurodollar lending rate that the New York City banks selected by the Trustee are quoting on such LIBOR Determination Date to leading European Banks. If on any LIBOR Determination Date the Trustee is required, but is unable, to determine the Reserve Interest Rate in the manner provided in the preceding paragraph, LIBOR for the next Interest Accrual Period will be LIBOR as determined on the previous LIBOR Determination Date or, in the case of the first LIBOR Determination Date, 4.95%. The establishment of LIBOR on each LIBOR Determination Date by the Trustee and the Trustee's calculation of the rate of interest applicable to the Class A-6, Class A-7, Class A-18 and Class A-19 Certificates for the related Interest Accrual Period shall (in the absence of manifest error) be final and binding. Each such rate of interest may be obtained by telephoning the Trustee at (212) 815-2007. Class A-17 Reserve Fund A reserve fund of approximately $15,000 (the "Class A-17 Reserve Fund") will be established for the benefit of the holders of the Class A-17 Certificates. No additional amounts will be deposited into the Class A-17 Reserve Fund. The funds on deposit in the Class A-17 Reserve Fund will not be invested. On each of the first twenty-four Distribution Dates, the Trustee will withdraw from the Class A-17 Reserve Fund and deposit into the Certificate Account an amount (the "Class A-17 Reserve Amount") equal to the product of (i) the class balance of the Class A-17 Certificates on the day preceding each of those Distribution Dates and (ii) the difference between the current pass- through rate on the Class A-17 Certificates and 6.500%. Any amounts remaining in the Class A-17 Reserve Fund at the end of the twenty-four-month period will be distributed to the holder of the Class A-LR Certificate. S-42
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Principal On each Distribution Date, certificateholders will be entitled to receive principal distributions from the Pool Distribution Amount to the extent described below and in accordance with the priorities set forth under "-- Priority of Distributions" above. The Class A-7 Certificates are interest- only certificates and are not entitled to distribution of principal. All payments and other amounts received in respect of principal of the Mortgage Loans will be allocated between (i) the Senior Certificates (other than the Class A-7 and Class A-PO Certificates) and the Subordinate Certificates and (ii) the Class A-PO Certificates, in each case based on the applicable Non-PO Percentage and the applicable PO Percentage, respectively, of such amounts. The "Non-PO Percentage" with respect to any Mortgage Loan with a Net Mortgage Interest Rate less than 6.500% (each such Mortgage Loan, a "Discount Mortgage Loan") will be equal to the Net Mortgage Interest Rate thereof divided by 6.500%. The Non-PO Percentage with respect to any Mortgage Loan with a Net Mortgage Interest Rate greater than or equal to 6.500% (each such Mortgage Loan, a "Premium Mortgage Loan") will be 100%. The "PO Percentage" with respect to any Discount Mortgage Loan will be equal to 100% minus the Non-PO Percentage for such Mortgage Loan. The PO Percentage with respect to any Premium Mortgage Loan will be 0%. The "Net Mortgage Interest Rate" of a Mortgage Loan is the excess of its mortgage interest rate over the applicable Expense Fee Rate. Non-PO Principal Amount On each Distribution Date, the Non-PO Principal Amount will be distributed (i) as principal of the Senior Certificates (other than the Class A-7 and Class A-PO Certificates) in an amount up to the Senior Principal Distribution Amount and (ii) as principal of the Subordinate Certificates in an amount up to the Subordinate Principal Distribution Amount. The "Non-PO Principal Amount" for any Distribution Date will equal the sum of the applicable Non-PO Percentage of: (a) all monthly payments of principal due on each Mortgage Loan on the related Due Date; (b) the principal portion of the Purchase Price of each Mortgage Loan that was repurchased by the Depositor pursuant to the Pooling Agreement as of that Distribution Date; (c) any Substitution Adjustment Amount in connection with a Deleted Mortgage Loan received with respect to that Distribution Date; (d) any Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that are not yet Liquidated Mortgage Loans received during the calendar month preceding the month of that Distribution Date; (e) with respect to each Mortgage Loan that became a Liquidated Mortgage Loan during the calendar month preceding the month of that Distribution Date, the amount of the Liquidation Proceeds allocable to principal received with respect to that Mortgage Loan; and (f) all partial and full principal prepayments by mortgagors received during the calendar month preceding the month of that Distribution Date. S-43
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Senior Principal Distribution Amount On each Distribution Date, an amount equal to the lesser of (a) the Senior Principal Distribution Amount for such Distribution Date and (b) the product of (1) the Pool Distribution Amount remaining after payment of funds due to the Trustee and distributions of interest on the Senior Certificates and (2) a fraction, the numerator of which is the Senior Principal Distribution Amount and the denominator of which is the sum of the PO Principal Amount and the Senior Principal Distribution Amount, will be distributed as principal of the following Classes of Senior Certificates in the following order of priority (percentages set forth are approximate): (i) first, to the Class A-R and Class A-LR Certificates, pro rata, until the class balance of each such class has been reduced to zero; (ii) second, to the Class A-24 Certificates, up to the Class A-24 Principal Distribution Amount for such Distribution Date, until their class balance has been reduced to zero; (iii) third, concurrently: (a) approximately 39.7256669278% to the Class A-1 Certificates; (b) approximately 20.3207013080% to the Class A-3 Certificates; (c) approximately 15.8638929587% to the Class A-2 Certificates; (d) approximately 9.8476224175% to the Class A-20 Certificates; (e) approximately 5.5378253871% to the Class A-4 Certificates; (f) approximately 4.7383178120% to the Class A-21 Certificates; and (g) approximately 3.9659731889% to the Class A-6 Certificates; until the class balance of the Class A-4 Certificates has been reduced to zero; (iv) fourth, concurrently: (a) approximately 39.7256669278% to the Class A-1 Certificates; (b) approximately 20.3207013080% to the Class A-3 Certificates; (c) approximately 15.8638929587% to the Class A-2 Certificates; (d) approximately 9.8476224175% to the Class A-20 Certificates; (e) approximately 5.5378253871% to the Class A-5 Certificates; (f) approximately 4.7383178120% to the Class A-21 Certificates; and (g) approximately 3.9659731889% to the Class A-6 Certificates; until the class balance of the Class A-1 Certificates has been reduced to zero; (v) fifth, concurrently: (a) approximately 20.3207013080% to the Class A-3 Certificates; (b) approximately 16.8063779711% to the Class A-20 Certificates; (c) approximately 15.8638929587% to the Class A-2 Certificates; (d) approximately 15.8528636042% to the Class A-11 Certificates; (e) approximately 9.6522875895% to the Class A-8 Certificates; (f) approximately 9.4506301617% to the Class A-5 Certificates; (g) approximately 8.0872732180% to the Class A-21 Certificates; and (h) approximately 3.9659731889% to the Class A-6 Certificates; until the class balance of the Class A-2 Certificates has been reduced to zero; (vi) sixth, concurrently: (a) approximately 20.3207013080% to the Class A-3 Certificates; (b) approximately 16.8063779711% to the Class A-20 Certificates; (c) approximately 15.8638929587% to the Class A-22 Certificates; S-44
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(d) approximately 15.8528636042% to the Class A-11 Certificates; (e) approximately 9.6522875895% to the Class A-8 Certificates; (f) approximately 9.4506301617% to the Class A-5 Certificates; (g) approximately 8.0872732180% to the Class A-21 Certificates; and (h) approximately 3.9659731889% to the Class A-6 Certificates; until the class balance of the Class A-11 Certificates has been reduced to zero; (vii) seventh, concurrently: (a) approximately 20.3207013080% to the Class A-3 Certificates; (b) approximately 16.8063779711% to the Class A-20 Certificates; (c) approximately 15.8638929587% to the Class A-22 Certificates; (d) approximately 15.8528636042% to the Class A-12 Certificates; (e) approximately 9.6522875895% to the Class A-8 Certificates; (f) approximately 9.4506301617% to the Class A-5 Certificates; (g) approximately 8.0872732180% to the Class A-21 Certificates; and (h) approximately 3.9659731889% to the Class A-6 Certificates; until the class balance of the Class A-5 Certificates has been reduced to zero; (viii) eighth, concurrently: (a) approximately 20.3207013080% to the Class A-3 Certificates; (b) approximately 16.8063779711% to the Class A-20 Certificates; (c) approximately 15.8638929587% to the Class A-22 Certificates; (d) approximately 15.8528636042% to the Class A-12 Certificates; (e) approximately 9.6522875895% to the Class A-8 Certificates; (f) approximately 9.4506301617% to the Class A-23 Certificates; (g) approximately 8.0872732180% to the Class A-21 Certificates; and (h) approximately 3.9659731889% to the Class A-6 Certificates; until the class balance of the Class A-12 Certificates has been reduced to zero; (ix) ninth, concurrently: (a) approximately 20.3207013080% to the Class A-3 Certificates; (b) approximately 16.8063779711% to the Class A-20 Certificates; (c) approximately 15.8638929587% to the Class A-22 Certificates; (d) approximately 9.6522875895% to the Class A-8 Certificates; (e) approximately 9.4506301617% to the Class A-23 Certificates; (f) approximately 8.0872732180% to the Class A-21 Certificates; (g) approximately 6.6355390768% to the Class A-13 Certificates; (h) approximately 9.2173245274% to the Class A-14 Certificates; and (i) approximately 3.9659731889% to the Class A-6 Certificates; until the class balance of the Class A-20 Certificates has been reduced to zero; (x) tenth, concurrently: (a) approximately 20.3207013080% to the Class A-3 Certificates; (b) approximately 16.8063779711% to the Class A-9 Certificates; (c) approximately 15.8638929587% to the Class A-22 Certificates; (d) approximately 9.6522875895% to the Class A-8 Certificates; (e) approximately 9.4506301617% to the Class A-23 Certificates; (f) approximately 8.0872732180% to the Class A-21 Certificates; (g) approximately 6.6355390768% to the Class A-13 Certificates; S-45
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(h) approximately 9.2173245274% to the Class A-14 Certificates; and (i) approximately 3.9659731889% to the Class A-6 Certificates; until the class balances of the Class A-13 and Class A-14 Certificates have been reduced to zero; (xi) eleventh, concurrently: (a) approximately 9.6522875895% to the Class A-8 Certificates; (b) approximately 8.0872732180% to the Class A-21 Certificates; (c) approximately 9.4506301617% to the Class A-23 Certificates; (d) approximately 16.8063779711% to the Class A-9 Certificates; (e) approximately 15.8638929587% to the Class A-22 Certificates; (f) approximately 15.8528636042% to the Class A-15 Certificates; (g) approximately 3.9659731889% to the Class A-6 Certificates; and (h) approximately 20.3207013080% to the Class A-3 Certificates; until the class balances of the Class A-3, Class A-6, Class A-8, Class A-9, Class A-15, Class A-21, Class A-22 and Class A-23 Certificates have been reduced to zero; (xii) twelfth, to the Class A-10, Class A-16, Class A-17, Class A-18 and Class A-19 Certificates, pro rata, until their class balances have been reduced to zero; and (xiii) thirteenth, to the Class A-24 Certificates, until their class balance has been reduced to zero. The preceding distribution priorities will not apply on any Distribution Date on or after the Senior Credit Support Depletion Date. On each of those Distribution Dates, the amount to be distributed as principal to the Senior Certificates (other than the Class A-7 and Class A-PO Certificates) will be distributed, concurrently, as principal of the classes of Senior Certificates (other than the Class A-7 and Class A-PO Certificates) pro rata in accordance with their respective balances immediately prior to that Distribution Date. The "Senior Credit Support Depletion Date" is the date on which the aggregate balance of the Subordinate Certificates has been reduced to zero. The "Senior Principal Distribution Amount" for any Distribution Date will equal the sum of: (a) the Senior Percentage of the applicable Non-PO Percentage of the amounts described in clauses (a) through (d) of the definition of "Non-PO Principal Amount" for that Distribution Date; and (b) the Senior Prepayment Percentage of the applicable Non-PO Percentage of the amounts described in clauses (e) and (f) of the definition of "Non- PO Principal Amount" for that Distribution Date; provided, however, that if a Debt Service Reduction that is an Excess Loss is sustained with respect to a Mortgage Loan that is not a Liquidated Mortgage Loan, the Senior Principal Distribution Amount will be reduced on the related Distribution Date by the Senior Percentage of the applicable Non-PO Percentage of the principal portion of the Debt Service Reduction. "Stated Principal Balance" means, as to any Mortgage Loan and due date, the unpaid principal balance of such Mortgage Loan as of such due date, as specified in the amortization schedule at the time relating thereto (before any adjustment to such amortization schedule by reason of any moratorium or similar waiver or grace period), after giving effect to any previous partial principal prepayments and Liquidation Proceeds received and to the payment of principal due on such due date and irrespective of any delinquency in payment by the related mortgagor and after giving effect to any Deficient Valuation. S-46
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The "Pool Principal Balance" with respect to any Distribution Date equals the aggregate of the Stated Principal Balances of the Mortgage Loans outstanding on the due date in the month preceding the month of such Distribution Date. The "Senior Percentage" for any Distribution Date will equal (i) the aggregate class balance of the Senior Certificates (other than the Class A-PO Certificates) immediately prior to such date, divided by (ii) the aggregate class balance of the Certificates (other than the Class A-PO Certificates) immediately prior to such date. The "Subordinate Percentage" for any Distribution Date will equal 100% minus the Senior Percentage for such date. As of the Cut-off Date, the Senior Percentage and the Subordinate Percentage are expected to be approximately 95.9919% and 4.0081%, respectively. The "Senior Prepayment Percentage" for any Distribution Date occurring during the periods set forth below will be as follows: [Download Table] Distribution Date Occurring In Senior Prepayment Percentage ------------------------------ ---------------------------- March 1999 through February 2004.................. 100%; March 2004 through February 2005.................. the Senior Percentage, plus 70% of the Subordinate Percentage; March 2005 through February 2006.................. the Senior Percentage, plus 60% of the Subordinate Percentage; March 2006 through February 2007.................. the Senior Percentage, plus 40% of the Subordinate Percentage; March 2007 through February 2008.................. the Senior Percentage, plus 20% of the Subordinate Percentage; and March 2008 and thereafter......................... the Senior Percentage; provided, however, that if on any Distribution Date the Senior Percentage exceeds the initial Senior Percentage, the Senior Prepayment Percentage for such Distribution Date will equal 100%. No decrease in the Senior Prepayment Percentage will occur, however, if as of the first Distribution Date as to which any such decrease applied, (i) the outstanding principal balance of all Mortgage Loans (including, for this purpose, any Mortgage Loans in foreclosure or any REO Property) delinquent 60 days or more (averaged over the preceding six-month period), as a percentage of the aggregate class balance of the Subordinate Certificates (averaged over the preceding six-month period), is equal to or greater than 50%, or (ii) cumulative Realized Losses with respect to the Mortgage Loans exceed the percentages of the aggregate balance of the Subordinate Certificates as of the Closing Date (the "Original Subordinate Principal Balance") indicated below: [Download Table] Percentage of Original Subordinate Distribution Date Occurring In Principal Balance ------------------------------ -------------------- March 2004 through February 2005........................... 30% March 2005 through February 2006........................... 35% March 2006 through February 2007........................... 40% March 2007 through February 2008........................... 45% March 2008 and thereafter.................................. 50% S-47
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This disproportionate allocation of certain unscheduled payments in respect of principal will have the effect of accelerating the amortization of the Senior Certificates (other than the Class A-PO Certificates) while, in the absence of Realized Losses, increasing the interest in the Pool Principal Balance evidenced by the Subordinate Certificates. Increasing the respective interest of the Subordinate Certificates relative to that of the Senior Certificates (other than the Class A-PO Certificates) is intended to preserve the availability of the subordination provided by the Subordinate Certificates. The "Subordinate Prepayment Percentage" as of any Distribution Date will equal 100% minus the Senior Prepayment Percentage for such date. If on any Distribution Date the allocation to any class of Senior Certificates (other than the Class A-PO Certificates) then entitled to distributions of full and partial principal prepayments and other amounts to be allocated in accordance with the Senior Prepayment Percentage, as described above, would reduce the outstanding class balance of such class below zero, the distribution to that class of the Senior Prepayment Percentage of those amounts for such Distribution Date will be limited to the percentage necessary to reduce the related class balance to zero. Class A-24 Principal Distribution Amount On each Distribution Date prior to the Senior Credit Support Depletion Date, the Pool Distribution Amount, up to the Class A-24 Principal Distribution Amount for such Distribution Date, will be distributed as principal to the Class A-24 Certificates. The "Class A-24 Principal Distribution Amount" for any Distribution Date will equal the lesser of (i) the class balance of the Class A-24 Certificates and (ii) the product of (a) the Class A-24 Shift Percentage, (b) the Class A-24 Percentage and (c) the Senior Principal Distribution Amount. The "Class A-24 Percentage" for any Distribution Date will equal (i) the class balance of the Class A-24 Certificates, divided by (ii) the aggregate class balance of the Senior Certificates (other than the Class A-PO Certificates) immediately prior to such date. The "Class A-24 Shift Percentage" for any Distribution Date will be the percentage indicated below: [Download Table] Class A-24 Distribution Date Occurring In Shift Percentage ------------------------------ ---------------- March 1999 through February 2004............................... 0% March 2004 through February 2005............................... 30% March 2005 through February 2006............................... 40% March 2006 through February 2007............................... 60% March 2007 through February 2008............................... 80% March 2008 and thereafter...................................... 100% Class A-PO Principal Distribution Amount On each Distribution Date, distributions of principal of the Class A-PO Certificates will be made in an amount (the "Class A-PO Principal Distribution Amount") equal to the lesser of: (a) the PO Principal Amount for such Distribution Date; and (b) the product of (1) the Pool Distribution Amount remaining after distribution of funds due to the Trustee and interest on the Senior Certificates and (2) a fraction, the numerator of which is the PO Principal Amount and the denominator of which is the sum of the PO Principal Amount and the Senior Principal Distribution Amount. S-48
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The "PO Principal Amount" for any Distribution Date will equal the sum of the applicable PO Percentage of: (a) all monthly payments of principal due on each Discount Mortgage Loan on the related Due Date; (b) the principal portion of the Purchase Price of each Discount Mortgage Loan that was repurchased by the Depositor pursuant to the Pooling Agreement as of such Distribution Date; (c) any Substitution Adjustment Amount in connection with a Deleted Mortgage Loan that was a Discount Mortgage Loan received with respect to such Distribution Date; (d) any Liquidation Proceeds allocable to recoveries of principal of Discount Mortgage Loans that are not yet Liquidated Mortgage Loans received during the calendar month preceding the month of such Distribution Date; (e) with respect to each Discount Mortgage Loan that became a Liquidated Mortgage Loan during the calendar month preceding the month of such Distribution Date, the amount of Liquidation Proceeds allocable to principal received with respect to such Discount Mortgage Loan; and (f) all partial and full principal prepayments by mortgagors on Discount Mortgage Loans received during the calendar month preceding such Distribution Date; provided, however, that if a Debt Service Reduction that is an Excess Loss is sustained with respect to a Discount Mortgage Loan that is not a Liquidated Mortgage Loan, the PO Principal Amount will be reduced on the related Distribution Date by the applicable PO Percentage of the principal portion of such Debt Service Reduction. Subordinate Principal Distribution Amount On each Distribution Date, to the extent of the remaining Pool Distribution Amount, the Subordinate Principal Distribution Amount will be distributed as principal of the Subordinate Certificates. Each class of Subordinate Certificates entitled to receive a principal distribution, as provided in the next paragraph, will receive its pro rata share (based on the class balances of all the Subordinate Certificates) of the Subordinate Principal Distribution Amount, in each case to the extent of the amount available from the Pool Distribution Amount for distribution of principal on that class. Distributions of principal of the Subordinate Certificates will be made on each Distribution Date sequentially to each class of Subordinate Certificates in the order of their numerical class designations, beginning with the Class B-1 Certificates, until each such class has received its respective pro rata share for the Distribution Date. However, the Class A-PO Deferred Amount will be paid to the Class A-PO Certificates from amounts otherwise distributable as principal to the Subordinate Certificates, beginning with amounts otherwise distributable as principal to the class of Subordinate Certificates with the highest numerical designation. With respect to each class of Subordinate Certificates, if on any Distribution Date the Credit Support Percentage is less than the Credit Support Percentage for that class on the Closing Date, no distribution of principal will be made to any classes junior to that class (the "Restricted Classes") and the amount otherwise distributable to the Restricted Classes in respect of principal will be allocated among the classes of Subordinate Certificates that are not Restricted Classes pro rata based upon their respective balances, and distributed in the order described above until the principal balances of such classes have been reduced to zero. Any funds remaining will be paid to the Restricted Classes in the order described above. The "Credit Support Percentage" with respect to any Distribution Date and each class of Subordinate Certificates will equal (i) the aggregate of the class balances immediately prior S-49
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to such Distribution Date of all classes of Subordinate Certificates that have higher numerical class designations than such class, divided by (ii) the aggregate balance of all the Certificates immediately prior to such Distribution Date. The approximate Credit Support Percentages for the Subordinate Certificates on the Closing Date are expected to be as follows: [Download Table] Class B-1........................................................... 1.85% Class B-2........................................................... 1.10% Class B-3........................................................... 0.75% Class B-4........................................................... 0.40% Class B-5........................................................... 0.20% Class B-6........................................................... 0.00% The "Subordinate Principal Distribution Amount" for any Distribution Date will equal the sum of: (a) the Subordinate Percentage of the applicable Non-PO Percentage of all amounts described in clauses (a) through (d) of the definition of "Non- PO Principal Amount" for such Distribution Date; and (b) the Subordinate Prepayment Percentage of the applicable Non-PO Percentage of the amounts described in clauses (e) and (f) of the definition of "Non-PO Principal Amount" for such Distribution Date; provided, however, that if a Debt Service Reduction that is an Excess Loss is sustained with respect to a Mortgage Loan that is not a Liquidated Mortgage Loan, the Subordinate Principal Distribution Amount will be reduced on the related Distribution Date by the Subordinate Percentage of the applicable Non- PO Percentage of the principal portion of that Debt Service Reduction. Residual Certificates The Residual Certificates will remain outstanding for so long as the Trust exists, whether or not they are receiving current distributions of principal or interest. In addition to distributions of interest and principal as described above, on each Distribution Date, the holder of the Class A-LR Certificate will be entitled to receive any Pool Distribution Amount remaining after the payment of (i) interest and principal on the Senior Certificates, (ii) Class A-PO Deferred Amounts on the Class A-PO Certificates and (iii) interest and principal on the Subordinate Certificates, as described above. It is not anticipated that there will be any significant amounts remaining for any such distribution. Distributions in Reduction of the Class A-14 and Class A-16 Certificates As to distributions of principal among holders of the Class A-14 and Class A-16 Certificates (the "Special Retail Certificates") prior to the earlier of (i) the Senior Credit Support Depletion Date and (ii) the date on which any Realized Loss is allocated to such class, Deceased Holders (as defined below) will be entitled to first priority (up to a limit of approximately $25,000 as described below) and beneficial owners other than Deceased Holders ("Living Holders") will be entitled to second priority (up to a limit of approximately $10,000, as described below). Beneficial owners of each class of the Special Retail Certificates have the right to request that distributions of principal be made with respect to their Special Retail Certificates on each Distribution Date on which distributions of principal are made with respect to that class. All such requested distributions are subject to the priorities described below S-50
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under "-- Priority of Requested Distributions" and to the limitations (i) that they be made only in lots equal to $1,000 of initial principal balance and (ii) that aggregate distributions on each class of the Special Retail Certificates on a Distribution Date will not exceed the portion of the Senior Principal Distribution Amount allocated to that class on that Distribution Date (plus any amounts available from the applicable Rounding Account, as described below). To the extent that amounts available for distributions of principal on any class of the Special Retail Certificates on any Distribution Date exceed the aggregate requests by Deceased Holders and Living Holders of that class for principal distributions applicable to that Distribution Date, those excess amounts will be distributed to the beneficial owners of that class by random lot, as described below under "-- Mandatory Distributions of Principal on the Special Retail Certificates." On each Distribution Date (prior to the earlier of (i) the Senior Credit Support Depletion Date and (ii) the date any Realized Loss is allocated to the applicable class of Special Retail Certificates) on which amounts are available for distributions of principal on any class of the Special Retail Certificates, the aggregate amount allocable to those distributions will be rounded upward, as necessary, to equal an integral multiple of $1,000, except as provided below, in accordance with the priorities and limitations set forth in this discussion. Rounding will be accomplished on the first Distribution Date on which distributions of principal on each class of the Special Retail Certificates are made, by withdrawing, from a non-interest bearing account to be established on the Closing Date for each class of the Special Retail Certificates with a $999.99 deposit by the Underwriter (each, a "Rounding Account"), the amount of funds, if any, needed to round the amounts otherwise available for distributions to each class upward to the next higher integral multiple of $1,000. On each succeeding Distribution Date on which distributions of principal on any class of Special Retail Certificates are to be made, the aggregate amount allocable to that class will be applied first to repay any funds withdrawn from the applicable Rounding Account on the prior Distribution Date, and then the remainder of such allocable amount, if any, will be similarly rounded upward through another withdrawal from the applicable Rounding Account and distributed as principal on that class. This process will continue on succeeding Distribution Date with respect to each class of the Special Retail Certificates until the balance of each of those classes has been reduced to zero. Thus, the aggregate distribution made in reduction of the balance of each class of Special Retail Certificates on each Distribution Date may be slightly more or less than would be the case in the absence of such rounding procedures, but such difference will be no more than $999.99 on that Distribution Date. Under no circumstances will the sum of all distributions of principal on any class of Special Retail Certificates through any Distribution Date be less than the sum that would have resulted in the absence of such rounding procedures. A beneficial owner of a Special Retail Certificate who has submitted a request for a principal distribution may not receive a distribution at any particular time after its request, since there can be no assurance that funds will be available for making principal distributions on the applicable class of Special Retail Certificates on any particular Distribution Date. Even if funds are available, those distributions with respect to the Special Retail Certificates owned by any particular beneficial owner may not be made. Also, due to the procedure for mandatory distributions described below, there can be no assurance that on any Distribution Date on which the funds available for distribution of principal on a class of Special Retail Certificates exceed the aggregate amount of distributions requested by beneficial owners of the class, any particular beneficial owner will not receive a principal distribution from such excess funds even if such beneficial owner has not submitted a request for distribution. Thus, the timing of distributions of principal with respect to any particular Special Retail Certificate is highly uncertain, and such distributions may be made earlier or later than the date that may be desired by a beneficial owner. S-51
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Investors in the Special Retail Certificates should note that, based on the Modeling Assumptions and a prepayment rate of 275% PSA, no distributions of principal are expected to be made on the classes of Special Retail Certificates until the Distribution Dates specified in the following table. Projected First Principal Payment Date for Special Retail Certificates [Download Table] Class Distribution Date ----- ------------------ Class A-14.............................................. November 25, 2009 Class A-16.............................................. September 25, 2013 On each Distribution Date on and after the earlier of (i) the Senior Credit Support Depletion Date and (ii) the date on which any Realized Loss is allocated to a class of Special Retail Certificates, distributions of principal on the Special Retail Certificates will be made pro rata among the holders of the Special Retail Certificates and will not be made in integral multiples of $1,000 nor pursuant to requested distributions or mandatory distributions. If pro rata distributions cannot be made through the facilities of DTC, the Special Retail Certificates will be withdrawn from the facilities of DTC and Definitive Certificates will be issued to the beneficial owners of those Certificates. Priority of Requested Distributions Subject to the limitations described herein, including the order of the receipt of the request for distributions as described below under "-- Procedure for Requesting Distributions," beneficial owners of the Special Retail Certificates have the right to request that distributions of principal on their Special Retail Certificates be made. On each Distribution Date (prior to the earlier of (i) the Senior Credit Support Depletion Date and (ii) the date on which any Realized Loss is allocated to the applicable class of Special Retail Certificates) on which distributions of principal on any class of Special Retail Certificates are made, priority of payment on that class will be given to beneficial owners for whom principal payment requests are in effect. For each class of Special Retail Certificates, DTC will honor requests in the following order of priority: First, DTC will honor requests submitted on behalf of Deceased Holders in the order of their receipt by DTC, until those requests have been honored in an amount up to $25,000 for each requesting Deceased Holder; and Second, DTC will honor requests submitted on behalf of Living Holders in the order of their receipt by DTC, until those requests have been honored in an amount up to $10,000 for each requesting Living Holder. Thereafter, DTC will honor requests submitted on behalf of each Deceased Holder as provided in step First up to a second $25,000 and requests submitted on behalf of each Living Holder as provided in step Second up to a second $10,000. This sequence of priorities will be repeated until all principal payment requests for each class of Special Retail Certificates have been honored to the extent of amounts available in reduction of that class. In no event will distributions exceed the amount of principal available for distribution to the applicable class of Special Retail Certificates on such Distribution Date. See "-- Principal" above. In no event will the beneficial owner of a Special Retail Certificate receive a distribution of principal in an amount greater than the principal balance of its Special Retail Certificate. If the amount of principal available for payment on any class of Special Retail Certificates on a given Distribution Date is insufficient to honor all requests, such requests will be honored on succeeding S-52
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Distribution Dates as principal becomes available. A Special Retail Certificate principal payment request submitted on behalf of a Living Holder who later dies will become entitled to the priority of a newly submitted request on behalf of a Deceased Holder. That priority will be effective for each subsequent Distribution Date if DTC has received a certified copy of the death certificate and any additional appropriate evidence of death and any requested tax waivers by the last business day of the preceding calendar month. Procedure for Requesting Distributions A beneficial owner may request that distributions of principal on such beneficial owner's Special Retail Certificates be made on a Distribution Date by delivering a written request therefor to the DTC Participant or Indirect DTC Participant that maintains such beneficial owner's account in the Special Retail Certificates so that the request for such distribution is received by the Trustee on or before the Record Date for such Distribution Date. In the case of a request on behalf of a Deceased Holder, a certified copy of the death certificate and any additional appropriate evidence of death and any tax waivers are required to be forwarded to the Trustee under separate cover. Furthermore, such requests of Deceased Holders that are incomplete may not be honored by the Trustee and, if not honored, will lose their priority and must be rerequested. The DTC Participant will in turn make the request of DTC (or, in the case of an Indirect DTC Participant, such Indirect DTC Participant must notify the related DTC Participant of such request, and the DTC Participant will make the request of DTC) in the manner required under the rules and regulations of DTC's APUT System. Upon receipt of such request, DTC will date and time stamp such request and forward such request to the Trustee. DTC may establish such procedures as it deems fair and equitable to establish the order of receipt of requests for such distributions received by it on the same day. Neither the Depositor, the Servicers, nor the Trustee will be liable for any delay by DTC, any DTC Participant or any Indirect DTC Participant in the delivery of requests for distributions to the Trustee. Requests for distributions of principal forwarded to the Trustee from DTC after the Record Date for such Distribution Date and requests for distributions of principal received in a timely manner but not accepted with respect to a given Distribution Date, will be treated as requests for distributions of principal on the next succeeding Distribution Date and each succeeding Distribution Date thereafter until each request is accepted or is withdrawn as described below. Each request for distributions of principal on a Special Retail Certificate submitted by a beneficial owner of a Special Retail Certificate will be held by the Trustee until such request has been accepted or has been withdrawn in writing, in the manner set forth below. The principal amount covered by such request will continue to bear interest at the related pass-through rate through the last calendar date of the month preceding the month of the Distribution Date. With respect to Special Retail Certificates for which beneficial owners have requested distributions on a particular Distribution Date on which distributions of principal on the applicable class of Special Retail Certificates are being made, the Trustee will notify DTC and the DTC Participants prior to such Distribution Date whether, and the extent to which, such requests for distributions on the Special Retail Certificates have been accepted. DTC Participants and Indirect DTC Participants holding Special Retail Certificates are required to forward such notices to the beneficial owners of such Certificates. Requested distributions on Special Retail Certificates entitled to such distributions will be due and payable on the applicable Distribution Date and will cease to bear interest after the last calendar date of the month preceding the month of such Distribution Date. Any beneficial owner of a Special Retail Certificate that has requested a distribution may withdraw such request by so notifying in writing the DTC Participant or Indirect DTC Participant that maintains such beneficial owner's account. The DTC Participant will forward the withdrawal, in the manner S-53
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required under the rules and regulations of DTC's APUT System, to the Trustee. In the event that such account is maintained by an Indirect DTC Participant, such Indirect DTC Participant must notify the related DTC Participant, which in turn must forward the withdrawal of such request in accordance with the APUT System to the Trustee. If such notice of withdrawal of a request for distribution has not been received by the Trustee on or before the Record Date for the Distribution Date, the previously made request for distribution will be irrevocable with respect to the making of distributions of principal on the applicable class of Special Retail Certificates on the applicable Distribution Date. Mandatory Distributions of Principal on the Special Retail Certificates If distributions of principal on any class of Special Retail Certificates on a Distribution Date exceed the aggregate amount of distribution requests for that class which have been received by DTC on or before the applicable Record Date, additional Special Retail Certificates in lots equal to $1,000 will be selected to receive principal distributions in accordance with the then- applicable established random lot procedures of DTC, and the procedures of the DTC Participants and Indirect DTC Participants, which may or may not be by random lot. Investors in the Special Retail Certificates should ask DTC Participants or Indirect DTC Participants which allocation procedures they use. DTC Participants and Indirect DTC Participants holding Special Retail Certificates selected for mandatory distributions of principal are required to provide notice of such mandatory distributions to the affected beneficial owners. Deceased Holder A "Deceased Holder" is a beneficial owner of a Special Retail Certificate who was living at the time such interest was acquired and whose executor or other authorized representative causes to be furnished to the Trustee a certified copy of the death certificate and any additional evidence of death satisfactory to the Trustee and any tax waivers requested by the Trustee. Special Retail Certificates beneficially owned by tenants by the entirety, joint tenants or tenants in common will be considered to be beneficially owned by a single owner. The death of a tenant by the entirety, joint tenant or tenant in common will be deemed to be the death of the beneficial owner, and the Special Retail Certificates so owned will be eligible for priority with respect to distributions of principal, subject to the limitations described herein. Special Retail Certificates beneficially owned by a trust will be considered to be beneficially owned by each beneficiary of the trust to the extent of such beneficiary's interest therein, but in no event will a trust's beneficiaries collectively be deemed to be beneficial owners of a number of Special Retail Certificates greater than the number of Special Retail Certificates of which the trust is the owner. The death of the beneficiary of a trust will be deemed to be the death of a beneficial owner of the Special Retail Certificates beneficially owned by the trust to the extent of that beneficiary's interest in the trust. The death of an individual who was a tenant by the entirety, joint tenant or tenant in common in a tenancy that is the beneficiary of a trust will be deemed to be the death of the beneficiary of the trust. The death of a person who, during his or her lifetime, was entitled to substantially all of the beneficial ownership interest in a Special Retail Certificate will be deemed to be the death of the beneficial owner of the Special Retail Certificate regardless of the registration of the ownership, if the beneficial ownership interest can be established to the satisfaction of the Trustee. Expenses incurred by the Trustee in an effort to determine the beneficial ownership interest, including attorney's fees, are required to be paid by the beneficial owner. Beneficial interests will be deemed to exist in typical cases of street name or nominee ownership, ownership by a trustee, ownership under the Uniform Gift to Minors Act and community property or other joint ownership arrangements between a husband and wife. Beneficial interests shall include the power to sell, transfer, or otherwise dispose of a Special Retail Certificate and the right to receive the proceeds therefrom, as well as interest payments and distributions in reduction of S-54
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principal balance with respect thereto. As used in this Prospectus Supplement, a request for a distribution of principal of a Special Retail Certificate by a Deceased Holder shall mean a request by the personal representative, surviving tenant by the entirety, surviving joint tenant or surviving tenant in common of such Deceased Holder. Allocation of Losses On each Distribution Date, the applicable PO Percentage of any Realized Loss, including any Excess Loss, on a Discount Mortgage Loan will be allocated to the Class A-PO Certificates until their class balance is reduced to zero. The amount of any such Realized Loss, other than an Excess Loss, allocated on or prior to the Senior Credit Support Depletion Date will be treated as a "Class A-PO Deferred Amount." To the extent funds are available on such Distribution Date or on any future Distribution Date from amounts that would otherwise be allocable to the Subordinate Principal Distribution Amount, Class A-PO Deferred Amounts will be paid on the Class A-PO Certificates prior to distributions of principal on the Subordinate Certificates. Any distribution of the Pool Distribution Amount in respect of unpaid Class A-PO Deferred Amounts will not further reduce the class balance of the Class A-PO Certificates. The Class A-PO Deferred Amounts will not bear interest. The class balance of the class of Subordinate Certificates then outstanding with the highest numerical class designation will be reduced by the amount of any payments in respect of Class A-PO Deferred Amounts. Any excess of the Class A-PO Deferred Amounts over the class balance of that class will be allocated to the next most subordinate class to reduce its class balance and so on, as necessary. After the Senior Credit Support Depletion Date, no new Class A-PO Deferred Amounts will be created. In addition, on each such Distribution Date, the class balance of the class of Subordinate Certificates then outstanding with the highest numerical class designation will be reduced if and to the extent that the aggregate of the class balances of all classes of Certificates (after taking into account the amount of all distributions to be made on such Distribution Date and the allocation of Realized Losses on such Distribution Date) exceeds the Adjusted Pool Amount for such Distribution Date. On each Distribution Date, the applicable Non-PO Percentage of any Realized Loss, other than any Excess Loss, will be allocated first to the Subordinate Certificates, in the reverse order of their numerical class designations (beginning with the class of Subordinate Certificates then outstanding with the highest numerical class designation), in each case until the class balance of the respective class of Certificates has been reduced to zero, and then to the Senior Certificates (other than the Class A-7 and Class A-PO Certificates) pro rata based upon their respective class balances. After the Senior Credit Support Depletion Date, on each Distribution Date, the aggregate of the class balances of all classes of Senior Certificates (other than the Class A-7 and Class A-PO Certificates) then outstanding will be reduced if and to the extent that such aggregate balance (after taking into account the amount of all distributions to be made on such Distribution Date and the allocation of Realized Losses on such Distribution Date) exceeds the difference between the Adjusted Pool Amount and the Adjusted Pool Amount (PO Portion) for such Distribution Date. The amount of any such reduction will be allocated among the Senior Certificates (other than the Class A-7 and Class A- PO Certificates) pro rata based on class balance. In addition, after the Senior Credit Support Depletion Date, on each Distribution Date, the class balance of the Class A-PO Certificates will be reduced if and to the extent that such class balance (after taking into account the amount of all distributions to be made on such Distribution Date and the allocation of Realized Losses on such Distribution Date) exceeds the Adjusted Pool Amount (PO Portion) for such Distribution Date. S-55
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On each Distribution Date, the applicable Non-PO Percentage of Excess Losses will be allocated pro rata among the classes of Senior Certificates (other than the Class A-7 and Class A-PO Certificates) and the Subordinate Certificates based upon their respective class balances. Realized Losses allocated to the Class A-6 Certificates will reduce the Class A-7 Notional Amount. Because principal distributions are paid to certain classes of Senior Certificates (other than the Class A-PO Certificates) before other classes of Senior Certificates, holders of those Senior Certificates that are entitled to receive principal later bear a greater risk of being allocated Realized Losses on the Mortgage Loans than holders of classes that are entitled to receive principal earlier. In general, a "Realized Loss" means, with respect to a Liquidated Mortgage Loan, the amount by which the remaining unpaid principal balance of the Mortgage Loan exceeds the amount of Liquidation Proceeds applied to the principal balance of the related Mortgage Loan. "Excess Losses" are (i) Special Hazard Losses in excess of the Special Hazard Loss Amount, (ii) Bankruptcy Losses in excess of the Bankruptcy Loss Amount and (iii) Fraud Losses in excess of the Fraud Loss Amount. "Bankruptcy Losses" are losses that are incurred as a result of Debt Service Reductions and Deficient Valuations. "Special Hazard Losses" are Realized Losses in respect of Special Hazard Mortgage Loans. "Fraud Losses" are Realized Losses sustained by reason of a default arising from fraud, dishonesty or misrepresentations. See "Credit Support" in this Prospectus Supplement. As used in this Prospectus Supplement, a "Deficient Valuation" occurs when a bankruptcy court establishes the value of a mortgaged property at an amount less than the then-outstanding principal balance of the Mortgage Loan secured by such mortgaged property or reduces the then-outstanding principal balance of a Mortgage Loan. In the case of a reduction in the value of the related mortgaged property, the amount of the secured debt could be reduced to such value, and the holder of such Mortgage Loan thus would become an unsecured creditor to the extent the then-outstanding principal balance of such Mortgage Loan exceeds the value so assigned to the mortgaged property by the bankruptcy court. In addition, certain other modifications of the terms of a Mortgage Loan can result from a bankruptcy proceeding, including the reduction (a "Debt Service Reduction") of the amount of the Monthly Payment on the related Mortgage Loan. However, none of these events shall be considered a Debt Service Reduction or Deficient Valuation so long as the related Servicer is pursuing any other remedies that may be available with respect to the related Mortgage Loan and (i) such Mortgage Loan is not in default with respect to any payment due thereunder or (ii) scheduled Monthly Payments are being advanced by the related Servicer without giving effect to any Debt Service Reduction. A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the related Servicer has determined that all recoverable Liquidation Proceeds have been received. A "Special Hazard Mortgage Loan" is a Liquidated Mortgage Loan as to which the ability to recover the full amount due thereunder was substantially impaired by a hazard not insured against under a standard hazard insurance policy of the type described in the Prospectus under "Description of the Certificates--Other Credit Enhancement--Special Hazard Insurance Policy." See "Credit Support" in this Prospectus Supplement. With respect to any Distribution Date, the "Adjusted Pool Amount" will equal the aggregate unpaid principal balance of the Mortgage Loans as of the Cut-off Date minus the sum of (i) all amounts in respect of principal received in respect of the Mortgage Loans (including amounts received as Advances, principal prepayments and Liquidation Proceeds in respect of principal) and distributed to holders of the Certificates on such Distribution Date and all prior Distribution Dates and (ii) the principal portion of all Realized Losses (other than Debt Service Reductions) incurred on the Mortgage Loans from the Cut-off Date through the end of the month preceding such Distribution Date. S-56
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With respect to any Distribution Date, the "Adjusted Pool Amount (PO Portion)" will equal the sum as to each Mortgage Loan outstanding at the Cut- off Date of the product of (A) the PO Percentage for such Mortgage Loan and (B) the principal balance of such Mortgage Loan as of the Cut-off Date less the sum of (i) all amounts in respect of principal received in respect of such Mortgage Loan (including amounts received as Advances, principal prepayments and Liquidation Proceeds in respect of principal) and distributed to holders of the Certificates on such Distribution Date and all prior Distribution Dates and (ii) the principal portion of any Realized Loss (other than a Debt Service Reduction) incurred on such Mortgage Loan from the Cut-off Date through the end of the month preceding the month in which such Distribution Date occurs. Restrictions on Transfer of the Class A-R and Class A-LR Certificates The Class A-R and Class A-LR Certificates will be subject to the following restrictions on transfer, and the Class A-R and Class A-LR Certificates will contain a legend describing such restrictions. The REMIC provisions of the Code impose certain taxes on (i) transferors of residual interests to, or agents that acquire residual interests on behalf of, Disqualified Organizations (as defined in the Prospectus) and (ii) certain Pass-Through Entities (as defined in the Prospectus) that have Disqualified Organizations as beneficial owners. No tax will be imposed on a Pass-Through Entity (other than an "electing large partnership" (as defined in the Prospectus)) with respect to the Class A-R or Class A-LR Certificate to the extent it has received an affidavit from the owner thereof that such owner is not a Disqualified Organization or a nominee for a Disqualified Organization. The Pooling Agreement will provide that no legal or beneficial interest in the Class A-R or Class A-LR Certificate may be transferred to or registered in the name of any person unless: .the proposed purchaser provides to the Trustee an affidavit to the effect that, among other items, such transferee is not a Disqualified Organization and is not purchasing the Class A-R or Class A-LR Certificate as an agent for a Disqualified Organization (i.e., as a broker, nominee or other middleman thereof); and .the transferor states in writing to the Trustee that it has no actual knowledge that such affidavit is false. Further, such affidavit will require the transferee to affirm that it (a) historically has paid its debts as they have come due and intends to do so in the future, (b) understands that it may incur tax liabilities with respect to the Class A-R or Class A-LR Certificate in excess of cash flows generated thereby, (c) intends to pay taxes associated with holding the Class A-R or Class A-LR Certificate as such taxes become due and (d) will not transfer the Class A-R or Class A-LR Certificate to any person or entity that does not provide a similar affidavit. The transferor must certify in writing to the Trustee that, as of the date of the transfer, it had no knowledge or reason to know that the affirmations made by the transferee pursuant to the preceding sentence were false. In addition, neither the Class A-R nor Class A-LR Certificate may be purchased by or transferred to any person that is not a U.S. Person, unless: .such person holds its Class A-R or Class A-LR Certificate in connection with the conduct of a trade or business within the United States and furnishes the transferor and the Trustee with an effective Internal Revenue Service Form 4224; or S-57
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.the transferee delivers to both the transferor and the Trustee an opinion of a nationally-recognized tax counsel to the effect that such transfer is in accordance with the requirements of the Code and the regulations promulgated thereunder and that such transfer of the Class A-R or Class A-LR Certificates will not be disregarded for federal income tax purposes. The term "U.S. Person" means a citizen or resident of the United States, a corporation, partnership (except to the extent provided in the applicable Treasury regulations) or other entity created or organized in or under the laws of the United States or any political subdivision thereof, an estate that is subject to United States federal income tax regardless of the source of its income, or a trust if a court within the United States is able to exercise primary supervision over the administration of such trust, and one or more such U.S. Persons have the authority to control all substantial decisions of such trust (or, to the extent provided in applicable Treasury regulations, certain trusts in existence on August 20, 1996 which are eligible to elect to be treated as U.S. Persons). The Pooling Agreement will provide that any attempted or purported transfer in violation of these transfer restrictions will be null and void and will vest no rights in any purported transferee. Any transferor or agent to whom the Trustee provides information as to any applicable tax imposed on such transferor or agent may be required to bear the cost of computing or providing such information. See "Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related Restrictions on Transfer of Residual Certificates" in the Prospectus. Neither the Class A-R nor Class A-LR Certificate may be purchased by or transferred to any Plan or any person acting on behalf of or investing the assets of such Plan. See "ERISA Considerations" in this Prospectus Supplement and in the Prospectus. Restrictions on Transfer of the Class B Certificates Under current law the purchase and holding of the Class B Certificates by or on behalf of a Plan may result in "prohibited transactions" within the meaning of ERISA, Section 4975 of the Code or Similar Law. Transfer of the Class B Certificates will not be made unless the transferee delivers to the Trustee either: (a) a representation letter, in form and substance satisfactory to the Trustee, stating that: (1) it is not, and is not acting on behalf of, any such Plan or using the assets of any such Plan to effect such purchase; or (2) if it is an insurance company, that the source of funds used to purchase the Class B Certificates is an "insurance company general account" (as such term is defined in Section V(e) of Prohibited Transaction Class Exemption 95-60 ("PTE 95-60"), 60 Fed. Reg. 35925 (July 12, 1995)), that there is no Plan with respect to which the amount of such general account's reserves and liabilities for the contract(s) held by or on behalf of such Plan and all other Plans maintained by the same employer (or affiliate thereof as defined in Section V(a)(1) of PTE 95- 60) or by the same employee organization exceeds 10% of the total of all reserves and liabilities of such general account (as such amounts are determined under Section I(a) of PTE 95-60) at the date of acquisition and that all Plans that have an interest in such general account are Plans to which PTE 95-60 applies; or S-58
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(b) an opinion of counsel, in form and substance satisfactory to the Trustee and the Servicers, to the effect that the purchase or holding of the Class B Certificates by or on behalf of such Plan will not result in the assets of the Trust being deemed to be "plan assets" and subject to the prohibited transaction provisions of ERISA, the Code or Similar Law and will not subject the Depositor, the Servicers or the Trustee to any obligation in addition to those undertaken in the Pooling Agreement. The Class B Certificates will contain a legend describing these restrictions on transfer. Any transferee of a Class B Certificate that does not comply with either clause (a) or clause (b) above will be deemed to have made the representation described in clause (a) above. The Pooling Agreement will provide that any attempted or purported transfer in violation of these transfer restrictions will be null and void and will vest no rights in any purported transferee. See "ERISA Considerations" in this Prospectus Supplement and in the Prospectus. -------------------------------------------------------------------------------- PREPAYMENT AND YIELD CONSIDERATIONS -------------------------------------------------------------------------------- Delinquencies on the Mortgage Loans which are not advanced by or on behalf of the Servicers (because amounts, if advanced, would be nonrecoverable), will adversely affect the yield on the Certificates. Because of the priority of distributions, shortfalls resulting from delinquencies not so advanced will be borne first by the Subordinate Certificates (in the reverse order of their priority of their numerical designations), and then by the Senior Certificates. Net Interest Shortfalls will adversely affect the yields on the Offered Certificates. In addition, although all losses initially will be borne by the Subordinate Certificates, as described in this Prospectus Supplement under "Description of the Certificates -- Allocation of Losses," Excess Losses will be borne by all classes of Certificates in the manner set forth in that section. As a result, the yields on the Offered Certificates will depend on the rate and timing of Realized Losses, including Excess Losses. Excess Losses could occur at a time when one or more classes of Subordinate Certificates are still outstanding and otherwise available to absorb other types of Realized Losses. The effective yields to investors (other than investors in the Class A-6 and Class A-7 Certificates) will be lower than the yields otherwise produced by the applicable rate at which interest is passed through to investors and the purchase price of their Certificates because monthly distributions will not be payable to investors until the 25th day (or, if not a business day, the next business day) of the month following the month in which interest accrues on the Mortgage Loans (without any additional distribution of interest or earnings thereon in respect of such delay). Prepayment Considerations and Risks Because principal payments on the Mortgage Loans will be distributed to certificateholders currently, the rate of principal payments on the Offered Certificates (other than the Class A-7 Certificates), the aggregate amount of each interest payment on the Offered Certificates (other than the Class A-PO Certificates) and the yield to maturity of Offered Certificates purchased at a price other than par are directly related to the rate of payments of principal on the Mortgage Loans (or in the case of the Class A-PO Certificates, the Discount Mortgage Loans). The principal payments on the Mortgage Loans may be in the form of scheduled principal payments or principal prepayments (for this purpose, the term "principal prepayment" includes prepayments and any other recovery of principal in advance of its S-59
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scheduled due date, including repurchases and liquidations due to default, casualty, condemnation and the like). Any such prepayments will result in distributions to you of amounts that would otherwise be distributed over the remaining term of the Mortgage Loans. See "Prepayment and Yield Considerations" in the Prospectus. The rate at which mortgage loans in general prepay may be influenced by a number of factors, including general economic conditions, mortgage market interest rates, availability of mortgage funds and homeowner mobility. .In general, if prevailing mortgage interest rates fall significantly below the mortgage interest rates on the Mortgage Loans, the Mortgage Loans are likely to prepay at higher rates than if prevailing mortgage interest rates remain at or above the mortgage interest rates on the Mortgage Loans. .Conversely, if prevailing mortgage interest rates rise above the mortgage interest rates on the Mortgage Loans, the rate of prepayment would be expected to decrease. The timing of changes in the rate of prepayments may significantly affect the actual yield to you, even if the average rate of principal prepayments is consistent with your expectations. In general, the earlier the payment of principal of the Mortgage Loans the greater the effect on your yield to maturity. As a result, the effect on your yield of principal prepayments occurring at a rate higher (or lower) than the rate you anticipate during the period immediately following the issuance of the Certificates will not be offset by a subsequent like reduction (or increase) in the rate of principal prepayments. The yield on the Class A-7 Certificates will be highly sensitive to the rate and timing of prepayments on the Mortgage Loans. A rapid rate of principal prepayments on the Mortgage Loans may have a material negative effect on the yield of the Class A-7 Certificates. You must make your own decisions as to the appropriate prepayment assumptions to be used in deciding whether to purchase Offered Certificates. Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part, at any time without penalty. The rate of payment of principal may also be affected by any repurchase of the Mortgage Loans permitted or required by the Pooling Agreement including any optional termination of the Trust Fund by the Depositor. See "The Pooling and Servicing Agreement -- Optional Termination" in this Prospectus Supplement for a description of the Depositor's option to repurchase the Mortgage Loans when the scheduled balance of the Mortgage Pool is less than 10% of the initial balance of the Mortgage Pool. The Depositor may be required to repurchase Mortgage Loans because of defective documentation or material breaches in its representations and warranties with respect to such Mortgage Loans. Any repurchases will shorten the weighted average lives of the classes of Offered Certificates. All of the Mortgage Loans will include "due-on-sale" clauses which allow the holder of the Mortgage Loan to demand payment in full of the remaining principal balance upon sale or certain transfers of the property securing such Mortgage Loan. The Servicers will enforce "due-on-sale" clauses to the extent permitted by applicable law. Each mortgage note which contains "due-on-sale" provisions permits the holder of the mortgage note to accelerate the maturity of the Mortgage Loan upon conveyance by the mortgagor of the underlying mortgaged property. Each Servicer will enforce any "due-on-sale" clause to the extent it has knowledge of the conveyance or proposed conveyance of the underlying mortgaged property and reasonably believes that it is entitled to do so under applicable law. However, the Servicers will not take any action in relation to the enforcement of any "due-on-sale" provisions which would impair or threaten to impair any recovery under any related primary mortgage insurance policy. See "Prepayment and Yield Considerations" in the Prospectus. Acceleration of Mortgage Loans as a result of enforcement of such "due-on-sale" provisions in connection with S-60
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transfers of the related mortgaged properties or the occurrence of certain other events resulting in acceleration would affect the level of prepayments on the Mortgage Loans, thereby affecting the weighted average lives of the classes of the Offered Certificates. In addition to prepayment risks, investors in the Class A-14 and Class A-16 Certificates should also realize that special procedures for principal distributions may cause funds to be unavailable for a requested principal distribution even if the Class A-14 or Class A-16 Certificates as a whole are receiving distributions of principal or may lead to an unrequested principal distribution, which may adversely affect their expected yield. See "Description of the Certificates -- Distributions in Reduction of the Class A-14 and Class A-16 Certificates." Investors in the Class A-6 Certificates should understand that if LIBOR is greater than or equal to 7.500% per annum, the pass-through rate of such class will remain at its maximum rate of 8.500% per annum. Investors in the Class A- 18 Certificates should understand that if LIBOR is greater than or equal to 7.000% per annum, the pass-through rate of such class will remain at its maximum rate of 8.000% per annum. Investors in the Class A-6 and Class A-18 Certificates should consider the risk that if LIBOR is lower than anticipated, the actual yields to such investors will be lower than the anticipated yields. Conversely, investors in the Class A-7 and Class A-19 Certificates should consider the risk that if LIBOR is higher than anticipated, the actual yields to such investors will be significantly lower than the anticipated yields. Investors in the Class A-7 Certificates should also understand that if LIBOR is greater than or equal to 8.000% per annum, the Class A-7 Certificates will accrue interest at the minimum rate of 0.000% per annum. Investors in the Class A-19 Certificates should also understand that if LIBOR is greater than or equal to 7.000% per annum, the Class A-19 Certificates will accrue interest at the minimum rate of 0.000% per annum. Further, based on the Modeling Assumptions, high constant rates of LIBOR, especially when combined with certain high constant prepayment rates, are expected to produce a negative yield to investors in the Class A-7 Certificates. See "--Yield on the Class A-7 and Class A-19 Certificates" below. Investors in the Class A-6, Class A-7, Class A-18 and Class A-19 Certificates should also understand that the timing of changes in LIBOR may affect the actual yields to such investors even if the average rate of LIBOR is consistent with such investors' expectations. Each investor must make an independent decision as to the appropriate LIBOR assumptions to be used in deciding whether to purchase a Class A-6, Class A-7, Class A-18 or Class A-19 Certificate. As described in this Prospectus Supplement under "Description of the Certificates -- Principal," the Senior Prepayment Percentage of the applicable Non-PO Percentage of all principal prepayments (excluding for this purpose, liquidations due to default, casualty, condemnation and the like) initially will be distributed to holders of the classes of Senior Certificates (other than the Class A-PO Certificates) then entitled to receive principal prepayment distributions. This may result in all (or a disproportionate percentage) of those principal prepayments being distributed to holders of the Senior Certificates (other than the Class A-PO Certificates) and none (or less than their pro rata share) of such principal prepayments being distributed to holders of the Subordinate Certificates during the periods of time described in the definition of "Senior Prepayment Percentage." As described herein under "Description of the Certificates -- Principal," unless the balances of the other Class A Certificates (other than the Class A- PO Certificates) have been reduced to zero, the Class A-24 Certificates will not be entitled to any distributions of principal for five years following the Closing Date, and during the next five years the percentage of principal payments allocated to the Class A-24 Certificates will gradually increase. S-61
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Assumptions Relating to Tables The tables beginning on page S-65 (the "Decrement Tables") have been prepared on the basis of the following assumptions (the "Modeling Assumptions"): (a) the Mortgage Pool consists of two hypothetical mortgage loans having the following characteristics: [Download Table] Unpaid Mortgage Remaining Term Age Principal Balance Interest Rate (Months) (Months) ----------------- ------------- -------------- -------- $123,215,539.76 6.6893057517% 356 2 $476,869,037.24 7.1867670529% 356 2 (b) the initial balances and pass-through rates for the Offered Certificates are as set forth in the table beginning on page S-4; (c) there are no Net Interest Shortfalls, delinquencies or Realized Losses with respect to the Mortgage Loans; (d) scheduled payments of principal and interest with respect to the Mortgage Loans are received on the applicable due date beginning on March 1, 1999; (e) there are no partial prepayments and all prepayments in full are received, together with a 30 days' interest thereon, on the last day of each month beginning in February 1999; (f) the Mortgage Loans prepay at the indicated percentages of PSA; (g) optional termination of the Trust does not occur; (h) no Mortgage Loans are required to be repurchased from the Trust and no Mortgage Loans are substituted for the Mortgage Loans included in the Trust on the Closing Date; (i) the Certificates are issued on the Closing Date; (j) cash payments on the Certificates are received on the 25th day of each month beginning in March 1999 in accordance with the priorities and amounts described in this Prospectus Supplement under "Description of the Certificates;" and (k) distributions on each class of Special Retail Certificates will be made on a pro rata basis to the certificateholders of that class without any rounding from the related Rounding Account. Although the characteristics of the mortgage loans for the Decrement Tables have been prepared on the basis of the weighted average characteristics of the Mortgage Loans which are expected to be in the Mortgage Pool, there is no assurance that the Modeling Assumptions will reflect the actual characteristics or performance of the Mortgage Loans or that the performance of the Offered Certificates will conform to the results set forth in the tables. Weighted Average Lives of the Offered Certificates Weighted average life of a class of Offered Certificates (other than the Class A-7 Certificates) refers to the average amount of time that will elapse from the date of issuance of the Certificate until each dollar in reduction of its balance is distributed to investors. With respect to the Class A-7 Certificates, weighted average life refers to the average amount of time that will elapse from the date of issuance of the Offered Certificates until each dollar in reduction of the class balance of the Class A-6 Certificates, (which corresponds to the Class A-7 Notional Amount) is distributed to investors. The weighted average S-62
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lives of classes of Offered Certificates will be influenced by, among other things, the rate at which principal of the Mortgage Loans is paid, which may be in the form of scheduled principal payments or principal prepayments (for this purpose, the term "prepayments" includes prepayments and liquidations due to default, casualty, condemnation and the like), the timing of changes in such rate of principal payments and the priority sequence of distributions of principal of such Offered Certificates. The interaction of the foregoing factors may have different effects on each class of Offered Certificates and the effects on any such class may vary at different times during the life of such class. Accordingly, no assurance can be given as to the weighted average life of any such class of Offered Certificates. For an example of how the weighted average lives of the Offered Certificates are affected by the foregoing factors at various constant percentages of PSA, see the Decrement Tables set forth below. Prepayments on mortgage loans are commonly measured relative to a prepayment standard or model. The prepayment model used in this Prospectus Supplement is the Prepayment Standard Assumption ("PSA"), which represents an assumed rate of principal prepayment each month relative to the then-outstanding principal balance of a pool of mortgage loans for the life of such mortgage loans. A prepayment assumption of 100% PSA assumes constant prepayment rates of 0.2% per annum of the then-outstanding principal balance of such mortgage loans in the first month of the life of the mortgage loans and an additional 0.2% per annum in each month thereafter until the thirtieth month. Beginning in the thirtieth month and in each month thereafter during the life of the mortgage loans, 100% PSA assumes a constant prepayment rate of 6% per annum each month. As used in the table below, "0% PSA" assumes prepayment rates equal to 0% of PSA, i.e., no prepayments. Correspondingly, "275% PSA" assumes prepayment rates equal to 275% of PSA, and so forth. PSA does not purport to be a historical description of prepayment experience or a prediction of the anticipated rate of prepayment of any pool of mortgage loans, including the Mortgage Loans. The Depositor believes that no existing statistics of which it is aware provide a reliable basis for investors to predict the amount or the timing of receipt of prepayments on the Mortgage Loans. The Decrement Tables set forth below have been prepared on the basis of the Modeling Assumptions described above under "-- Assumptions Relating to Tables." There will likely be discrepancies between the characteristics of the actual Mortgage Loans included in the Mortgage Pool and the characteristics of the Mortgage Loans assumed in preparing the Decrement Tables. Any such discrepancy may have an effect upon the percentages of initial class balances or notional amount outstanding set forth in the Decrement Tables (and the weighted average lives of the Offered Certificates). In addition, to the extent that the Mortgage Loans that actually are included in the Mortgage Pool have characteristics that differ from those assumed in preparing the following Decrement Tables, the class balance or notional amount of a class of Offered Certificates could be reduced to zero earlier or later than indicated by such Decrement Tables. Furthermore, the information contained in the Decrement Tables with respect to the weighted average life of any Offered Certificate is not necessarily indicative of the weighted average life of that class of Offered Certificates that might be calculated or projected under different or varying prepayment assumptions. It is not likely that (i) all of the Mortgage Loans will have the interest rates or remaining terms to maturity assumed or (ii) the Mortgage Loans will prepay at the indicated percentage of PSA until maturity. In addition, the diverse remaining terms to maturity of the Mortgage Loans (which includes many recently originated Mortgage Loans) could produce slower or faster reductions of the class balances or notional amount than indicated in the Decrement Tables at the various percentages of PSA specified. S-63
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Based upon the Modeling Assumptions, the following Decrement Tables indicate the projected weighted average life of each class of the Offered Certificates and set forth the percentages of the initial class balance or notional amount of each class that would be outstanding after each of the dates shown at various constant percentages of the PSA. S-64
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-1 Class A-2 ------------------------- ------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ---- ---- ---- ---- ----- ---- ---- ---- ---- Initial Percentage.......... 100 100 100 100 100 100 100 100 100 100 February 25, 2000........... 99 96 92 89 86 99 96 92 89 86 February 25, 2001........... 97 89 75 66 59 97 89 75 66 59 February 25, 2002........... 95 80 55 39 28 95 80 55 39 28 February 25, 2003........... 94 71 38 19 6 94 71 38 19 6 February 25, 2004........... 92 63 24 4 0 92 63 24 4 0 February 25, 2005........... 90 55 13 0 0 90 55 13 0 0 February 25, 2006........... 88 49 5 0 0 88 49 5 0 0 February 25, 2007........... 86 43 0 0 0 86 43 0 0 0 February 25, 2008........... 83 37 0 0 0 83 37 0 0 0 February 25, 2009........... 81 32 0 0 0 81 32 0 0 0 February 25, 2010........... 79 28 0 0 0 79 28 0 0 0 February 25, 2011........... 76 23 0 0 0 76 23 0 0 0 February 25, 2012........... 73 19 0 0 0 73 19 0 0 0 February 25, 2013........... 70 16 0 0 0 70 16 0 0 0 February 25, 2014........... 66 12 0 0 0 66 12 0 0 0 February 25, 2015........... 63 9 0 0 0 63 9 0 0 0 February 25, 2016........... 59 5 0 0 0 59 5 0 0 0 February 25, 2017........... 55 2 0 0 0 55 2 0 0 0 February 25, 2018........... 50 0 0 0 0 50 0 0 0 0 February 25, 2019........... 46 0 0 0 0 46 0 0 0 0 February 25, 2020........... 41 0 0 0 0 41 0 0 0 0 February 25, 2021........... 35 0 0 0 0 35 0 0 0 0 February 25, 2022........... 29 0 0 0 0 29 0 0 0 0 February 25, 2023........... 23 0 0 0 0 23 0 0 0 0 February 25, 2024........... 16 0 0 0 0 16 0 0 0 0 February 25, 2025........... 9 0 0 0 0 9 0 0 0 0 February 25, 2026........... 1 0 0 0 0 1 0 0 0 0 February 25, 2027........... 0 0 0 0 0 0 0 0 0 0 February 25, 2028........... 0 0 0 0 0 0 0 0 0 0 February 25, 2029........... 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1).............. 17.49 7.84 3.57 2.71 2.33 17.49 7.84 3.57 2.71 2.33 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. S-65
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-3 Class A-4 -------------------------- ------------------------ Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ---- ---- ---- ---- ---- ---- ---- ---- Initial Percentage.......... 100 100 100 100 100 100 100 100 100 100 February 25, 2000........... 99 97 93 91 88 83 54 3 0 0 February 25, 2001........... 98 91 79 71 65 65 0 0 0 0 February 25, 2002........... 96 83 62 48 39 45 0 0 0 0 February 25, 2003........... 95 75 47 31 20 24 0 0 0 0 February 25, 2004........... 93 68 35 18 7 1 0 0 0 0 February 25, 2005........... 91 62 26 10 * 0 0 0 0 0 February 25, 2006........... 90 56 19 4 0 0 0 0 0 0 February 25, 2007........... 88 51 14 1 0 0 0 0 0 0 February 25, 2008........... 86 47 10 0 0 0 0 0 0 0 February 25, 2009........... 84 42 7 0 0 0 0 0 0 0 February 25, 2010........... 82 39 5 0 0 0 0 0 0 0 February 25, 2011........... 79 35 3 0 0 0 0 0 0 0 February 25, 2012........... 77 31 2 0 0 0 0 0 0 0 February 25, 2013........... 74 28 1 0 0 0 0 0 0 0 February 25, 2014........... 71 25 0 0 0 0 0 0 0 0 February 25, 2015........... 68 22 0 0 0 0 0 0 0 0 February 25, 2016........... 65 19 0 0 0 0 0 0 0 0 February 25, 2017........... 62 17 0 0 0 0 0 0 0 0 February 25, 2018........... 58 14 0 0 0 0 0 0 0 0 February 25, 2019........... 54 12 0 0 0 0 0 0 0 0 February 25, 2020........... 49 10 0 0 0 0 0 0 0 0 February 25, 2021........... 45 8 0 0 0 0 0 0 0 0 February 25, 2022........... 40 6 0 0 0 0 0 0 0 0 February 25, 2023........... 34 4 0 0 0 0 0 0 0 0 February 25, 2024........... 28 2 0 0 0 0 0 0 0 0 February 25, 2025........... 22 1 0 0 0 0 0 0 0 0 February 25, 2026........... 16 0 0 0 0 0 0 0 0 0 February 25, 2027........... 8 0 0 0 0 0 0 0 0 0 February 25, 2028........... 1 0 0 0 0 0 0 0 0 0 February 25, 2029........... 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1).............. 19.08 10.00 4.58 3.28 2.75 2.73 1.04 0.65 0.54 0.48 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. * Less than 0.5%, but greater than zero. S-66
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-5 Class A-6 -------------------------- -------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ---- ---- ---- ----- ----- ---- ---- ---- Initial Percentage........ 100 100 100 100 100 100 100 100 100 100 February 25, 2000......... 100 100 100 97 95 99 97 93 91 88 February 25, 2001......... 100 98 85 76 69 98 91 79 71 65 February 25, 2002......... 100 89 66 51 41 96 83 62 48 39 February 25, 2003......... 100 81 50 32 21 95 75 47 31 20 February 25, 2004......... 100 73 37 18 1 93 68 35 18 7 February 25, 2005......... 98 66 27 5 0 91 62 26 10 * February 25, 2006......... 96 60 19 0 0 90 56 19 4 0 February 25, 2007......... 94 54 13 0 0 88 51 14 1 0 February 25, 2008......... 92 49 6 0 0 86 47 10 0 0 February 25, 2009......... 90 45 1 0 0 84 42 7 0 0 February 25, 2010......... 88 41 0 0 0 82 39 5 0 0 February 25, 2011......... 85 37 0 0 0 79 35 3 0 0 February 25, 2012......... 83 33 0 0 0 77 31 2 0 0 February 25, 2013......... 80 29 0 0 0 74 28 1 0 0 February 25, 2014......... 77 26 0 0 0 71 25 0 0 0 February 25, 2015......... 73 23 0 0 0 68 22 0 0 0 February 25, 2016......... 70 20 0 0 0 65 19 0 0 0 February 25, 2017......... 66 17 0 0 0 62 17 0 0 0 February 25, 2018......... 62 14 0 0 0 58 14 0 0 0 February 25, 2019......... 57 10 0 0 0 54 12 0 0 0 February 25, 2020......... 52 6 0 0 0 49 10 0 0 0 February 25, 2021......... 47 2 0 0 0 45 8 0 0 0 February 25, 2022......... 42 0 0 0 0 40 6 0 0 0 February 25, 2023......... 36 0 0 0 0 34 4 0 0 0 February 25, 2024......... 30 0 0 0 0 28 2 0 0 0 February 25, 2025......... 23 0 0 0 0 22 1 0 0 0 February 25, 2026......... 16 0 0 0 0 16 0 0 0 0 February 25, 2027......... 3 0 0 0 0 8 0 0 0 0 February 25, 2028......... 0 0 0 0 0 1 0 0 0 0 February 25, 2029......... 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1)............ 20.14 10.26 4.59 3.35 2.83 19.08 10.00 4.58 3.28 2.75 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. * Less than 0.5%, but greater than zero. S-67
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Percentage of Initial Class Balance(1) Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-7 Class A-8 -------------------------- --------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ---- ---- ---- ----- ----- ----- ---- ---- Initial Percentage....... 100 100 100 100 100 100 100 100 100 100 February 25, 2000........ 99 97 93 91 88 100 100 100 100 100 February 25, 2001........ 98 91 79 71 65 100 100 100 100 100 February 25, 2002........ 96 83 62 48 39 100 100 100 100 100 February 25, 2003........ 95 75 47 31 20 100 100 100 100 100 February 25, 2004........ 93 68 35 18 7 100 100 100 100 49 February 25, 2005........ 91 62 26 10 * 100 100 100 64 2 February 25, 2006........ 90 56 19 4 0 100 100 100 26 0 February 25, 2007........ 88 51 14 1 0 100 100 93 4 0 February 25, 2008........ 86 47 10 0 0 100 100 68 0 0 February 25, 2009........ 84 42 7 0 0 100 100 50 0 0 February 25, 2010........ 82 39 5 0 0 100 100 35 0 0 February 25, 2011........ 79 35 3 0 0 100 100 22 0 0 February 25, 2012........ 77 31 2 0 0 100 100 12 0 0 February 25, 2013........ 74 28 1 0 0 100 100 4 0 0 February 25, 2014........ 71 25 0 0 0 100 100 0 0 0 February 25, 2015........ 68 22 0 0 0 100 100 0 0 0 February 25, 2016........ 65 19 0 0 0 100 100 0 0 0 February 25, 2017........ 62 17 0 0 0 100 100 0 0 0 February 25, 2018........ 58 14 0 0 0 100 97 0 0 0 February 25, 2019........ 54 12 0 0 0 100 81 0 0 0 February 25, 2020........ 49 10 0 0 0 100 67 0 0 0 February 25, 2021........ 45 8 0 0 0 100 53 0 0 0 February 25, 2022........ 40 6 0 0 0 100 40 0 0 0 February 25, 2023........ 34 4 0 0 0 100 27 0 0 0 February 25, 2024........ 28 2 0 0 0 100 16 0 0 0 February 25, 2025........ 22 1 0 0 0 100 5 0 0 0 February 25, 2026........ 16 0 0 0 0 100 0 0 0 0 February 25, 2027........ 8 0 0 0 0 57 0 0 0 0 February 25, 2028........ 1 0 0 0 0 5 0 0 0 0 February 25, 2029........ 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(2)........... 19.08 10.00 4.58 3.28 2.75 28.17 22.39 10.40 6.52 5.12 -------- (1) With respect to the Class A-7 Certificates, percentages are expressed as percentages of the initial Class A-7 Notional Amount. (2) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof (or notional amount) by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance (or initial notional amount) of that class. * Less than 0.5%, but greater than zero. S-68
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-9 Class A-10 --------------------------- ---------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ----- ---- ---- ----- ----- ----- ----- ---- Initial Percentage.... 100 100 100 100 100 100 100 100 100 100 February 25, 2000..... 100 100 100 100 100 100 100 100 100 100 February 25, 2001..... 100 100 100 100 100 100 100 100 100 100 February 25, 2002..... 100 100 100 100 100 100 100 100 100 100 February 25, 2003..... 100 100 100 100 100 100 100 100 100 100 February 25, 2004..... 100 100 100 100 100 100 100 100 100 100 February 25, 2005..... 100 100 100 100 8 100 100 100 100 100 February 25, 2006..... 100 100 100 91 0 100 100 100 100 24 February 25, 2007..... 100 100 100 15 0 100 100 100 100 0 February 25, 2008..... 100 100 100 0 0 100 100 100 75 0 February 25, 2009..... 100 100 100 0 0 100 100 100 56 0 February 25, 2010..... 100 100 100 0 0 100 100 100 41 0 February 25, 2011..... 100 100 78 0 0 100 100 100 31 0 February 25, 2012..... 100 100 43 0 0 100 100 100 23 0 February 25, 2013..... 100 100 14 0 0 100 100 100 17 0 February 25, 2014..... 100 100 0 0 0 100 100 91 12 0 February 25, 2015..... 100 100 0 0 0 100 100 73 9 0 February 25, 2016..... 100 100 0 0 0 100 100 58 6 0 February 25, 2017..... 100 100 0 0 0 100 100 46 5 0 February 25, 2018..... 100 100 0 0 0 100 100 36 3 0 February 25, 2019..... 100 100 0 0 0 100 100 28 2 0 February 25, 2020..... 100 100 0 0 0 100 100 22 2 0 February 25, 2021..... 100 100 0 0 0 100 100 17 1 0 February 25, 2022..... 100 100 0 0 0 100 100 12 1 0 February 25, 2023..... 100 95 0 0 0 100 100 9 1 0 February 25, 2024..... 100 54 0 0 0 100 100 7 * 0 February 25, 2025..... 100 16 0 0 0 100 100 4 * 0 February 25, 2026..... 100 0 0 0 0 100 81 3 * 0 February 25, 2027..... 100 0 0 0 0 100 49 1 * 0 February 25, 2028..... 19 0 0 0 0 100 19 1 * 0 February 25, 2029..... 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1)........ 28.88 25.17 12.90 7.57 5.75 29.43 28.05 18.63 11.42 6.74 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. * Less than 0.5%, but greater than zero. S-69
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-11 Class A-12 -------------------------- --------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ---- ---- ---- ----- ----- ----- ---- ---- Initial Percentage....... 100 100 100 100 100 100 100 100 100 100 February 25, 2000........ 100 100 100 100 100 100 100 100 100 100 February 25, 2001........ 100 100 100 100 100 100 100 100 100 100 February 25, 2002........ 100 100 100 100 100 100 100 100 100 100 February 25, 2003........ 100 100 100 100 100 100 100 100 100 100 February 25, 2004........ 100 100 100 100 0 100 100 100 100 51 February 25, 2005........ 100 100 100 14 0 100 100 100 100 0 February 25, 2006........ 100 100 100 0 0 100 100 100 0 0 February 25, 2007........ 100 100 84 0 0 100 100 100 0 0 February 25, 2008........ 100 100 23 0 0 100 100 100 0 0 February 25, 2009........ 100 100 0 0 0 100 100 55 0 0 February 25, 2010........ 100 100 0 0 0 100 100 0 0 0 February 25, 2011........ 100 100 0 0 0 100 100 0 0 0 February 25, 2012........ 100 100 0 0 0 100 100 0 0 0 February 25, 2013........ 100 100 0 0 0 100 100 0 0 0 February 25, 2014........ 100 100 0 0 0 100 100 0 0 0 February 25, 2015........ 100 100 0 0 0 100 100 0 0 0 February 25, 2016........ 100 100 0 0 0 100 100 0 0 0 February 25, 2017........ 100 100 0 0 0 100 100 0 0 0 February 25, 2018........ 100 92 0 0 0 100 100 0 0 0 February 25, 2019........ 100 55 0 0 0 100 100 0 0 0 February 25, 2020........ 100 20 0 0 0 100 100 0 0 0 February 25, 2021........ 100 0 0 0 0 100 70 0 0 0 February 25, 2022........ 100 0 0 0 0 100 1 0 0 0 February 25, 2023........ 100 0 0 0 0 100 0 0 0 0 February 25, 2024........ 100 0 0 0 0 100 0 0 0 0 February 25, 2025........ 100 0 0 0 0 100 0 0 0 0 February 25, 2026........ 100 0 0 0 0 100 0 0 0 0 February 25, 2027........ 0 0 0 0 0 93 0 0 0 0 February 25, 2028........ 0 0 0 0 0 0 0 0 0 0 February 25, 2029........ 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1)........... 27.59 20.20 8.61 5.76 4.66 28.21 22.34 10.11 6.41 5.06 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. S-70
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-13 Class A-14(/1/) --------------------------- --------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ----- ---- ---- ----- ----- ----- ---- ---- Initial Percentage...... 100 100 100 100 100 100 100 100 100 100 February 25, 2000....... 100 100 100 100 100 100 100 100 100 100 February 25, 2001....... 100 100 100 100 100 100 100 100 100 100 February 25, 2002....... 100 100 100 100 100 100 100 100 100 100 February 25, 2003....... 100 100 100 100 100 100 100 100 100 100 February 25, 2004....... 100 100 100 100 100 100 100 100 100 100 February 25, 2005....... 100 100 100 100 0 100 100 100 100 0 February 25, 2006....... 100 100 100 44 0 100 100 100 44 0 February 25, 2007....... 100 100 100 0 0 100 100 100 0 0 February 25, 2008....... 100 100 100 0 0 100 100 100 0 0 February 25, 2009....... 100 100 100 0 0 100 100 100 0 0 February 25, 2010....... 100 100 80 0 0 100 100 80 0 0 February 25, 2011....... 100 100 27 0 0 100 100 27 0 0 February 25, 2012....... 100 100 0 0 0 100 100 0 0 0 February 25, 2013....... 100 100 0 0 0 100 100 0 0 0 February 25, 2014....... 100 100 0 0 0 100 100 0 0 0 February 25, 2015....... 100 100 0 0 0 100 100 0 0 0 February 25, 2016....... 100 100 0 0 0 100 100 0 0 0 February 25, 2017....... 100 100 0 0 0 100 100 0 0 0 February 25, 2018....... 100 100 0 0 0 100 100 0 0 0 February 25, 2019....... 100 100 0 0 0 100 100 0 0 0 February 25, 2020....... 100 100 0 0 0 100 100 0 0 0 February 25, 2021....... 100 100 0 0 0 100 100 0 0 0 February 25, 2022....... 100 100 0 0 0 100 100 0 0 0 February 25, 2023....... 100 48 0 0 0 100 48 0 0 0 February 25, 2024....... 100 0 0 0 0 100 0 0 0 0 February 25, 2025....... 100 0 0 0 0 100 0 0 0 0 February 25, 2026....... 100 0 0 0 0 100 0 0 0 0 February 25, 2027....... 100 0 0 0 0 100 0 0 0 0 February 25, 2028....... 0 0 0 0 0 0 0 0 0 0 February 25, 2029....... 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(2).......... 28.62 24.02 11.62 7.02 5.45 28.62 24.02 11.62 7.02 5.45 -------- (1) The weighted average lives shown for the Class A-14 Certificates applies to such class taken as a whole. As a result of the distribution priorities and allocations described herein, the weighted average life of a Class A-14 Certificate beneficially owned by an individual investor may vary significantly from the weighted averaged life of such class taken as a whole. (2) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. S-71
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-15 Class A-16(/1/) --------------------------- ---------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ----- ---- ---- ----- ----- ----- ----- ---- Initial Percentage.... 100 100 100 100 100 100 100 100 100 100 February 25, 2000..... 100 100 100 100 100 100 100 100 100 100 February 25, 2001..... 100 100 100 100 100 100 100 100 100 100 February 25, 2002..... 100 100 100 100 100 100 100 100 100 100 February 25, 2003..... 100 100 100 100 100 100 100 100 100 100 February 25, 2004..... 100 100 100 100 100 100 100 100 100 100 February 25, 2005..... 100 100 100 100 15 100 100 100 100 100 February 25, 2006..... 100 100 100 100 0 100 100 100 100 24 February 25, 2007..... 100 100 100 26 0 100 100 100 100 0 February 25, 2008..... 100 100 100 0 0 100 100 100 75 0 February 25, 2009..... 100 100 100 0 0 100 100 100 56 0 February 25, 2010..... 100 100 100 0 0 100 100 100 41 0 February 25, 2011..... 100 100 100 0 0 100 100 100 31 0 February 25, 2012..... 100 100 77 0 0 100 100 100 23 0 February 25, 2013..... 100 100 25 0 0 100 100 100 17 0 February 25, 2014..... 100 100 0 0 0 100 100 91 12 0 February 25, 2015..... 100 100 0 0 0 100 100 73 9 0 February 25, 2016..... 100 100 0 0 0 100 100 58 6 0 February 25, 2017..... 100 100 0 0 0 100 100 46 5 0 February 25, 2018..... 100 100 0 0 0 100 100 36 3 0 February 25, 2019..... 100 100 0 0 0 100 100 28 2 0 February 25, 2020..... 100 100 0 0 0 100 100 22 2 0 February 25, 2021..... 100 100 0 0 0 100 100 17 1 0 February 25, 2022..... 100 100 0 0 0 100 100 12 1 0 February 25, 2023..... 100 100 0 0 0 100 100 9 1 0 February 25, 2024..... 100 97 0 0 0 100 100 7 * 0 February 25, 2025..... 100 29 0 0 0 100 100 4 * 0 February 25, 2026..... 100 0 0 0 0 100 81 3 * 0 February 25, 2027..... 100 0 0 0 0 100 49 1 * 0 February 25, 2028..... 33 0 0 0 0 100 19 1 * 0 February 25, 2029..... 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(2)........ 29.00 25.74 13.57 7.87 5.90 29.43 28.05 18.63 11.42 6.74 -------- (1) The weighted average lives shown for the Class A-16 Certificates applies to such class taken as a whole. As a result of the distribution priorities and allocations described herein, the weighted average life of a Class A-16 Certificate beneficially owned by an individual investor may vary significantly from the weighted averaged life of such class taken as a whole. (2) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. * Less than 0.5%, but greater than zero. S-72
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-17 Class A-18 ---------------------------- ---------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ----- ----- ---- ----- ----- ----- ----- ---- Initial Percentage...... 100 100 100 100 100 100 100 100 100 100 February 25, 2000....... 100 100 100 100 100 100 100 100 100 100 February 25, 2001....... 100 100 100 100 100 100 100 100 100 100 February 25, 2002....... 100 100 100 100 100 100 100 100 100 100 February 25, 2003....... 100 100 100 100 100 100 100 100 100 100 February 25, 2004....... 100 100 100 100 100 100 100 100 100 100 February 25, 2005....... 100 100 100 100 100 100 100 100 100 100 February 25, 2006....... 100 100 100 100 24 100 100 100 100 24 February 25, 2007....... 100 100 100 100 0 100 100 100 100 0 February 25, 2008....... 100 100 100 75 0 100 100 100 75 0 February 25, 2009....... 100 100 100 56 0 100 100 100 56 0 February 25, 2010....... 100 100 100 41 0 100 100 100 41 0 February 25, 2011....... 100 100 100 31 0 100 100 100 31 0 February 25, 2012....... 100 100 100 23 0 100 100 100 23 0 February 25, 2013....... 100 100 100 17 0 100 100 100 17 0 February 25, 2014....... 100 100 91 12 0 100 100 91 12 0 February 25, 2015....... 100 100 73 9 0 100 100 73 9 0 February 25, 2016....... 100 100 58 6 0 100 100 58 6 0 February 25, 2017....... 100 100 46 5 0 100 100 46 5 0 February 25, 2018....... 100 100 36 3 0 100 100 36 3 0 February 25, 2019....... 100 100 28 2 0 100 100 28 2 0 February 25, 2020....... 100 100 22 2 0 100 100 22 2 0 February 25, 2021....... 100 100 17 1 0 100 100 17 1 0 February 25, 2022....... 100 100 12 1 0 100 100 12 1 0 February 25, 2023....... 100 100 9 1 0 100 100 9 1 0 February 25, 2024....... 100 100 7 * 0 100 100 7 * 0 February 25, 2025....... 100 100 4 * 0 100 100 4 * 0 February 25, 2026....... 100 81 3 * 0 100 81 3 * 0 February 25, 2027....... 100 49 1 * 0 100 49 1 * 0 February 25, 2028....... 100 19 1 * 0 100 19 1 * 0 February 25, 2029....... 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1).......... 29.43 28.05 18.63 11.42 6.74 29.43 28.05 18.63 11.42 6.74 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. * Less than 0.5%, but greater than zero. S-73
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-19 Class A-20 ---------------------------- -------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ----- ----- ---- ----- ----- ---- ---- ---- Initial Percentage...... 100 100 100 100 100 100 100 100 100 100 February 25, 2000....... 100 100 100 100 100 99 97 93 91 89 February 25, 2001....... 100 100 100 100 100 98 91 80 72 66 February 25, 2002....... 100 100 100 100 100 96 83 63 50 41 February 25, 2003....... 100 100 100 100 100 95 76 49 33 23 February 25, 2004....... 100 100 100 100 100 93 69 37 20 5 February 25, 2005....... 100 100 100 100 100 92 63 28 9 0 February 25, 2006....... 100 100 100 100 24 90 58 22 0 0 February 25, 2007....... 100 100 100 100 0 88 53 16 0 0 February 25, 2008....... 100 100 100 75 0 86 48 10 0 0 February 25, 2009....... 100 100 100 56 0 84 44 5 0 0 February 25, 2010....... 100 100 100 41 0 82 40 1 0 0 February 25, 2011....... 100 100 100 31 0 80 37 0 0 0 February 25, 2012....... 100 100 100 23 0 78 33 0 0 0 February 25, 2013....... 100 100 100 17 0 75 30 0 0 0 February 25, 2014....... 100 100 91 12 0 72 27 0 0 0 February 25, 2015....... 100 100 73 9 0 69 25 0 0 0 February 25, 2016....... 100 100 58 6 0 66 22 0 0 0 February 25, 2017....... 100 100 46 5 0 63 19 0 0 0 February 25, 2018....... 100 100 36 3 0 59 17 0 0 0 February 25, 2019....... 100 100 28 2 0 55 13 0 0 0 February 25, 2020....... 100 100 22 2 0 51 9 0 0 0 February 25, 2021....... 100 100 17 1 0 46 6 0 0 0 February 25, 2022....... 100 100 12 1 0 42 3 0 0 0 February 25, 2023....... 100 100 9 1 0 36 0 0 0 0 February 25, 2024....... 100 100 7 * 0 31 0 0 0 0 February 25, 2025....... 100 100 4 * 0 25 0 0 0 0 February 25, 2026....... 100 81 3 * 0 18 0 0 0 0 February 25, 2027....... 100 49 1 * 0 7 0 0 0 0 February 25, 2028....... 100 19 1 * 0 0 0 0 0 0 February 25, 2029....... 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1).......... 29.43 28.05 18.63 11.42 6.74 19.31 10.19 4.59 3.30 2.77 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. * Less than 0.5%, but greater than zero. S-74
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-21 Class A-22 -------------------------- --------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ---- ---- ---- ----- ----- ----- ---- ---- Initial Percentage....... 100 100 100 100 100 100 100 100 100 100 February 25, 2000........ 99 97 94 91 90 100 100 100 100 100 February 25, 2001........ 98 92 81 74 68 100 100 100 100 100 February 25, 2002........ 96 84 65 53 45 100 100 100 100 100 February 25, 2003........ 95 78 52 38 28 100 100 100 100 100 February 25, 2004........ 94 71 41 26 11 100 100 100 100 49 February 25, 2005........ 92 66 33 15 1 100 100 100 64 2 February 25, 2006........ 91 60 27 6 0 100 100 100 26 0 February 25, 2007........ 89 56 21 1 0 100 100 93 4 0 February 25, 2008........ 87 52 16 0 0 100 100 68 0 0 February 25, 2009........ 85 48 11 0 0 100 100 50 0 0 February 25, 2010........ 83 44 8 0 0 100 100 35 0 0 February 25, 2011........ 81 41 5 0 0 100 100 22 0 0 February 25, 2012........ 79 38 3 0 0 100 100 12 0 0 February 25, 2013........ 77 35 1 0 0 100 100 4 0 0 February 25, 2014........ 74 32 0 0 0 100 100 0 0 0 February 25, 2015........ 71 30 0 0 0 100 100 0 0 0 February 25, 2016........ 68 27 0 0 0 100 100 0 0 0 February 25, 2017........ 65 25 0 0 0 100 100 0 0 0 February 25, 2018........ 62 22 0 0 0 100 97 0 0 0 February 25, 2019........ 58 19 0 0 0 100 81 0 0 0 February 25, 2020........ 54 15 0 0 0 100 67 0 0 0 February 25, 2021........ 50 12 0 0 0 100 53 0 0 0 February 25, 2022........ 45 9 0 0 0 100 40 0 0 0 February 25, 2023........ 41 6 0 0 0 100 27 0 0 0 February 25, 2024........ 35 4 0 0 0 100 16 0 0 0 February 25, 2025........ 30 1 0 0 0 100 5 0 0 0 February 25, 2026........ 24 0 0 0 0 100 0 0 0 0 February 25, 2027........ 13 0 0 0 0 57 0 0 0 0 February 25, 2028........ 1 0 0 0 0 5 0 0 0 0 February 25, 2029........ 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1)........... 19.95 11.18 5.14 3.59 2.97 28.18 22.39 10.40 6.52 5.12 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. S-75
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-23 Class A-24 --------------------------- --------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ----- ---- ---- ----- ----- ----- ---- ---- Initial Percentage...... 100 100 100 100 100 100 100 100 100 100 February 25, 2000....... 100 100 100 100 100 100 100 100 100 100 February 25, 2001....... 100 100 100 100 100 100 100 100 100 100 February 25, 2002....... 100 100 100 100 100 100 100 100 100 100 February 25, 2003....... 100 100 100 100 100 100 100 100 100 100 February 25, 2004....... 100 100 100 100 100 100 100 100 100 100 February 25, 2005....... 100 100 100 100 5 100 98 94 91 88 February 25, 2006....... 100 100 100 57 0 99 95 86 80 74 February 25, 2007....... 100 100 100 9 0 98 90 76 66 54 February 25, 2008....... 100 100 100 0 0 96 84 65 52 36 February 25, 2009....... 100 100 100 0 0 94 77 53 39 25 February 25, 2010....... 100 100 75 0 0 92 71 43 29 17 February 25, 2011....... 100 100 49 0 0 89 65 35 21 11 February 25, 2012....... 100 100 27 0 0 87 59 28 16 8 February 25, 2013....... 100 100 9 0 0 84 54 23 11 5 February 25, 2014....... 100 100 0 0 0 81 49 18 8 4 February 25, 2015....... 100 100 0 0 0 78 44 15 6 2 February 25, 2016....... 100 100 0 0 0 74 40 12 4 2 February 25, 2017....... 100 100 0 0 0 70 35 9 3 1 February 25, 2018....... 100 100 0 0 0 66 31 7 2 1 February 25, 2019....... 100 100 0 0 0 62 27 6 2 * February 25, 2020....... 100 100 0 0 0 57 24 4 1 * February 25, 2021....... 100 100 0 0 0 52 21 3 1 * February 25, 2022....... 100 86 0 0 0 47 17 3 1 * February 25, 2023....... 100 59 0 0 0 41 14 2 * * February 25, 2024....... 100 34 0 0 0 35 11 1 * * February 25, 2025....... 100 10 0 0 0 29 9 1 * * February 25, 2026....... 100 0 0 0 0 22 6 1 * * February 25, 2027....... 100 0 0 0 0 14 4 * * * February 25, 2028....... 12 0 0 0 0 6 1 * * * February 25, 2029....... 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1).......... 28.71 24.44 12.13 7.25 5.57 21.26 15.81 11.40 9.87 8.82 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. * Less than 0.5%, but greater than zero. S-76
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-R and Class A-LR ------------------------ Distribution Date 0% 100% 275% 400% 500% ----------------- ---- ---- ---- ---- ---- Initial Percentage..................................... 100 100 100 100 100 February 25, 2000...................................... 0 0 0 0 0 February 25, 2001...................................... 0 0 0 0 0 February 25, 2002...................................... 0 0 0 0 0 February 25, 2003...................................... 0 0 0 0 0 February 25, 2004...................................... 0 0 0 0 0 February 25, 2005...................................... 0 0 0 0 0 February 25, 2006...................................... 0 0 0 0 0 February 25, 2007...................................... 0 0 0 0 0 February 25, 2008...................................... 0 0 0 0 0 February 25, 2009...................................... 0 0 0 0 0 February 25, 2010...................................... 0 0 0 0 0 February 25, 2011...................................... 0 0 0 0 0 February 25, 2012...................................... 0 0 0 0 0 February 25, 2013...................................... 0 0 0 0 0 February 25, 2014...................................... 0 0 0 0 0 February 25, 2015...................................... 0 0 0 0 0 February 25, 2016...................................... 0 0 0 0 0 February 25, 2017...................................... 0 0 0 0 0 February 25, 2018...................................... 0 0 0 0 0 February 25, 2019...................................... 0 0 0 0 0 February 25, 2020...................................... 0 0 0 0 0 February 25, 2021...................................... 0 0 0 0 0 February 25, 2022...................................... 0 0 0 0 0 February 25, 2023...................................... 0 0 0 0 0 February 25, 2024...................................... 0 0 0 0 0 February 25, 2025...................................... 0 0 0 0 0 February 25, 2026...................................... 0 0 0 0 0 February 25, 2027...................................... 0 0 0 0 0 February 25, 2028...................................... 0 0 0 0 0 February 25, 2029...................................... 0 0 0 0 0 Weighted Average Life (in years)(1)......................................... 0.09 0.09 0.09 0.09 0.09 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. S-77
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Percentage of Initial Class Balance Outstanding at the Respective Percentages of PSA Set Forth Below: [Download Table] Class A-PO B-1, B-2 and B-3 -------------------------- --------------------------- Distribution Date 0% 100% 275% 400% 500% 0% 100% 275% 400% 500% ----------------- ----- ----- ---- ---- ---- ----- ----- ----- ---- ---- Initial Percentage....... 100 100 100 100 100 100 100 100 100 100 February 25, 2000........ 99 97 94 92 90 99 99 99 99 99 February 25, 2001........ 98 92 83 76 71 98 98 98 98 98 February 25, 2002........ 96 86 68 57 49 97 97 97 97 97 February 25, 2003........ 95 79 56 43 34 95 95 95 95 95 February 25, 2004........ 94 73 46 32 23 94 94 94 94 94 February 25, 2005........ 92 68 38 24 16 93 91 88 85 83 February 25, 2006........ 90 63 31 18 11 91 87 80 75 71 February 25, 2007........ 89 58 25 13 8 89 82 71 63 56 February 25, 2008........ 87 53 21 10 5 88 77 60 49 42 February 25, 2009........ 85 49 17 7 4 86 71 49 37 28 February 25, 2010........ 83 45 14 5 2 84 65 40 27 19 February 25, 2011........ 80 41 11 4 2 81 59 32 20 13 February 25, 2012........ 78 37 9 3 1 79 54 26 15 9 February 25, 2013........ 75 34 7 2 1 76 49 21 11 6 February 25, 2014........ 72 31 6 2 1 74 45 17 8 4 February 25, 2015........ 69 28 5 1 * 71 40 14 6 3 February 25, 2016........ 66 25 4 1 * 67 36 11 4 2 February 25, 2017........ 63 22 3 1 * 64 32 9 3 1 February 25, 2018........ 59 19 2 * * 60 29 7 2 1 February 25, 2019........ 55 17 2 * * 56 25 5 2 1 February 25, 2020........ 51 15 1 * * 52 22 4 1 * February 25, 2021........ 46 13 1 * * 48 19 3 1 * February 25, 2022........ 42 11 1 * * 43 16 2 1 * February 25, 2023........ 37 9 1 * * 38 13 2 * * February 25, 2024........ 31 7 * * * 32 10 1 * * February 25, 2025........ 25 5 * * * 26 8 1 * * February 25, 2026........ 19 4 * * * 20 6 1 * * February 25, 2027........ 12 2 * * * 13 3 * * * February 25, 2028........ 5 1 * * * 5 1 * * * February 25, 2029........ 0 0 0 0 0 0 0 0 0 0 Weighted Average Life (in years)(1)........... 19.48 11.37 6.02 4.48 3.74 19.72 14.78 10.81 9.46 8.76 -------- (1) The weighted average life of a class of Certificates is determined by (i) multiplying the amount of each distribution in reduction of the balance thereof by the number of years from the date of the issuance of such class to the related Distribution Date, (ii) adding the results and (iii) dividing the sum by the initial balance of that class. * Less than 0.5%, but greater than zero. S-78
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Yield on the Class A-7 and Class A-19 Certificates The significance of the effects of prepayments on the Mortgage Loans and changes in LIBOR on the Class A-7 and Class A-19 Certificates is illustrated in the following tables which show the pre-tax yield (on a corporate bond equivalent basis) to the holders of Class A-7 or Class A-19 Certificates under different constant percentages of PSA and rates of LIBOR. The yields of such Certificates set forth in the following tables were calculated using the Modeling Assumptions and the additional assumptions that (i) on the first LIBOR Determination Date and on each LIBOR Determination Date thereafter, LIBOR will be as indicated and (ii) the Class A-7 and Class A-19 Certificates are purchased on the Closing Date at assumed purchase prices equal to 7.00% and 98.00%, in each case, of their class balance or notional amount plus accrued interest from February 1, 1999 to (but not including) the Closing Date. As indicated in the following tables, the yield to investors in the Class A- 7 or Class A-19 Certificates will be extremely sensitive to changes in the rate of LIBOR. Increases in LIBOR may have a negative effect on the yield to investors in Class A-7 or Class A-19 Certificates. In addition, investors in the Class A-7 Certificates, which are interest-only Certificates and have no class balance, should consider carefully the risk that a rapid rate of prepayment of the Mortgage Loans or a high level of LIBOR could result in the failure of investors in the Class A-7 Certificates to fully recover their initial investment. It is not likely that the Mortgage Loans will prepay at a constant rate until maturity or that all of the Mortgage Loans will prepay at the same rate or that they will have the characteristics assumed. 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. The timing of changes in the rate of prepayments may affect significantly the yield realized by a holder of a Class A-7 or Class A-19 Certificate and there can be no assurance that the pre-tax yield to an investor in the Class A-7 or Class A-19 Certificates will correspond to any of the pre-tax yields shown herein. Each investor must make its own decision as to the appropriate prepayment assumptions to be used in deciding whether to purchase a Class A-7 or Class A-19 Certificate. Changes in LIBOR may not correlate with changes in prevailing mortgage interest rates. It is possible that lower prevailing mortgage interest rates, which might be expected to result in faster prepayments, could occur concurrently with an increase in LIBOR. Sensitivity of the Class A-7 Certificates to Prepayments and LIBOR (Pre-Tax Yields to Maturity) [Download Table] Percentage of PSA ----------------------------------- LIBOR 0% 100% 275% 400% 500% ----- ----- ----- ----- ------ ------ 2.95%...................................... 79.90% 74.53% 64.55% 56.81% 50.33% 3.95....................................... 62.72 57.11 46.48 37.98 30.88 4.95....................................... 46.03 40.12 28.54 18.86 10.86 5.95....................................... 29.76 23.49 10.43 (1.28) (10.66) 6.95....................................... 13.47 6.77 (9.05) (24.67) (36.36) S-79
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Sensitivity of the Class A-19 Certificates to Prepayments and LIBOR (Pre-Tax Yields to Maturity) [Download Table] Percentage of PSA --------------------------------- LIBOR 0% 100% 275% 400% 500% ----- ----- ----- ----- ----- ----- 2.95%........................................ 18.33% 18.33% 18.33% 18.35% 18.38% 3.95......................................... 13.73 13.73 13.75 13.78 13.83 4.95......................................... 9.19 9.19 9.21 9.26 9.34 5.95......................................... 4.71 4.71 4.74 4.80 4.91 6.95......................................... 0.29 0.30 0.34 0.41 0.55 The yields set forth in the preceding tables were calculated by (i) determining the monthly discount rates that, when applied to the assumed streams of cash flows to be paid on the Class A-7 and Class A-19 Certificates would cause that discounted present value of such assumed stream of cash flows to equal the assumed purchase prices of the Class A-7 and Class A-19 Certificates indicated above and (ii) converting such monthly rates to corporate bond equivalent rates. Such calculation does not take into account variations that may occur in the interest rates at which you may be able to reinvest funds received as payments of interest on the Class A-7 or Class A-19 Certificates and consequently does not purport to reflect the return on any investment in the Class A-7 or Class A-19 Certificates when such reinvestment rates are considered. Yield on the Class A-PO Certificates The Class A-PO Certificates are principal-only Certificates and, as such, will not be entitled to receive distributions of interest in respect of the Mortgage Loans. As a result, the Class A-PO Certificates will be offered at a substantial discount to their original principal amount. The significance of the effects of prepayments on the Class A-PO Certificates is illustrated in the following table which shows the pre-tax yield (on a corporate bond equivalent basis) to the holders of Class A-PO Certificates under different constant percentages of PSA. The yields set forth were calculated using the Modeling Assumptions and the additional assumption that the Class A-PO Certificates are purchased on the Closing Date at an assumed purchase price equal to 69.00% of their balance. As indicated in the following table, because the Class A-PO Certificates represent the right to receive only a portion of the principal received with respect to the Discount Mortgage Loans, the yield to maturity on the Class A-PO Certificates will be extremely sensitive to the rate and timing of principal payments (including prepayments) on the Discount Mortgage Loans. It is not likely that the Discount Mortgage Loans will prepay at a constant rate until maturity, that all of the Discount Mortgage Loans will prepay at the same rate or that they will have the characteristics assumed. There can be no assurance that the Discount Mortgage Loans will prepay at any of the rates shown in the table or at any other particular rate. The timing of changes in the rate of prepayments may affect significantly the yield realized by a holder of a Class A-PO Certificate and there can be no assurance that your pre-tax yield on the Class A-PO Certificates will correspond to any of the pre-tax yields shown in this Prospectus Supplement. You must make your own decision as to the appropriate prepayment assumptions to be used in deciding whether to purchase a Class A-PO Certificate. S-80
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Sensitivity of the Class A-PO Certificates to Prepayments (Pre-Tax Yields to Maturity) [Download Table] Percentage of PSA ----------------------------- 0% 100% 275% 400% 500% ---- ---- ---- ---- ----- Class A-PO Certificates.......................... 1.98% 3.62% 7.05% 9.45% 11.27% The yields set forth in the preceding table were calculated by (i) determining the monthly discount rates that, when applied to the assumed stream of cash flows to be paid on the Class A-PO Certificates, would cause the discounted present value of such assumed stream of cash flows to equal the assumed purchase price of the Class A-PO Certificates indicated above and (ii) converting such monthly rates to corporate bond equivalent rates. This calculation does not take into account variations that may occur in the interest rates at which you may be able to reinvest funds received as payments of principal of the Class A-PO Certificates and consequently does not purport to reflect the return on any investment in the Class A-PO Certificates when such reinvestment rates are considered. Yield on the Class A-R and Class A-LR Certificates The after-tax rate of return to the holder of the Class A-R Certificate and the after-tax rate of return to the holder of the Class A-LR Certificates will reflect their pre-tax rate of return, reduced by the taxes required to be paid with respect to those Certificates. If you hold a Class A-R or Class A-LR Certificate, you may have tax liabilities during the early years of the applicable REMIC's term that substantially exceed any distributions payable thereon during any such period. In addition, the present value of the tax liabilities with respect to your Class A-R or Class A-LR Certificates may substantially exceed the present value of expected distributions on those certificates and of any tax benefits that may arise with respect to them. Accordingly, the after-tax rate of return on the Class A-R Certificate and the after-tax rate of return of the Class A-LR Certificate may be negative or may be otherwise significantly adversely affected. The timing and amount of taxable income attributable to the Class A-R Certificate and the timing and amount of taxable income attributable to the Class A-LR Certificate will depend on, among other things, the timing and amounts of prepayments and losses experienced with respect to the Mortgage Loans. If you own a Class A-R or Class A-LR Certificate, you should consult your tax advisors regarding the effect of taxes and the receipt of any payments made in connection with the purchase of your Class A-R or Class A-LR Certificate on your after-tax rate of return. See "Federal Income Tax Consequences" in this Prospectus Supplement and in the Prospectus. Yield on the Subordinate Certificates The weighted average life of, and the yield to maturity on, the Subordinate Certificates, in increasing order of their numerical class designation, will be progressively more sensitive to the rate and timing of mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If the actual rate and severity of losses on the Mortgage Loans is higher than those you assumed, the actual yield to maturity of your Subordinate Certificate may be lower than the yield you expected. The timing of losses on Mortgage Loans will also affect your actual yield to maturity, even if the rate of defaults and severity of losses over the life of the Trust are consistent with your expectations. In general, the earlier a loss occurs, the greater the effect on an investor's yield to maturity. Realized Losses on the Mortgage Loans will be allocated to reduce the balance of the applicable class of Subordinate Certificates (as described in this Prospectus Supplement under "Description of the Certificates -- Allocation of Losses"), without the receipt of cash equal to the reduction. In addition, shortfalls in cash available for distributions on the Subordinate Certificates will result in a reduction in the balance of the class of Subordinate Certificates then outstanding with the highest numerical class designation if and to the extent that the aggregate S-81
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balance of all classes of Certificates, following all distributions and the allocation of Realized Losses on a Distribution Date, exceeds the balance of the Mortgage Pool as of the due date occurring in the month of such Distribution Date. As a result of such reductions, less interest will accrue on that class of Subordinate Certificates than otherwise would be the case. The yield to maturity of the Subordinate Certificates will also be affected by the disproportionate allocation of principal prepayments to the Senior Certificates (other than the Class A-PO Certificates), Net Interest Shortfalls, other cash shortfalls in the Pool Distribution Amount and distribution of funds to holders of Class A-PO Certificates otherwise available for distribution on the Subordinate Certificates to the extent of reimbursement for Class A-PO Deferred Amounts. See "Description of the Certificates -- Allocation of Losses" in this Prospectus Supplement. If on any Distribution Date, the Credit Support Percentage for any class of Subordinate Certificates is less than its original Credit Support Percentage, all partial principal prepayments and principal prepayments in full available for distribution on the Subordinate Certificates will be allocated solely to that class and all other classes of Subordinate Certificates with lower numerical class designations, thereby accelerating the amortization thereof relative to that of the Restricted Classes and reducing the weighted average lives of the classes of Subordinate Certificates receiving such distributions. Accelerating the amortization of the classes of Subordinate Certificates with lower numerical class designations relative to the other classes of Subordinate Certificates is intended to preserve the availability of the subordination provided by those other classes. Yield Considerations with Respect tothe Class B-2 and Class B-3 Certificates Defaults on mortgage loans may be measured relative to a default standard or model. The model used in this Prospectus Supplement, the standard default assumption ("SDA"), represents an assumed rate of default each month relative to the outstanding performing principal balance of a pool of new mortgage loans. A default assumption of 100% SDA assumes constant default rates of 0.02% per annum of the outstanding principal balance of such mortgage loans in the first month of the life of the mortgage loans and an additional 0.02% per annum in each month thereafter until the 30th month. Beginning in the 30th month and in each month thereafter through the 60th month of the life of the mortgage loans, 100% SDA assumes a constant default rate of 0.60% per annum each month. Beginning in the 61st month and in each month thereafter through the 120th month of the life of the mortgage loans, 100% SDA assumes that the constant default rate declines each month by 0.0095% per annum, and that the constant default rate remains at 0.03% per annum in each month after the 120th month. For the following tables, it is assumed that there is no delay between the default and liquidation of the mortgage loans. As used in the following tables, "0% SDA" assumes no defaults. SDA is not a historical description of default experience or a prediction of the rate of default of any pool of mortgage loan. The following tables indicate the sensitivity of the pre-tax yield to maturity on the Class B-2 and Class B-3 Certificates to various rates of prepayment and varying levels of Realized Losses. The tables set forth below are based upon, among other things, the Modeling Assumptions (other than the assumption that no defaults shall have occurred with respect to the Mortgage Loans) and the additional assumption that liquidations (other than those scenarios indicated as 0% of SDA (no defaults)) occur monthly on the last day of the preceding month (other than on a due date) at the percentages of SDA set forth in the table. In addition, it was assumed that (i) Realized Losses on liquidations of 25% or 50% of the outstanding principal balance of the Liquidated Mortgage Loans, as indicated in the tables below S-82
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(referred to as a "Loss Severity Percentage"), will occur at the time of liquidation, (ii) there are no Special Hazard Losses, Fraud Losses or Bankruptcy Losses and (iii) the Class B-2 and Class B-3 Certificates are purchased on the Closing Date at assumed purchase prices equal to 98.50% and 92.00%, in each case, of their balance plus accrued interest from February 1, 1999 to (but not including) the Closing Date. It is highly unlikely that the Mortgage Loans will have the precise characteristics referred to in this Prospectus Supplement or that they will prepay or liquidate at any of the rates specified or that the Realized Losses will be incurred according to one particular pattern. The assumed percentages of SDA and PSA and the Loss Severity Percentages shown below are for illustrative purposes only. Those assumptions may not be correct and the actual rates of prepayment and liquidation and loss severity experience of the Mortgage Loans may not correspond to any of the assumptions made in this Prospectus Supplement. For these reasons, and because the timing of cash flows is critical to determining yield, the pre-tax yield to maturity of the Class B- 2 and Class B-3 Certificates are likely to differ from the pre-tax yields to maturity shown below. The pre-tax yields to maturity set forth below were calculated by determining the monthly discount rates which, when applied to the assumed streams of cash flows to be paid on the Class B-2 and Class B-3 Certificates, would cause the discounted present value of those assumed streams of cash flows to equal the aggregate assumed purchase prices of the Class B-2 and Class B-3 Certificates set forth above. In all cases, monthly rates were then converted to the semi-annual corporate bond equivalent yields shown below. Implicit in the use of any discounted present value or internal rate or return calculations such as these is the assumption that intermediate cash flows are reinvested at the discount rates at which investors may be able to reinvest funds received by them as distributions on the Class B-2 and Class B-3 Certificates. Consequently, these yields do not purport to reflect the total return on any investment in the Class B-2 and Class B-3 Certificates when reinvestment rates are considered. Sensitivity of Pre-Tax Yields to Maturity of the Class B-2 Certificates to Prepayments and Realized Losses [Download Table] Percentage of PSA Loss ------------------------------------------ Percentage Severity of SDA Percentage 0% 100% 275% 400% 500% ---------- ---------- ------ ------ ------ ------ ------ 0% ................... 0% 6.69 % 6.71 % 6.74 % 6.75% 6.76% 50..................... 25 6.68 6.72 6.74 6.75 6.76 50..................... 50 6.68 6.71 6.74 6.75 6.76 75..................... 25 6.68 6.72 6.74 6.75 6.76 75..................... 50 4.16 6.42 6.74 6.75 6.76 100..................... 25 6.68 6.71 6.74 6.75 6.76 100..................... 50 (15.60) 2.64 6.74 6.75 6.76 150..................... 25 4.35 6.51 6.74 6.75 6.76 150..................... 50 (39.82) (33.74) (0.86) 3.79 6.76 Sensitivity of Pre-Tax Yields to Maturity of the Class B-3 Certificates to Prepayments and Realized Losses Percentage of PSA Loss ------------------------------------------ Percentage Severity of SDA Percentage 0% 100% 275% 400% 500% ---------- ---------- ------ ------ ------ ------ ------ 0%.................... 0% 7.38 % 7.52 % 7.70 % 7.80 % 7.85 % 50..................... 25 7.26 7.54 7.71 7.80 7.86 50..................... 50 3.47 7.13 7.72 7.80 7.86 75..................... 25 7.24 7.41 7.71 7.80 7.86 75..................... 50 (27.88) (19.51) 6.17 7.81 7.86 100..................... 25 3.71 7.20 7.72 7.80 7.86 100..................... 50 (41.62) (36.38) (6.36) 3.88 7.87 150..................... 25 (27.49) (18.58) 6.36 7.81 7.86 150..................... 50 (62.75) (59.02) (50.65) (42.04) (18.42) S-83
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The following table sets forth the amount of Realized Losses that would be incurred with respect to the Mortgage Loans, expressed as a percentage of the aggregate outstanding principal balance of the Mortgage Loans as of the Cut-off Date. Aggregate Realized Losses [Download Table] Percentage of PSA Loss ---------------------------- Percentage Severity of SDA Percentage 0% 100% 275% 400% 500% ---------- ---------- ---- ---- ---- ---- ---- 50%................................... 25% 0.49% 0.39% 0.27% 0.22% 0.18% 50.................................... 50 0.97 0.77 0.54 0.44 0.37 75.................................... 25 0.73 0.58 0.41 0.33 0.28 75.................................... 50 1.46 1.15 0.81 0.65 0.55 100.................................... 25 0.97 0.76 0.54 0.43 0.37 100.................................... 50 1.93 1.53 1.08 0.87 0.74 150.................................... 25 1.44 1.14 0.81 0.65 0.55 150.................................... 50 2.87 2.28 1.61 1.29 1.10 You should make your investment decisions based on your determinations of anticipated rates of prepayment and Realized Losses under a variety of scenarios. If you are purchasing Class B-2 or Class B-3 Certificates you should fully consider the risk that Realized Losses on the Mortgage Loans could result in the failure to fully recover your investments. -------------------------------------------------------------------------------- CREDIT SUPPORT -------------------------------------------------------------------------------- The rights of holders of each class of Class B Certificates to receive distributions of principal and interest are subordinated to such rights of holders of the Class A Certificates and the holders of each class of Class B Certificates with a lower numerical designation. For example, the holders of the Class B-2 Certificates will not receive principal or interest on a Distribution Date until the holders of the Class A and Class B-1 Certificates have received the amounts to which they are entitled on that Distribution Date. The subordination described above is intended to increase the likelihood of receipt by holders of the Class A Certificates and the holders of the Class B Certificates with lower numerical class designations of the amount to which they are entitled on any Distribution Date and to provide those holders with protection against Realized Losses, other than Excess Losses. The Class B Certificates also will provide limited protection against Special Hazard Losses, Bankruptcy Losses and Fraud Losses up to the Special Hazard Loss Amount, Bankruptcy Loss Amount and Fraud Loss Amount, as described below. The applicable Non-PO Percentage of Realized Losses, other than Excess Losses, will be allocated to the class of Class B Certificates then outstanding with the highest numerical class designation. In addition, the balance of that class of Class B Certificates will be reduced by the amount of distributions on the Class A-PO Certificates in reimbursement for Class A-PO Deferred Amounts. The Class B Certificates will provide protection to the classes of Certificates of higher relative priority against (i) Special Hazard Losses in an initial amount of approximately $6,014,660 (the "Special Hazard Loss Amount"), (ii) Bankruptcy Losses in an initial amount of approximately $179,557 (the "Bankruptcy Loss Amount") and (iii) Fraud Losses in an initial amount of approximately $6,000,846 (the "Fraud Loss Amount"). S-84
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On any Distribution Date, the Special Hazard Loss Amount will be reduced to equal the lesser of (a) the greatest of (i) 1% of the scheduled balance of the Mortgage Pool, (ii) twice the principal balance of the largest Mortgage Loan and (iii) the aggregate principal balance of the Mortgage Loans secured by mortgaged properties located in the single California postal zip code area having the highest aggregate principal balance of any zip code area and (b) the initial Special Hazard Loss Amount less any Special Hazard Losses incurred since the Closing Date. All principal balances for the purpose of this definition will be calculated as of the first day of the month preceding the Distribution Date after giving effect to scheduled installments of principal and interest due on the Mortgage Loans, whether or not paid. For the period from the Closing Date through the first anniversary of the Cut-off Date, the Fraud Loss Amount equals the initial Fraud Loss Amount reduced by the cumulative amount of Fraud Losses allocated to the Certificates. After that period, the Fraud Loss Amount equals the lesser of (i) the initial Fraud Loss Amount reduced by the cumulative amount of Fraud Losses allocated to the Certificates and (ii) for each Distribution Date occurring (a) during the period from the day after the first anniversary through the third anniversary of the Cut-off Date, 1% of the scheduled balance of the Mortgage Pool, (b) during the period from the day after the third anniversary through the fifth anniversary of the Cut-off Date, 0.5% of the scheduled balance of the Mortgage Pool and (c) after the fifth anniversary of the Cut-off Date, zero. The Bankruptcy Loss Amount will be reduced, from time to time, by the Bankruptcy Losses allocated to the Certificates. The amount of coverage provided by the Class B Certificates for Special Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or reduced if the ratings of the Certificates assigned by the Rating Agencies are not adversely affected. In addition, a reserve fund or other form of credit support may be substituted for the protection provided by the Class B Certificates for Special Hazard Losses, Bankruptcy Losses and Fraud Losses. The Senior Certificates (other than the Class A-PO Certificates) will receive 100% of the Non-PO Percentage of principal prepayments received with respect to the Mortgage Loans until the fifth anniversary of the first Distribution Date. During the following four years, those Senior Certificates will receive a large, but generally decreasing, share of such principal prepayments. This disproportionate allocation of prepayments will result in an acceleration of the amortization of those Senior Certificates and will enhance the likelihood that holders of those Certificates will receive the entire amount of principal to which they are entitled. In addition to this acceleration mechanism, on any Distribution Date on which the Senior Percentage exceeds the initial Senior Percentage, the Senior Certificates (other than the Class A-PO Certificates) will be entitled to receive 100% of the Non-PO Percentage of principal prepayments received with respect to the Mortgage Loans. See "Description of the Certificates -- Principal" in this Prospectus Supplement. -------------------------------------------------------------------------------- USE OF PROCEEDS -------------------------------------------------------------------------------- The Depositor will apply the net proceeds of the sale of the Offered Certificates against the purchase price of the Mortgage Loans. S-85
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-------------------------------------------------------------------------------- FEDERAL INCOME TAX CONSEQUENCES -------------------------------------------------------------------------------- An election will be made to treat the Trust as two separate "real estate mortgage investment conduits" (the "Upper-Tier REMIC" and the "Lower-Tier REMIC" and each, a "REMIC") for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"). .The Certificates other than the Class A-R and Class A-LR Certificates will be designated as "regular interests" in the Upper-Tier REMIC. All of the Certificates other than the Class A-R and Class A-LR Certificates are "Regular Certificates" for purposes of the following discussion. .The Class A-R and Class A-LR Certificates will be designated as the sole class of "residual interests" in the Upper-Tier REMIC and the Lower-Tier REMIC, respectively. See "Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates" in the Prospectus. Regular Certificates The Regular Certificates generally will be treated as debt instruments issued by the Upper-Tier REMIC for federal income tax purposes. Income on the Regular Certificates must be reported under an accrual method of accounting. The Class A-7 and Class A-PO Certificates will, and the other classes of Offered Certificates may, depending on their respective issue prices, be treated for federal income tax purposes as having been issued with original issue discount. See "Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Taxation of Regular Certificates -- Original Issue Discount" in the Prospectus. Certain classes of the Regular Certificates may be treated for federal income tax purposes as having been issued at a premium. Whether any holder of such a class of Certificates will be treated as holding a Certificate with amortizable bond premium will depend on such certificateholder's purchase price and the distributions remaining to be made on such Certificate at the time of its acquisition by such certificateholder. Holders of such classes of Certificates should consult their own tax advisors regarding the possibility of making an election to amortize such premium. See "Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Taxation of Regular Certificates -- Premium" in the Prospectus. For purposes of determining the amount and the rate of accrual of original issue discount and market discount, the Depositor intends to assume that there will be prepayments on the Mortgage Loans at a rate equal to 275% PSA. No representation is made as to the actual rate at which the Mortgage Loans will be prepaid. The Regular Certificates will be treated as regular interests in a REMIC under Section 860G of the Code. Accordingly, to the extent described in the Prospectus: .the Regular Certificates will be treated as assets described in Section 7701(a)(19)(C) of the Code; .the Regular Certificates will be treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code; and .interest on the Regular Certificates will be treated as interest on obligations secured by mortgages on real property within the meaning of Section 856(c)(3)(B) of the Code. See "Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Status of REMIC Certificates" in the Prospectus. S-86
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Residual Certificates If you hold a Class A-R or Class A-LR Certificate, you must include the taxable income or loss of the Upper-Tier REMIC or Lower-Tier REMIC, respectively, in determining your federal taxable income. Your resulting tax liability may exceed cash distributions to you during certain periods. In addition, all or a portion of the taxable income you recognize from a Class A-R or Class A-LR Certificate may be treated as "excess inclusion" income, which, among other consequences, will result in your inability to use net operating losses to offset such income from the Upper-Tier REMIC or Lower-Tier REMIC, respectively. You should consider carefully the tax consequences of any investment in Class A-R or Class A-LR Certificates discussed in the Prospectus and should consult your tax advisors with respect to those consequences. See "Federal Income Tax Consequences" in the Prospectus. Specifically, you should consult your tax advisors regarding whether, at the time of acquisition, a Class A-R or Class A-LR Certificate will be treated as "noneconomic" residual interests and "tax avoidance potential" residual interests. See "Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related Restrictions on Transfer of Residual Certificates -- Noneconomic Residual Interests," "-- Foreign Investors" and "-- Mark to Market Regulations" in the Prospectus. Additionally, for information regarding Prohibited Transactions, see "Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Taxes That May Be Imposed on the REMIC Pool -- Prohibited Transactions" in the Prospectus. Backup Withholding and Reporting Requirements Certain holders or other beneficial owners of Offered Certificates may be subject to backup withholding at the rate of 31% with respect to interest paid on the Offered Certificates if those holders or beneficial owners, upon issuance, fail to supply the Trustee or their broker with their taxpayer identification number, furnish an incorrect taxpayer identification number, fail to report interest, dividends or other "reportable payments" (as defined in the Code) properly, or, under certain circumstances, fail to provide the Trustee or their broker with a certified statement, under penalty of perjury, that they are not subject to backup withholding. See "Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Backup Withholding" in the Prospectus. The Trustee will be required to report annually to the Internal Revenue Service (the "IRS"), and to each certificateholder of record, the amount of interest paid (and original issue discount accrued, if any) on the Regular Certificates and the amount of interest withheld for federal income taxes, if any, for each calendar year, except as to exempt holders (generally, holders that are corporations, certain tax-exempt organizations or nonresident aliens who provide certification as to their status as nonresidents). As long as the only "certificateholder" of record of the Offered Certificates (other than the Class A-R and Class A-LR Certificates) is Cede & Co., as nominee for DTC, beneficial owners of the Offered Certificates and the IRS will receive tax and other information including the amount of interest paid on such Certificates from DTC Participants rather than from the Trustee. (The Trustee, however, will respond to requests for necessary information to enable DTC Participants and certain other persons to complete their reports.) See "Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Reporting Requirements" in the Prospectus. All investors should consult their tax advisors regarding the federal, state, local or foreign income tax consequences of the purchase, ownership and disposition of the Offered Certificates. S-87
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-------------------------------------------------------------------------------- STATE TAXES -------------------------------------------------------------------------------- The Depositor makes no representations regarding the tax consequences of purchase, ownership or disposition of the Offered Certificates under the tax laws of any state. Investors considering an investment in the Offered Certificates should consult their tax advisors regarding such tax consequences. -------------------------------------------------------------------------------- ERISA CONSIDERATIONS -------------------------------------------------------------------------------- A fiduciary or other person acting on behalf of any employee benefit plan or arrangement, including an individual retirement account (an "IRA"), subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code or any federal, state or local law ("Similar Law") which is similar to ERISA or the Code (collectively, a "Plan") should carefully review with its legal advisors whether the purchase or holding of an Offered Certificate could give rise to a transaction prohibited or not otherwise permissible under ERISA, the Code or Similar Law. See "ERISA Considerations" in the Prospectus. The U.S. Department of Labor has extended to BankAmerica Corporation, as successor to NationsBank Corporation, the corporate parent of NationsBanc Montgomery Securities LLC, an administrative exemption (Prohibited Transaction Exemption 93-31; Exemption Application No. D-9105) (the "Exemption") from certain of the prohibited transaction rules of ERISA and the related excise tax provisions of Section 4975 of the Code with respect to the initial purchase, the holding and the subsequent resale by certain Plans of certificates in pass- through trusts that consist of certain receivables, loans and other obligations that meet the conditions and requirements of the Exemption. The Exemption applies to mortgage loans such as the Mortgage Loans, but does not cover certain IRAs and certain employee benefit plans covering only self-employed individuals which are subject to the prohibited transaction provisions of the Code. For a general description of the Exemption and the conditions that must be satisfied for the Exemption to apply, see "ERISA Considerations -- Administrative Exemptions -- Individual Administrative Exemptions" in the Prospectus. The Underwriter believes that the Exemption will cover the acquisition and holding of the Senior Certificates (other than the Residual Certificates) by the Plans to which it applies and that all conditions of the Exemption other than those within the control of the investors will be met. In addition, as of the date hereof, there is no single mortgagor that is the obligor on 5% of the initial balance of the Mortgage Pool. Because the Class B Certificates are subordinated to the Senior Certificates, the Class B Certificates may not be transferred unless the transferee has delivered (i) a representation letter to the Trustee stating that either the transferee is not a Plan and is not acting on behalf of a Plan or using the assets of a Plan to effect such purchase or, subject to the conditions described in this Prospectus Supplement, the source of funds used to purchase the Class B Certificates is an "insurance company general account" or (ii) an opinion of counsel and such other documentation as described in this Prospectus Supplement under "Description of the Certificates -- Restrictions on Transfer of the Class B Certificates." Any transferee of a Class B Certificate that does not comply with either clause (i) or clause (ii) of the preceding sentence will be deemed to have made one of the representations described in clause (i) of the preceding sentence. S-88
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Prospective Plan investors should consult with their legal advisors concerning the impact of ERISA, the Code and Similar Law, the applicability of PTE 83-1 described under "ERISA Considerations" in the Prospectus and the Exemption, and the potential consequences in their specific circumstances, prior to making an investment in the Offered Certificates. Moreover, each Plan fiduciary should determine whether under the governing plan instruments and the applicable fiduciary standards of investment prudence and diversification, an investment in the Offered Certificates is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan's investment portfolio. The Class A-R and Class A-LR Certificates may not be purchased by or transferred to a Plan or a person acting on behalf of or investing assets of a Plan. See "Description of the Certificates -- Restrictions on Transfer of the Class A-R and Class A-LR Certificates" in this Prospectus Supplement. -------------------------------------------------------------------------------- METHOD OF DISTRIBUTION -------------------------------------------------------------------------------- Subject to the terms and conditions set forth in the Underwriting Agreement (the "Underwriting Agreement") among the Depositor, NationsBanc Montgomery Securities LLC (the "Underwriter"), NationsBanc Mortgage Corporation and Bank of America, FSB, the Depositor has agreed to sell to the Underwriter, and the Underwriter has agreed to purchase from the Depositor, all of the Offered Certificates. Proceeds to the Depositor from the sale of the Offered Certificates are expected to be approximately 99.725% of the initial balance of those Certificates plus accrued interest from February 1, 1999 to (but not including) the Closing Date, before deducting expenses payable by the Depositor. Distribution of the Offered Certificates will be made by the Underwriter from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale. In connection with the purchase and sale of the Offered Certificates, the Underwriter may be deemed to have received compensation from the Depositor in the form of underwriting discounts. The Depositor has been advised by the Underwriter that it intends to make a market in the Offered Certificates but has no obligation to do so. There can be no assurance that a secondary market for the Offered Certificates will develop or, if it does develop, that it will continue. The Depositor has agreed to indemnify the Underwriter against, or make contributions to the Underwriter with respect to, certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Underwriter is an affiliate of the Depositor, the Sellers and the Servicers, and is a registered broker/dealer. Any obligations of the Underwriter are the sole responsibility of the Underwriter and do not create any obligation or guarantee on the part of any aliate of the Underwriter. This Prospectus Supplement and the Prospectus may be used by the Underwriter in connection with offers and sales related to market-making transactions in the Offered Certificates. The Underwriter may act as principal or agent in such transactions. -------------------------------------------------------------------------------- LEGAL MATTERS -------------------------------------------------------------------------------- The validity of and certain federal income tax matters with respect to the Offered Certificates will be passed upon for the Depositor by Cadwalader, Wickersham & Taft, New York, New York. Kennedy Covington Lobdell & Hickman, L.L.P., Charlotte, North Carolina will pass upon certain legal matters on behalf of the Underwriter. S-89
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-------------------------------------------------------------------------------- CERTIFICATE RATINGS -------------------------------------------------------------------------------- At their issuance, each class of Offered Certificates is required to receive from Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and Fitch IBCA, Inc. ("Fitch") at least the rating set forth in the table beginning on page S-4 of this Prospectus Supplement. Ratings on mortgage pass-through certificates address the likelihood of receipt by certificateholders of payments required under the Pooling Agreement. .S&P's and Fitch's ratings take into consideration the credit quality of the Mortgage Pool including any credit support, structural and legal aspects associated with the Offered Certificates, and the extent to which the payment stream of the Mortgage Pool is adequate to make payments required under the Offered Certificates. S&P's and Fitch's ratings on the Offered Certificates do not, however, constitute a statement regarding frequency of prepayments on the Mortgage Loans. .The "r" symbol is appended to the rating by S&P of the Class A-7, Class A- 19 and Class A-PO Certificates because they are inverse floating rate, interest-only or principal-only mortgage-backed securities that S&P believes may experience high volatility or high variability in expected returns due to non-credit risks created by the terms of those Certificates. The absence of an "r" symbol in the ratings of the other Offered Certificates should not be taken as an indication those Certificates will exhibit no volatility or variability in total return. .S&P's and Fitch's ratings do not address the remote possibility that, in the event of the insolvency of either Seller, the sale of the Offered Certificates may be recharacterized as a financing and that, as a result of such recharacterization, the Offered Certificates may be accelerated. As a result, holders of the Offered Certificates might suffer a lower than anticipated yield. The Depositor has not requested a rating of any class of Offered Certificates by any rating agency other than S&P and Fitch. However, there can be no assurance as to whether any other rating agency will rate the Offered Certificates or, if it does, what rating would be assigned by such other rating agency. The rating assigned by any such other rating agency to a class of Offered Certificates may be lower than the ratings assigned by S&P and Fitch. The rating of the Offered Certificates should be evaluated independently from similar ratings on other types of securities. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. S-90
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-------------------------------------------------------------------------------- INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS -------------------------------------------------------------------------------- [Download Table] Page ---- Adjusted Pool Amount....................................................... S-56 Adjusted Pool Amount (PO Portion).......................................... S-57 Advance.................................................................... S-34 Affiliated Sellers......................................................... S-26 Bankruptcy Loss Amount..................................................... S-84 Bankruptcy Losses.......................................................... S-56 BBA........................................................................ S-42 Book-Entry Certificates.................................................... S-36 Certificates............................................................... S-6 Class A Certificates....................................................... S-6 Class A-7 Notional Amount.................................................. S-41 Class A-17 Reserve Amount.................................................. S-42 Class A-17 Reserve Fund.................................................... S-42 Class A-24 Percentage...................................................... S-48 Class A-24 Principal Distribution Amount................................... S-48 Class A-24 Shift Percentage................................................ S-48 Class A-PO Deferred Amount................................................. S-55 Class A-PO Principal Distribution Amount................................... S-48 Class B Certificates....................................................... S-6 Closing Date............................................................... S-6 Code....................................................................... S-86 Compensating Interest...................................................... S-34 Corporate Trust Office..................................................... S-35 Corporation................................................................ S-18 Credit Scores.............................................................. S-24 Credit Support Percentage.................................................. S-49 Cut-off Date............................................................... S-6 Debt Service Reduction..................................................... S-56 Decrement Tables........................................................... S-62 Deficient Valuation........................................................ S-56 Definitive Certificates.................................................... S-36 Deleted Mortgage Loan...................................................... S-32 Depositor.................................................................. S-6 Determination Date......................................................... S-34 Discount Mortgage Loan..................................................... S-43 Distribution Date.......................................................... S-38 DTC........................................................................ S-36 DTC Participants........................................................... S-37 Eligible Substitute Mortgage Loan.......................................... S-32 ERISA...................................................................... S-88 Excess Losses.............................................................. S-56 Exemption.................................................................. S-88 Expense Fee Rate........................................................... S-33 Expense Fees............................................................... S-33 FHLMC...................................................................... S-20 Fitch...................................................................... S-90 FNMA....................................................................... S-20 Fraud Loss Amount.......................................................... S-84 Fraud Losses............................................................... S-56 Guides..................................................................... S-26 Indirect DTC Participants.................................................. S-37 Industry................................................................... S-37 S-91
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[Download Table] Page ---- Interest Accrual Period.................................................... S-41 Interest Distribution Amount............................................... S-40 IRA........................................................................ S-88 IRS........................................................................ S-87 Issuer..................................................................... S-6 LIBOR...................................................................... S-5 LIBOR Based Interest Accrual Period........................................ S-41 LIBOR Determination Date................................................... S-42 Limited or Reduced Documentation Guidelines................................ S-25 Liquidated Mortgage Loan................................................... S-56 Liquidation Proceeds....................................................... S-39 Living Holders............................................................. S-50 Loan-to-Value Ratio........................................................ S-20 Loss Severity Percentage................................................... S-83 Lower-Tier REMIC........................................................... S-86 Modeling Assumptions....................................................... S-62 Mortgage File.............................................................. S-31 Mortgage Loan Purchase Agreements.......................................... S-19 Mortgage Loans............................................................. S-19 Mortgage Pool.............................................................. S-19 Net Interest Shortfall..................................................... S-40 Net Mortgage Interest Rate................................................. S-43 Non-Offered Certificates................................................... S-6 Non-PO Percentage.......................................................... S-43 Non-PO Principal Amount.................................................... S-43 Non-Supported Interest Shortfall........................................... S-40 Offered Certificates....................................................... S-6 Original Subordinate Principal Balance..................................... S-47 Percentage Interest........................................................ S-35 Plan....................................................................... S-88 PO Percentage.............................................................. S-43 PO Principal Amount........................................................ S-49 Pool Distribution Amount................................................... S-39 Pooling Agreement.......................................................... S-31 Pool Principal Balance..................................................... S-47 Premium Mortgage Loan...................................................... S-43 Prepayment Interest Shortfall.............................................. S-40 Principal-Only Certificates................................................ S-6 PSA........................................................................ S-63 PTE 95-60.................................................................. S-58 Purchase Price............................................................. S-32 Rapid Processing Program................................................... S-27 Realized Loss.............................................................. S-56 Record Date................................................................ S-38 Regular Certificates....................................................... S-86 Regular Interest Accrual Period............................................ S-41 Relief Act Reduction....................................................... S-40 REMIC...................................................................... S-86 REO Property............................................................... S-34 Reserve Interest Rate...................................................... S-42 Residual Certificates...................................................... S-6 Restricted Classes......................................................... S-49 Rounding Account........................................................... S-51 Rules...................................................................... S-37 S&P........................................................................ S-90 SDA........................................................................ S-82 Sellers.................................................................... S-6 Senior Certificates........................................................ S-6 S-92
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[Download Table] Page ---- Senior Credit Support Depletion Date....................................... S-46 Senior Percentage.......................................................... S-47 Senior Prepayment Percentage............................................... S-47 Senior Principal Distribution Amount....................................... S-46 Servicer Custodial Account................................................. S-33 Servicers.................................................................. S-28 Servicing Fee.............................................................. S-33 Servicing Fee Rate......................................................... S-33 Similar Law................................................................ S-88 SMMEA...................................................................... S-13 Special Hazard Loss Amount................................................. S-84 Special Hazard Losses...................................................... S-56 Special Hazard Mortgage Loan............................................... S-56 Special Retail Certificates................................................ S-50 Stated Principal Balance................................................... S-46 Subordinate Certificates................................................... S-6 Subordinate Percentage..................................................... S-47 Subordinate Prepayment Percentage.......................................... S-48 Subordinate Principal Distribution Amount.................................. S-50 Substitution Adjustment Amount............................................. S-32 Telerate page 3750......................................................... S-42 Trust...................................................................... S-6 Trustee.................................................................... S-6 Trustee Fee Rate........................................................... S-33 Underwriter................................................................ S-89 Underwriting Agreement..................................................... S-89 Upper-Tier REMIC........................................................... S-86 U.S. Person................................................................ S-58 S-93
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PROSPECTUS Bank of America Mortgage Securities, Inc. Depositor Mortgage Pass-Through Certificates (Issuable in Series by separate Trusts) --------------- Each Trust-- You should carefully . will issue a series of mortgage pass-through consider the certificates, which will consist of one or more risk factors classes of certificates; and beginning on page 10 of this . will own-- prospectus. . a pool or pools of fixed or adjustable interest Neither the rate, conventional mortgage loans, each of which certificates of is secured by a first lien on a one- to four- any series nor family residential property; and the related underlying . other assets described in this prospectus and mortgage loans the accompanying prospectus supplement. will be insured or guaranteed by Each Pool of Mortgage Loans-- any governmental agency or . will be sold to the related Trust by the Depositor, instrumentality. who will have in turn purchased them from affiliated or unaffiliated sellers; The certificates of each series . will be underwritten to such standards as described will represent in this prospectus or the accompanying prospectus interests in the supplement; and related Trust only and will . will be serviced by servicers affiliated or not represent unaffiliated with the Depositor. interests in or obligations of Each Series of Certificates-- the Depositor or any affiliate of . will represent interests in the related Trust; other entity. . may provide credit support by "subordinating" This prospectus certain classes to other classes of certificates; may be used to any subordinated classes will be entitled to payment offer and sell subject to the payment of more senior classes and any series of may bear losses before more senior classes; certificates only if . may be entitled to one or more of the other types of accompanied by credit support described in this prospectus; and the prospectus supplement for . will be paid only from the assets of the related that series. Trust. Neither the Securities and Exchange Commission nor any state securities commission has approved the certificates or determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. --------------- The date of this Prospectus is February 18, 1999
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Important Notice About Information Presented in this Prospectus and the Prospectus Supplement Information is provided to you about the Certificates in two separate documents that progressively provide more detail: (a) this Prospectus, which provides general information, some of which may not apply to a particular Series of Certificates, including your Series, and (b) the accompanying Prospectus Supplement, which will describe the specific terms of your Series of Certificates, including: .the principal balances and/or interest rates of each Class; .the timing and priority of interest and principal payments; .statistical and other information about the Mortgage Loans; .information about credit enhancement, if any, for each Class; .the ratings for each Class; and .the method for selling the Certificates. If the terms of a particular Series of Certificates vary between this Prospectus and the Prospectus Supplement, you should rely on the information in the Prospectus Supplement. You should rely only on the information provided in this Prospectus and the accompanying Prospectus Supplement including the information incorporated by reference. No one has been authorized to provide you with different information. The Certificates are not being offered in any state where the offer is not permitted. The Depositor does not claim the accuracy of the information in this Prospectus or the accompanying Prospectus Supplement as of any date other than the dates stated on their respective covers. Cross-references are included in this Prospectus and in the accompanying Prospectus Supplement to captions in these materials where you can find further related discussions. The following Table of Contents and the Table of Contents included in the accompanying Prospectus Supplement provide the pages on which these captions are located. You can find a listing of the pages where capitalized terms used in this Prospectus are defined under the caption "Index of Significant Definitions" beginning on page 97 in this Prospectus. ---------------- 2
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TABLE OF CONTENTS PROSPECTUS [Download Table] Page ---- IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT.................................................... 2 SUMMARY OF PROSPECTUS..................................................... 6 RISK FACTORS.............................................................. 10 Limited Liquidity....................................................... 10 Limited Assets for Payment of Certificates.............................. 10 Credit Enhancement is Limited in Amount and Coverage.................... 10 Real Estate Market Conditions Affect Mortgage Loan Performance.......... 11 Geographic Concentration May Increase Risk of Loss...................... 11 General Economic Conditions May Increase Risk of Loss................... 12 Yield is Sensitive to Rate of Principal Prepayment...................... 12 Bankruptcy of the Depositor or a Seller May Delay or Reduce Collections on Mortgage Loans...................................................... 13 Book-Entry System for Certain Classes of Certificates May Decrease Liquidity and Delay Payment............................................ 13 Cash Flow Agreements are Subject to Counterparty Risk................... 13 THE TRUST ESTATES......................................................... 14 General................................................................. 14 Mortgage Loans.......................................................... 14 Fixed Rate Loans...................................................... 15 Adjustable Rate Loans................................................. 16 Net 5 Loans........................................................... 16 Graduated Payment Loans............................................... 16 Subsidy Loans......................................................... 17 Buy-Down Loans........................................................ 18 Balloon Loans......................................................... 18 Pledged Asset Mortgage Loans.......................................... 18 THE DEPOSITOR............................................................. 18 THE MORTGAGE LOAN PROGRAMS................................................ 19 General................................................................. 19 Mortgage Loan Underwriting.............................................. 19 Representations and Warranties.......................................... 21 DESCRIPTION OF THE CERTIFICATES........................................... 22 General................................................................. 22 Definitive Form......................................................... 22 [Download Table] Page ---- Book-Entry Form......................................................... 23 Distributions to Certificateholders..................................... 25 General............................................................... 25 Distributions of Interest............................................. 26 Distributions of Principal............................................ 26 Categories of Classes of Certificates................................... 28 Other Credit Enhancement................................................ 31 Limited Guarantee..................................................... 31 Financial Guaranty Insurance Policy or Surety Bond.................... 31 Letter of Credit...................................................... 31 Pool Insurance Policy................................................. 32 Special Hazard Insurance Policy....................................... 32 Mortgagor Bankruptcy Bond............................................. 32 Reserve Fund.......................................................... 32 Cross Support......................................................... 32 Cash Flow Agreements.................................................... 32 PREPAYMENT AND YIELD CONSIDERATIONS....................................... 33 Pass-Through Rates...................................................... 33 Scheduled Delays in Distributions....................................... 33 Effect of Principal Prepayments......................................... 33 Weighted Average Life of Certificates................................... 34 SERVICING OF THE MORTGAGE LOANS........................................... 35 The Master Servicer..................................................... 35 The Servicers........................................................... 36 Payments on Mortgage Loans.............................................. 37 Periodic Advances and Limitations Thereon............................... 39 Collection and Other Servicing Procedures............................... 40 Enforcement of "Due-on-Sale Clauses"; Realization Upon Defaulted Mortgage Loans......................................................... 41 Insurance Policies...................................................... 42 Fixed Retained Yield, Servicing Compensation and Payment of Expenses.... 43 Evidence as to Compliance............................................... 44 CERTAIN MATTERS REGARDING THE MASTER SERVICER............................. 45 THE POOLING AND SERVICING AGREEMENT....................................... 46 Assignment of Mortgage Loans to the Trustee............................. 46 3
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[Download Table] Page ---- Optional Purchases...................................................... 48 Reports to Certificateholders........................................... 48 List of Certificateholders.............................................. 49 Events of Default....................................................... 49 Rights Upon Event of Default............................................ 49 Amendment............................................................... 50 Termination; Optional Purchase of Mortgage Loans........................ 51 The Trustee............................................................. 51 CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS............................... 52 General................................................................. 52 Foreclosure............................................................. 52 Foreclosure on Shares of Cooperatives................................... 53 Rights of Redemption.................................................... 54 Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders............................................................. 54 Soldiers' and Sailors' Civil Relief Act and Similar Laws................ 57 Environmental Considerations............................................ 57 "Due-on-Sale" Clauses................................................... 59 Applicability of Usury Laws............................................. 60 Enforceability of Certain Provisions.................................... 60 FEDERAL INCOME TAX CONSEQUENCES........................................... 61 Federal Income Tax Consequences for REMIC Certificates.................. 61 General................................................................. 61 Status of REMIC Certificates............................................ 61 Qualification as a REMIC................................................ 62 Taxation of Regular Certificates........................................ 64 General............................................................... 64 Original Issue Discount............................................... 64 Acquisition Premium................................................... 66 Variable Rate Regular Certificates.................................... 66 Market Discount....................................................... 68 Premium............................................................... 68 Election to Treat All Interest Under the Constant Yield Method........ 69 Treatment of Losses................................................... 69 Sale or Exchange of Regular Certificates.............................. 70 Taxation of Residual Certificates....................................... 70 Taxation of REMIC Income.............................................. 70 Basis and Losses...................................................... 71 [Download Table] Page ---- Treatment of Certain Items of REMIC Income and Expense................ 72 Limitations on Offset or Exemption of REMIC Income.................... 73 Tax-Related Restrictions on Transfer of Residual Certificates......... 74 Sale or Exchange of a Residual Certificate............................ 76 Mark to Market Regulations............................................ 77 Taxes That May Be Imposed on the REMIC Pool............................. 77 Prohibited Transactions............................................... 77 Contributions to the REMIC Pool After the Startup Day................. 77 Net Income from Foreclosure Property.................................. 77 Liquidation of the REMIC Pool........................................... 78 Administrative Matters.................................................. 78 Limitations on Deduction of Certain Expenses............................ 78 Taxation of Certain Foreign Investors................................... 79 Regular Certificates.................................................. 79 Residual Certificates................................................. 79 Backup Withholding...................................................... 80 Reporting Requirements.................................................. 80 Federal Income Tax Consequences for Certificates as to Which No REMIC Election Is Made....................................................... 81 General................................................................. 81 Tax Status.............................................................. 81 Premium and Discount.................................................... 82 Premium............................................................... 82 Original Issue Discount............................................... 82 Market Discount....................................................... 83 Recharacterization of Servicing Fees.................................... 83 Sale or Exchange of Certificates........................................ 83 Stripped Certificates................................................... 84 General............................................................... 84 Status of Stripped Certificates....................................... 85 Taxation of Stripped Certificates..................................... 85 Reporting Requirements and Backup Withholding........................... 87 Taxation of Certain Foreign Investors................................... 87 ERISA CONSIDERATIONS...................................................... 88 General................................................................. 88 Certain Requirements Under ERISA and the Code........................... 88 4
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[Download Table] Page ---- General................................................................ 88 Parties in Interest/Disqualified Persons............................... 88 Delegation of Fiduciary Duty........................................... 89 Applicability to Non-ERISA Plans ...................................... 89 Administrative Exemptions................................................ 89 Individual Administrative Exemptions................................... 89 PTE 83-1............................................................... 91 Non-ERISA Plans and Exempt Plans......................................... 91 Unrelated Business Taxable Income--Residual Certificates................. 92 LEGAL INVESTMENT........................................................... 92 [Download Table] Page ---- PLAN OF DISTRIBUTION....................................................... 93 USE OF PROCEEDS............................................................ 95 LEGAL MATTERS.............................................................. 95 RATING..................................................................... 95 REPORTS TO CERTIFICATEHOLDERS.............................................. 95 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... 95 WHERE YOU CAN FIND MORE INFORMATION........................................ 96 INDEX OF SIGNIFICANT DEFINITIONS........................................... 97 5
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SUMMARY OF PROSPECTUS . This summary highlights selected information from this document, but does not contain all of the information that you should consider in making your investment decision. To understand all of the terms of a Series of Certificates, please read this entire document and the accompanying Prospectus Supplement carefully. . This summary provides an overview of certain calculations, cash flows and other information to aid your understanding of the terms of the Certificates and is qualified by the full description of these calculations, cash flows and other information in this Prospectus and the accompanying Prospectus Supplement. RELEVANT PARTIES FOR EACH SERIES OF CERTIFICATES Issuer Each series (each, a "Series") of certificates (the "Certificates") will be issued by a separate trust (a "Trust" and the assets owned by such Trust, a "Trust Estate"). Each Trust will be formed pursuant to a pooling and servicing agreement (each, a "Pooling and Servicing Agreement") among the Depositor, one or more Servicers and/or the Master Servicer and the Trustee specified in the applicable Prospectus Supplement. Depositor With respect to each Trust Estate, Bank of America Mortgage Securities, Inc. (the "Depositor") will acquire the Mortgage Loans from affiliated or unaffili- ated mortgage loan originators or sellers (each, a "Seller") and will transfer the Mortgage Loans to the Trust. The Depositor is a direct, wholly-owned sub- sidiary of Bank of America, FSB. Servicer(s) One or more entities affiliated or unaffiliated with the Depositor specified in the applicable Prospectus Supplement (each, a "Servicer") will service the Mortgage Loans in each Trust. Each Servicer will perform certain servicing functions with respect to the Mortgage Loans serviced by it pursuant to the related Pooling and Servicing Agreement or a related servicing agreement (each, an "Underlying Servicing Agreement"). Master Servicer To the extent specified in the related Prospectus Supplement, if there is more than one Servicer of the Mortgage Loans related to a Series or the sole Servicer is not an affiliate of the Depositor, a master servicer, affiliated or unaffiliated with the Depositor, (the "Master Servicer") may be appointed to supervise the Servicers. In addition, the Master Servicer will generally be required to make Periodic Advances with respect to the Mortgage Loans in each Trust Estate if the related Servicer fails to make a required Periodic Ad- vance. THE MORTGAGE LOANS Each Trust will own the related Mortgage Loans (other than the Fixed Retained Yield described in this Prospectus, if any) and certain other related proper- ty, as specified in the applicable Prospectus Supplement. The Mortgage Loans in each Trust Estate: . will be conventional, fixed or adjustable interest rate, mortgage loans secured by first liens on some or all of the following types of property, to the extent set forth in the applicable Prospectus Supplement: (i) one-family attached or detached residences, (ii) two- to four-family units, (iii) row houses, (iv) townhouses, (v) condominium units, (vi) units within planned unit developments, (vii) long-term leases with respect to any of the foregoing, and (viii) shares issued by private non-profit housing corporations and the related proprietary leases or occupancy agreements granting exclusive rights to occupy specified units in such cooperatives' buildings. . will have been acquired by the Depositor, either directly or indirectly through an affiliate from the Sellers; . will have been originated by mortgage loan originators which are either affiliated or unaffiliated with the Depositor; and 6
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. will have been underwritten to the standards specified herein or in the applicable Prospectus Supplement. See "The Trust Estates" and "The Mortgage Loan Programs--Mortgage Loan Under- writing." You should refer to the applicable Prospectus Supplement for the precise char- acteristics or expected characteristics of the Mortgage Loans and a description of the other property, if any, included in a particular Trust Estate. DISTRIBUTIONS ON THE CERTIFICATES Each Series of Certificates will include one or more classes (each, a "Class"). A Class of Certificates will be entitled, to the extent of funds available, to either: . principal and interest payments in respect of the related Mortgage Loans; . principal distributions, with no interest distributions; . interest distributions, with no principal distributions; or . such other distributions as are described in the applicable Prospectus Supplement. Interest Distributions With respect to each Series of Certificates, interest on the related Mortgage Loans at the weighted average of their mortgage interest rates (net of servic- ing fees and certain other amounts as described in this Prospectus or in the applicable Prospectus Supplement), will be passed through to holders of the re- lated Classes of Certificates in accordance with the particular terms of each such Class of Certificates. The terms of each Class of Certificates will be de- scribed in the related Prospectus Supplement. See "Description of the Certifi- cates--Distributions to Certificateholders--Distributions of Interest." Except as otherwise specified in the applicable Prospectus Supplement, interest will accrue at the pass-through rate for each Class indicated in the applicable Prospectus Supplement (each, a "Pass-Through Rate") on its outstanding princi- pal balance or notional amount. Principal Distributions With respect to a Series of Certificates, principal payments (including prepay- ments) on the related Mortgage Loans will be passed through to holders of the related Certificates or otherwise applied in accordance with the related Pool- ing and Servicing Agreement on each Distribution Date. Distributions in reduc- tion of principal balance will be allocated among the Classes of Certificates of a Series in the manner specified in the applicable Prospectus Supplement. See "Description of the Certificates--Distributions to Certificateholders--Dis- tributions of Principal." Distribution Dates Distributions on the Certificates will generally be made on the 25th day (or, if such day is not a business day, the business day following the 25th day) of each month, commencing with the month following the month in which the applica- ble Cut-Off Date occurs (each, a "Distribution Date"). The "Cut-Off Date" for each Series will be the date specified in the applicable Prospectus Supplement. If so specified in the applicable Prospectus Supplement, distributions on Cer- tificates may be made on a different day of each month or may be made quarter- ly, or semi-annually, on the dates specified in such Prospectus Supplement. Record Dates Distributions will be made on each Distribution Date to Certificateholders of record at the close of business on (unless a different date is specified in the applicable Prospectus Supplement) the last business day of the month preceding the month in which such Distribution Date occurs (each, a "Record Date"). CREDIT ENHANCEMENT Subordination A Series of Certificates may include one or more Classes of senior certificates (the "Senior Certificates") and one or more Classes of subordinated certifi- cates (the "Subordinated Certificates"). The rights of the holders of Subordi- nated Certificates of a Series to receive distributions will be subordinated to such rights of the holders of the Senior Certificates of the same Series to the extent and in the manner specified in the applicable Prospectus Supplement. 7
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Subordination is intended to enhance the likelihood of the timely receipt by the Senior Certificateholders of their proportionate share of scheduled monthly principal and interest payments on the related Mortgage Loans and to protect them from losses. This protection will be effected by: . the preferential right of the Senior Certificateholders to receive, prior to any distribution being made in respect of the related Subordinated Certifi- cates on each Distribution Date, current distributions on the related Mort- gage Loans of principal and interest due them on each Distribution Date out of the funds available for distributions on such date; . the right of such holders to receive future distributions on the Mortgage Loans that would otherwise have been payable to the holders of Subordinated Certificates; and/or . the prior allocation to the Subordinated Certificates of all or a portion of losses realized on the underlying Mortgage Loans. Other Types of Credit Enhancement If so specified in the applicable Prospectus Supplement, the Certificates of any Series, or any one or more Classes of a Series, may be entitled to the benefits of other types of credit enhancement, including but not limited to: .limited guarantee .mortgage pool .financial guaranty insurance policy insurance policy .reserve fund .surety bond .cross-support .letter of credit Any credit support will be described in the applicable Prospectus Supplement. See "Description of the Certificates--Other Credit Enhancement." PERIODIC ADVANCES ON DELINQUENT PAYMENTS In the event that a payment on a Mortgage Loan is delinquent, the Servicer of the Mortgage Loan will be obligated to make cash advances ("Periodic Advanc- es") to the Servicer Custodial Account or the Certificate Account if the Servicer determines that it will be able to recover such amounts from future payments and collections on such Mortgage Loan. A Servicer who makes Periodic Advances will be reimbursed for such Periodic Advances as described in this Prospectus and in the applicable Prospectus Supplement. In certain circum- stances, the Master Servicer or Trustee will be required to make Periodic Ad- vances upon a Servicer default. See "Servicing of the Mortgage Loans--Periodic Advances and Limitations There- on." FORMS OF CERTIFICATES The Certificates will be issued either: . in book-entry form ("Book-Entry Certificates") through the facilities of The Depository Trust Company ("DTC"); or . in fully-registered, certificated form ("Definitive Certificates"). If you own Book-Entry Certificates, you will not receive a physical certifi- cate representing your ownership interest in such Book-Entry Certificates, ex- cept under extraordinary circumstances which are discussed in "Description of the Certificates--Definitive Form" in this Prospectus. Instead, DTC will ef- fect payments and transfers by means of its electronic recordkeeping services, acting through certain participating organizations. This may result in certain delays in your receipt of distributions and may restrict your ability to pledge your securities. Your rights with respect to Book-Entry Certificates may generally only be exercised through DTC and its participating organiza- tions. See "Description of the Certificates--Book-Entry Form." OPTIONAL PURCHASE OF ALL MORTGAGE LOANS If so specified in the Prospectus Supplement with respect to a Series, all, but not less than all, of the Mortgage Loans in the related Trust and any property acquired with respect to such Mortgage Loans may be purchased by the Depositor or such other party as is specified in the applicable Prospectus Supplement. Any such purchase must be made in the manner and at the price specified in such Prospectus Supplement. If an election is made to treat the related Trust Estate (or one or more seg- regated pools of assets in the 8
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Trust Estate) as a "real estate mortgage investment conduit" (a "REMIC"), any such purchase will be effected only pursuant to a "qualified liquidation," as defined under Section 860F(a)(4)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). Exercise of the right of purchase will effect the early retirement of the Cer- tificates of that Series. See "Prepayment and Yield Considerations." ERISA LIMITATIONS If you are a fiduciary of any employee benefit plan or another type of retire- ment plan or arrangement subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code or similar law, you should carefully review with your legal advisors whether the purchase or holding of Certificates could give rise to a transaction prohibited or otherwise impermissible under ERISA or the Code. Certain Classes of Certificates may not be transferred unless the Trustee and the Depositor are furnished with a letter of representation or an opinion of counsel to the effect that such transfer will not result in a violation of the prohibited transaction provisions of ERISA or the Code and will not subject the Trustee, the Depositor, any Servicers or the Master Servicer to additional obligations. See "ERISA Considerations." TAX STATUS The treatment of the Certificates for federal income tax purposes will depend on: . whether a REMIC election is made with respect to a Series of Certificates; and . if a REMIC election is made, whether the Certificates are Regular Interests or Residual Interests. See "Federal Income Tax Consequences." LEGAL INVESTMENT The applicable Prospectus Supplement will specify whether the Class or Classes of Certificates offered will constitute "mortgage related securities" for pur- poses of the Secondary Mortgage Market Enhancement Act of 1984, as amended. If your investment authority is subject to legal restrictions you should consult your own legal advisors to determine whether and to what extent such Certifi- cates constitute legal investments for you. See "Legal Investment" in this Prospectus and "Summary of Terms--Legal Invest- ment" in the applicable Prospectus Supplement. RATING Certificates of any Series will not be offered pursuant to this Prospectus and a Prospectus Supplement unless each offered Class is rated in one of the four highest rating categories by at least one nationally recognized statistical rating organization (a "Rating Agency"). . A security rating is not a recommendation to buy, sell or hold the Certificates of any Series and is subject to revision or withdrawal at any time by the assigning rating agency. . Ratings do not address the effect of prepayments on the yield you may antici- pate when you purchase your Certificates. 9
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RISK FACTORS Investors should consider, among other things, the following description of the material risks associated with the purchase of Certificates. Limited Liquidity The liquidity of your Certificates may be limited. You should consider that: . a secondary market for the Certificates of any Series may not develop, or if it does, it may not provide you with liquidity of investment, or it may not continue for the life of the Certificates of any Series; . the Prospectus Supplement for any Series of Certificates may indicate that an underwriter intends to establish a secondary market in such Certificates, but no underwriter will be obligated to do so; and . unless specified in the applicable Prospectus Supplement, the Certificates will not be listed on any securities exchange. Limited Assets for Payment of Certificates Except for any related insurance policies and any reserve fund or credit enhancement described in the applicable Prospectus Supplement: . Mortgage Loans included in the related Trust Estate will be the sole source of payments on the Certificates of a Series; . the Certificates of any Series will not represent an interest in or obligation of the Depositor, the Trustee or any of their affiliates, except for the Depositor's limited obligations with respect to certain breaches of its representations and warranties and, to the extent an affiliate of the Depositor acts as such, its obligations as a Servicer or Master Servicer, if applicable; and . neither the Certificates of any Series nor the related Mortgage Loans will be guaranteed or insured by any governmental agency or instrumentality, the Depositor, the Trustee, any of their affiliates or any other person. Consequently, in the event that payments on the Mortgage Loans underlying your Series of Certificates are insufficient or otherwise unavailable to make all payments required on your Certificates, there will be no recourse to the Depositor, the Trustee or any of their affiliates or, except as specified in the applicable Prospectus Supplement, any other entity. Credit Enhancement is Limited in Amount and Coverage With respect to each Series of Certificates, credit enhancement may be provided in limited amounts to cover certain types of losses on the underlying Mortgage Loans. Credit enhancement will be provided in one or more of the forms referred to in this Prospectus, including, but not limited to: subordination of other Classes of Certificates of the same Series; a limited guarantee; a financial guaranty insurance policy; a surety bond; a letter of credit; a pool insurance policy; a special hazard insurance policy; a mortgagor bankruptcy bond; a reserve fund; cross-support; and any combination of the preceding types of credit enhancement. See "Description of the Certificates--Other Credit Enhancement." Regardless of the form of credit enhancement provided: . the amount of coverage will be limited in amount and in most cases will be subject to periodic reduction in accordance with a schedule or formula; . may provide only very limited coverage as to certain types of losses, and may provide no coverage as to certain other types of losses; and 10
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. all or a portion of the credit enhancement for any Series of Certificates will generally be permitted to be reduced, terminated or substituted for, in the sole discretion of the Servicer or the Master Servicer, if each applicable Rating Agency indicates that the then-current ratings will not be adversely affected. If losses exceed the amount of coverage provided by any credit enhancement or losses of a type not covered by any credit enhancement occur, such losses will be borne by the holders of the related Certificates (or certain Classes). The rating of any Class of Certificates by a Rating Agency may be lowered following its issuance as a result of the downgrading of the obligations of any applicable credit support provider, or as a result of losses on the related Mortgage Loans in excess of the levels contemplated by such Rating Agency at the time of its initial rating analysis. Neither the Depositor nor any of its affiliates will have any obligation to replace or supplement any credit enhancement, or to take any other action to maintain any rating of any Class of Certificates. See "Description of the Certificates--Other Credit Enhancement." Real Estate Market Conditions Affect Mortgage Loan Performance An investment in securities such as the Certificates, which generally represent interests in pools of residential mortgage loans, may be affected by a decline in real estate values and changes in the mortgagor's financial condition. There is no assurance that the values of the Mortgaged Properties securing the Mortgage Loans underlying any Series of Certificates have remained or will remain at their levels on the dates of origination of the related Mortgage Loans. If the residential real estate market should experience an overall decline in property values such that the outstanding balances of the Mortgage Loans contained in a particular Trust Estate and any secondary financing on the Mortgaged Properties, become equal to or greater than the value of the Mortgaged Properties, delinquencies, foreclosures and losses could be higher than those now generally experienced in the mortgage lending industry and those experienced in a Servicer's servicing portfolio. If losses on Mortgage Loans underlying a Series are not covered by credit enhancement, Certificateholders of the Series will bear all risk of loss resulting from default by mortgagors and will have to look primarily to the value of the Mortgaged Properties for recovery of the outstanding principal and unpaid interest on the defaulted Mortgage Loans. See "The Trusts Estates-- Mortgage Loans" and "The Mortgage Loan Programs--Mortgage Loan Underwriting." Geographic Concentration May Increase Risk of Loss The Mortgage Loans underlying certain Series of Certificates may be concentrated in certain regions. Such concentration may present risk considerations in addition to those generally present for similar mortgage- backed securities without such concentration. Certain geographic regions of the United States from time to time will experience weaker regional economic conditions and housing markets or be directly or indirectly affected by natural disasters or civil disturbances such as earthquakes, hurricanes, floods, eruptions or riots. Mortgage loans in such areas will experience higher rates of loss and delinquency than on mortgage loans generally. Although Mortgaged Properties located in certain identified flood zones will be required to be covered, to the maximum extent available, by flood insurance, as described under "Servicing of the Mortgage Loans--Insurance Policies," no Mortgaged Properties will otherwise be required to be insured against earthquake damage or any other loss not covered by Standard Hazard Insurance Policies, as described under "Servicing of the Mortgage Loans-- Insurance Policies." 11
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See "The Mortgage Pool" in the related Prospectus Supplement for further information regarding the geographic concentration of the Mortgage Loans underlying the Certificates of any Series. See also "The Mortgage Loan Programs--Mortgage Loan Underwriting" and "Prepayment and Yield Considerations--Weighted Average Life of Certificates." General Economic Conditions May Increase Risk of Loss Adverse economic conditions generally, in particular geographic areas or industries, or affecting particular segments of the borrowing community (such as mortgagors relying on commission income and self-employed mortgagors) and other factors which may or may not affect real property values (including the purposes for which the Mortgage Loans were made and the uses of the Mortgaged Properties) may affect the timely payment by mortgagors of scheduled payments of principal and interest on the Mortgage Loans and, accordingly, the actual rates of delinquencies, foreclosures and losses with respect to any Trust Estate. See "The Mortgage Loan Programs--Mortgage Loan Underwriting" and "Prepayment and Yield Considerations--Weighted Average Life of Certificates." If such losses are not covered by the applicable credit enhancement, holders of Certificates of the Series evidencing interests in the related Trust Estate will bear all risk of loss resulting from default by mortgagors and will have to look primarily to the value of the Mortgaged Properties for recovery of the outstanding principal and unpaid interest on the defaulted Mortgage Loans. See "The Trust Estates--Mortgage Loans" and "The Mortgage Loan Programs--Mortgage Loan Underwriting." Yield is Sensitive to Rate of Principal Prepayment The yield on the Certificates of each Series will depend in part on the rate of principal payment on the Mortgage Loans (including prepayments, liquidations due to defaults and mortgage loan repurchases). Such yield may be adversely affected, depending upon whether a particular Certificate is purchased at a premium or a discount, by a higher or lower than anticipated rate of prepayments on the related Mortgage Loans. In particular: . the yield on Classes of Certificates entitling their holders primarily or exclusively to payments of interest or primarily or exclusively to payments of principal will be extremely sensitive to the rate of prepayments on the related Mortgage Loans; and . the yield on certain Classes of Certificates may be relatively more sensitive to the rate of prepayment of specified Mortgage Loans than other Classes of Certificates. The rate of prepayments on Mortgage loans is influenced by a number of factors, including: . prevailing mortgage market interest rates; . local and national economic conditions; . homeowner mobility; and . the ability of the borrower to obtain refinancing. In addition, your yield may be adversely affected by interest shortfalls which may result from the timing of the receipt of prepayments or liquidations to the extent that such interest shortfalls are not covered by aggregate Servicing Fees or other mechanisms specified in the applicable Prospectus Supplement. Your yield will be also adversely affected to the extent that losses on the Mortgage Loans in the related Trust Estate are allocated to your Certificates and may be adversely affected to the extent of unadvanced delinquencies on the Mortgage Loans in the related Trust. Classes of Certificates identified in the applicable Prospectus Supplement as Subordinated Certificates are more likely to be affected by delinquencies and losses than other Classes of Certificates. See "Prepayment and Yield Considerations." 12
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Bankruptcy of the Depositor or a Seller May Delay or Reduce Collections on Mortgage Loans Neither the United States Bankruptcy Code nor similar applicable state laws (the "Insolvency Laws") prohibit the Depositor from filing a voluntary application for relief under the Insolvency Laws. However, the transactions contemplated hereby and by the related Prospectus Supplement will be structured such that the voluntary or involuntary application for relief under the Insolvency Laws by the Depositor is unlikely and such filings by a Seller which is an affiliate of the Depositor from whom the Depositor acquires the Mortgage Loans should not result in consolidation of the assets and liabilities of the Depositor with those of such Seller. These steps include the creation of the Depositor as a separate, limited purpose subsidiary, the certificate of incorporation of which contains limitations on the nature of the Depositor's business and restrictions on the ability of the Depositor to commence voluntary or involuntary cases or proceedings under the Insolvency Laws without the prior unanimous affirmative vote of all its directors. However, there can be no assurance that the activities of the Depositor would not result in a court concluding that the assets and liabilities of the Depositor should be consolidated with those of such Seller. Each Seller will transfer its related Mortgage Loans to the Depositor and the Depositor will transfer the Mortgage Loans to the related Trust Estate. If a Seller were to become a debtor in a bankruptcy case, a creditor or trustee (or the debtor itself) may take the position that the contribution or transfer of the Mortgage Loans by the Seller to the Depositor should be characterized as a pledge of such Mortgage Loans to secure a borrowing of such debtor, with the result that the Depositor is deemed to be a creditor of such Seller, secured by a pledge of the applicable Mortgage Loans. If such an attempt were successful, delays in payments of collections on the Mortgage Loans could occur or reductions in the amount of such payments could result, or such a trustee in bankruptcy could elect to accelerate payment of the obligation to the Depositor and liquidate the Mortgage Loans. Book-Entry System for Certain Classes of Certificates May Decrease Liquidity and Delay Payment Since transactions in the Classes of Book-Entry Certificates of any Series generally can be effected only through DTC, DTC Participants and Indirect DTC Participants: . your ability to pledge Book-Entry Certificates to someone who does not participate in the DTC system, or to otherwise act with respect to such Book-Entry Certificates, may be limited due to the lack of a physical certificate; . you may experience delays in your receipt of payments on Book-Entry Certificates because distributions will be made by the Trustee, or a Paying Agent on behalf of the Trustee, to Cede, as nominee for DTC; and . the liquidity of Book-Entry Certificates in any secondary trading market that may develop may be limited because investors may be unwilling to purchase securities for which they cannot obtain delivery of physical certificates. See "Description of the Certificates--Book-Entry Form." Cash Flow Agreements are Subject to Counterparty Risk The assets of a Trust Estate may, if specified in the related Prospectus Supplement, include agreements, such as interest rate swap, cap, floor or similar agreements (each a "Cash Flow Agreement"), which will require the provider of such instrument (the "Counterparty") to make payments to the Trust Estate under the circumstances described in the Prospectus Supplement. If payments on the Certificates of the related Series depend in part on payments to be received under a Cash Flow Agreement, the ability of the Trust Estate to make payments on the Certificates will be subject to the credit risk of the Counterparty. The Prospectus Supplement for a Series of Certificates will describe any mechanism, such as the payment of "breakage fees," which may exist to facilitate replacement of a Cash Flow Agreement upon the default or credit impairment of the related Counterparty. However, there can be no assurance that any such mechanism will result in the ability of the Master Servicer to obtain a replacement Cash Flow Agreement. 13
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THE TRUST ESTATES General The Trust Estate for each Series of Certificates will consist primarily of mortgage loans (the "Mortgage Loans") evidenced by promissory notes (the "Mortgage Notes") secured by mortgages, deeds of trust or other instruments creating first liens (the "Mortgages") on some or all of the following eight types of property (as so secured, the "Mortgaged Properties"), to the extent set forth in the applicable Prospectus Supplement: (i) one-family attached or detached residences, (ii) two- to four-family units, (iii) row houses, (iv) townhouses, (v) condominium units, (vi) units within planned unit developments, (vii) long-term leases with respect to any of the foregoing, and (viii) shares issued by private non-profit housing corporations ("cooperatives") and the related proprietary leases or occupancy agreements granting exclusive rights to occupy specified units in such cooperatives' buildings. In addition, a Trust Estate will also include (i) amounts held from time to time in the related Certificate Account, (ii) the Depositor's interest in any primary mortgage insurance, hazard insurance, title insurance or other insurance policies relating to a Mortgage Loan, (iii) any property which initially secured a Mortgage Loan and which has been acquired by foreclosure or trustee's sale or deed in lieu of foreclosure or trustee's sale, (iv) if applicable, and to the extent set forth in the applicable Prospectus Supplement, any reserve fund or funds, (v) if applicable, and to the extent set forth in the applicable Prospectus Supplement, contractual obligations of any person to make payments in respect of any form of credit enhancement or any interest subsidy agreement and (vi) such other assets of the kind described herein as may be specified in the applicable Prospectus Supplement. The Trust Estate will not include the portion of interest on the Mortgage Loans which constitutes the Fixed Retained Yield, if any. See "Servicing of the Mortgage Loans--Fixed Retained Yield, Servicing Compensation and Payment of Expenses." Mortgage Loans The Mortgage Loans will have been acquired by the Depositor from affiliates of the Depositor or unaffiliated mortgage loan originators or sellers (each, a "Seller"). The Mortgage Loans will have been originated by affiliated or unaffiliated mortgage loan originators. Each Mortgage Loan will have been underwritten either to the standards set forth herein or to such other standards set forth in the applicable Prospectus Supplement. See "The Mortgage Loan Programs--Mortgage Loan Underwriting." Each of the Mortgage Loans will be secured by a Mortgage on a Mortgaged Property located in any of the 50 states or the District of Columbia. If specified in the applicable Prospectus Supplement, the Mortgage Loans may be secured by leases on real property under circumstances that the applicable Seller determines in its discretion are commonly acceptable to institutional mortgage investors. A Mortgage Loan secured by a lease on real property is secured not by a fee simple interest in the Mortgaged Property but rather by a lease under which the mortgagor has the right, for a specified term, to use the related real estate and the residential dwelling located thereon. Generally, a Mortgage Loan will be secured by a lease only if the use of leasehold estates as security for mortgage loans is customary in the area where the Mortgaged Property is located, the lease is not subject to any prior lien that could result in termination of the lease and the term of the lease ends at least five years beyond the maturity date of the related Mortgage Loan. The provisions of each lease securing a Mortgage Loan will expressly permit (i) mortgaging of the leasehold estate, (ii) assignment of the lease without the lessor's consent and (iii) acquisition by the holder of the Mortgage, in its own or its nominee's name, of the rights of the lessee upon foreclosure or assignment in lieu of foreclosure, unless alternative arrangements provide the holder of the Mortgage with substantially similar protections. No lease will contain provisions which (i) provide for termination upon the lessee's default without the holder of the Mortgage being entitled to receive written notice of, and opportunity to cure, such default, (ii) provide for termination in the event of damage or destruction as long as the Mortgage is in existence or (iii) prohibit the holder of the Mortgage from being insured under the hazard insurance policy or policies related to the premises. 14
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The Prospectus Supplement will set forth the geographic distribution of Mortgaged Properties and the number and aggregate unpaid principal balances of the Mortgage Loans by category of Mortgaged Property. The Prospectus Supplement for each Series will also set forth the range of original terms to maturity of the Mortgage Loans in the Trust Estate, the weighted average remaining term to stated maturity at the Cut-Off Date of such Mortgage Loans, the earliest and latest months of origination of such Mortgage Loans, the range of Mortgage Interest Rates borne by such Mortgage Loans, if such Mortgage Loans have varying Net Mortgage Interest Rates, the weighted average Net Mortgage Interest Rate at the Cut-Off Date of such Mortgage Loans, the range of loan-to-value ratios at the time of origination of such Mortgage Loans and the range of principal balances at origination of such Mortgage Loans. A Mortgage Loan will generally provide for level monthly installments (except, in the case of Balloon Loans, the final payment) consisting of interest equal to one-twelfth of the applicable Mortgage Interest Rate times the unpaid principal balance, with the remainder of such payment applied to principal (an "Actuarial Mortgage Loan"). No adjustment is made if payment on an Actuarial Mortgage Loan is made earlier or later than the Due Date, although the mortgagor may be subject to a late payment charge. If so specified in the applicable Prospectus Supplement, some Mortgage Loans may provide for payments that are allocated to principal and interest according to the daily simple interest method (each, a "Simple Interest Mortgage Loan"). A Simple Interest Mortgage Loan provides for the amortization of the amount financed under the Mortgage Loan over a series of equal monthly payments (except, in the case of a Balloon Loan, the final payment). Each monthly payment consists of an installment of interest which is calculated on the basis of the outstanding principal balance of the Mortgage Loan multiplied by the stated Mortgage Interest Rate and further multiplied by a fraction, the numerator of which is the number of days in the period elapsed since the preceding payment of interest was made and the denominator of which is the number of days in the annual period for which interest accrues on such Mortgage Loan. As payments are received under a Simple Interest Mortgage Loan, the amount received is applied first to interest accrued to the date of payment and the balance is applied to reduce the unpaid principal balance. Accordingly, if a borrower pays a fixed monthly installment on a Simple Interest Mortgage Loan before its scheduled due date, the portion of the payment allocable to interest for the period since the preceding payment was made will be less than it would have been had the payment been made as scheduled, and the portion of the payment applied to reduce the unpaid principal balance will be correspondingly greater. The next scheduled payment, however, will result in an allocation of a greater amount to interest if such payment is made on its scheduled due date. Conversely, if a borrower pays a fixed monthly installment after its scheduled due date, the portion of the payment allocable to interest for the period since the preceding payment was made will be greater than it would have been had the payment been made as scheduled, and the remaining portion, if any, of the payment applied to reduce the unpaid principal balance will be correspondingly less. Accordingly, if the borrower consistently makes scheduled payments after the scheduled due date, the Mortgage Loan will amortize more slowly than scheduled. If a Mortgage Loan is prepaid, the borrower is required to pay interest only to the date of prepayment. The information with respect to the Mortgage Loans and Mortgaged Properties described in the preceding three paragraphs may be presented in the Prospectus Supplement for a Series as ranges in which the actual characteristics of such Mortgage Loans and Mortgaged Properties are expected to fall. In all such cases, information as to the final characteristics of the Mortgage Loans and Mortgaged Properties will be available in a Current Report on Form 8-K which will be filed with the Commission within 15 days of the initial issuance of the related Series. The Mortgage Loans in a Trust Estate will generally have monthly payments due on the first of each month (each, a "Due Date") but may, if so specified in the applicable Prospectus Supplement, have payments due on a different day of each month and will be of one of the following types of mortgage loans: a. Fixed Rate Loans. If so specified in the applicable Prospectus Supplement, a Trust Estate may contain fixed-rate, fully-amortizing Mortgage Loans providing for level monthly payments of principal and interest and terms at origination or modification of not more than 30 years. If specified in the applicable Prospectus Supplement, fixed rates on certain Mortgage Loans may be converted to adjustable rates after origination of such Mortgage Loans and upon the satisfaction of other conditions specified in the applicable Prospectus Supplement. 15
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If so specified in the applicable Prospectus Supplement, the Pooling and Servicing Agreement will require the Depositor or another party to repurchase each such converted Mortgage Loan at the price set forth in the applicable Prospectus Supplement. A Trust Estate containing fixed-rate Mortgage Loans may contain convertible Mortgage Loans which have converted from an adjustable interest rate prior to the formation of the Trust Estate and which are subject to no further conversions. b. Adjustable Rate Loans. If so specified in the applicable Prospectus Supplement, a Trust Estate may contain adjustable-rate, fully-amortizing Mortgage Loans having an original or modified term to maturity of not more than 40 years with a related Mortgage Interest Rate which generally adjusts initially either one, three or six months, one, three, five, seven or ten years subsequent to the initial Due Date, and thereafter at either one-month, six-month, one-year or other intervals over the term of the Mortgage Loan to equal the sum of a fixed margin set forth in the related Mortgage Note (the "Note Margin") and an index. The applicable Prospectus Supplement will set forth the relevant index and the highest, lowest and weighted average Note Margin with respect to the adjustable-rate Mortgage Loans in the related Trust Estate. The applicable Prospectus Supplement will also indicate any periodic or lifetime limitations on the adjustment of any Mortgage Interest Rate. If specified in the applicable Prospectus Supplement, adjustable rates on certain Mortgage Loans may be converted to fixed rates after origination of such Mortgage Loans and upon the satisfaction of the conditions specified in the applicable Prospectus Supplement. If specified in the applicable Prospectus Supplement, the Depositor or another party will generally be required to repurchase each such converted Mortgage Loan at the price set forth in the applicable Prospectus Supplement. A Trust Estate containing adjustable-rate Mortgage Loans may contain convertible Mortgage Loans which have converted from a fixed interest rate prior to the formation of the Trust Estate. If so specified in the applicable Prospectus Supplement, a Trust Estate may contain adjustable-rate Mortgage Loans which have Mortgage Interest Rates that generally adjust monthly or may adjust at other intervals as specified in the applicable Prospectus Supplement. The scheduled monthly payment will be adjusted as and when described in the applicable Prospectus Supplement (at intervals which may be different from those at which the Mortgage Interest Rate is adjusted) to an amount that would fully amortize the Mortgage Loan over its remaining term on a level debt service basis. Increases in the scheduled monthly payment may be subject to certain limitations, as specified in the applicable Prospectus Supplement, which may result in negative amortization of principal. If an adjustment to the Mortgage Interest Rate on such a Mortgage Loan causes the amount of interest accrued thereon in any month to exceed the current scheduled monthly payment on such mortgage loan, the resulting amount of interest that has accrued but is not then payable ("Deferred Interest") will be added to the principal balance of such Mortgage Loan. c. Net 5 Loans. If so specified in the applicable Prospectus Supplement, a Trust Estate may contain Mortgage Loans having an original term to maturity of not more than 30 years with a Mortgage Interest Rate which adjusts initially five years subsequent to the initial payment date, and thereafter at one- month, six-month, one-year or other intervals (with corresponding adjustments in the amount of monthly payments) over the term of the mortgage loan to equal the sum of the related Note Margin and index, and providing for monthly payments of interest only prior to the date of the initial Mortgage Interest Rate adjustment and monthly payments of principal and interest thereafter sufficient to fully-amortize the Mortgage Loans over their remaining terms to maturity ("Net 5 Loans"). The related Prospectus Supplement will set forth the relevant index and the highest, lowest and weighted average Note Margin with respect to the Net 5 Loans in the related Trust Estate. The related Prospectus Supplement will also indicate any periodic or lifetime limitations on changes in any per annum Mortgage Interest Rate at the time of any adjustment. d. Graduated Payment Loans. If so specified in the applicable Prospectus Supplement, a Trust Estate may contain fixed-rate, graduated-payment Mortgage Loans having original or modified terms to maturity of not more than 30 years with monthly payments during the first year calculated on the basis of an assumed interest rate which is a specified percentage below the Mortgage Interest Rate on such Mortgage Loan. Such monthly 16
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payments increase at the beginning of the second year by a specified percentage of the monthly payment during the preceding year and each year specified thereafter to the extent necessary to amortize the Mortgage Loan over the remainder of its term or other shorter period. Mortgage Loans incorporating such graduated payment features may include (i) "Graduated Pay Mortgage Loans," pursuant to which amounts constituting Deferred Interest are added to the principal balances of such Mortgage Loans, (ii) "Tiered Payment Mortgage Loans," pursuant to which, if the amount of interest accrued in any month exceeds the current scheduled payment for such month, such excess amounts are paid from a subsidy account (usually funded by a home builder or family member) established at closing and (iii) "Growing Equity Mortgage Loans," for which the monthly payments increase at a rate which has the effect of amortizing the loan over a period shorter than the stated term. e. Subsidy Loans. If so specified in the applicable Prospectus Supplement, a Trust Estate may contain Mortgage Loans subject to temporary interest subsidy agreements ("Subsidy Loans") pursuant to which the monthly payments made by the related mortgagors will be less than the scheduled monthly payments on such Mortgage Loans with the present value of the resulting difference in payment ("Subsidy Payments") being provided by the employer of the mortgagor, generally on an annual basis. Subsidy Payments will generally be placed in a custodial account ("Subsidy Account") by the related Servicer. Despite the existence of a subsidy program, a mortgagor remains primarily liable for making all scheduled payments on a Subsidy Loan and for all other obligations provided for in the related Mortgage Note and Mortgage Loan. Subsidy Loans are offered by employers generally through either a graduated or fixed subsidy loan program, or a combination thereof. The terms of the subsidy agreements relating to Subsidy Loans generally range from one to ten years. The subsidy agreements relating to Subsidy Loans made under a graduated program generally will provide for subsidy payments that result in effective subsidized interest rates between three percentage points and five percentage points below the Mortgage Interest Rates specified in the related Mortgage Notes. Generally, under a graduated program, the subsidized rate for a Mortgage Loan will increase approximately one percentage point per year until it equals the full Mortgage Interest Rate. For example, if the initial subsidized interest rate is five percentage points below the Mortgage Interest Rate in year one, the subsidized rate will increase to four percentage points below the Mortgage Interest Rate in year two, and likewise until year six, when the subsidized rate will equal the Mortgage Interest Rate. Where the subsidy agreements relating to Subsidy Loans are in effect for longer than five years, the subsidized interest rates generally increase at smaller percentage increments for each year. The subsidy agreements relating to Subsidy Loans made under a fixed program generally will provide for subsidized interest rates at fixed percentages (generally one percentage point to two percentage points) below the Mortgage Interest Rates for specified periods, generally not in excess of ten years. Subsidy Loans are also offered pursuant to combination fixed/graduated programs. The subsidy agreements relating to such Subsidy Loans generally will provide for an initial fixed subsidy of up to five percentage points below the related Mortgage Interest Rate for up to five years, and then a periodic reduction in the subsidy for up to five years, at an equal fixed percentage per year until the subsidized rate equals the Mortgage Interest Rate. Generally, employers may terminate subsidy programs in the event of (i) the mortgagor's death, retirement, resignation or termination of employment, (ii) the full prepayment of the Subsidy Loan by the mortgagor, (iii) the sale or transfer by the mortgagor of the related Mortgaged Property as a result of which the mortgagee is entitled to accelerate the Subsidy Loan pursuant to the "due-on-sale" clause contained in the Mortgage, or (iv) the commencement of foreclosure proceedings or the acceptance of a deed in lieu of foreclosure. In addition, some subsidy programs provide that if prevailing market rates of interest on mortgage loans similar to a Subsidy Loan are less than the Mortgage Interest Rate of such Subsidy Loan, the employer may request that the mortgagor refinance such Subsidy Loan and may terminate the related subsidy agreement if the mortgagor fails to refinance such Subsidy Loan. In the event the mortgagor refinances such Subsidy Loan, the new loan will not be included in the Trust Estate. See "Prepayment and Yield Considerations." In the event a subsidy agreement is terminated, the amount remaining in the Subsidy Account will be returned to the employer, and the mortgagor will be obligated to make the full amount of all remaining scheduled payments, if any. The mortgagor's reduced monthly housing expense as a consequence of payments under a subsidy agreement is used by certain Sellers in determining certain expense-to-income ratios utilized in underwriting a Subsidy Loan. See "The Mortgage Loan Programs--Mortgage Loan Underwriting." 17
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f. Buy-Down Loans. If so specified in the applicable Prospectus Supplement, a Trust Estate may contain Mortgage Loans subject to temporary buy-down plans ("Buy-Down Loans") pursuant to which the monthly payments made by the mortgagor during the early years of the Mortgage Loan will be less than the scheduled monthly payments on the Mortgage Loan. The resulting difference in payment will be compensated for from an amount contributed by the seller of the related Mortgaged Property or another source, including the originator of the Mortgage Loan (generally on a present value basis) and, if so specified in the applicable Prospectus Supplement, placed in a custodial account (the "Buy- Down Fund") by the related Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage Loan in its entirety, or defaults on such Mortgage Loan and the Mortgaged Property is sold in liquidation thereof, during the period when the mortgagor is not obligated, by virtue of the buy-down plan, to pay the full monthly payment otherwise due on such loan, the unpaid principal balance of such Buy-Down Loan will be reduced by the amounts remaining in the Buy-Down Fund with respect to such Buy-Down Loan, and such amounts will be deposited in the Servicer Custodial Account or the Certificate Account, net of any amounts paid with respect to such Buy-Down Loan by any insurer, guarantor or other person pursuant to a credit enhancement arrangement described in the applicable Prospectus Supplement. g. Balloon Loans. If so specified in the applicable Prospectus Supplement, a Trust Estate may contain Mortgage Loans which are amortized over a fixed period not exceeding 30 years but which have shorter terms to maturity ("Balloon Loans") that causes the outstanding principal balance of the related Mortgage Loan to be due and payable at the end of a certain specified period (the "Balloon Period"). The borrower of such Balloon Loan will be obligated to pay the entire outstanding principal balance of the Balloon Loan at the end of the related Balloon Period. In the event the related mortgagor refinances a Balloon Loan at maturity, the new loan will not be included in the Trust Estate. See "Prepayment and Yield Considerations" herein. h. Pledged Asset Mortgage Loans. If so specified in the applicable Prospectus Supplement, a Trust Estate may contain fixed-rate mortgage loans having original terms to stated maturity of not more than 30 years which are either (i) secured by a security interest in additional collateral (normally securities) owned by the borrower or (ii) supported by a third party guarantee (usually a parent of the borrower); which is in turn secured by a security interest in collateral (usually securities) owned by such guarantor (any such loans, "Pledged Asset Mortgage Loans," and any such collateral, "Additional Collateral"). Generally, the amount of such Additional Collateral will not exceed 30% of the amount of such loan, and the requirement to maintain Additional Collateral will terminate when the principal amount of the loan is paid down to a predetermined amount. A Trust Estate may also include other types of first-lien, residential Mortgage Loans to the extent set forth in the applicable Prospectus Supplement. THE DEPOSITOR Bank of America Mortgage Securities, Inc. (the "Depositor") was incorporated in the State of Delaware on May 6, 1996 and filed a Certificate of Amendment of Certificate of Incorporation changing its name to "Bank of America Mortgage Securities, Inc." on January 8, 1999. The Depositor is a wholly-owned subsidiary of NationsBank, N.A. It is not expected that the Depositor will have any business operations other than offering Certificates and related activities. The Depositor maintains its principal executive office at 345 Montgomery Street, Lower Level #2, Unit #8152, San Francisco, California 94104. Its telephone number is (415) 622-3676. 18
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THE MORTGAGE LOAN PROGRAMS General The Depositor will purchase the Mortgage Loans, either directly or through its affiliates, from Sellers. The Sellers may be affiliated or unaffiliated with the Depositor. The Mortgage Loans will generally have been underwritten in accordance with the underwriting standards set forth below. In the event the Mortgage Loans in a particular Trust Estate have been originated in accordance with underwriting standards which vary materially from those described below, the underwriting standards will be described in the related Prospectus Supplement. Mortgage Loan Underwriting The underwriting guidelines are intended to evaluate the mortgagor's credit standing and repayment ability and the value and adequacy of the mortgaged property as collateral. The underwriting guidelines are applied in a standard procedure which is intended to comply with applicable federal and state laws and regulations. With respect to the underwriting guidelines described below, as well as any other underwriting guidelines that may be applicable to the Mortgage Loans, such underwriting standards generally include a set of specific criteria pursuant to which the underwriting evaluation is made. However, the application of such underwriting guidelines does not imply that each specific criteria was satisfied individually. A Seller will have considered a Mortgage Loan to be originated in accordance with a given set of underwriting guidelines if, based on an overall qualitative evaluation, the loan is in substantial compliance with such underwriting guidelines. A Mortgage Loan may be considered to comply with a set of underwriting standards, even if one or more specific criteria included in such underwriting standards were not satisfied, if other factors compensated for the criteria that were not satisfied or the Mortgage Loan is considered to be in substantial compliance with the underwriting standards. Initially, a prospective mortgagor is required to fill out a detailed application designed to provide pertinent credit information. As part of the description of the prospective mortgagor's financial condition, the applicant is required to provide current information describing assets and liabilities and a statement of income and expenses, as well as an authorization to apply for a credit report which summarizes the applicant's credit history with merchants and lenders and any record of bankruptcy. In most cases, an employment verification is obtained either from the applicant's employer wherein the employer reports the length of employment with that organization, the current salary and an indication as to whether it is expected that the applicant will continue such employment in the future or through analysis of copies of federal withholding (IRS W-2) forms, current payroll earnings statements and account statements of the applicant. If a prospective mortgagor is self-employed, the applicant is required to submit copies of signed tax returns. The applicant also authorizes deposit verification at all financial institutions where the applicant has accounts. A Seller may, as part of its overall evaluation of the applicant's creditworthiness, use a credit scoring system or mortgage scoring system to evaluate in a statistical manner the expected performance of a Mortgage Loan based on the pertinent credit information concerning the applicant provided through national credit bureaus, certain other information provided by the applicant and an assessment of specific mortgage loan characteristics, including loan-to-value ratio and type of loan product. Certain Sellers may use an automated process to assist in making credit decisions on certain mortgage loans. A prospective borrower's credit history is assigned a score based on standard criteria designed to predict the possibility of a default by the prospective borrower on a mortgage loan. An application from a prospective borrower whose score indicates a high probability of default will receive scrutiny from a senior underwriter who may override a decision based on the credit score. An application from a prospective borrower whose score indicates a lower probability of default is subject to less stringent underwriting guidelines and documentation standards to verify the information in the application. In addition, certain Sellers may maintain alternative underwriting guidelines for certain qualifying Mortgage Loans underwritten through an underwriting program ("Limited or Reduced Documentation Guidelines") designed to streamline the loan underwriting process. Certain reduced loan documentation programs may not require income, employment or asset verifications. Generally, in order to be eligible for a reduced loan documentation program, the Mortgaged Property must have a loan-to-value ratio which supports the amount of the Mortgage Loan and the mortgagor must have a good credit history. Eligibility for such program may be determined by use of a credit scoring model. 19
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Once all applicable employment and deposit documentation and the credit report are received, a determination is made as to whether the prospective mortgagor has sufficient monthly income available to meet the mortgagor's monthly obligations on the proposed mortgage loan and other expenses related to the mortgaged property (such as property taxes, hazard insurance and maintenance and utility costs) and to meet other financial obligations and monthly living expenses. To determine the adequacy of the Mortgaged Property as collateral, an appraisal is made of each property considered for financing. The appraisal is conducted by either a staff appraiser of the applicable Seller or an independent appraiser. The appraiser is required to inspect the property and verify that it is in acceptable condition and that construction, if recent, has been completed. The appraisal is based on various factors including the appraiser's estimate of values, giving appropriate weight to both the market value of comparable housing, as well as the cost of replacing the property. Appraisers may be required by a Seller to note on their appraisal any environmental hazard the appraiser becomes aware of while appraising the property. Properties with contaminated water or septic may be ineligible for financing by certain originators. EPA Lead Paint requirements for notice and an inspection period are standard for properties built before 1978. Properties containing other hazards may be eligible for financing if the appraiser can value the property showing the impact of the hazard, and the borrower executes a "hold harmless" letter to the lender. The title insurance policy may include Environmental Protection Lien Endorsement coverage (ALTA Form 8.1 or its equivalent) excepting only Superliens which may arise after the loan is made. See "Certain Legal Aspects of the Mortgage Loans--Environmental Considerations." With respect to certain mortgage loans, the underwriting of such mortgage loans may be based on data obtained by parties, other than the applicable Seller, that are involved at various stages in the mortgage origination or acquisition process. This typically occurs under circumstances in which loans are subject to more than one approval process, as when correspondents, certain mortgage brokers or similar entities that have been approved by a Seller to process loans on its behalf, or independent contractors hired by such Seller to perform underwriting services on its behalf make initial determinations as to the consistency of loans with such Seller's underwriting guidelines. The underwriting of mortgage loans acquired by a Seller pursuant to a delegated underwriting arrangement with a correspondent may not be reviewed prior to acquisition of the mortgage loan by such Seller although the mortgage loan file may be reviewed by such Seller to confirm that certain documents are included in the file. Instead, such Seller may rely on (i) the correspondent's representations that such mortgage loan was underwritten in accordance with such Seller's underwriting standards and (ii) a post-purchase review of a sampling of all mortgage loans acquired from such originator. In addition, in order to be eligible to sell mortgage loans to such Seller pursuant to a delegated underwriting arrangement, the originator must meet certain requirements including, among other things, certain quality, operational and financial guidelines. Certain states where the Mortgaged Properties securing the Mortgage Notes are located are "anti-deficiency" states where, in general, lenders providing credit on one-to-four-family properties must look solely to the property for repayment in the event of foreclosure, see "Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders." The underwriting guidelines in all states (including anti-deficiency states) require that the value of the property being financed, as indicated by the appraisal, currently supports and is anticipated to support in the future the outstanding loan balance and provides sufficient value to mitigate the effects of adverse shifts in real estate values, although there can be no assurance that such value will support the outstanding loan balance in the future. Except as described in the related Prospectus Supplement, Mortgage Loans originated with Loan-to-Value Ratios in excess of 80% will be covered by primary mortgage insurance. The "Loan-to-Value Ratio" is the ratio, expressed as a percentage, of the principal amount of the Mortgage Loan at origination to the lesser of (i) the appraised value of the related Mortgaged Property, as established by an appraisal obtained by the originator prior to origination, or (ii) the sale price for such property. For the purpose of calculating the Loan-to-Value 20
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Ratio of any Mortgage Loan that is the result of the refinancing (including a refinancing for "equity take out" purposes) of an existing mortgage loan, the appraised value of the related Mortgaged Property is generally determined by reference to an appraisal obtained in connection with the origination of the replacement loan. Certain of the Mortgage Loans may be purchased by the Depositor either directly or through an affiliate in negotiated transactions, and such negotiated transactions may be governed by contractual agreements. The contractual agreements with Sellers may provide the commitment by the Depositor or an affiliate to accept the delivery of a certain dollar amount of mortgage loans over a specific period of time; this commitment may allow for the delivery of mortgage loans one at a time or in multiples as aggregated by the Seller. Many of the contractual agreements allow the delegation of all underwriting functions to the Seller, who will represent that the Mortgage Loans have been originated in accordance with underwriting standards agreed to by the Depositor or its affiliate. In the event such standards differ naturally from those set forth above, the related Prospectus Supplement will describe such standards. Representations and Warranties In connection with the transfer of the Mortgage Loans related to any Series by the Depositor to the Trust Estate, the Depositor will generally make certain representations and warranties regarding the Mortgage Loans. If so indicated in the applicable Prospectus Supplement, the Depositor may, rather than itself making representations and warranties, cause the representations and warranties made by the Seller in connection with its sale of Mortgage Loans to the Depositor or to another affiliate of the Depositor to be assigned to the Trust Estate. In such cases, the Seller's representations and warranties may have been made as of a date prior to the date of execution of the Pooling and Servicing Agreement. Such representations and warranties (whether made by the Depositor or another party) will generally include the following with respect to the Mortgage Loans, or each Mortgage Loan, as the case may be: (i) the schedule of Mortgage Loans appearing as an exhibit to such Pooling and Servicing Agreement is correct in all material respects at the date or dates respecting which such information is furnished as specified therein; (ii) immediately prior to the transfer and assignment contemplated by the Pooling and Servicing Agreement, the Depositor is the sole owner and holder of the Mortgage Loan, free and clear of any and all liens, pledges, charges or security interests of any nature and has full right and authority to sell and assign the same; (iii) to the knowledge of the representing party, no Mortgage Note or Mortgage is subject to any right of rescission, set-off, counterclaim or defense; (iv) the Mortgage Loan is covered by a title insurance policy (or in the case of any Mortgage Loan secured by a Mortgaged Property located in a jurisdiction where such policies are generally not available, an opinion of counsel of the type customarily rendered in such jurisdiction in lieu of title insurance is instead received); (v) the Mortgage is a valid, subsisting and enforceable first lien on the related Mortgaged Property; (vi) the Mortgaged Property is undamaged by water, fire, earthquake or earth movement, windstorm, flood, tornado or similar casualty (excluding casualty from the presence of hazardous wastes or hazardous substances, as to which no representation is made), so as to affect adversely the value of the Mortgaged Property as security for the Mortgage Loan or the use for which the premises were intended; (vii) all payments required to be made up to the Due Date immediately preceding the Cut-Off Date for such Mortgage Loan under the terms of the related Mortgage Note have been made and no Mortgage Loan had more than one delinquency in the 12 months preceding the Cut-Off Date; and (viii) any and all requirements of any federal, state or local law with respect to the origination of the Mortgage Loans including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Mortgage Loans have been complied with. No representations or warranties are made by the Depositor or any other party as to the environmental condition of any Mortgaged Property including the absence, presence or effect of hazardous wastes or hazardous substances on such Mortgaged Property or any effect from the presence or effect of hazardous wastes or hazardous substances on, near or emanating from such Mortgaged Property. See "Certain Legal Aspects of the Mortgage Loans--Environmental Considerations." See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans to the Trustee" for a description of the limited remedies available in connection with breaches of the foregoing representations and warranties. 21
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DESCRIPTION OF THE CERTIFICATES General Each Series of Certificates will include one or more Classes. Any Class of Certificates may consist of two or more non-severable components, each of which may exhibit any of the principal or interest payment characteristics described herein with respect to a Class of Certificates. A Series may include one or more Classes of Certificates entitled, to the extent of funds available, to (i) principal and interest distributions in respect of the related Mortgage Loans, (ii) principal distributions, with no interest distributions, (iii) interest distributions, with no principal distributions or (iv) such other distributions as are described in the applicable Prospectus Supplement. Each Series of Certificates will be issued on the date specified in the applicable Prospectus Supplement (the "Closing Date") pursuant to a Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") among the Depositor, the Servicer(s) (or, if applicable, the Master Servicer), and the Trustee named in the applicable Prospectus Supplement. An illustrative form of Pooling and Servicing Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The following summaries describe material provisions common to the Certificates and to each Pooling and Servicing Agreement. The summaries are subject to, and are qualified by reference to, the further material provisions of the Pooling and Servicing Agreement for each specific Series of Certificates, as described in the applicable Prospectus Supplement. Wherever particular sections or defined terms of the Pooling and Servicing Agreement are referred to, such sections or defined terms are thereby incorporated herein by reference from the form of Pooling and Servicing Agreement filed as an exhibit to the Registration Statement. Distributions to holders of Certificates (the "Certificateholders") of all Series (other than the final distribution in retirement of the Certificates) will be made by check mailed to the address of the person entitled thereto (which in the case of Book-Entry Certificates will be Cede as nominee for DTC) as it appears on the certificate register, except that, with respect to any holder of a Certificate evidencing not less than a certain minimum denomination set forth in the applicable Prospectus Supplement, distributions will be made by wire transfer in immediately available funds, provided that the Trustee or the Paying Agent acting on behalf of the Trustee shall have been furnished with appropriate wiring instructions not less than seven business days prior to the related Distribution Date. The final distribution in retirement of Certificates will be made only upon presentation and surrender of the Certificates at the office or agency maintained by the Trustee or other entity for such purpose, as specified in the final distribution notice to Certificateholders. Each Series of Certificates will represent ownership interests in the related Trust Estate. An election may be made to treat the Trust Estate (or one or more segregated pools of assets therein) with respect to a Series of Certificates as a REMIC. If such an election is made, such Series will consist of one or more Classes of Certificates that will represent "regular interests" within the meaning of Code Section 860G(a)(1) (such Class or Classes collectively referred to as the "Regular Certificates") and one Class of Certificates with respect to each REMIC that will be designated as the "residual interest" within the meaning of Code Section 860G(a)(2) (the "Residual Certificates") representing the right to receive distributions as specified in the Prospectus Supplement for such Series. See "Federal Income Tax Consequences." The Depositor may sell certain Classes of the Certificates of a Series, including one or more Classes of Subordinated Certificates, in privately negotiated transactions exempt from registration under the Securities Act. Alternatively, if so specified in a Prospectus Supplement relating to such Subordinated Certificates, the Depositor may offer one or more Classes of the Subordinated Certificates of a Series by means of this Prospectus and such Prospectus Supplement. Definitive Form Certificates of a Series that are issued in fully-registered, certificated form are referred to herein as "Definitive Certificates." Distributions of principal of, and interest on, the Definitive Certificates will be made 22
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directly to holders of Definitive Certificates in accordance with the procedures set forth in the Pooling and Servicing Agreement. The Definitive Certificates of a Series offered hereby and by means of the applicable Prospectus Supplements will be transferable and exchangeable at the office or agency maintained by the Trustee or such other entity for such purpose set forth in the applicable Prospectus Supplement. No service charge will be made for any transfer or exchange of Definitive Certificates, but the Trustee or such other entity may require payment of a sum sufficient to cover any tax or other governmental charge in connection with such transfer or exchange. In the event that an election is made to treat the Trust Estate (or one or more segregated pools of assets therein) as a REMIC, the "residual interest" thereof will be issued as a Definitive Certificate. No legal or beneficial interest in all or any portion of any "residual interest" may be transferred without the receipt by the transferor and the Trustee of an affidavit signed by the transferee stating, among other things, that the transferee (i) is not a disqualified organization within the meaning of Code Section 860E(e) or an agent (including a broker, nominee or middleman) thereof and (ii) understands that it may incur tax liabilities in excess of any cash flows generated by the residual interest. Further, the transferee must state in the affidavit that it (a) historically has paid its debts as they have come due, (b) intends to pay its debts as they come due in the future and (c) intends to pay taxes associated with holding the residual interest as they become due. The transferor must certify to the Trustee that, as of the time of the transfer, it has no actual knowledge that any of the statements made in the transferee affidavit are false and no reason to know that the statements made by the transferee pursuant to clauses (a), (b) and (c) of the preceding sentence are false. See "Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on Transfer of Residual Certificates." Book-Entry Form Each Class of the Book-Entry Certificates of a Series initially will be represented by one or more physical certificates registered in the name of Cede & Co. ("Cede"), as nominee of DTC, which will be the "holder" or "Certificateholder" of such Certificates, as such terms are used herein. No person acquiring an interest in a Book-Entry Certificate (a "Beneficial Owner") will be entitled to receive a Definitive Certificate representing such person's interest in the Book-Entry Certificate, except as set forth below. Unless and until Definitive Certificates are issued under the limited circumstances described herein, all references to actions taken by Certificateholders or holders shall, in the case of the Book-Entry Certificates, refer to actions taken by DTC upon instructions from its DTC Participants, and all references herein to distributions, notices, reports and statements to Certificateholders or holders shall, in the case of the Book- Entry Certificates, refer to distributions, notices, reports and statements to DTC or Cede, as the registered holder of the Book-Entry Certificates, as the case may be, for distribution to Beneficial Owners in accordance with DTC procedures. DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold securities for its participating organizations ("DTC Participants") and to facilitate the clearance and settlement of securities transactions among DTC Participants through electronic book entries, thereby eliminating the need for physical movement of certificates. DTC Participants include securities brokers and dealers (which may include any underwriter identified in the Prospectus Supplement applicable to any Series), banks, trust companies and clearing corporations. Indirect access to the DTC system also is available to banks, brokers, dealers, trust companies and other institutions that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly ("Indirect DTC Participants"). Under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers of Book-Entry Certificates among DTC Participants on whose behalf it acts with respect to the Book-Entry Certificates and to receive and transmit distributions of principal of 23
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and interest on the Book-Entry Certificates. DTC Participants and Indirect DTC Participants with which Beneficial Owners have accounts with respect to the Book-Entry Certificates similarly are required to make book-entry transfers and receive and transmit such payments on behalf of their respective Beneficial Owners. Beneficial Owners that are not DTC Participants or Indirect DTC Participants but desire to purchase, sell or otherwise transfer ownership of, or other interests in, Book-Entry Certificates may do so only through DTC Participants and Indirect DTC Participants. In addition, Beneficial Owners will receive all distributions of principal and interest from the Trustee, or a Paying Agent on behalf of the Trustee, through DTC Participants. DTC will forward such distributions to its DTC Participants, which thereafter will forward them to Indirect DTC Participants or Beneficial Owners. Beneficial Owners will not be recognized by the Trustee, any Servicer, or the Master Servicer or any Paying Agent as Certificateholders, as such term is used in the Pooling and Servicing Agreement, and Beneficial Owners will be permitted to exercise the rights of Certificateholders only indirectly through DTC and its DTC Participants. Because DTC can only act on behalf of DTC Participants, who in turn act on behalf of Indirect DTC Participants and certain banks, the ability of a Beneficial Owner to pledge Book-Entry Certificates to persons or entities that do not participate in the DTC system, or to otherwise act with respect to such Book-Entry Certificates, may be limited due to the lack of a physical certificate for such Book-Entry Certificates. In addition, under a book-entry format, Beneficial Owners may experience delays in their receipt of payments, since distributions will be made by the Trustee, or a Paying Agent on behalf of the Trustee, to Cede, as nominee for DTC. DTC has advised the Depositor that it will take any action permitted to be taken by a Certificateholder under the Pooling and Servicing Agreement only at the direction of one or more DTC Participants to whose accounts with DTC the Book-Entry Certificates are credited. Additionally, DTC has advised the Depositor that it will take such actions with respect to specified Voting Interests only at the direction of and on behalf of DTC Participants whose holdings of Book-Entry Certificates evidence such specified Voting Interests. DTC may take conflicting actions with respect to Voting Interests to the extent that DTC Participants whose holdings of Book-Entry Certificates evidence such Voting Interests authorize divergent action. None of the Depositor, any Servicer, the Master Servicer or the Trustee will have any responsibility for any aspect of the records relating to or payments made on account of beneficial ownership interests of the Book-Entry Certificates held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. In the event of the insolvency of DTC, a DTC Participant or an Indirect DTC Participant in whose name Book-Entry Certificates are registered, the ability of the Beneficial Owners of such Book-Entry Certificates to obtain timely payment and, if the limits of applicable insurance coverage by the Securities Investor Protection Corporation are exceeded or if such coverage is otherwise unavailable, ultimate payment, of amounts distributable with respect to such Book-Entry Certificates may be impaired. The Book-Entry Certificates will be converted to Definitive Certificates and reissued to Beneficial Owners or their nominees, rather than to DTC or its nominee, only if (i) the Trustee is advised in writing that DTC is no longer willing or able to discharge properly its responsibilities as depository with respect to the Book-Entry Certificates and the Trustee is unable to locate a qualified successor, (ii) the Servicer(s) or the Master Servicer, as applicable, optionally, elect to terminate the book-entry system through DTC, (iii) after the occurrence of a dismissal or resignation of the Servicer(s) or the Master Servicer, as applicable, under the Pooling and Servicing Agreement, Beneficial Owners representing not less than 51% of the Voting Interests of the outstanding Book-Entry Certificates advise the Trustee through DTC, in writing, that the continuation of a book-entry system through DTC (or a successor thereto) is no longer in the Beneficial Owners' best interest or (iv) under such other circumstances as described in the related Prospectus Supplement. Upon the occurrence of any event described in the immediately preceding paragraph, the Trustee will be required to notify all Beneficial Owners through DTC Participants of the availability of Definitive Certificates. Upon surrender by DTC of the physical certificates representing the Book-Entry Certificates and receipt of instructions for re-registration, the Trustee will reissue the Book-Entry Certificates as Definitive Certificates to 24
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Beneficial Owners. The procedures relating to payment on and transfer of Certificates initially issued as Definitive Certificates will thereafter apply to those Book-Entry Certificates that have been reissued as Definitive Certificates. Distributions to Certificateholders General. On each Distribution Date, each holder of a Certificate of a Class will be entitled to receive its Certificate's Percentage Interest of the portion of the Pool Distribution Amount allocated to such Class. The undivided percentage interest (the "Percentage Interest") represented by any Certificate of a Class in distributions to such Class will be equal to the percentage obtained by dividing the initial principal balance (or notional amount) of such Certificate by the aggregate initial principal balance (or notional amount) of all Certificates of such Class. In general, the funds available for distribution to Certificateholders of a Series of Certificates with respect to each Distribution Date for such Series (the "Pool Distribution Amount") will be the sum of all previously undistributed payments or other receipts on account of principal (including principal prepayments and Liquidation Proceeds, if any) and interest on or in respect of the related Mortgage Loans received by the related Servicer after the Cut-Off Date (except for amounts due on or prior to the Cut-Off Date), or received by the related Servicer on or prior to the Cut-Off Date but due after the Cut-Off Date, in either case received on or prior to the business day preceding the Determination Date in the month in which such Distribution Date occurs, plus all Periodic Advances with respect to payments due to be received on the Mortgage Loans on the Due Date preceding such Distribution Date, but excluding the following: (a) amounts received as late payments of principal or interest respecting which one or more unreimbursed Periodic Advances has been made; (b) that portion of Liquidation Proceeds with respect to a Mortgage Loan which represents any unreimbursed Periodic Advances; (c) those portions of each payment of interest on a particular Mortgage Loan which represent (i) the Fixed Retained Yield, if any, (ii) the applicable Servicing Fee, (iii) the applicable Master Servicing Fee, if any, (iv) the Trustee Fee and (v) any other amounts described in the applicable Prospectus Supplement; (d) all amounts representing scheduled payments of principal and interest due after the Due Date occurring in the month in which such Distribution Date occurs; (e) all proceeds (including Liquidation Proceeds other than, in certain cases as specified in the applicable Prospectus Supplement, Liquidation Proceeds which were received prior to the related Servicer's determination that no further recoveries on a defaulted Mortgage Loan will be forthcoming ("Partial Liquidation Proceeds")) of any Mortgage Loans, or property acquired in respect thereof, that were liquidated, foreclosed, purchased or repurchased pursuant to the applicable Pooling and Servicing Agreement, which proceeds were received on or after the Due Date occurring in the month in which such Distribution Date occurs and all principal prepayments in full, partial principal prepayments and Partial Liquidation Proceeds received by the related Servicer on or after the Determination Date (or, with respect to any such amount, and if specified in the applicable Prospectus Supplement, the Due Date) occurring in the month in which such Distribution Date occurs, and all related payments of interest on such amounts; (f) that portion of Liquidation Proceeds which represents any unpaid Servicing Fees, Master Servicing Fee or any Trustee Fee to which the related Servicer, the Trustee or the Master Servicer, respectively, is entitled and any unpaid Fixed Retained Yield; (g) if an election has been made to treat the applicable Trust Estate as a REMIC, any Net Foreclosure Profits with respect to such Distribution Date; (h) all amounts representing certain expenses reimbursable to the Master Servicer or any Servicer and other amounts permitted to be withdrawn by the Master Servicer or such Servicer from the Certificate Account, in each case pursuant to the applicable Pooling and Servicing Agreement; 25
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(i) all amounts in the nature of late fees, assumption fees, prepayment fees and similar fees which the related Servicer is entitled to retain pursuant to the applicable Underlying Servicing Agreement or applicable Pooling and Servicing Agreement; (j) reinvestment earnings on payments received in respect of the Mortgage Loans; and (k) any recovery of an amount in respect of principal which had previously been allocated as a realized loss to such Series of Certificates. The applicable Prospectus Supplement for a Series will describe any variation in the calculation of the Pool Distribution Amount for such Series. "Net Foreclosure Profits" with respect to a Distribution Date will be the excess of (i) the amount by which any aggregate profits on liquidated Mortgage Loans with respect to which net Liquidation Proceeds exceed the unpaid principal balance thereof plus accrued interest thereon at the Mortgage Interest Rate over (ii) aggregate realized losses on liquidated Mortgage Loans with respect to which net Liquidation Proceeds are less than the unpaid principal balance thereof plus accrued interest thereon at the Mortgage Interest Rate. Distributions of Interest. With respect to each Series of Certificates, interest on the related Mortgage Loans at the weighted average of the applicable Net Mortgage Interest Rates thereof, will be passed through monthly to holders of the related Classes of Certificates in the aggregate, in accordance with the particular terms of each such Class of Certificates. The "Net Mortgage Interest Rate" for each Mortgage Loan in a given period will equal the mortgage interest rate for such Mortgage Loan in such period, as specified in the related Mortgage Note (the "Mortgage Interest Rate"), less the portion thereof, if any, not contained in the Trust Estate (the "Fixed Retained Yield"), and less amounts payable to the Servicer for servicing the Mortgage Loan (the "Servicing Fee"), the fee payable to the Master Servicer, if any (the "Master Servicing Fee"), the fee payable to the Trustee (the "Trustee Fee") and any related expenses specified in the applicable Prospectus Supplement. Interest will accrue on the principal balance (or notional amount, as described below) of each Class of Certificates entitled to interest at the Pass-Through Rate for such Class indicated in the applicable Prospectus Supplement (which may be a fixed rate or an adjustable rate) from the date and for the periods specified in such Prospectus Supplement. To the extent the Pool Distribution Amount is available therefor, interest accrued during each such specified period on each Class of Certificates entitled to interest (other than a Class that provides for interest that accrues, but is not currently payable, referred to hereinafter as "Accrual Certificates") will be distributable on the Distribution Dates specified in the applicable Prospectus Supplement until the principal balance (or notional amount) of such Class has been reduced to zero. Distributions allocable to interest on each Certificate that is not entitled to distributions allocable to principal will generally be calculated based on the notional amount of such Certificate. The notional amount of a Certificate will not evidence an interest in or entitlement to distributions allocable to principal but will be solely for convenience in expressing the calculation of interest and for certain other purposes. With respect to any Class of Accrual Certificates, any interest that has accrued but is not paid on a given Distribution Date will be added to the principal balance of such Class of Certificates on that Distribution Date. Distributions of interest on each Class of Accrual Certificates will commence only after the occurrence of the events or the existence of the circumstance specified in such Prospectus Supplement and, prior to such time, or in the absence of such circumstances, the principal balance of such Class will increase on each Distribution Date by the amount of interest that accrued on such Class during the preceding interest accrual period but that was not required to be distributed to such Class on such Distribution Date. Any such Class of Accrual Certificates will thereafter accrue interest on its outstanding principal balance as so adjusted. Distributions of Principal. The principal balance of any Class of Certificates entitled to distributions of principal will generally be the original principal balance of such Class specified in such Prospectus Supplement, reduced by all distributions reported to the holders of such Certificates as allocable to principal and any losses 26
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on the related Mortgage Loans allocated to such Class of Certificates and (i) in the case of Accrual Certificates, increased by all interest accrued but not then distributable on such Accrual Certificates and (ii) in the case of a Series of Certificates representing interests in a Trust Estate containing adjustable-rate Mortgage Loans, increased by any Deferred Interest allocable to such Class. The principal balance of a Class of Certificates generally represents the maximum specified dollar amount (exclusive of any interest that may accrue on such Class to which the holder thereof is entitled from the cash flow on the related Mortgage Loans at such time) and will decline to the extent of distributions in reduction of the principal balance of, and allocations of losses to, such Class. Certificates with no principal balance will not receive distributions in respect of principal. The applicable Prospectus Supplement will specify the method by which the amount of principal to be distributed on the Certificates on each Distribution Date will be calculated and the manner in which such amount will be allocated among the Classes of Certificates entitled to distributions of principal. If so provided in the applicable Prospectus Supplement, one or more Classes of Senior Certificates will be entitled to receive all or a disproportionate percentage of the payments of principal that are received from borrowers in advance of their scheduled due dates and are not accompanied by amounts representing scheduled interest due after the months of such payments or of other unscheduled principal receipts or recoveries in the percentages and under the circumstances or for the periods specified in such Prospectus Supplement. Any such allocation of principal prepayments or other unscheduled receipts or recoveries in respect of principal to such Class or Classes of Senior Certificates will have the effect of accelerating the amortization of such Senior Certificates while increasing the interests evidenced by the Subordinated Certificates in the Trust Estate. Increasing the interests of the Subordinated Certificates relative to that of the Senior Certificates is intended to preserve the availability of the subordination provided by the Subordinated Certificates. If specified in the applicable Prospectus Supplement, the rights of the holders of the Subordinated Certificates of a Series of Certificates for which credit enhancement is provided through subordination to receive distributions with respect to the Mortgage Loans in the related Trust Estate will be subordinated to such rights of the holders of the Senior Certificates of the same Series to the extent described below, except as otherwise set forth in such Prospectus Supplement. This subordination is intended to enhance the likelihood of regular receipt by holders of Senior Certificates of the full amount of scheduled monthly payments of principal and interest due them and to provide limited protection to the holders of the Senior Certificates against losses due to mortgagor defaults. The protection afforded to the holders of Senior Certificates of a Series of Certificates for which credit enhancement is provided by the subordination feature described above will be effected by (i) the preferential right of such holders to receive, prior to any distribution being made in respect of the related Subordinated Certificates on each Distribution Date, current distributions on the related Mortgage Loans of principal and interest due them on each Distribution Date out of the funds available for distribution on such date in the related Certificate Account, (ii) by the right of such holders to receive future distributions on the Mortgage Loans that would otherwise have been payable to the holders of Subordinated Certificates and/or (iii) by the prior allocation to the Subordinated Certificates of all or a portion of losses realized on the related Mortgage Loans. Losses realized on liquidated Mortgage Loans (other than Excess Special Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses as described below) will be allocated to the holders of Subordinated Certificates through a reduction of the amount of principal payments on the Mortgage Loans to which such holders are entitled before any corresponding reduction is made in respect of the Senior Certificate. A "Special Hazard Loss" is a loss on a liquidated Mortgage Loan occurring as a result of a hazard not insured against under a standard hazard insurance policy of the type described herein under "Servicing of the Mortgage Loans-- Insurance Policies." A "Fraud Loss" is a loss on a liquidated Mortgage Loan as to which there was fraud in the origination of such Mortgage Loan. A "Bankruptcy Loss" is a loss on a liquidated Mortgage Loan attributable to certain actions which may be taken by a bankruptcy court in connection with a Mortgage Loan, including a reduction by a bankruptcy court of the principal balance of or the interest rate on a Mortgage Loan or an extension of its maturity. Special Hazard Losses in excess of the amount specified in the 27
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applicable Prospectus Supplement (the "SPECIAL HAZARD LOSS AMOUNT") are "EXCESS SPECIAL HAZARD LOSSES." Fraud Losses in excess of the amount specified in the applicable Prospectus Supplement (the "FRAUD LOSS AMOUNT") are "EXCESS FRAUD LOSSES." Bankruptcy losses in excess of the amount specified in the applicable Prospectus Supplement (the "BANKRUPTCY LOSS AMOUNT") are "EXCESS BANKRUPTCY LOSSES." Any Excess Special Hazard Losses, Excess Fraud Losses or Excess Bankruptcy Losses with respect to a Series will be allocated on a pro rata basis among the related Classes of Senior and Subordinated Certificates. An allocation of a loss on a "pro rata basis" among two or more Classes of Certificates means an allocation on a pro rata basis to each such Class of Certificates on the basis of their then-outstanding principal balances in the case of the principal portion of a loss or based on the accrued interest thereon in the case of an interest portion of a loss. Since the Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy Loss Amount for a Series of Certificates are each expected to be less than the amount of principal payments on the Mortgage Loans to which the holders of the Subordinated Certificates of such Series are initially entitled (such amount being subject to reduction, as described above, as a result of allocation of losses on liquidated Mortgage Loans that are not Special Hazard Losses, Fraud Losses or Bankruptcy Losses), the holders of Subordinated Certificates of such Series will bear the risk of Special Hazard Losses, Fraud Losses and Bankruptcy Losses to a lesser extent than they will bear other losses on liquidated Mortgage Loans. Although the subordination feature described above is intended to enhance the likelihood of timely payment of principal and interest to the holders of Senior Certificates, shortfalls could result in certain circumstances. For example, a shortfall in the payment of principal otherwise due the holders of Senior Certificates could occur if losses realized on the Mortgage Loans in a Trust Estate were exceptionally high and were concentrated in a particular month. The holders of Subordinated Certificates will not be required to refund any amounts previously properly distributed to them, regardless of whether there are sufficient funds on a subsequent Distribution Date to make a full distribution to holders of each Class of Senior Certificates of the same Series. CATEGORIES OF CLASSES OF CERTIFICATES The Certificates of any Series may be comprised of one or more Classes. Such Classes, in general, fall into different categories. The following chart identifies and generally defines certain of the more typical categories. The Prospectus Supplement for a Series of Certificates may identify the Classes which comprise such Series by reference to the following categories or another category specified in the Prospectus Supplement. 28
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PRINCIPAL TYPES CATEGORIES OF CLASSES DEFINITIONS Accretion Directed Class................... A Class that receives principal payments from amounts that would otherwise be distributed as interest on specified Accrual Classes. Such principal payments may be in lieu of or in addition to principal payments from principal receipts on the Mortgage Loans for the related Series. Companion Class (also sometimes referred to as a "SUPPORT CLASS")........ A Class that is entitled to receive principal payments on any Distribution Date only if scheduled payments have been made on specified Planned Amortization Classes, Targeted Amortization Classes and/or Scheduled Amortization Classes. Component Class.......... A Class consisting of two or more specified components (each, a "COMPONENT"), as described in the applicable Prospectus Supplement. The Components of a Class of Component Certificates may have different principal and/or interest payment characteristics but together constitute a single class and do not represent severable interests. Each Component of a Class of Component Certificates may be identified as falling into one or more of the categories in this chart. Lockout Class............ A senior Class that is designed not to participate in or to participate to a limited extent in (i.e., to be "locked out" of ), for a specified period, the receipt of (1) principal prepayments on the Mortgage Loans that are allocated disproportionately to the senior Classes of such Series as a group pursuant to a "shifting interest" structure and/or (2) scheduled principal payments on the Mortgage Loans that are allocated to the senior Classes as a group. A Lockout Class will typically not be entitled to receive, or will be entitled to receive only a restricted portion of, distributions of principal prepayments and/or scheduled principal prepayments, as applicable, for a period of several years, during which time all or a portion of such principal payments that it would otherwise be entitled to receive in the absence of a "lockout" structure will be distributed in reduction of the Principal Balance of other senior Classes. Lockout Classes are designed to minimize weighted average life volatility during the lockout period. Notional Amount Class.... A Class having no principal balance and bearing interest on the related notional amount. The notional amount is used for purposes of the determination of interest distributions. Planned Amortization Class (also sometimes referred to as a "PAC")................ A Class that is designed to receive principal payments using a predetermined principal balance schedule derived by assuming two constant prepayment rates for the underlying Mortgage Loans. These two rates are the endpoints for the "structuring range" for the Planned Amortization Class. The Planned Amortization Classes in any Series of Certificates may be subdivided into different categories (e.g., Planned Amortization Class I ("PAC I"), Planned Amortization Class II ("PAC II") and so forth) derived using different structuring ranges. A PAC is designed to provide protection against prepayments occurring at a constant rate within the structuring range. 29
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Ratio Strip Class........ A Class that is entitled to receive a constant proportion, or "ratio strip," of the principal payments on the underlying Mortgage Loans. Scheduled Amortization Class................... A Class that is designed to receive principal payments using a predetermined principal balance schedule but is not designated as a Planned Amortization Class or Targeted Amortization Class. The schedule is derived by assuming either two constant prepayment rates or a single constant prepayment rate for the underlying Mortgage Loans. In the former case, the two rates are the endpoints for the "structuring range" for the Scheduled Amortization Class and such range generally is narrower than that for a Planned Amortization Class. Typically, the Support Class for the applicable Series of Certificates generally will represent a smaller percentage of the Scheduled Amortization Class than a Support Class generally would represent in relation to a Planned Amortization Class or a Targeted Amortization Class. A Scheduled Amortization Class is generally less sensitive to prepayments than a Companion Class, but more sensitive than a Planned Amortization Class or a Targeted Amortization Class. Senior Class............. A Class that is entitled to receive payments of principal and interest on each Distribution Date prior to the Classes of Subordinated Certificates. Sequential Pay Class..... Classes that are entitled to receive principal payments in a prescribed sequence, that do not have predetermined principal balance schedules and that, in most cases, are entitled to receive payments of principal continuously from the first Distribution Date on which they receive principal until they are retired. Sequential Pay Classes may receive principal payments concurrently with one or more other Sequential Pay Classes. A single Class that is entitled to receive principal payments before or after other Classes in the same Series of Certificates may be identified as a Sequential Pay Class. Subordinated Class....... A Class that is entitled to receive payments of principal and interest on each Distribution Date only after the Senior Certificates and certain Classes of Subordinated Certificates with higher priority of distributions have received their full principal and interest entitlements. Targeted Amortization Class (also sometimes referred to as a "TAC")................ A Class that is designed to receive principal payments using a predetermined principal balance schedule derived by assuming a single constant prepayment rate for the underlying Mortgage Loans. A TAC is designed to provide some protection against prepayments at a rate exceeding the assumed constant prepayment rate used to derive such Class principal balance schedule. INTEREST TYPES CATEGORIES OF CLASS DEFINITIONS Accrual Class............ A Class that accretes the amount of accrued interest otherwise distributable on such Class, which amount will be added as principal to 30
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the principal balance of such Class on each applicable Distribution Date. Such accretion may continue until some specified event has occurred or until such Accrual Class is retired. Fixed Rate Class......... A Class with an interest rate that is fixed throughout the life of the Class or a Class with more than one interest rate where such rate is fixed for a specified period during the life of the Class. Floating Rate Class...... A Class with an interest rate that resets periodically based upon a designated index and that varies directly with changes in such index. Interest Only Class...... A Class that is entitled to receive some or all of the interest payments made on the Mortgage Loans and little or no principal. Interest Only Classes have either a nominal principal balance or a notional amount. A nominal principal balance represents actual principal that will be paid on the Class. It is referred to as nominal since it is extremely small compared to other Classes. A notional amount is the amount used as a reference to calculate the amount of Interest due on an Interest Only Class that is not entitled to any distributions in respect of principal. Inverse Floating Rate Class................... A Class with an interest rate that resets periodically based upon a designated index and that varies inversely with changes in such index and with changes in the interest rate payable on the related Floating Rate Class. Principal Only Class..... A Class that does not bear interest and is entitled to receive only distributions in respect of principal. Step Coupon Class........ A Class with a fixed interest rate that is reduced to a lower fixed rate after a specified period of time. The difference between the initial interest rate and the lower interest rate will be supported by a reserve fund established on the Closing Date. Variable Rate Class...... A Class with an interest rate that resets periodically and is calculated by reference to the rate or rates of interest applicable to the Mortgage Loans. OTHER CREDIT ENHANCEMENT In addition to, or in substitution for, the subordination discussed above, credit enhancement may be provided with respect to any Series of Certificates in any other manner which may be described in the applicable Prospectus Supplement, including, but not limited to, credit enhancement through an alternative form of subordination and/or one or more of the methods described below. Limited Guarantee. If so specified in the Prospectus Supplement with respect to a Series of Certificates, credit enhancement may be provided in the form of a limited guarantee issued by a guarantor named therein. Financial Guaranty Insurance Policy or Surety Bond. If so specified in the Prospectus Supplement with respect to a Series of Certificates, credit enhancement may be provided in the form of a financial guaranty insurance policy or a surety bond issued by an insurer named therein. Letter of Credit. Alternative credit support with respect to a Series of Certificates may be provided by the issuance of a letter of credit by the bank or financial institution specified in the applicable Prospectus Supplement. The coverage, amount and frequency of any reduction in coverage provided by a letter of credit issued with respect to a Series of Certificates will be set forth in the Prospectus Supplement relating to such Series. 31
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Pool Insurance Policy. If so specified in the Prospectus Supplement relating to a Series of Certificates, the Seller will obtain a pool insurance policy for the Mortgage Loans in the related Trust Estate. The pool insurance policy will cover any loss (subject to the limitations described in the applicable Prospectus Supplement) by reason of default to the extent a related Mortgage Loan is not covered by any primary mortgage insurance policy. The amount and principal terms of any such coverage will be set forth in the Prospectus Supplement. Special Hazard Insurance Policy. If so specified in the applicable Prospectus Supplement, for each Series of Certificates as to which a pool insurance policy is provided, the Depositor will also obtain a special hazard insurance policy for the related Trust Estate in the amount set forth in such Prospectus Supplement. The special hazard insurance policy will, subject to the limitations described in the applicable Prospectus Supplement, protect against loss by reason of damage to Mortgaged Properties caused by certain hazards not insured against under the standard form of hazard insurance policy for the respective states in which the Mortgaged Properties are located. The amount and principal terms of any such coverage will be set forth in the Prospectus Supplement. Mortgagor Bankruptcy Bond. If so specified in the applicable Prospectus Supplement, losses resulting from a bankruptcy proceeding relating to a mortgagor affecting the Mortgage Loans in a Trust Estate with respect to a Series of Certificates will be covered under a mortgagor bankruptcy bond (or any other instrument that will not result in a downgrading of the rating of the Certificates of a Series by the Rating Agency or Rating Agencies that rated such Series). Any mortgagor bankruptcy bond or such other instrument will provide for coverage in an amount meeting the criteria of the Rating Agency or Rating Agencies rating the Certificates of the related Series, which amount will be set forth in the applicable Prospectus Supplement. The principal terms of any such coverage will be set forth in the Prospectus Supplement. Reserve Fund. If so specified in the applicable Prospectus Supplement, credit enhancement with respect to a Series of Certificates may be provided by the establishment of one or more reserve funds (each, a "Reserve Fund") for such Series. The Reserve Fund for a Series may be funded (i) by the deposit therein of cash, U.S. Treasury securities or instruments evidencing ownership of principal or interest payments thereon, letters of credit, demand notes, certificates of deposit or a combination thereof in the aggregate amount specified in the applicable Prospectus Supplement, (ii) by the deposit therein from time to time of certain amounts, as specified in the applicable Prospectus Supplement, to which the certain Classes of Certificates would otherwise be entitled or (iii) in such other manner as may be specified in the applicable Prospectus Supplement. Cross Support. If specified in the applicable Prospectus Supplement, the beneficial ownership of separate groups of Mortgage Loans included in a Trust Estate may be evidenced by separate Classes of Certificates. In such case, credit support may be provided by a cross support feature which requires that distributions be made with respect to certain Classes from mortgage loan payments that would otherwise be distributed to Subordinated Certificates evidencing a beneficial ownership interest in other loan groups within the same Trust Estate. As a result, the amount of credit enhancement available to a Class of Certificates against future losses on the Mortgage Loans in which such Class represents an interest may be reduced as the result of losses on a group of Mortgage Loans in which such Class has no interest. The applicable Prospectus Supplement for a Series that includes a cross support feature will describe the specific operation of any such cross support feature. Cash Flow Agreements If specified in the Prospectus Supplement, the Trust Estate may include guaranteed investment contracts pursuant to which moneys held in the funds and accounts established for the related Series of Certificates will be invested at a specified rate. The Trust Estate may also include certain other agreements, such as interest rate exchange or swap agreements, interest rate cap or floor agreements, or similar agreements provided to reduce the effects of interest rate fluctuations on the assets or on one or more Classes of Certificates. The principal terms 32
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of any such guaranteed investment contract or other agreement (any such agreement, a "Cash Flow Agreement"), including, without limitation, provisions relating to the timing, manner and amount of payments thereunder and provisions relating to the termination thereof, will be described in the Prospectus Supplement for the related Series of Certificates. In addition, the related Prospectus Supplement will provide certain information with respect to the obligor under any such Cash Flow Agreement. PREPAYMENT AND YIELD CONSIDERATIONS Pass-Through Rates Any Class of Certificates of a Series may have a fixed Pass-Through Rate, or a Pass-Through Rate which varies based on changes in an index or based on changes with respect to the underlying Mortgage Loans (such as, for example, varying on the basis of changes in the weighted average Net Mortgage Interest Rate of the underlying Mortgage Loans). The Prospectus Supplement for each Series will specify the range and the weighted average of the Mortgage Interest Rates and, if applicable, Net Mortgage Interest Rates for the Mortgage Loans underlying such Series as of the Cut-Off Date. If the Trust Estate includes adjustable-rate Mortgage Loans or Net 5 Loans or includes Mortgage Loans with different Net Mortgage Interest Rates, the weighted average Net Mortgage Interest Rate may vary from time to time as set forth below. See "The Trust Estates." The Prospectus Supplement for a Series will also specify the initial Pass-Through Rate for each Class of Certificates of such Series and will specify whether each such Pass-Through Rate is fixed or is variable. The Net Mortgage Interest Rate for any adjustable-rate Mortgage Loan will change with any changes in the index specified in the applicable Prospectus Supplement on which such Mortgage Interest Rate adjustments are based, subject to any applicable periodic or aggregate caps or floors on the related Mortgage Interest Rate. The weighted average Net Mortgage Interest Rate with respect to any Series may vary due to changes in the Net Mortgage Interest Rates of adjustable-rate Mortgage Loans, to the timing of the Mortgage Interest Rate readjustments of such Mortgage Loans and to different rates of payment of principal of fixed- or adjustable-rate Mortgage Loans bearing different Mortgage Interest Rates. Scheduled Delays in Distributions At the date of initial issuance of the Certificates of each Series offered hereby, the initial purchasers of a Class of Certificates may be required to pay accrued interest at the applicable Pass-Through Rate for such Class from the Cut-Off Date for such Series to, but not including, the date of issuance. The effective yield to Certificateholders will be below the yield otherwise produced by the applicable Pass-Through Rate because the distribution of principal and interest which is due on each Due Date will not be made until the 25th day (or, if such day is not a business day, the first business day following the 25th day) of the month in which such Due Date occurs (or until such other Distribution Date specified in the applicable Prospectus Supplement). Effect of Principal Prepayments When a Mortgage Loan is prepaid in full, the mortgagor pays interest on the amount prepaid only to the date of prepayment and not thereafter. Liquidation Proceeds and amounts received in settlement of insurance claims are also likely to include interest only to the time of payment or settlement. When a Mortgage Loan is prepaid in full or in part, an interest shortfall may result depending on the timing of the receipt of the prepayment and the timing of when those prepayments are passed through to Certificateholders. To partially mitigate this reduction in yield, the Pooling and Servicing Agreement and/or Underlying Servicing Agreements relating to a Series may provide, to the extent specified in the applicable Prospectus Supplement, that with respect to certain principal prepayments received, the applicable Servicer or the Master Servicer will be obligated, on or before each Distribution Date, to pay an amount equal to the lesser of (i) the aggregate interest shortfall with respect to 33
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such Distribution Date resulting from such principal prepayments by mortgagors and (ii) all or a portion of the Servicer's or the Master Servicer's, as applicable, servicing compensation for such Distribution Date specified in the applicable Prospectus Supplement. No comparable interest shortfall coverage will be provided by the Servicer or the Master Servicer with respect to liquidations of any Mortgage Loans. Any interest shortfall arising from liquidations will be covered by means of the subordination of the rights of Subordinated Certificateholders or any other credit support arrangements. A lower rate of principal prepayments than anticipated would negatively affect the total return to investors in any Certificates of a Series that are offered at a discount to their principal amount and a higher rate of principal prepayments than anticipated would negatively affect the total return to investors in the Certificates of a Series that are offered at a premium to their principal amount. The yield on Certificates that are entitled solely or disproportionately to distributions of principal or interest may be particularly sensitive to prepayment rates, and further information with respect to yield on such Certificates will be included in the applicable Prospectus Supplement. Weighted Average Life of Certificates The Mortgage Loans may be prepaid in full or in part at any time. The Mortgage Loans generally will not provide for a prepayment penalty but may so provide if indicated in the related Prospectus Supplement. Fixed-rate Mortgage Loans generally will contain due-on-sale clauses permitting the mortgagee to accelerate the maturities of the Mortgage Loans upon conveyance of the related Mortgaged Properties, and adjustable-rate Mortgage Loans generally will permit creditworthy borrowers to assume the then-outstanding indebtedness on the Mortgage Loans. Prepayments on Mortgage Loans are commonly measured relative to a prepayment standard or model. The Prospectus Supplement for each Series of Certificates may describe one or more such prepayment standards or models and contain tables setting forth the weighted average life of each Class and the percentage of the original aggregate principal balance of each Class that would be outstanding on specified Distribution Dates for such Series and the projected yields to maturity on certain Classes thereof, in each case based on the assumptions stated in such Prospectus Supplement, including assumptions that prepayments on the Mortgage Loans are made at rates corresponding to various percentages of the prepayment standard or model specified in such Prospectus Supplement. There is no assurance that prepayment of the Mortgage Loans underlying a Series of Certificates will conform to any level of the prepayment standard or model specified in the applicable Prospectus Supplement. A number of factors, including but not limited to homeowner mobility, economic conditions, natural disasters, changes in mortgagors' housing needs, job transfers, unemployment or, in the case of borrowers relying on commission income and self-employed borrowers, significant fluctuations in income or adverse economic conditions, mortgagors' net equity in the properties securing the mortgage loans, including the use of second or "home equity" mortgage loans by mortgagors or the use of the properties as second or vacation homes, servicing decisions, enforceability of due-on-sale clauses, mortgage market interest rates, mortgage recording taxes, competition among mortgage loan originators resulting in reduced refinancing costs, reduction in documentation requirements and willingness to accept higher loan-to-value ratios, and the availability of mortgage funds, may affect prepayment experience. In general, however, if prevailing mortgage interest rates fall below the Mortgage Interest Rates borne by the Mortgage Loans underlying a Series of Certificates, the prepayment rates of such Mortgage Loans are likely to be higher than if prevailing rates remain at or above the rates borne by such Mortgage Loans. Conversely, if prevailing mortgage interest rates rise above the Mortgage Interest Rates borne by the Mortgage Loans, the Mortgage Loans are likely to experience a lower prepayment rate than if prevailing rates remain at or below such Mortgage Interest Rates. However, there can be no assurance that prepayments will rise or fall according to such changes in mortgage interest rates. It should be noted that Certificates of a Series may evidence an interest in a Trust Estate with different Mortgage Interest Rates. Accordingly, the prepayment experience of such Certificates will to some extent be a function of the mix of interest rates of the Mortgage Loans. In addition, the terms of the Underlying Servicing Agreements will require the related Servicer 34
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to enforce any due-on-sale clause to the extent it has knowledge of the conveyance or the proposed conveyance of the underlying Mortgaged Property; provided, however, that any enforcement action that the Servicer determines would jeopardize any recovery under any related primary mortgage insurance policy will not be required and provided, further, that the Servicer may permit the assumption of defaulted Mortgage Loans. See "Servicing of the Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans" and "Certain Legal Aspects of the Mortgage Loans--Due-On-Sale Clauses" for a description of certain provisions of each Pooling and Servicing Agreement and certain legal developments that may affect the prepayment experience on the Mortgage Loans. At the request of the mortgagor, a Servicer may allow the refinancing of a Mortgage Loan in any Trust Estate serviced by such Servicer by accepting prepayments thereon and permitting a new loan secured by a Mortgage on the same property. Upon such refinancing, the new loan will not be included in the Trust Estate. A mortgagor may be legally entitled to require the Servicer to allow such a refinancing. Any such refinancing will have the same effect as a prepayment in full of the related Mortgage Loan. In this regard a Servicer may, from time to time, implement programs designed to encourage refinancing through such Servicer, including but not limited to general or targeted solicitations, or the offering of pre-approved applications, reduced or nominal origination fees or closing costs, or other financial incentives. A Servicer may also encourage refinancing of defaulted Mortgage Loans, including Mortgage Loans that would permit creditworthy borrowers to assume the outstanding indebtedness. The Depositor will be obligated, under certain circumstances, to repurchase certain of the Mortgage Loans. In addition, if specified in the applicable Prospectus Supplement, the Pooling and Servicing Agreement will permit, but not require, the Depositor, and the terms of certain insurance policies relating to the Mortgage Loans may permit the applicable insurer, to purchase any Mortgage Loan which is in default or as to which default is reasonably foreseeable. The proceeds of any such purchase or repurchase will be deposited in the related Certificate Account and such purchase or repurchase will have the same effect as a prepayment in full of the related Mortgage Loan. See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans to the Trustee" and "--Optional Purchases." In addition, if so specified in the applicable Prospectus Supplement, the Depositor or another person identified therein will have the option to purchase all, but not less than all, of the Mortgage Loans in any Trust Estate under the limited conditions specified in such Prospectus Supplement. For any Series of Certificates for which an election has been made to treat the Trust Estate (or one or more segregated pools of assets therein) as a REMIC, any such purchase or repurchase may be effected only pursuant to a "qualified liquidation," as defined in Code Section 860F(a)(4)(A). See "The Pooling and Servicing Agreement--Termination; Optional Purchase of Mortgage Loans." SERVICING OF THE MORTGAGE LOANS The following includes a summary of the material provisions of the form of Pooling and Servicing Agreement that has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. Such summary does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all of the provisions of the Pooling and Servicing Agreement for each Series of Certificates and the applicable Prospectus Supplement. The Master Servicer In the event that there is more than one Servicer with respect to the Mortgage Loans related to a Series or the sole Servicer is not an affiliate of the Depositor, a master servicer may act as the Master Servicer with respect to such Series of Certificates. The Master Servicer may be affiliated or unaffiliated with the Depositor. The Master Servicer generally will be responsible under each Pooling and Servicing Agreement for, among other things, (i) administering and supervising the performance by the Servicers of their duties and responsibilities under the Underlying Servicing Agreements, (ii) oversight of payments received on Mortgage Loans, 35
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(iii) preparation of periodic reports to the Trustee with respect to the foregoing matters, (iv) performing certain of the servicing obligations of a terminated Servicer as described below under "--The Servicers" and (v) making advances of delinquent payments of principal and interest on the Mortgage Loans to the limited extent described below under the heading "--Periodic Advances and Limitations Thereon," if such amounts are not advanced by a Servicer. The Master Servicer will also perform additional duties as described in the applicable Pooling and Servicing Agreement. The Master Servicer will be entitled to receive a portion of the interest payments on the Mortgage Loans included in the Trust Estate for such a Series to cover its fees as Master Servicer. The Master Servicer may subcontract with any other entity the obligations of the Master Servicer under any Pooling and Servicing Agreement. The Master Servicer will remain primarily liable for any such contractor's performance in accordance with the applicable Pooling and Servicing Agreement. The Master Servicer may be released from its obligations in certain circumstances. See "Certain Matters Regarding the Master Servicer." The Servicers With respect to any Series, one or more Servicers will provide certain customary servicing functions with respect to the Mortgage Loans pursuant to the related Pooling and Servicing Agreement or separate Underlying Servicing Agreements with the Depositor or an affiliate thereof. Such Servicers are expected to be the Sellers of the Mortgage Loans or affiliates of such Sellers. The rights of the Depositor or such affiliate under the applicable Underlying Servicing Agreements in respect of the Mortgage Loans included in the Trust Estate for any such Series will be assigned (directly or indirectly) to the Trustee for the benefit of Certificateholders of such Series. The Servicers may be entitled to withhold their Servicing Fees and certain other fees and charges from remittances of payments received on Mortgage Loans serviced by them. Each Servicer generally will be approved by Fannie Mae ("FNMA") or The Federal Home Loan Mortgage Corporation ("FHLMC") as a servicer of mortgage loans. The duties to be performed by each Servicer include collection and remittance of principal and interest payments on the Mortgage Loans, administration of mortgage escrow accounts, collection of insurance claims, foreclosure procedures, and, if necessary, the advance of funds to the extent certain payments are not made by the mortgagor and have not been determined by the Servicer to be not recoverable under the applicable insurance policies with respect to such Series, from proceeds of liquidation of such Mortgage Loans or otherwise. Each Servicer also will provide such accounting and reporting services as are necessary to provide required information to the Trustee or to enable the Master Servicer to provide required information to the Trustee with respect to the Mortgage Loans included in the Trust Estate for such Series. Each Servicer is entitled to a periodic Servicing Fee equal to a specified percentage of the outstanding principal balance of each Mortgage Loan serviced by such Servicer. The servicing obligations of a Servicer may be delegated to another person as provided in the Pooling and Servicing Agreement or Underlying Servicing Agreement. The Trustee, or if so provided in the applicable Pooling and Servicing Agreement, the Master Servicer, may terminate a Servicer who has failed to comply with its covenants or breached one of its representations contained in the Underlying Servicing Agreement or in certain other circumstances. Upon termination of a Servicer by the Trustee or the Master Servicer, the Master Servicer will assume certain servicing obligations of the terminated Servicer, or, at its option, may appoint a substitute Servicer acceptable to the Trustee to assume the servicing obligations of the terminated Servicer. The Master Servicer's obligations to act as substitute Servicer following the termination of an Underlying Servicing Agreement will not, however, require the Master Servicer to purchase a Mortgage Loan from the Trust Estate due to a breach by the terminated Servicer of a representation or warranty in respect of such Mortgage Loan. Each Prospectus Supplement relating to such a Series of Certificates will contain information concerning recent delinquency, foreclosure and loan loss experience on the mortgage loans in a Servicer's servicing portfolio to the extent such information is material and reasonably available to the Depositor. 36
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Payments on Mortgage Loans The Trustee for each Series will establish and maintain a separate trust account in the name of the Trustee (the "Certificate Account"). Each such account must be maintained with a depository institution (the "Depository") either (i) whose long-term debt obligations (or, in the case of a Depository which is part of a holding company structure, the long-term debt obligations of such parent holding company) are, at the time of any deposit therein rated in at least one of the two highest rating categories by the Rating Agency or Rating Agencies rating the Certificates of such Series, or (ii) that is otherwise acceptable to the Rating Agency or Rating Agencies rating the Certificates of such Series and, if a REMIC election has been made, that would not cause the related Trust Estate (or one or more segregated pools of assets therein) to fail to qualify as a REMIC. To the extent that the portion of funds deposited in the Certificate Account at any time exceeds the limit of insurance coverage established by the Federal Deposit Insurance Corporation (the "FDIC"), such excess will be subject to loss in the event of the failure of the Depository. Such insurance coverage will be based on the number of holders of Certificates, rather than the number of underlying mortgagors. Holders of the Subordinated Certificates of a Series will bear any such loss up to the amount of principal payments on the related Mortgage Loans to which such holders are entitled. Pursuant to the applicable Pooling and Servicing Agreement or the Underlying Servicing Agreements, if any, with respect to a Series, each Servicer will be required to establish and maintain one or more accounts (collectively, the "Servicer Custodial Account") into which the Servicer will be required to deposit on a daily basis amounts received with respect to Mortgage Loans serviced by such Servicer included in the Trust Estate for such Series, as more fully described below. Each Servicer Custodial Account must be a separate custodial account insured to the available limits by the FDIC or otherwise acceptable to the applicable Rating Agencies (such acceptable account, an "Eligible Custodial Account") and limited to funds held with respect to a particular Series, unless the Pooling and Servicing Agreement or the Underlying Servicing Agreement specifies that a Servicer may establish an account which is an eligible account to serve as a unitary Servicer Custodial Account both for such Series and for other Series of Certificates as well as other Mortgage Loans serviced by such Servicer. Each Servicer will be required to deposit in the Certificate Account for each Series of Certificates on the date the Certificates are issued any amounts representing scheduled payments of principal and interest on the Mortgage Loans serviced by such Servicer due after the applicable Cut-Off Date but received on or prior thereto. Each Servicer will be required, not later than the 24th calendar day of each month or such earlier day as may be specified in the Pooling and Servicing Agreement or the applicable Underlying Servicing Agreement (the "Remittance Date"), to remit to the Master Servicer for deposit in an Eligible Custodial Account maintained by the Master Servicer in the name of the Trustee (the "Master Servicer Custodial Account") or, if there is no Master Servicer, to remit to the Trustee for deposit in the Certificate Account, the following payments and collections received or made by such Servicer with respect to the Mortgage Loans serviced by such Servicer subsequent to the applicable Cut-Off Date (other than (a) payments due on or before the Cut-Off Date and (b) amounts held for future distribution): (i) all payments on account of principal, including prepayments, and interest; (ii) all amounts received by the Servicer in connection with the liquidation of defaulted Mortgage Loans or property acquired in respect thereof, whether through foreclosure sale or otherwise, including payments in connection with defaulted Mortgage Loans received from the mortgagor other than amounts required to be paid to the mortgagor pursuant to the terms of the applicable Mortgage Loan or otherwise pursuant to law ("Liquidation Proceeds") less, to the extent permitted under the applicable Underlying Servicing Agreement, the amount of any expenses incurred in connection with the liquidation of such Mortgage Loans; 37
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(iii) all proceeds received by the Servicer under any title, hazard or other insurance policy covering any such Mortgage Loan, other than proceeds to be applied to the restoration or repair of the property subject to the related Mortgage or released to the mortgagor in accordance with the Underlying Servicing Agreement; (iv) all Periodic Advances made by the Servicer; (v) all amounts withdrawn from Buy-Down Funds or Subsidy Funds, if any, with respect to such Mortgage Loans, in accordance with the terms of the respective agreements applicable thereto; (vi) all proceeds of any such Mortgage Loans or property acquired in respect thereof purchased or repurchased pursuant to the Pooling and Servicing Agreement or the Underlying Servicing Agreement; and (vii) all other amounts required to be deposited therein pursuant to the applicable Pooling and Servicing Agreement or the Underlying Servicing Agreement. Notwithstanding the foregoing, if at any time the sums in (a) any Servicer Custodial Account, other than any Eligible Custodial Account, exceed $100,000 or (b) any such Servicer Custodial Account, in certain circumstances, exceed such amount less than $100,000 as shall have been specified by the Trustee, each Servicer will be required within one business day to withdraw such excess funds from such account and remit such amounts to the Master Servicer Custodial Account or the Certificate Account. Notwithstanding the foregoing, each Servicer will be entitled, at its election, either (a) to withhold and pay itself the applicable Servicing Fee from any payment or other recovery on account of interest as received and prior to deposit in the Servicer Custodial Account or (b) to withdraw from the Servicer Custodial Account the applicable Servicing Fee after the entire payment or recovery has been deposited in such account. The Master Servicer or Trustee will deposit in the Certificate Account any Periodic Advances made by the Master Servicer or Trustee, as applicable, in the event of a Servicer default not later than the Distribution Date on which such amounts are required to be distributed. All other amounts deposited in the Master Servicer Custodial Account (other than Master Servicing Fees and, to the extent the Master Servicer is entitled thereto under the applicable Pooling and Servicing Agreement, interest on amounts in the Master Servicer Custodial Account) are required to be remitted by the Master Servicer to the Trustee for deposit in the Certificate Account not later than the business day preceding the applicable Distribution Date. On each Distribution Date, the Trustee will withdraw from the Certificate Account and remit to Certificateholders all amounts allocable to the Pool Distribution Amount for such Distribution Date. If a Servicer, the Master Servicer or the Trustee deposits in the Certificate Account for a Series any amount not required to be deposited therein, the Trustee may at any time withdraw such amount from such account for itself or for remittance to such Servicer or the Master Servicer, as applicable. Funds on deposit in the Certificate Account may be invested in certain investments acceptable to the Rating Agencies ("Eligible Investments") maturing in general not later than the business day preceding the next Distribution Date. In the event that an election has been made to treat the Trust Estate (or one or more segregated pools of assets therein) with respect to a Series as a REMIC, no such Eligible Investments will be sold or disposed of at a gain prior to maturity unless the Trustee has received an opinion of counsel or other evidence satisfactory to it that such sale or disposition will not cause the Trust Estate (or segregated pool of assets) to be subject to the tax on "prohibited transactions" imposed by Code Section 860F(a)(1), otherwise subject the Trust Estate (or segregated pool of assets) to tax, or cause the Trust Estate (or any segregated pool of assets) to fail to qualify as a REMIC while any Certificates of the Series are outstanding. All income and gain realized from any such investment will generally be for the account of the Trustee as additional compensation and all losses from any such investment will be deposited by the Trustee out of its own funds to the Certificate Account immediately as realized. The Trustee is permitted, from time to time, to make withdrawals from the Certificate Account for the following purposes, to the extent permitted in the applicable Pooling and Servicing Agreement (and, in the case 38
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of Servicer or Master Servicer reimbursements by the Trustee, only to the extent funds in the respective Servicer Custodial Account or Master Servicer Custodial Account are not sufficient therefor): (i) to reimburse the Master Servicer, itself or any Servicer for Advances; (ii) to reimburse any Servicer for liquidation expenses and for amounts expended by the Master Servicer or any Servicer, as applicable, in connection with the restoration of damaged property; (iii) to pay to the Master Servicer the applicable Master Servicing Fee and any other amounts constituting additional master servicing compensation, to pay itself the applicable Trustee Fee, to pay any other fees described in the applicable Prospectus Supplement; and to pay to the owner thereof any Fixed Retained Yield; (iv) to reimburse the Master Servicer or any Servicer for certain expenses (including taxes paid on behalf of the Trust Estate) incurred by and recoverable by or reimbursable to the Master Servicer or the Servicer, as applicable; (v) to pay to the Depositor, a Servicer or the Master Servicer with respect to each Mortgage Loan or property acquired in respect thereof that has been repurchased by the Depositor or purchased by a Servicer or the Master Servicer all amounts received thereon and not distributed as of the date as of which the purchase price of such Mortgage Loan was determined; (vi) to pay to itself any interest earned on or investment income earned with respect to funds in the Certificate Account (all such interest or income to be withdrawn not later than the next Distribution Date); (vii) to pay to the Master Servicer, the Servicer and itself from net Liquidation Proceeds allocable to interest, the amount of any unpaid Master Servicing Fee, Servicing Fees or Trustee Fees and any unpaid assumption fees, late payment charges or other mortgagor charges on the related Mortgage Loan; (viii) to withdraw from the Certificate Account any amount deposited in such account that was not required to be deposited therein; and (ix) to clear and terminate the Certificate Account. The Trustee will be authorized to appoint a paying agent (the "Paying Agent") to make distributions, as agent for the Trustee, to Certificateholders of a Series. If the Paying Agent for a Series is not the Trustee for such Series, the Trustee will, on each Distribution Date, deposit in immediately available funds in an account designated by any such Paying Agent the amount required to be distributed to the Certificateholders on such Distribution Date. The Trustee will cause any Paying Agent to execute and deliver to the Trustee an instrument in which such Paying Agent agrees with the Trustee that such Paying Agent will hold all amounts deposited with it by the Trustee for distribution to Certificateholders in trust for the benefit of Certificateholders until such amounts are distributed to Certificateholders or otherwise disposed of as provided in the applicable Pooling and Servicing Agreement. Periodic Advances and Limitations Thereon Generally each Servicer will be required to make (i) Periodic Advances to cover delinquent payments of principal and interest on such Mortgage Loan and (ii) other advances of cash ("Other Advances" and, collectively with Periodic Advances, "Advances") to cover (a) delinquent payments of taxes, insurance premiums, and other escrowed items and (b) rehabilitation expenses and foreclosure costs, including reasonable attorneys' fees, in either case unless such Servicer has determined that any subsequent payments on that Mortgage Loan or from the borrower will ultimately not be available to reimburse such Servicer for such amounts. The failure of the Servicer to make any required Periodic Advances or Other Advances under an Underlying Servicing Agreement constitutes a default under such agreement for which the Servicer will be terminated. Upon default by a Servicer, the Master Servicer or the Trustee may, in each case if so provided in the Pooling and Servicing Agreement, be required to make Periodic Advances to the extent necessary to make 39
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required distributions on certain Certificates or certain Other Advances, provided that the Master Servicer or Trustee, as applicable, determines that funds will ultimately be available to reimburse it from proceeds of the related Mortgaged Property. In the case of Certificates of any Series for which credit enhancement is provided in the form of a mortgage pool insurance policy, the Depositor may obtain an endorsement to the mortgage pool insurance policy which obligates the pool insurer to advance delinquent payments of principal and interest. The pool insurer would only be obligated under such endorsement to the extent the mortgagor fails to make such payment and the Master Servicer or Trustee fails to make a required advance. The advance obligation of the Master Servicer and Trustee may be further limited to an amount specified by the Rating Agency rating the Certificates. Any such Periodic Advances by the Servicers, the Master Servicer or Trustee, as the case may be, must be deposited into the applicable Servicer Custodial Account or the Certificate Account and will be due no later than the business day before the Distribution Date to which such delinquent payment relates. Advances by the Servicers, the Master Servicer or Trustee, as the case may be, will be reimbursable out of insurance proceeds or Liquidation Proceeds of, or, except for Other Advances, future payments on, the Mortgage Loans for which such amounts were advanced. If an Advance made by a Servicer, the Master Servicer or the Trustee later proves, or is deemed by the Servicer, the Master Servicer or the Trustee, to be unrecoverable, such Servicer, the Master Servicer or the Trustee, as the case may be, will be entitled to reimbursement from funds in the Certificate Account prior to the distribution of payments to the Certificateholders to the extent provided in the Pooling and Servicing Agreement. Any Periodic Advances made by a Servicer, the Master Servicer or the Trustee with respect to Mortgage Loans included in the Trust Estate for any Series are intended to enable the Trustee to make timely payment of the scheduled distributions of principal and interest on the Certificates of such Series. However, none of the Master Servicer, the Trustee, any Servicer or any other person will, except as specified in the applicable Prospectus Supplement with respect to credit enhancement described therein, insure or guarantee the Certificates of any Series or the Mortgage Loans included in the Trust Estate for any Certificates. Collection and Other Servicing Procedures Each Servicer will be required by the related Underlying Servicing Agreement to make reasonable efforts to collect all payments called for under the Mortgage Loans and, consistent with the applicable Underlying Servicing Agreement or the Pooling and Servicing Agreement and any applicable agreement governing any form of credit enhancement, to follow such collection procedures as it follows with respect to mortgage loans serviced by it that are comparable to the Mortgage Loans. Consistent with the above, the Servicer may, in its discretion, (i) waive any prepayment charge, assumption fee, late payment charge or any other charge in connection with the prepayment of a Mortgage Loan and (ii) arrange with a mortgagor a schedule for the liquidation of deficiencies running for not more than 180 days (or such longer period to which the Master Servicer and any applicable pool insurer or primary mortgage insurer have consented) after the applicable Due Date. Under each Underlying Servicing Agreement or the Pooling and Servicing Agreement, each Servicer, to the extent permitted by law, will establish and maintain one or more escrow accounts (each such account, an "Escrow Account") in which each such Servicer will be required to deposit any payments made by mortgagors in advance for taxes, assessments, primary mortgage (if applicable) and hazard insurance premiums and other similar items. Withdrawals from the Escrow Account may be made to effect timely payment of taxes, assessments, mortgage and hazard insurance, to refund to mortgagors amounts determined to be overages, to pay interest to mortgagors on balances in the Escrow Account, if required, and to clear and terminate such account. Each Servicer will be responsible for the administration of its Escrow Account. A Servicer will be obligated to advance certain amounts which are not timely paid by the mortgagors, to the extent that it determines, in good faith, that they will be recoverable out of insurance proceeds, liquidation proceeds, or otherwise. Alternatively, in lieu of establishing a Escrow Account, a Servicer may procure a performance bond or other form of insurance coverage, in an amount acceptable to the Master Servicer and each Rating Agency rating the related Series of Certificates, covering loss occasioned by the failure to escrow such amounts. 40
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Enforcement of "Due-on-Sale Clauses"; Realization Upon Defaulted Mortgage Loans With respect to each Mortgage Loan having a fixed interest rate, the applicable Underlying Servicing Agreement or Pooling and Servicing Agreement will generally provide that, when any Mortgaged Property is about to be conveyed by the mortgagor, the Servicer will, to the extent it has knowledge of such prospective conveyance, exercise its rights to accelerate the maturity of such Mortgage Loan under the "due-on-sale" clause applicable thereto, if any, unless it is not exercisable under applicable law or if such exercise would result in loss of insurance coverage with respect to such Mortgage Loan or would, in the Servicer's judgment, be reasonably likely to result in litigation by the mortgagor and such Servicer, if applicable, has not obtained the Master Servicer's consent to such exercise. In either case, the Servicer is authorized to take or enter into an assumption and modification agreement from or with the person to whom such Mortgaged Property has been or is about to be conveyed, pursuant to which such person becomes liable under the Mortgage Note and, unless prohibited by applicable state law, the mortgagor remains liable thereon, provided that the Mortgage Loan will continue to be covered by any pool insurance policy and any related primary mortgage insurance policy and the Mortgage Interest Rate with respect to such Mortgage Loan and the payment terms shall remain unchanged. The Servicer will also be authorized, with the prior approval of the pool insurer and the primary mortgage insurer, if any, to enter into a substitution of liability agreement with such person, pursuant to which the original mortgagor is released from liability and such person is substituted as mortgagor and becomes liable under the Mortgage Note. Each Underlying Servicing Agreement and Pooling and Servicing Agreement with respect to a Series will require the Servicer or the Master Servicer, as the case may be, to present claims to the insurer under any insurance policy applicable to the Mortgage Loans included in the Trust Estate for such Series and to take such reasonable steps as are necessary to permit recovery under such insurance policies with respect to defaulted Mortgage Loans, or losses on the Mortgaged Property securing the Mortgage Loans. Each Servicer is obligated to realize upon defaulted Mortgage Loans in accordance with its normal servicing practices, which will conform generally to those of prudent mortgage lending institutions which service mortgage loans of the same type in the same jurisdictions. Notwithstanding the foregoing, each Servicer is authorized to permit the assumption of a defaulted Mortgage Loan rather than to foreclose or accept a deed-in-lieu of foreclosure if, in the Servicer's judgment, the default is unlikely to be cured and the assuming borrower meets the applicable underwriting guidelines. In connection with any such assumption, the Mortgage Interest Rate and the payment terms of the related Mortgage Note will not be changed. Each Servicer may also, with the consent of the Master Servicer, modify the payment terms of Mortgage Loans that are in default, or as to which default is reasonably foreseeable, that remain in the Trust Estate rather than foreclose on such Mortgage Loans; provided that no such modification shall forgive principal owing under such Mortgage Loan or permanently reduce the interest rate on such Mortgage Loan. Any such modification will be made only upon the determination by the Servicer and, if applicable, the Master Servicer that such modification is likely to increase the proceeds of such Mortgage Loan over the amount expected to be collected pursuant to foreclosure. See also "The Pooling and Servicing Agreement--Optional Purchases," with respect to the Seller's right to repurchase Mortgage Loans that are in default, or as to which default is reasonably foreseeable. Further, a Servicer may encourage the refinancing of such defaulted Mortgage Loans, including Mortgage Loans that would permit creditworthy borrowers to assume the outstanding indebtedness. In the case of foreclosure or of damage to a Mortgaged Property from an uninsured cause, the Servicer will not be required to expend its own funds to foreclose or restore any damaged property, unless it reasonably determines (i) that such foreclosure or restoration will increase the proceeds to Certificateholders of such Series of liquidation of the Mortgage Loan after reimbursement to the related Servicer for its expenses and (ii) that such expenses will be recoverable to it through Liquidation Proceeds or any applicable insurance policy in respect of such Mortgage Loan. In the event that Servicer has expended its own funds for foreclosure or to restore damaged property, it will be entitled to be reimbursed from the Certificate Account for such Series an amount equal to all costs and expenses incurred by it. No Servicer will be obligated to foreclose on any Mortgaged Property which it believes may be contaminated with or affected by hazardous wastes or hazardous substances. See "Certain Legal Aspects of the 41
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Mortgage Loans--Environmental Considerations." If a Servicer does not foreclose on a Mortgaged Property, the Certificateholders of the related Series may experience a loss on the related Mortgage Loan. A Servicer will not be liable to the Certificateholders if it fails to foreclose on a Mortgaged Property which it believes may be so contaminated or affected, even if such Mortgaged Property is, in fact, not so contaminated or affected. Conversely, a Servicer will not be liable to the Certificateholders if, based on its belief that no such contamination or effect exists, the Servicer forecloses on a Mortgaged Property and takes title to such Mortgaged Property, and thereafter such Mortgaged Property is determined to be so contaminated or affected. The Servicer may foreclose against property securing a defaulted Mortgage Loan either by foreclosure, by sale or by strict foreclosure and in the event a deficiency judgment is available against the mortgagor or other person (see "Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders" for a discussion of the availability of deficiency judgments), may proceed for the deficiency. It is anticipated that in most cases the Servicer will not seek deficiency judgments, and will not be required under the applicable Underlying Servicing Agreement to seek deficiency judgments. In lieu of foreclosure, each Servicer may arrange for the sale by the borrower of the Mortgaged Property related to a defaulted Mortgage Loan to a third party, rather than foreclosing upon and selling such Mortgaged Property. With respect to a Trust Estate (or any segregated pool of assets therein) as to which a REMIC election has been made, if the Trustee acquires ownership of any Mortgaged Property as a result of a default or reasonably foreseeable default of any Mortgage Loan secured by such Mortgaged Property, the Trustee or Master Servicer will be required to dispose of such property prior to the close of the third calendar year following the year the Trust Estate acquired such property (or such shorter period as is provided in the applicable Underlying Servicing Agreement) unless the Trustee (a) receives an opinion of counsel to the effect that the holding of the Mortgaged Property by the Trust Estate will not cause the Trust Estate to be subject to the tax on "prohibited transactions" imposed by Code Section 860F(a)(1) or cause the Trust Estate (or any segregated pool of assets therein as to which one or more REMIC elections have been made or will be made) to fail to qualify as a REMIC or (b) applies for and is granted an extension of the applicable period in the manner contemplated by Code Section 856(e)(3). The Servicer also will be required to administer the Mortgaged Property in a manner which does not cause the Mortgaged Property to fail to qualify as "foreclosure property" within the meaning of Code Section 860G(a)(8) or result in the receipt by the Trust Estate of any "net income from foreclosure property" within the meaning of Code Section 860G(c)(2), respectively. In general, this would preclude the holding of the Mortgaged Property by a party acting as a dealer in such property or the receipt of rental income based on the profits of the lessee of such property. See "Federal Income Tax Consequences." Insurance Policies Each Servicer will be required to cause to be maintained for each Mortgage Loan (other than Mortgage Loans secured by cooperative shares and condominium apartments) a standard hazard insurance policy issued by a generally acceptable insurer insuring the improvements on the Mortgaged Property underlying such Mortgage Loan against loss by fire, with extended coverage (a "Standard Hazard Insurance Policy"). Such Standard Hazard Insurance Policy will be required to be in an amount at least equal to the lesser of 100% of the insurable value of the improvements on the Mortgaged Property or the principal balance of such Mortgage Loan; provided, however, that such insurance may not be less than the minimum amount required to fully compensate for any damage or loss on a replacement cost basis. Each Servicer will also maintain on property acquired upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, a Standard Hazard Insurance Policy in an amount that is at least equal to the lesser of 100% of the insurable value of the improvements which are a part of such property or the principal balance of such Mortgage Loan plus accrued interest and liquidation expenses; provided, however, that such insurance may not be less than the minimum amount required to fully compensate for any damage or loss on a replacement cost basis. Any amounts collected under any such policies (other than amounts to be applied to the restoration or repair of the Mortgaged Property or released to the borrower in accordance with normal servicing procedures) will be deposited in the Servicer Custodial Account for remittance to the Certificate Account by the applicable Servicer. 42
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The Standard Hazard Insurance Policies covering the Mortgage Loans generally will cover physical damage to, or destruction of, the improvements on the Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion, subject to the conditions and exclusions particularized in each policy. Because the Standard Hazard Insurance Policies relating to such Mortgage Loans will be underwritten by different insurers and will cover Mortgaged Properties located in various states, such policies will not contain identical terms and conditions. The most significant terms thereof, however, generally will be determined by state law and generally will be similar. Most such policies typically will not cover any physical damage resulting from the following: war, revolution, governmental actions, floods and other water-related causes, earth movement (including earthquakes, landslides and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or domestic animals, hazardous wastes or hazardous substances, theft and, in certain cases, vandalism. The foregoing list is merely indicative of certain kinds of uninsured risks and is not all- inclusive. In general, if the improvements on a Mortgaged Property are located in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and such flood insurance has been made available) each Underlying Servicing Agreement will require the related Servicer to cause to be maintained a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administration with a generally acceptable insurance carrier. Generally, the Underlying Servicing Agreement will require that such flood insurance be in an amount not less than the least of (i) the outstanding principal balance of the Mortgage Loan, (ii) the full insurable value of the improvements, or (iii) the maximum amount of insurance which is available under the National Flood Insurance Act of 1968, as amended. Each Servicer may maintain a blanket policy insuring against hazard losses on all of the Mortgaged Properties in lieu of maintaining the required Standard Hazard Insurance Policies and may maintain a blanket policy insuring against special hazards in lieu of maintaining any required flood insurance. Each Servicer will be liable for the amount of any deductible under a blanket policy if such amount would have been covered by a required Standard Hazard Insurance Policy or flood insurance, had it been maintained. Any losses incurred with respect to Mortgage Loans due to uninsured risks (including earthquakes, mudflows, floods and hazardous wastes or hazardous substances) or insufficient hazard insurance proceeds will adversely affect distributions to the Certificateholders. Fixed Retained Yield, Servicing Compensation and Payment of Expenses Fixed Retained Yield with respect to any Mortgage Loan is that portion, if any, of interest at the Mortgage Interest Rate that is not included in the related Trust Estate and is retained by the Depositor or a Seller. The Prospectus Supplement for a Series will describe the Fixed Retained Yield, if any, with respect to the Mortgage Loans of such Series. If so, the Fixed Retained Yield will be established on a loan-by-loan basis and will be specified in the schedule of Mortgage Loans attached as an exhibit to the applicable Pooling and Servicing Agreement. If the Seller retaining the Fixed Retained Yield is a Servicer, such Servicer may deduct the Fixed Retained Yield from mortgagor payments as received or deposit such payments in the Servicer Custodial Account or Certificate Account for such Series and then request the Master Servicer or the Trustee to withdraw the Fixed Retained Yield from the Master Servicer Custodial Account or the Certificate Account for remittance to such Servicer. In the case of any Fixed Retained Yield with respect to other Mortgage Loans, serviced by the Master Servicer or the Trustee will make withdrawals from the Master Servicer Custodial Account or the Certificate Account for the purpose of remittances to the Owner of the Fixed Retained Yield. Notwithstanding the foregoing, with respect to any payment of interest received relating to a Mortgage Loan (whether paid by the mortgagor or received as Liquidation Proceeds, insurance proceeds or otherwise) which is less than the full amount of interest then due with respect to such Mortgage Loan, the owner of the Fixed Retained Yield with respect to such Mortgage Loan will bear a ratable share of such interest shortfall. For each Series of Certificates, each Servicer will be entitled to be paid the Servicing Fee on the related Mortgage Loans serviced by such Servicer until termination of the applicable Underlying Servicing Agreement, or the Pooling and Servicing Agreement. A Servicer, at its election, will pay itself the Servicing Fee for a Series 43
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with respect to each Mortgage Loan by (a) withholding the Servicing Fee from any scheduled payment of interest prior to deposit of such payment in the Servicer Custodial Account for such Series or (b) withdrawing the Servicing Fee from the Servicer Custodial Account after the entire interest payment has been deposited in such account. A Servicer may also pay itself out of the Liquidation Proceeds of a Mortgage Loan or other recoveries with respect thereto, or withdraw from the Servicer Custodial Account or request the Master Servicer or the Trustee to withdraw from the Master Servicer Custodial Account or the Certificate Account for remittance to the Servicer such amounts after the deposit thereof in such accounts, or if such Liquidation Proceeds or other recoveries are insufficient, from Net Foreclosure Profits with respect to the related Distribution Date the Servicing Fee in respect of such Mortgage Loan to the extent provided in the applicable Pooling and Servicing Agreement. The Servicing Fee or the range of Servicing Fees with respect to the Mortgage Loans underlying the Certificates of a Series will be specified in the applicable Prospectus Supplement. Additional servicing compensation in the form of prepayment charges, assumption fees, late payment charges or otherwise will be retained by the Servicers. Each Servicer will pay all expenses incurred in connection with the servicing of the Mortgage Loans serviced by such Servicer underlying a Series, including, without limitation, payment of the Standard Hazard Insurance Policy premiums. The Servicer will be entitled, in certain circumstances, to reimbursement from the Certificate Account of Periodic Advances, of Other Advances made by it to pay taxes, insurance premiums and similar items with respect to any Mortgaged Property or for expenditures incurred by it in connection with the restoration, foreclosure or liquidation of any Mortgaged Property (to the extent of Liquidation Proceeds or insurance policy proceeds in respect of such Mortgaged Property) and of certain losses against which it is indemnified by the Trust Estate. As set forth in the preceding paragraph, a Servicer may be entitled to reimbursement for certain expenses incurred by it, and payment of additional fees for certain extraordinary services rendered by it (provided that such fees do not exceed those which would be charged by third parties for similar services) in connection with the liquidation of defaulted Mortgage Loans and related Mortgaged Properties. In the event that claims are either not made or are not fully paid from any applicable form of credit enhancement, the related Trust Estate will suffer a loss to the extent that Liquidation Proceeds, after reimbursement of the Servicing Fee and the expenses of the Servicer, are less than the principal balance of the related Mortgage Loan. Evidence as to Compliance Each Servicer will deliver annually to the Trustee or Master Servicer, as applicable, on or before the date specified in the applicable Pooling and Servicing Agreement or Underlying Servicing Agreement, an Officer's Certificate stating that (i) a review of the activities of such Servicer during the preceding calendar year and of performance under the applicable Pooling and Servicing Agreement or Underlying Servicing Agreement has been made under the supervision of such officer, and (ii) to the best of such officer's knowledge, based on such review, such Servicer has fulfilled all its obligations under the applicable Pooling and Servicing Agreement or Underlying Servicing Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof. Such Officer's Certificate shall be accompanied by a statement of a firm of independent public accountants to the effect that, on the basis of an examination of certain documents and records relating to a random sample of the mortgage loans being serviced by such Servicer pursuant to such Pooling and Servicing Agreement or Underlying Servicing Agreement and/or other similar agreements, conducted substantially in compliance with the Uniform Single Attestation Program for Mortgage Bankers, the servicing of such mortgage loans was conducted in compliance with the provisions of the applicable Underlying Servicing Agreement and other similar agreements, except for (i) such exceptions as such firm believes to be immaterial and (ii) such other exceptions as are set forth in such statement. The Master Servicer will deliver annually to the Trustee, on or before the date specified in the applicable Pooling and Servicing Agreement, an Officer's Certificate stating that such officer has received, with respect to 44
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each Servicer, the Officer's Certificate and accountant's statement described in the preceding paragraph, and, that on the basis of such officer's review of such information, each Servicer has fulfilled all its obligations under the applicable Underlying Servicing Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof. CERTAIN MATTERS REGARDING THE MASTER SERVICER In the event there is a Master Servicer with respect to a Series of Certificates, such Master Servicer may not resign from its obligations and duties under the Pooling and Servicing Agreement for each Series without the consent of the Trustee, except upon its determination that its duties thereunder are no longer permissible under applicable law or are in material conflict by reason of applicable law with any other activities of a type and nature carried on by it. No such resignation will become effective until the Trustee for such Series or a successor master servicer has assumed the Master Servicer's obligations and duties under the Pooling and Servicing Agreement. If the Master Servicer resigns for any of the foregoing reasons and the Trustee is unable or unwilling to assume responsibility for its duties under the Pooling and Servicing Agreement, it may appoint another institution to so act as described under "The Pooling and Servicing Agreement--Rights Upon Event of Default" below. The Pooling and Servicing Agreement will also provide that neither the Master Servicer nor any subcontractor, nor any partner, director, officer, employee or agent of any of them, will be under any liability to the Trust Estate or the Certificateholders, for the taking of any action or for refraining from the taking of any action in good faith pursuant to the Pooling and Servicing Agreement, or for errors in judgment; provided, however, that neither the Master Servicer, any subcontractor, nor any such person will be protected against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or gross negligence in the performance of his or its duties or by reason of reckless disregard of his or its obligations and duties thereunder. The Pooling and Servicing Agreement will further provide that the Master Servicer, any subcontractor, and any partner, director, officer, employee or agent of either of them shall be entitled to indemnification by the Trust Estate and will be held harmless against any loss, liability or expense incurred in connection with any legal action relating to the Pooling and Servicing Agreement or the Certificates, other than any loss, liability or expense incurred by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties thereunder or by reason of reckless disregard of its obligations and duties thereunder. In addition, the Pooling and Servicing Agreement will provide that the Master Servicer will not be under any obligation to appear in, prosecute or defend any legal action that is not incidental to its duties under the Pooling and Servicing Agreement and that in its opinion may involve it in any expense or liability. The Master Servicer may, however, in its discretion, undertake any such action deemed by it necessary or desirable with respect to the Pooling and Servicing Agreement and the rights and duties of the parties thereto and the interests of the Certificateholders thereunder. In such event, the legal expenses and costs of such action and any liability resulting therefrom will be expenses, costs and liabilities of the Trust Estate and the Master Servicer will be entitled to be reimbursed therefor out of the Certificate Account, and any loss to the Trust Estate arising from such right of reimbursement will be allocated first to the Subordinated Certificate of a Series before being allocated to the related Senior Certificates, or if such Series does not contain Subordinated Certificates, pro rata among the various Classes of Certificates unless otherwise specified in the applicable Pooling and Servicing Agreement. Any person into which the Master Servicer may be merged or consolidated, or any person resulting from any merger, conversion or consolidation to which the Master Servicer is a party, or any person succeeding to the business through the transfer of substantially all of its assets or all assets relating to such business, or otherwise, of the Master Servicer will be the successor of the Master Servicer under the Pooling and Servicing Agreement for each Series provided that such successor or resulting entity has a net worth of not less than $15,000,000 and is qualified to service mortgage loans for FNMA or FHLMC. The Master Servicer also has the right to assign its rights and delegate its duties and obligations under the Pooling and Servicing Agreement for each Series; provided that, if the Master Servicer desires to be released 45
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from its obligations under the Pooling and Servicing Agreement, (i) the purchaser or transferee accepting such assignment or delegation is qualified to service mortgage loans for FNMA or FHLMC, (ii) the purchaser is satisfactory to the Trustee for such Series, in the reasonable exercise of its judgment, and executes and delivers to the Trustee an agreement, in form and substance reasonably satisfactory to the Trustee, which contains an assumption by such purchaser or transferee of the due and punctual performance and observance of each covenant and condition to be performed or observed by the Master Servicer under the Pooling and Servicing Agreement from and after the date of such agreement; and (iii) each applicable Rating Agency's rating of any Certificates for such Series in effect immediately prior to such assignment, sale or transfer would not be qualified, downgraded or withdrawn as a result of such assignment, sale or transfer and the Certificates would not be placed on credit review status by any such Rating Agency. The Master Servicer will be released from its obligations under the Pooling and Servicing Agreement upon any such assignment and delegation, except that the Master Servicer will remain liable for all liabilities and obligations incurred by it prior to the time that the conditions contained in clauses (i), (ii) and (iii) above are met. THE POOLING AND SERVICING AGREEMENT Assignment of Mortgage Loans to the Trustee The Depositor will have acquired the Mortgage Loans included in each Trust Estate pursuant to one or more agreements (each, a "Sale Agreement"). In connection with the conveyance of the Mortgage Loans to the Depositor, a Seller will (i) agree to deliver to the Depositor all of the documents which the Depositor is required to deliver to the Trustee; (ii) make certain representations and warranties to the Depositor which will be the basis of certain of the Depositor's representations and warranties to the Trustee or assign the representations and warranties made by the originator of the Mortgage Loans; and (iii) agree to repurchase or substitute (or assign rights to a comparable agreement of the originator of the Mortgage Loans) for any Mortgage Loan for which any document is not delivered or is found to be defective in any material respect, or which Mortgage Loan is discovered at any time not to be in conformance with the representations and warranties the Seller has made to the Depositor and the breach of such representations and warranties materially and adversely affects the interests of the Certificateholders in the related Mortgage Loan, if the Seller cannot deliver such document or cure such defect or breach within 60 days after notice thereof. Such agreement will inure to the benefit of the Trustee and is intended to help ensure the Depositor's performance of its limited obligation to repurchase or substitute for Mortgage Loans. See "The Mortgage Loan Programs--Representations and Warranties" above. To the extent specified in the related Prospectus Supplement, the applicable Seller or other entity specified therein rather than the Depositor will have the limited obligation to repurchase or substitute for Mortgage Loans. At the time of issuance of each Series of Certificates, the Mortgage Loans in the related Trust Estate will, pursuant to the applicable Pooling and Servicing Agreement, be assigned to the Trustee for the benefit of the Certificateholders, together with all principal and interest received on or with respect to such Mortgage Loans after the applicable Cut-Off Date other than principal and interest due and payable on or before such Cut-Off Date and interest attributable to the Fixed Retained Yield on such Mortgage Loans, if any. See "Servicing of the Mortgage Loans--Fixed Retained Yield, Servicing Compensation and Payment of Expenses." The Trustee or its agent will, concurrently with such assignment, authenticate and deliver the Certificates evidencing such Series to the Depositor in exchange for the Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing as an exhibit to the applicable Pooling and Servicing Agreement. Each such schedule will include, among other things, the unpaid principal balance as of the close of business on the applicable Cut-Off Date, the maturity date and the Mortgage Interest Rate for each Mortgage Loan in the related Trust Estate. In addition, with respect to each Mortgage Loan in a Trust Estate, the mortgage or other promissory note, any assumption, modification or conversion to fixed interest rate agreement, a mortgage assignment in recordable form and the recorded Mortgage (or other documents as are required under applicable law to create perfected security interest in the Mortgaged Property in favor of the Trustee) will be delivered to the Trustee or, if indicated in the applicable Prospectus Supplement, to a custodian; provided that, in instances where recorded documents 46
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cannot be delivered due to delays in connection with recording, copies thereof, certified by the Depositor to be true and complete copies of such documents sent for recording, may be delivered and the original recorded documents will be delivered promptly upon receipt. The assignment of each Mortgage will be recorded promptly after the initial issuance of Certificates for the related Trust Estate, except in states where, in the opinion of counsel acceptable to the Trustee, such recording is not required to protect the Trustee's interest in the Mortgage Loan against the claim of any subsequent transferee or any successor to or creditor of the Depositor, or another affiliate that sold the Mortgage Loan to the Depositor, or the originator of such Mortgage Loan. Notwithstanding the foregoing, with respect to any Mortgage which has been recorded in the name of Mortgage Electronic Registration Systems, Inc. ("MERS") or its designee, no mortgage assignment in favor of the Trustee will be required to be prepared or delivered. Instead, the Trustee and the applicable Servicers will be required to take all actions as are necessary to cause the applicable Trust Estate to be shown as the owner of the related Mortgage Loan on the records of MERS for purposes of the system of recording transfers of beneficial ownership of mortgages maintained by MERS. The Trustee or custodian will hold such documents in trust for the benefit of Certificateholders of the related Series and will review such documents within 90 days of the date of the applicable Pooling and Servicing Agreement. If any document is not delivered or is found to be defective in any material respect, or if the Depositor or other representing party is in breach of any of its representations and warranties, and such breach materially and adversely affects the interests of the Certificateholders in a Mortgage Loan, and the Depositor or other entity specified in the related Prospectus Supplement cannot deliver such document or cure such defect or breach within 90 days after written notice thereof, the Depositor or other entity specified in the related Prospectus Supplement will, within 90 days of such notice, either repurchase the related Mortgage Loan from the Trustee at a price equal to the then unpaid principal balance thereof, plus accrued and unpaid interest at the applicable Mortgage Interest Rate (minus any Fixed Retained Yield) through the last day of the month in which such repurchase takes place, or (in the case of a Series for which one or more REMIC elections have been or will be made, unless the maximum period as may be provided by the Code or applicable regulations of the Department of the Treasury ("Treasury Regulations") shall have elapsed since the execution of the applicable Pooling and Servicing Agreement) substitute for such Mortgage Loan a new mortgage loan having characteristics such that the representations and warranties of the Depositor or other representing party made pursuant to the applicable Pooling and Servicing Agreement (except for representations and warranties as to the correctness of the applicable schedule of mortgage loans) would not have been incorrect had such substitute Mortgage Loan originally been a Mortgage Loan. In the case of a repurchased Mortgage Loan, the purchase price will be deposited by the Seller in the related Certificate Account. In the case of a substitute Mortgage Loan, the mortgage file relating thereto will be delivered to the Trustee or the custodian and the Depositor or other entity specified in the related Prospectus Supplement will deposit in the Certificate Account, an amount equal to the excess of (i) the unpaid principal balance of the Mortgage Loan for which it is being substituted (the "Removed Mortgage Loan"), over (ii) the unpaid principal balance of the substitute Mortgage Loan, together with interest on such excess at the Mortgage Interest Rate (minus any Fixed Retained Yield) to the next scheduled Due Date of the Removed Mortgage Loan. In no event will any substitute Mortgage Loan have (i) an unpaid principal balance greater than the scheduled principal balance calculated in accordance with the amortization schedule (the "Scheduled Principal Balance") of the Mortgage Loan for which it is substituted (after giving effect to the scheduled principal payment due in the month of substitution on the Removed Mortgage Loan), or (ii) a term greater than, a Mortgage Interest Rate less than, a Mortgage Interest Rate more than two percent per annum greater than or a loan-to-value ratio greater than, the Removed Mortgage Loan. If substitution is to be made for an adjustable-rate Mortgage Loan, the substitute Mortgage Loan will have (i) an unpaid principal balance no greater than the Scheduled Principal Balance of the Removed Mortgage Loan (after giving effect to the scheduled principal payment due in the month of substitution on the Removed Mortgage Loan), (ii) a loan-to-value ratio less than or equal to, and a Mortgage Interest Rate at least equal to, that of the Removed Mortgage Loan, and (iii) will bear interest based on the same index, margin and frequency of adjustment as the Removed Mortgage Loan. The repurchase obligation and the mortgage substitution referred to above will constitute the sole remedies available to the Certificateholders or the Trustee with respect to missing or defective documents or breach of the Depositor's or other representing entity's representations and warranties. 47
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If no custodian is named in the related Pooling and Servicing Agreement, the Trustee will be authorized to appoint a custodian to maintain possession of the documents relating to the Mortgage Loans and to conduct the review of such documents described above. Any custodian so appointed will keep and review such documents as the Trustee's agent under a custodial agreement. Optional Purchases Subject to the provisions of the applicable Pooling and Servicing Agreement, the Depositor or the Master Servicer may, at such party's option, repurchase (i) any Mortgage Loan which is in default or as to which default is reasonably foreseeable if, in the Depositor's or the Master Servicer's judgment, the related default is not likely to be cured by the borrower or default is not likely to be averted, up to the limit, if any, specified in such Pooling and Servicing Agreement and (ii) any Mortgage Loan as to which the originator of such Mortgage Loan breached a representation or warranty to a Seller regarding the characteristics of such Mortgage Loan, at a price equal to the unpaid principal balance thereof plus accrued interest thereon and under the conditions set forth in the applicable Prospectus Supplement. Reports to Certificateholders Unless otherwise specified or modified in the related Pooling and Servicing Agreement for each Series, the Trustee will prepare and include with each distribution to Certificateholders of record of such Series a statement setting forth the following information, if applicable: (i) the amount of such distribution allocable to principal of the related Mortgage Loans, separately identifying the aggregate amount of any principal prepayments included therein, the amount of such distribution allocable to interest on the related Mortgage Loans and the aggregate unpaid principal balance of the Mortgage Loans evidenced by each Class after giving effect to the principal distributions on such Distribution Date; (ii) the amount of servicing compensation with respect to the related Trust Estate and such other customary information as is required to enable Certificateholders to prepare their tax returns; (iii) the amount by which the Servicing Fee or Master Servicing Fee, as applicable, for the related Distribution Date has been reduced by interest shortfalls due to prepayments; (iv) the aggregate amount of any Periodic Advances by the Servicer, the Master Servicer or the Trustee included in the amounts actually distributed to the Certificateholders; (v) to each holder of a Certificate entitled to the benefits of payments under any form of credit enhancement: (a) the amounts so distributed under any such form of credit enhancement on the applicable Distribution Date; and (b) the amount of coverage remaining under any such form of credit enhancement, after giving effect to any payments thereunder and other amounts charged thereto on the Distribution Date; (vi) in the case of a Class of Certificates with a variable Pass-Through Rate, such Pass-Through Rate; (vii) the book value of any collateral acquired by the Trust Estate through foreclosure or otherwise; (viii) the unpaid principal balance of any Mortgage Loan as to which the Servicer has notified the Master Servicer and/or the Trustee that such Servicer has determined not to foreclose because it believes the related Mortgaged Property may be contaminated with or affected by hazardous wastes or hazardous substances; and (ix) the number and aggregate principal amount of Mortgage Loans one month, two months and three or more months delinquent. In addition, within a reasonable period of time after the end of each calendar year, the Trustee will furnish a report to each Certificateholder of record at any time during such calendar year such information as required 48
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by the Code and applicable regulations thereunder to enable Certificateholders to prepare their tax returns. In the event that an election has been made to treat the Trust Estate (or one or more segregated pools of assets therein) as a REMIC, the Trustee will be required to prepare and sign the federal and applicable state and local income tax returns of the REMIC. See "Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC Certificates--Administrative Matters." List of Certificateholders The Pooling and Servicing Agreement for each Series will require the Trustee to provide access to the most current list of names and addresses of Certificateholders of such Series to any group of five or more Certificateholders who advise the Trustee in writing that they desire to communicate with other Certificateholders with respect to their rights under the Pooling and Servicing Agreement or under the Certificates. Events of Default Events of Default under the Pooling and Servicing Agreement for each Series include (i) any failure by the Master Servicer or, if a Servicer has executed the Pooling and Servicing Agreement, such Servicer, to make a required deposit which continues unremedied for five days; (ii) any failure by the Master Servicer or a Servicer that has executed the Pooling and Servicing Agreement duly to observe or perform in any material respect any other of its covenants or agreements in the Pooling and Servicing Agreement which continues unremedied for 30 days after the giving of written notice of such failure to the Master Servicer or such Servicer by the Trustee, or to the Master Servicer or such Servicer and the Trustee by the holders of Certificates of such Series having voting rights allocated to such Certificates ("Voting Interests") aggregating not less than 25% of the Voting Interests allocated to all Certificates for such Series; and (iii) certain events of insolvency, readjustment of debt, marshaling of assets and liabilities or similar proceedings and certain action by the Master Servicer or a Servicer that has executed the Pooling and Servicing Agreement indicating its insolvency, reorganization or inability to pay its obligations. Rights Upon Event of Default So long as an Event of Default remains unremedied under the Pooling and Servicing Agreement for a Series, the Trustee for such Series or holders of Certificates of such Series evidencing not less than 51% of the Voting Interests in the Trust Estate for such Series may terminate all of the rights and obligations of the Master Servicer or a Servicer executing the Pooling and Servicing Agreement, under the Pooling and Servicing Agreement and in and to the Mortgage Loans (other than the Master Servicer's or such Servicer's right to recovery of the aggregate Servicing Fees or Master Servicing Fees, as applicable, due prior to the date of termination, and other expenses and amounts advanced pursuant to the terms of the Pooling and Servicing Agreement, which rights the Master Servicer or such Servicer will retain under all circumstances), whereupon the Trustee will succeed to all the responsibilities, duties and liabilities of the Master Servicer or such Servicer under the Pooling and Servicing Agreement and will be entitled to monthly compensation not to exceed the aggregate fees together with the other compensation to which the Master Servicer or such Servicer is entitled under the Pooling and Servicing Agreement. In the event that the Trustee is unwilling or unable so to act, it may select, pursuant to the public bid procedure described in the applicable Pooling and Servicing Agreement, or petition a court of competent jurisdiction to appoint, a housing and home finance institution, bank or mortgage servicing institution with a net worth of at least $10,000,000 to act as successor to the Master Servicer or such Servicer, under the provisions of the Pooling and Servicing Agreement; provided however, that until such a successor Master Servicer or Servicer is appointed and has assumed the responsibilities, duties and liabilities of the Master Servicer or such Servicer under the Pooling and Servicing Agreement, the Trustee shall continue as the successor to the Master Servicer or such Servicer as described above. In the event such public bid procedure is utilized, the successor would be entitled to compensation in an amount equal to the aggregate fees, together with the other compensation to which the Master Servicer or such Servicer, is entitled under the Pooling and Servicing Agreement, and the Master Servicer or such Servicer would be entitled to receive the net profits, if any, realized from the sale of its rights and obligations under the Pooling and Servicing Agreement. 49
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During the continuance of any Event of Default under the Pooling and Servicing Agreement for a Series, the Trustee for such Series will have the right to take action to enforce its rights and remedies and to protect and enforce the rights and remedies of the Certificateholders of such Series, and holders of Certificates evidencing not less than 25% of the Voting Interests for such Series may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred upon the Trustee. However, the Trustee will not be under any obligation to pursue any such remedy or to exercise any of such trusts or powers unless such Certificateholders have offered the Trustee reasonable security or indemnity against the cost, expenses and liabilities which may be incurred by the Trustee thereby. Also, the Trustee may decline to follow any such direction if the Trustee determines that the action or proceeding so directed may not lawfully be taken or would involve it in personal liability or be unjustly prejudicial to the non-assenting Certificateholders. No Certificateholder of a Series, solely by virtue of such holder's status as a Certificateholder, will have any right under the Pooling and Servicing Agreement for such Series to institute any proceeding with respect to the Pooling and Servicing Agreement, unless (i) such holder previously has given to the Trustee for such Series written notice of default and (ii) the holders of Certificates evidencing not less than 25% of the Voting Interests for such Series have made written request upon the Trustee to institute such proceeding in its own name as Trustee thereunder and have offered to the Trustee reasonable indemnity and the Trustee for 60 days has neglected or refused to institute any such proceeding. Amendment Each Pooling and Servicing Agreement may be amended by the Depositor, the Servicer(s) (or the Master Servicer, if applicable) and the Trustee without the consent of the Certificateholders, (i) to cure any ambiguity or mistake, (ii) to correct or supplement any provision therein that may be inconsistent with any other provision therein, (iii) if a REMIC election has been made, to modify, eliminate or add to any of its provisions to such extent as shall be necessary to maintain the qualification of the Trust Estate (or one or more segregated pools of assets therein) as a REMIC at all times that any Certificates are outstanding or to avoid or minimize the risk of the imposition of any tax on the Trust Estate pursuant to the Code that would be a claim against the Trust Estate, provided that the Trustee has received an opinion of counsel to the effect that such action is necessary or desirable to maintain such qualification or to avoid or minimize the risk of the imposition of any such tax and such action will not, as evidenced by such opinion of counsel, adversely affect in any material respect the interests of any Certificateholder, (iv) to change the timing and/or nature of deposits into the Certificate Account, provided that such change will not, as evidenced by an opinion of counsel, adversely affect in any material respect the interests of any Certificateholder and that such change will not adversely affect the then current rating assigned to any Certificates, as evidenced by a letter from each Rating Agency to such effect, (v) if a REMIC election has been made, to add to, modify or eliminate any provisions therein restricting transfers of Residual Certificates to certain disqualified organizations described below under "Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on Transfer of Residual Certificates," (vi) to make certain provisions with respect to the denominations of, and the manner of payments on, certain Classes of Certificates initially retained by the Depositor or an affiliate, or (vii) to make any other provisions with respect to matters or questions arising under such Pooling and Servicing Agreement that are not inconsistent with the provisions thereof, provided that such action will not, as evidenced by an opinion of counsel, adversely affect in any material respect the interests of the Certificateholders of the related Series. The Pooling and Servicing Agreement may also be amended by the Depositor, the Servicer(s) (or the Master Servicer, if applicable) and the Trustee with the consent of the holders of Certificates evidencing interests aggregating not less than 66 2/3% of the Voting Interests evidenced by the Certificates of each Class affected thereby, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of such Pooling and Servicing Agreement or of modifying in any manner the rights of the Certificateholders; provided, however, that no such amendment may (i) reduce in any manner the amount of, or delay the timing of, any payments received on or with respect to Mortgage Loans that are required to be distributed on any Certificate, without the consent of the holder of such Certificate, (ii) adversely 50
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affect in any material respect the interests of the holders of a Class of Certificates of a Series in a manner other than that set forth in (i) above without the consent of the holders of Certificates aggregating not less than 66 2/3% of the Voting Interests evidenced by such Class, or (iii) reduce the aforesaid percentage of Certificates of any Class, the holders of which are required to consent to such amendment, without the consent of the holders of all Certificates of such affected Class then outstanding. Notwithstanding the foregoing, the Trustee will not consent to any such amendment if such amendment would subject the Trust Estate (or any segregated pool of assets therein) to tax or, if a REMIC election has been made, cause the Trust Estate (or any segregated pool of assets therein) to fail to qualify as a REMIC. Termination; Optional Purchase of Mortgage Loans The obligations created by the Pooling and Servicing Agreement for a Series of Certificates will terminate on the Distribution Date following the final payment or other liquidation of the last Mortgage Loan subject thereto and the disposition of all property acquired upon foreclosure of any such Mortgage Loan. In no event, however, will the trust created by the Pooling and Servicing Agreement continue beyond the expiration of 21 years from the death of the last survivor of certain persons named in such Pooling and Servicing Agreement. For each Series of Certificates, the Trustee will give written notice of termination of the Pooling and Servicing Agreement to each Certificateholder, and the final distribution will be made only upon surrender and cancellation of the Certificates at an office or agency appointed by the Depositor and specified in the notice of termination. If so provided in the applicable Prospectus Supplement, the Pooling and Servicing Agreement for each Series of Certificates will permit, but not require, the Depositor or such other party as is specified in the applicable Prospectus Supplement, to purchase from the Trust Estate for such Series all remaining Mortgage Loans at the time and price specified in such Prospectus Supplement. In the event that such party has caused the related Trust Estate (or any segregated pool of assets therein) to be treated as a REMIC, any such purchase will be effected only pursuant to either (a) a "clean up call" as defined in Treasury Regulations Section 1.860G-2(j) or (b) a "qualified liquidation" as defined in Code Section 860F(a)(4)(A). Any qualified liquidation will effect early retirement of the Certificates of that Series, but the right so to purchase may be exercised only after the aggregate principal balance of the Mortgage Loans for such Series at the time of purchase is less than a specified percentage, not exceeding 10%, of the aggregate principal balance at the Cut-Off Date for the Series, or after the date set forth in the applicable Prospectus Supplement. A clean up call will result in the early retirement of one or more Classes of Certificates as specified in the related Prospectus Supplement. Such a clean up call may be effected only when the outstanding principal balance of each Class to be redeemed is 10% or less of the original principal balance of such Class. The Trustee The Trustee under each Pooling and Servicing Agreement (the "Trustee") will be named in the applicable Prospectus Supplement. The commercial bank or trust company serving as Trustee may have normal banking relationships with the Depositor or any of its affiliates. The Trustee generally will be responsible under each Pooling and Servicing Agreement for providing general administrative services for the Trust Estate for any such Series, including, among other things, (i) monitoring the amounts on deposit in various trust accounts; (ii) calculation of the amounts payable to Certificateholders on each Distribution Date; (iii) preparation of federal and applicable state and local tax and information returns; (iv) preparation of reports, if any, required under the Securities and Exchange Act of 1934, as amended; (v) maintaining any mortgage pool insurance policy, mortgagor bankruptcy bond, special hazard insurance policy or other form of credit enhancement that may be required with respect to any Series; and (vi) making Periodic Advances on the Mortgage Loans to the limited extent described under "Servicing of the Mortgage Loans--Periodic Advances and Limitations Thereon," if such amounts are not advanced by a Servicer or the Master Servicer. 51
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The Trustee may resign at any time, in which event the Master Servicer or, if there is no Master Servicer, the Servicer(s) will be obligated to appoint a successor trustee. The Master Servicer or, if there is no Master Servicer, the Servicer(s) may also remove the Trustee if the Trustee ceases to be eligible to act as Trustee under the Pooling and Servicing Agreement, if the Trustee becomes insolvent or in order to change the situs of the Trust Estate for state tax reasons. Upon becoming aware of such circumstances, the Master Servicer or, if there is no Master Servicer, the Servicer(s) will become obligated to appoint a successor trustee. The Trustee may also be removed at any time by the holders of Certificates evidencing not less than 50% of the Voting Interests in the Trust Estate, except that any Certificate registered in the name of the Depositor or any affiliate thereof will not be taken into account in determining whether the requisite Voting Interest in the Trust Estate necessary to effect any such removal has been obtained. Any resignation and removal of the Trustee, and the appointment of a successor trustee, will not become effective until acceptance of such appointment by the successor trustee. The Trustee, and any successor trustee, must have a combined capital and surplus of at least $50,000,000, or be a member of a bank holding system, the aggregate combined capital and surplus of which is at least $50,000,000, provided that the Trustee's and any such successor trustee's separate capital and surplus shall at all times be at least the amount specified in Section 310(a)(2) of the Trust Indenture Act of 1939, as amended, and will be subject to supervision or examination by federal or state authorities. CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS The following discussion contains summaries of certain legal aspects of mortgage loans which are general in nature. Because such legal aspects are governed by applicable state law (which laws may differ substantially), the summaries do not purport to be complete, to reflect the laws of any particular state or to encompass the laws of all states in which the security for the Mortgage Loans is situated. The summaries are qualified in their entirety by reference to the applicable federal and state laws governing the Mortgage Loans. General The Mortgage Loans will be secured by either first mortgages, first deeds of trust or similar security devices creating a first lien, depending upon the prevailing practice in the state in which the underlying property is located. A mortgage creates a lien upon the real property described in the mortgage. There are two parties to a mortgage: the mortgagor, who is the borrower (or, in the case of a Mortgage Loan secured by a property that has been conveyed to an inter vivos revocable trust, the settlor of such trust); and the mortgagee, who is the lender. In a mortgage instrument state, the mortgagor delivers to the mortgagee a note or bond evidencing the loan and the mortgage. Although a deed of trust is similar to a mortgage, a deed of trust has three parties: a borrower called the trustor (similar to a mortgagor), a lender called the beneficiary (similar to a mortgagee), and a third-party grantee called the trustee. Under a deed of trust, the borrower grants the property, irrevocably until the debt is paid, in trust, generally with a power of sale, to the trustee to secure payment of the loan. The trustee's authority under a deed of trust and the mortgagee's authority under a mortgage are governed by the express provisions of the deed of trust or mortgage, applicable law, and, in some cases, with respect to the deed of trust, the directions of the beneficiary. Foreclosure Foreclosure of a mortgage is generally accomplished by judicial action. Generally, the action is initiated by the service of legal pleadings upon all parties having an interest of record in the real property. Delays in completion of the foreclosure occasionally may result from difficulties in locating necessary parties defendant. When the mortgagee's right of foreclosure is contested, the legal proceedings necessary to resolve the issue can be time-consuming. After the completion of a judicial foreclosure proceeding, the court may issue a judgment of foreclosure and appoint a receiver or other officer to conduct the sale of the property. In some states, mortgages may also be foreclosed by advertisement, pursuant to a power of sale provided in the mortgage. Foreclosure of a mortgage by advertisement is essentially similar to foreclosure of a deed of trust by non-judicial power of sale. 52
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Foreclosure of a deed of trust is generally accomplished by a non-judicial trustee's sale under a specific provision in the deed of trust that authorizes the trustee to sell the property to a third party upon any default by the borrower under the terms of the note or deed of trust. In certain states, such foreclosure also may be accomplished by judicial action in the manner provided for foreclosure of mortgages. In some states, the trustee must record a notice of default and send a copy to the borrower-trustor and to any person who has recorded a request for a copy of a notice of default and notice of sale. In addition, the trustee must provide notice in some states to any other individual having an interest of record in the real property, including any junior lienholders. If the deed of trust is not reinstated within any applicable cure period, a notice of sale must be posted in a public place and, in most states, published for a specified period of time in one or more newspapers. In addition, some state laws require that a copy of the notice of sale be posted on the property and sent to all parties having an interest of record in the property. In some states, the borrower-trustor has the right to reinstate the loan at any time following default until shortly before the trustee's sale. In general, the borrower, or any other person having a junior encumbrance on the real estate, may, during a reinstatement period, cure the default by paying the entire amount in arrears plus the costs and expenses incurred in enforcing the obligation. Certain state laws control the amount of foreclosure expenses and costs, including attorneys' fees, which may be recovered by a lender. In case of foreclosure under either a mortgage or a deed of trust, the sale by the receiver or other designated officer, or by the trustee, is a public sale. However, because of the difficulty a potential buyer at the sale would have in determining the exact status of title and because the physical condition of the property may have deteriorated during the foreclosure proceedings, it is uncommon for a third party to purchase the property at the foreclosure sale. Rather, it is common for the lender to purchase the property from the trustee or receiver for an amount equal to the unpaid principal amount of the note, accrued and unpaid interest and the expenses of foreclosure. Thereafter, subject to the right of the borrower in some states to remain in possession during the redemption period, the lender will assume the burdens of ownership, including obtaining hazard insurance and making such repairs at its own expense as are necessary to render the property suitable for sale. The lender commonly will obtain the services of a real estate broker and pay the broker a commission in connection with the sale of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender's investment in the property. Any loss may be reduced by the receipt of mortgage insurance proceeds, if any, or by judicial action against the borrower for the deficiency, if such action is permitted by law. See "--Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders" below. Foreclosure on Shares of Cooperatives The cooperative shares owned by the tenant-stockholder and pledged to the lender are, in almost all cases, subject to restrictions on transfer as set forth in the cooperative's certificate of incorporation and by-laws, as well as in the proprietary lease or occupancy agreement, and may be canceled by the cooperative for failure by the tenant-stockholder to pay rent or other obligations or charges owed by such tenant-stockholder, including mechanics' liens against the cooperative apartment building incurred by such tenant- stockholder. The proprietary lease or occupancy agreement generally permits the cooperative to terminate such lease or agreement in the event an obligor fails to make payments or defaults in the performance of covenants required thereunder. Typically, the lender and the cooperative enter into a recognition agreement which establishes the rights and obligations of both parties in the event of a default by the tenant-stockholder on its obligations under the proprietary lease or occupancy agreement. A default by the tenant-stockholder under the proprietary lease or occupancy agreement will usually constitute a default under the security agreement between the lender and the tenant- stockholder. The recognition agreement generally provides that, in the event that the tenant-stockholder has defaulted under the proprietary lease or occupancy agreement, the cooperative will take no action to terminate such lease or agreement until the lender has been provided an opportunity to cure the default. The recognition agreement typically provides that if the proprietary lease or occupancy agreement is terminated, the cooperative will recognize the lender's lien against proceeds from a sale of the cooperative apartment, subject, however, to the cooperative's right to sums due under such proprietary lease or occupancy agreement. The total amount owed to 53
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the cooperative by the tenant-stockholder, which the lender generally cannot restrict and does not monitor, could reduce the value of the collateral below the outstanding principal balance of the cooperative loan and accrued and unpaid interest thereon. Recognition agreements also provide that in the event of a foreclosure on a cooperative loan, the lender must obtain the approval or consent of the cooperative as required by the proprietary lease before transferring the cooperative shares or assigning the proprietary lease. Generally, the lender is not limited by the agreement in any rights it may have to dispossess the tenant-stockholders. Foreclosure on the cooperative shares is accomplished by a sale in accordance with the provisions of Article 9 of the Uniform Commercial Code (the "UCC") and the security agreement relating to those shares. Article 9 of the UCC requires that a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure sale has been conducted in a "commercially reasonable" manner will depend on the facts in each case. In determining commercial reasonableness, a court will look to the notice given the debtor and the method, manner, time, place and terms of the foreclosure. Generally, a sale conducted according to the usual practice of banks selling similar collateral will be considered reasonably conducted. Article 9 of the UCC provides that the proceeds of the sale will be applied first to pay the costs and expenses of the sale and then to satisfy the indebtedness secured by the lender's security interest. The recognition agreement, however, generally provides that the lender's right to reimbursement is subject to the right of the cooperative corporation to receive sums due under the proprietary lease or occupancy agreement. If there are proceeds remaining, the lender must account to the tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness remains unpaid, the tenant-stockholder is generally responsible for the deficiency. See "--Anti- Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders" below. Rights of Redemption In some states, after sale pursuant to a deed of trust and/or foreclosure of a mortgage, the borrower and certain foreclosed junior lienors are given a statutory period in which to redeem the property from the foreclosure sale. In most states where the right of redemption is available, statutory redemption may occur upon payment of the foreclosure purchase price, accrued interest and taxes. In some states, the right to redeem is an equitable right. The effect of a right of redemption is to delay the ability of the lender to sell the foreclosed property. The exercise of a right of redemption would defeat the title of any purchaser at a foreclosure sale, or of any purchaser from the lender subsequent to judicial foreclosure or sale under a deed of trust. Consequently, the practical effect of the redemption right is to force the lender to maintain the property and pay the expenses of ownership until the redemption period has run. Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders Certain states have imposed statutory prohibitions which limit the remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some states, statutes limit the right of the beneficiary or mortgagee to obtain a deficiency judgment against the borrower following foreclosure or sale under a deed of trust. A deficiency judgment would be a personal judgment against the former borrower equal in most cases to the difference between the net amount realized upon the public sale of the real property and the amount due to the lender. Other statutes require the beneficiary or mortgagee to exhaust the security afforded under a deed of trust or mortgage by foreclosure in an attempt to satisfy the full debt before bringing a personal action against the borrower. Finally, other statutory provisions limit any deficiency judgment against the former borrower following a judicial sale to the excess of the outstanding debt over the fair market value of the property at the time of public sale. The purpose of these statutes is generally to prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment against the former borrower as a result of low or no bids at the judicial sale. Generally, Article 9 of the UCC governs foreclosure on cooperative shares and the related proprietary lease or occupancy agreement and foreclosure on the beneficial interest in a land trust. Some courts have interpreted 54
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Section 9-504 of the UCC to prohibit a deficiency award unless the creditor establishes that the sale of the collateral (which, in the case of a Mortgage Loan secured by shares of a cooperative, would be such shares and the related proprietary lease or occupancy agreement) was conducted in a commercially reasonable manner. A Servicer generally will not be required under the Pooling and Servicing Agreement or applicable Underlying Servicing Agreement to pursue deficiency judgments on the Mortgage Loans even if permitted by law. In addition to anti-deficiency and related legislation, numerous other federal and state statutory provisions, including the United States Bankruptcy Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), and state laws affording relief to debtors may interfere with or affect the ability of a secured mortgage lender to obtain payment of a mortgage loan, to realize upon collateral and/or enforce a deficiency judgment. For example, under the Bankruptcy Code, virtually all actions (including foreclosure actions and deficiency judgment proceedings) are automatically stayed upon the filing of a bankruptcy petition, and, usually, no interest or principal payments are made during the course of the bankruptcy case. Foreclosure of an interest in real property of a debtor in a case under the Bankruptcy Code can typically occur only if the bankruptcy court vacates the stay, an action, the court may be reluctant to take, particularly if the debtor has the prospect of restructuring his or her debts and the mortgage collateral is not deteriorating in value. The delay and the consequences thereof caused by such automatic stay can be significant. Also, under the Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by a mortgage on the property) may stay a senior lender from taking action to foreclose. A homeowner may file for relief under the Bankruptcy Code under any of three different chapters of the Bankruptcy Code. Under Chapter 7, the assets of the debtor are liquidated and a lender secured by a lien may "bid in" (i.e., bid up to the amount of the debt) at the sale of the asset. See "--Foreclosure." A homeowner may also file for relief under Chapter 11 of the Bankruptcy Code and reorganize his or her debts through his or her reorganization plan. Alternatively, a homeowner may file for relief under Chapter 13 of the Bankruptcy Code and address his or her debts in a rehabilitation plan. (Chapter 13 is often referred to as the "wage earner chapter" or "consumer chapter" because most individuals seeking to restructure their debts file for relief under Chapter 13 rather than Chapter 11). The Bankruptcy Code permits a mortgage loan that is secured by property that does not consist solely of the debtor's principal residence to be modified without the consent of the lender provided certain substantive and procedural safeguards are met. Under the Bankruptcy Code, the lender's security interest may be reduced to the then-current value of the property as determined by the court if the value is less than the amount due on the loan, thereby leaving the lender as a general unsecured creditor for the difference between the value of the collateral and the outstanding balance of the mortgage loan. A borrower's unsecured indebtedness will typically be discharged in full upon payment of a substantially reduced amount. Other modifications to a mortgage loan may include a reduction in the amount of each scheduled payment, which reduction may result from a reduction in the rate of interest, an alteration of the repayment schedule, an extension of the final maturity date, and/or a reduction in the outstanding balance of the secured portion of the loan. In certain circumstances, subject to the court's approval, a debtor in a case under Chapter 11 of the Bankruptcy Code may have the power to grant liens senior to the lien of a mortgage. A reorganization plan under Chapter 11 and a rehabilitation plan under Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default with respect to a mortgage loan on such debtor's residence by paying arrearages over a period of time and to deaccelerate and reinstate the original mortgage loan payment schedule, even though the lender accelerated the loan and a final judgment of foreclosure had been entered in state court (provided no sale of the property had yet occurred) prior to the filing of the debtor's petition under the Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be accomplished within the five year maximum term permitted for repayment plans, such term commencing when repayment plan becomes effective, while defaults may be cured over a longer period of time under a Chapter 11 plan of reorganization. 55
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Generally, a repayment plan in a case under Chapter 13 and a plan of reorganization under Chapter 11 may not modify the claim of a mortgage lender if the borrower elects to retain the property, the property is the borrower's principal residence and the property is the lender's only collateral. Certain courts have allowed modifications when the mortgage loan is secured both by the debtor's principal residence and by collateral that is not "inextricably bound" to the real property, such as appliances, machinery, or furniture. The general protection for mortgages secured only by the debtor's principal residence is not applicable in a case under Chapter 13 if the last payment on the original payment schedule is due before the final date for payment under the debtor's Chapter 13 plan (which date could be up to five years after the debtor emerges from bankruptcy). Under several recently decided cases, the terms of such a loan can be modified in the manner described above. While these decisions are contrary to the holding in a prior case by a senior appellate court, it is possible that the later decisions will become the accepted interpretation in view of the language of the applicable statutory provision. If this interpretation is adopted by a court considering the treatment in a Chapter 13 repayment plan of a Mortgage Loan, it is possible that the Mortgage Loan could be modified. State statutes and general principles of equity may also provide a mortgagor with means to halt a foreclosure proceeding or sale and to force a restructuring of a mortgage loan on terms a lender would not otherwise accept. In a bankruptcy or similar proceeding of a mortgagor, action may be taken seeking the recovery, as a preferential transfer or on other grounds, of any payments made by the mortgagor under the related mortgage loan prior to the bankruptcy or similar proceeding. Payments on long-term debt may be protected from recovery as preferences if they are payments in the ordinary course of business made on debts incurred in the ordinary course of business or if the value of the collateral exceeds the debt at the time of payment. Whether any particular payment would be protected depends upon the facts specific to a particular transaction. A trustee in bankruptcy, in some cases, may be entitled to collect its costs and expenses in preserving or selling the mortgaged property ahead of a payment to the lender. Moreover, the laws of certain states also give priority to certain tax and mechanics liens over the lien of a mortgage. Under the Bankruptcy Code, if the court finds that actions of the mortgagee have been unreasonable and inequitable, the lien of the related mortgage may be subordinated to the claims of unsecured creditors. Bankruptcy reform legislation that was passed by the Senate on September 23, 1998 would have amended the Bankruptcy Code (such amendment, the "TILA Amendment") to authorize bankruptcy court judges to disallow claims based on secured debt if the creditor failed to comply with certain provisions of the federal Truth in Lending Act. As proposed, such provision would apply retroactively to secured debt incurred by a debtor prior to the date of effectiveness of such legislation, including the Mortgage Loans. The House bill and the conference report did not have a similar provision, and Congress adjourned from its last session without acting on the proposed legislation. However, such legislation may be reintroduced in the current session. If the TILA Amendment were to become law, a violation of the Truth in Lending Act with respect to a Mortgage Loan could result in a total loss with respect to such loan in a bankruptcy proceeding. Any such violation would be a breach of representation and warranty of the depositor, and the depositor would be obligated to repurchase such Mortgage Loan as described herein. Various proposals to amend the Bankruptcy Code in ways that could adversely affect the value of the Mortgage Loans in a trust have been considered by Congress, and more such proposed legislation may be considered in the future. No assurance can be given that any particular proposal will or will not be enacted into law, or that any provision so enacted will not differ materially from the proposals described above. The Code provides priority to certain tax liens over the lien of the mortgage. In addition, substantive requirements are imposed upon mortgage lenders in connection with the origination and the servicing of mortgage loans by numerous federal and some state consumer protection laws. These laws include the federal Trust-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and related statutes. These federal laws impose specific statutory liabilities upon lenders who originate mortgage loans and who fail to comply with the provisions of the applicable laws. In some cases, this liability may affect assignees of the Mortgage Loans. 56
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Soldiers' and Sailors' Civil Relief Act and Similar Laws Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"), a borrower who enters military service after the origination of such borrower's Mortgage Loan (including a borrower who is a member of the National Guard or is in reserve status at the time of the origination of the Mortgage Loan and is later called to active duty) may not be charged interest above an annual rate of 6% during the period of such borrower's active duty status, unless a court orders otherwise upon application of the lender. It is possible that such action could have an effect, for an indeterminate period of time, on the ability of the Servicer to collect full amounts of interest on certain of the Mortgage Loans in a Trust Estate. Any shortfall in interest collections resulting from the application of the Relief Act could result in losses to the holders of the Certificates of the related Series. Further, the Relief Act imposes limitations which would impair the ability of the Servicer to foreclose on an affected Mortgage Loan during the borrower's period of active duty status. Thus, in the event that such a Mortgage Loan goes into default, there may be delays and losses occasioned by the inability to realize upon the Mortgaged Property in a timely fashion. Certain states have enacted comparable legislation which may interfere with or affect the ability of the Servicer to timely collect payments of principal and interest on, or to foreclose on, Mortgage Loans of borrowers in such states who are active or reserve members of the armed services. Environmental Considerations A lender may be subject to unforeseen environmental risks when taking a security interest in real or personal property. Property subject to such a security interest may be subject to federal, state, and local laws and regulations relating to environmental protection. Such laws may regulate, among other things: emissions of air pollutants; discharges of wastewater or storm water; generation, transport, storage or disposal of hazardous waste or hazardous substances; operation, closure and removal of underground storage tanks; removal and disposal of asbestos-containing materials; management of electrical or other equipment containing polychlorinated biphenyls ("PCBs"). Failure to comply with such laws and regulations may result in significant penalties, including civil and criminal fines. Under the laws of certain states, environmental contamination on a property may give rise to a lien on the property to ensure the availability and/or reimbursement of cleanup costs. Generally all subsequent liens on such property are subordinated to such a lien and, in some states, even prior recorded liens are subordinated to such liens ("Superliens"). In the latter states, the security interest of the Trustee in a property that is subject to such a Superlien could be adversely affected. Environmental contamination on a property is likely to have a negative impact on the value of such property, which may lead to losses on the related Series of Certificates. Under the federal Comprehensive Environmental Response Compensation and Liability Act, as amended ("CERCLA"), and under state law in certain states, a secured party which takes a deed in lieu of foreclosure, purchases a mortgaged property at a foreclosure sale, operates a mortgaged property or undertakes certain types of activities that may constitute management of the mortgaged property may become liable in certain circumstances for the costs of remedial action ("Cleanup Costs") if hazardous wastes or hazardous substances have been released or disposed of on the property. Such Cleanup Costs may be substantial. CERCLA imposes strict, as well as joint and several liability for environmental remediation and/or damage costs on several classes of "potentially responsible parties," including current "owners and/or operators" of property, irrespective of whether those owners or operators caused or contributed to contamination on the property. In addition, owners and operators of properties that generate hazardous substances that are disposed of at other "off-site" locations may held strictly, jointly and severally liable for environmental remediation and/or damages at those off-site locations. Many states also have laws that are similar to CERCLA. Liability under CERCLA or under similar state law could exceed the value of the property itself as well as the aggregate assets of the property owner. The law is unclear as to whether and under what precise circumstances cleanup costs, or the obligation to take remedial actions, could be imposed on a secured lender such as the Trust Estate. Under the laws of some states and under CERCLA, a lender may be liable as an "owner or operator" for costs of addressing releases or threatened releases of hazardous substances on a mortgaged property if such lender or its agents or employees 57
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have "participated in the management" of the operations of the borrower, even though the environmental damage or threat was caused by a prior owner or current owner or operator or other third party. Excluded from CERCLA's definition of "owner or operator," is a person "who without participating in the management of . . . [the] facility, holds indicia of ownership primarily to protect his security interest" (the "secured-creditor exemption"). This exemption for holders of a security interest such as a secured lender applies only to the extent that a lender seeks to protect its security interest in the contaminated facility or property. Thus, if a lender's activities begin to encroach on the actual management of such facility or property, the lender faces potential liability as an "owner or operator" under CERCLA. Similarly, when a lender forecloses and takes title to a contaminated facility or property, the lender may incur potential CERCLA liability in various circumstances, including among others, when it holds the facility or property as an investment (including leasing the facility or property to a third party), fails to market the property in a timely fashion or fails to properly address environmental conditions at the property or facility. The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a similar secured-creditor exemption for those lenders who hold a security interest in a petroleum underground storage tank ("UST") or in real estate containing a UST, or that acquire title to a petroleum UST or facility or property on which such a UST is located. As under CERCLA, a lender may lose its secured-creditor exemption and be held liable under RCRA as a UST owner or operator if such lender or its employees or agents participate in the management of the UST. In addition, if the lender takes title to or possession of the UST or the real estate containing the UST, under certain circumstances the secured-creditor exemption may be deemed to be unavailable. A decision in May 1990 of the United States Court of Appeals for the Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed CERCLA's secured-creditor exemption. The court's opinion suggested that a lender need not have involved itself in the day-to-day operations of the facility or participated in decisions relating to hazardous waste to be liable under CERCLA; rather, liability could attach to a lender if its involvement with the management of the facility were broad enough to support the inference that the lender had the capacity to influence the borrower's treatment of hazardous waste. The court added that a lender's capacity to influence such decisions could be inferred from the extent of its involvement in the facility's financial management. A subsequent decision by the United States Court of Appeals for the Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with, but not expressly contradicting, the Fleet Factors court, held that a secured lender had no liability absent "some actual management of the facility" on the part of the lender. Court decisions have taken varying views of the scope of the secured- creditor exemption, leading to administrative and legislative efforts to provide guidance to lenders on the scope of activities that would trigger CERCLA and/or RCRA liability. Until recently, these efforts have failed to provide substantial guidance. On September 30, 1996 the President signed into law (the Asset Conservation, Lender Liability and Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act"). The Asset Conservation Act was intended to clarify the scope of the secured creditor exemption under both CERCLA and RCRA. The Asset Conservation Act more clearly defined the kinds of "participation in management" that would trigger liability under CERCLA and specified certain activities that would not constitute "participation in management" or otherwise result in a forfeiture of the secured-creditor exemption prior to foreclosure or during a workout period. The Asset Conservation Act also clarified the extent of protection against liability under CERCLA in the event of foreclosure and authorized certain regulatory clarifications of the scope of the secured-creditor exemption for purposes of RCRA, similar to the statutory protections under CERCLA. However, since the courts have not yet had the opportunity to interpret the new statutory provisions, the scope of the additional protections offered by the Asset Conservation Act is not fully defined. It also is important to note that the Asset Conservation Act does not offer complete protection to lenders and that the risk of liability remains. If a secured lender does become liable, it may be entitled to bring an action for contribution against the owner or operator who created the environmental contamination or against some other liable party, but that person or entity may be bankrupt or otherwise judgment-proof. It is therefore possible that cleanup or other 58
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environmental liability costs could become a liability of the Trust Estate and occasion a loss to the Trust Estate and to Certificateholders in certain circumstances. The new secured creditor amendments to CERCLA, also, would not necessarily affect the potential for liability in actions by either a state or a private party under other federal or state laws which may impose liability on "owners or operators" but do not incorporate the secured-creditor exemption. Traditionally, residential mortgage lenders have not taken steps to evaluate whether hazardous wastes or hazardous substances are present with respect to any mortgaged property prior to the origination of the mortgage loan or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, at the time the Mortgage Loans were originated no such evaluations were required, nor were any such evaluations required prior to foreclosure or accepting a deed- in-lieu of foreclosure. Neither the Depositor nor any other entity makes any representations or warranties or assumes any liability with respect to: the environmental condition of such Mortgaged Property; the absence, presence or effect of hazardous wastes or hazardous substances on any Mortgaged Property; any casualty resulting from the presence or effect of hazardous wastes or hazardous substances on, near or emanating from such Mortgaged Property; the impact on Certificateholders of any environmental condition or presence of any substance on or near such Mortgaged Property; or the compliance of any Mortgaged Property with any environmental laws, nor is any agent, person or entity otherwise affiliated with the Depositor authorized or able to make any such representation, warranty or assumption of liability relative to any such Mortgaged Property. See "The Mortgage Loan Programs--Representations and Warranties" and "Servicing of the Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans" above. "Due-on-Sale" Clauses The forms of note, mortgage and deed of trust relating to conventional Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the maturity of a loan if the borrower transfers its interest in the property. In recent years, court decisions and legislative actions placed substantial restrictions on the right of lenders to enforce such clauses in many states. However, effective October 15, 1982, Congress enacted the Garn-St Germain Depository Institutions Act of 1982 (the "Garn Act") which purports to preempt state laws which prohibit the enforcement of "due-on-sale" clauses by providing among other matters, that "due-on-sale" clauses in certain loans (which loans may include the Mortgage Loans) made after the effective date of the Garn Act are enforceable, within certain limitations as set forth in the Garn Act and the regulations promulgated thereunder. "Due-on-sale" clauses contained in mortgage loans originated by federal savings and loan associations or federal savings banks are fully enforceable pursuant to regulations of the Office of Thrift Supervision ("OTS"), as successor to the Federal Home Loan Bank Board ("FHLBB"), which preempt state law restrictions on the enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national banks and federal credit unions are now fully enforceable pursuant to preemptive regulations of the Comptroller of the Currency and the National Credit Union Administration, respectively. The Garn Act created a limited exemption from its general rule of enforceability for "due-on-sale" clauses in certain mortgage loans ("Window Period Loans") which were originated by non-federal lenders and made or assumed in certain states ("Window Period States") during the period, prior to October 15, 1982, in which that state prohibited the enforcement of "due-on- sale" clauses by constitutional provision, statute or statewide court decision (the "Window Period"). Though neither the Garn Act nor the OTS regulations actually names the Window Period States, FHLMC has taken the position, in prescribing mortgage loan servicing standards with respect to mortgage loans which it has purchased, that the Window Period States were: Arizona, Arkansas, California, Colorado, Georgia, Iowa, Michigan, Minnesota, New Mexico, Utah and Washington. Under the Garn Act, unless a Window Period State took action by October 15, 1985, the end of the Window Period, to further regulate enforcement of "due-on-sale" clauses in Window Period Loans, "due-on-sale" clauses would become enforceable even in Window Period Loans. Five of the Window Period States (Arizona, Minnesota, Michigan, New Mexico and Utah) have taken actions which restrict the enforceability of "due-on-sale" clauses in Window Period Loans beyond October 15, 1985. The actions taken vary among such states. 59
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By virtue of the Garn Act, a Servicer may generally be permitted to accelerate any conventional Mortgage Loan which contains a "due-on-sale" clause upon transfer of an interest in the property subject to the mortgage or deed of trust. With respect to any Mortgage Loan secured by a residence occupied or to be occupied by the borrower, this ability to accelerate will not apply to certain types of transfers, including (i) the granting of a leasehold interest which has a term of three years or less and which does not contain an option to purchase; (ii) a transfer to a relative resulting from the death of a borrower, or a transfer where the spouse or children become an owner of the property in each case where the transferee(s) will occupy the property; (iii) a transfer resulting from a decree of dissolution of marriage, legal separation agreement or from an incidental property settlement agreement by which the spouse becomes an owner of the property; (iv) the creation of a lien or other encumbrance subordinate to the lender's security instrument which does not relate to a transfer of rights of occupancy in the property (provided that such lien or encumbrance is not created pursuant to a contract for deed); (v) a transfer by devise, descent or operation of law on the death of a joint tenant or tenant by the entirety; (vi) a transfer into an inter vivos trust in which the borrower is the beneficiary and which does not relate to a transfer of rights of occupancy; and (vii) other transfers as set forth in the Garn Act and the regulations thereunder. Regulations promulgated under the Garn Act also prohibit the imposition of a prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale clause. The extent of the effect of the Garn Act on the average lives and delinquency rates of the Mortgage Loans cannot be predicted. See "Prepayment and Yield Considerations." Applicability of Usury Laws Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title V"), provides that state usury limitations shall not apply to certain types of residential first mortgage loans originated by certain lenders after March 31, 1980. The OTS as successor to the FHLBB is authorized to issue rules and regulations and to publish interpretations governing implementation of Title V. The statute authorized any state to reimpose interest rate limits by adopting before April 1, 1983, a law or constitutional provision which expressly rejects application of the federal law. Fifteen states have adopted laws reimposing or reserving the right to reimpose interest rate limits. In addition, even where Title V is not so rejected, any state is authorized to adopt a provision limiting certain other loan charges. The Depositor or other entity specified in the related Prospectus Supplement will represent and warrant in the Pooling and Servicing Agreement to the Trustee for the benefit of Certificateholders that all Mortgage Loans are originated in full compliance with applicable state laws, including usury laws. See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans to the Trustee." Enforceability of Certain Provisions Standard forms of note, mortgage and deed of trust generally contain provisions obligating the borrower to pay a late charge if payments are not timely made and in some circumstances may provide for prepayment fees or penalties if the obligation is paid prior to maturity. In certain states, there are or may be specific limitations upon late charges which a lender may collect from a borrower for delinquent payments. Certain states also limit the amounts that a lender may collect from a borrower as an additional charge if the loan is prepaid. Under the Pooling and Servicing Agreement, late charges and prepayment fees (to the extent permitted by law and not waived by the Servicer) will be retained by the Servicer as additional servicing compensation. Courts have imposed general equitable principles upon foreclosure. These equitable principles are generally designed to relieve the borrower from the legal effect of defaults under the loan documents. Examples of judicial remedies that may be fashioned include judicial requirements that the lender undertake affirmative and expensive actions to determine the causes for the borrower's default and the likelihood that the borrower will be able to reinstate the loan. In some cases, courts have substituted their judgment for the lender's judgment and have required lenders to reinstate loans or recast payment schedules to accommodate borrowers who are suffering from temporary financial disability. In some cases, courts have limited the right of lenders to foreclose if the default under the mortgage instrument is not monetary, such as the borrower failing to adequately maintain the 60
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property or the borrower executing a second mortgage or deed of trust affecting the property. In other cases, some courts have been faced with the issue of whether federal or state constitutional provisions reflecting due process concerns for adequate notice require that borrowers under the deeds of trust receive notices in addition to the statutorily-prescribed minimum requirements. For the most part, these cases have upheld the notice provisions as being reasonable or have found that the sale by a trustee under a deed of trust or under a mortgage having a power of sale does not involve sufficient state action to afford constitutional protections to the borrower. FEDERAL INCOME TAX CONSEQUENCES The following discussion represents the opinion of Cadwalader, Wickersham & Taft or Kennedy Covington Lobdell & Hickman, L.L.P. as to the material federal income tax consequences of the purchase, ownership and disposition of Certificates. The discussion below does not purport to address all federal income tax consequences that may be applicable to particular categories of investors, some of which may be subject to special rules. The authorities on which this discussion is based are subject to change or differing interpretations, and any such change or interpretation could apply retroactively. This discussion reflects the applicable provisions of the Code, as well as regulations (the "REMIC Regulations") promulgated by the U.S. Department of the Treasury. Investors should consult their own tax advisors in determining the federal, state, local and any other tax consequences to them of the purchase, ownership and disposition of Certificates. For purposes of this discussion, where the applicable Prospectus Supplement provides for a Fixed Retained Yield with respect to the Mortgage Loans of a Series of Certificates, references to the Mortgage Loans will be deemed to refer to that portion of the Mortgage Loans held by the Trust Estate that does not include the Fixed Retained Yield. References to a "holder" or "Certificateholder" in this discussion generally mean the Beneficial Owner of a Certificate. Federal Income Tax Consequences for REMIC Certificates General With respect to a particular Series of Certificates, an election may be made to treat the Trust Estate or one or more segregated pools of assets therein as one or more REMICs within the meaning of Code Section 860D. A Trust Estate or a portion or portions thereof as to which one or more REMIC elections will be made will be referred to as a "REMIC Pool." For purposes of this discussion, Certificates of a Series as to which one or more REMIC elections are made are referred to as "REMIC Certificates" and will consist of one or more Classes of "Regular Certificates" and one Class of "Residual Certificates" in the case of each REMIC Pool. Qualification as a REMIC requires ongoing compliance with certain conditions. With respect to each Series of REMIC Certificates, Cadwalader, Wickersham & Taft or Kennedy Covington Lobdell & Hickman, L.L.P., counsel to the Depositor, has advised the Depositor that in each firm's opinion, assuming (i) the making of an appropriate election, (ii) compliance with the Pooling and Servicing Agreement, and (iii) compliance with any changes in the law, including any amendments to the Code or applicable Treasury regulations thereunder, each REMIC Pool will qualify as a REMIC. In such case, the Regular Certificates will be considered to be "regular interests" in the REMIC Pool and generally will be treated for federal income tax purposes as if they were newly originated debt instruments, and the Residual Certificates will be considered to be "residual interests" in the REMIC Pool. The Prospectus Supplement for each Series of Certificates will indicate whether one or more REMIC elections with respect to the related Trust Estate will be made, in which event references to "REMIC" or "REMIC Pool" herein shall be deemed to refer to each such REMIC Pool. Status of REMIC Certificates REMIC Certificates held by a domestic building and loan association will constitute "a regular or residual interest in a REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the REMIC Pool would be treated as "loans . . . secured by an interest in real property which is . . . 61
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residential real property" within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C). REMIC Certificates held by a real estate investment trust will constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A), and interest on the Regular Certificates and income with respect to Residual Certificates will be considered "interest on obligations secured by mortgages on real property or on interests in real property" within the meaning of Code Section 856(c)(3)(B) in the same proportion that, for both purposes, the assets of the REMIC Pool would be so treated. If at all times 95% or more of the assets of the REMIC Pool qualify for each of the foregoing treatments, the REMIC Certificates will qualify for the corresponding status in their entirety. For purposes of Code Section 856(c)(4)(A), payments of principal and interest on the Mortgage Loans that are reinvested pending distribution to holders of REMIC Certificates qualify for such treatment. Regular Certificates held by a financial asset securitization investment trust will be "permitted assets" within the meaning of Code Section 860L(a). Where two REMIC Pools are a part of a tiered structure they will be treated as one REMIC for purposes of the tests described above respecting asset ownership of more or less than 95%. In addition, if the assets of the REMIC include Buy-Down Loans, it is possible that the percentage of such assets constituting "loans . . . secured by an interest in real property which is . . . residential real property" for purposes of Code Section 7701(a)(19)(C)(v), may be required to be reduced by the amount of the related Buy-Down Funds. REMIC Certificates held by a regulated investment company will not constitute "Government securities" within the meaning of Code Section 851(b)(3)(A)(i). REMIC Certificates held by certain financial institutions will constitute an "evidence of indebtedness" within the meaning of Code Section 582(c)(1). The Small Business Job Protection Act of 1996 (the "SBJPA of 1996") repealed the reserve method for bad debts of domestic building and loan associations and mutual savings banks, and thus has eliminated the asset category of "qualifying real property loans" in former Code Section 593(d) for taxable years beginning after December 31, 1995. The requirement in the SBJPA of 1996 that such institutions must "recapture" a portion of their existing bad debt reserves is suspended if a certain portion of their assets are maintained in "residential loans" under Code Section 7701(a)(19)(C)(v), but only if such loans were made to acquire, construct or improve the related real property and not for the purpose of refinancing. However, no effort will be made to identify the portion of the Mortgage Loans of any Series meeting this requirement, and no representation is made in this regard. Qualification as a REMIC In order for the REMIC Pool to qualify as a REMIC, there must be ongoing compliance on the part of the REMIC Pool with the requirements set forth in the Code. The REMIC Pool must fulfill an asset test, which requires that no more than a de minimis portion of the assets of the REMIC Pool, as of the close of the third calendar month beginning after the "Startup Day" (which for purposes of this discussion is the date of issuance of the REMIC Certificates) and at all times thereafter, may consist of assets other than "qualified mortgages" and "permitted investments." The REMIC Regulations provide a safe harbor pursuant to which the de minimis requirement will be met if at all times the aggregate adjusted basis of the nonqualified assets is less than 1% of the aggregate adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the safe harbor may nevertheless demonstrate that it holds no more than a de minimis amount of nonqualified assets. A REMIC Pool also must provide "reasonable arrangements" to prevent its residual interests from being held by "disqualified organizations" or agents thereof and must furnish applicable tax information to transferors or agents that violate this requirement. See "--Taxation of Residual Certificates--Tax-Related Restrictions on Transfer of Residual Certificates--Disqualified Organizations." A qualified mortgage is any obligation that is principally secured by an interest in real property and that is either transferred to the REMIC Pool on the Startup Day or is purchased by the REMIC Pool within a three-month period thereafter pursuant to a fixed price contract in effect on the Startup Day. Qualified mortgages include whole mortgage loans, such as the Mortgage Loans, and, generally, certificates of beneficial interest in a grantor trust that holds mortgage loans, regular interests in another REMIC, such as lower-tier regular interests in a tiered REMIC and regular interests in a Financial Asset Securitization Investment Trust (a "FASIT") within the meaning of Code Section 860L if 95% or more of the value of the assets of the FASIT is at all times attributable to whole mortgage loans such as the Mortgage Loans. The REMIC Regulations specify that loans 62
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secured by timeshare interests and shares held by a tenant stockholder in a cooperative housing corporation can be qualified mortgages. A qualified mortgage includes a qualified replacement mortgage, which is any property that would have been treated as a qualified mortgage if it were transferred to the REMIC Pool on the Startup Day and that is received either (i) in exchange for any qualified mortgage within a three-month period thereafter or (ii) in exchange for a "defective obligation" within a two-year period thereafter. A "defective obligation" includes (i) a mortgage in default or as to which default is reasonably foreseeable, (ii) a mortgage as to which a customary representation or warranty made at the time of transfer to the REMIC Pool has been breached, (iii) a mortgage that was fraudulently procured by the mortgagor, and (iv) a mortgage that was not in fact principally secured by real property (but only if such mortgage is disposed of within 90 days of discovery). A Mortgage Loan that is "defective" as described in clause (iv) that is not sold or, if within two years of the Startup Day, exchanged, within 90 days of discovery, ceases to be a qualified mortgage after such 90-day period. Permitted investments include cash flow investments, qualified reserve assets, and foreclosure property. A cash flow investment is an investment, earning a return in the nature of interest, of amounts received on or with respect to qualified mortgages for a temporary period, not exceeding 13 months, until the next scheduled distribution to holders of interests in the REMIC Pool. A qualified reserve asset is any intangible property held for investment that is part of any reasonably required reserve maintained by the REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts due on the regular or residual interests in the event of defaults (including delinquencies) on the qualified mortgages, lower than expected reinvestment returns, prepayment interest shortfalls and certain other contingencies. The reserve fund will be disqualified if more than 30% of the gross income from the assets in such fund for the year is derived from the sale or other disposition of property held for less than three months, unless required to prevent a default on the regular interests caused by a default on one or more qualified mortgages. A reserve fund must be reduced "promptly and appropriately" as payments on the Mortgage Loans are received. Foreclosure property is real property acquired by the REMIC Pool in connection with the default or imminent default of a qualified mortgage and generally not held beyond the close of the third calendar year following the year in which such property is acquired with an extension that may be granted by the Internal Revenue Service. In addition to the foregoing requirements, the various interests in a REMIC Pool also must meet certain requirements. All of the interests in a REMIC Pool must be either of the following: (i) one or more classes of regular interests or (ii) a single class of residual interests on which distributions, if any, are made pro rata. A regular interest is an interest in a REMIC Pool that is issued on the Startup Day with fixed terms, is designated as a regular interest, and unconditionally entitles the holder to receive a specified principal amount (or other similar amount), and provides that interest payments (or other similar amounts), if any, at or before maturity either are payable based on a fixed rate or a qualified variable rate, or consist of a specified, nonvarying portion of the interest payments on qualified mortgages. Such a specified portion may consist of a fixed number of basis points, a fixed percentage of the total interest, or a qualified variable rate, inverse variable rate or difference between two fixed or qualified variable rates on some or all of the qualified mortgages. The specified principal amount of a regular interest that provides for interest payments consisting of a specified, nonvarying portion of interest payments on qualified mortgages may be zero. A residual interest is an interest in a REMIC Pool other than a regular interest that is issued on the Startup Day and that is designated as a residual interest. An interest in a REMIC Pool may be treated as a regular interest even if payments of principal with respect to such interest are subordinated to payments on other regular interests or the residual interest in the REMIC Pool, and are dependent on the absence of defaults or delinquencies on qualified mortgages or permitted investments, lower than reasonably expected returns on permitted investments, unanticipated expenses incurred by the REMIC Pool or prepayment interest shortfalls. Accordingly, the Regular Certificates of a Series will constitute one or more classes of regular interests, and the Residual Certificates with respect to that Series will constitute a single class of residual interests on which distributions are made pro rata. If an entity, such as the REMIC Pool, fails to comply with one or more of the ongoing requirements of the Code for REMIC status during any taxable year, the Code provides that the entity will not be treated as a REMIC for such year and thereafter. In this event, an entity with multiple classes of ownership interests may be treated 63
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as a separate association taxable as a corporation under Treasury regulations, and the Regular Certificates may be treated as equity interests therein. The Code, however, authorizes the Treasury Department to issue regulations that address situations where failure to meet one or more of the requirements for REMIC status occurs inadvertently and in good faith, and disqualification of the REMIC Pool would occur absent regulatory relief. Investors should be aware, however, that the Conference Committee Report to the Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be accompanied by sanctions, such as the imposition of a corporate tax on all or a portion of the REMIC Pool's income for the period of time in which the requirements for REMIC status are not satisfied. Taxation of Regular Certificates General In general, interest, original issue discount, and market discount on a Regular Certificate will be treated as ordinary income to a holder of the Regular Certificate (the "Regular Certificateholder"), and principal payments on a Regular Certificate will be treated as a return of capital to the extent of the Regular Certificateholder's basis in the Regular Certificate allocable thereto (other than accrued market discount not previously reported as income). Regular Certificateholders must use the accrual method of accounting with regard to Regular Certificates, regardless of the method of accounting otherwise used by such Regular Certificateholders. Original Issue Discount Compound Interest Certificates will be, and other classes of Regular Certificates may be, issued with "original issue discount" within the meaning of Code Section 1273(a). Holders of any Class of Regular Certificates having original issue discount generally must include original issue discount in ordinary income for federal income tax purposes as it accrues, in accordance with a constant interest method that takes into account the compounding of interest, in advance of receipt of the cash attributable to such income. The following discussion is based in part on temporary and final Treasury regulations issued on February 2, 1994, as amended on June 14, 1996, (the "OID Regulations") under Code Sections 1271 through 1273 and 1275 and in part on the provisions of the 1986 Act. Regular Certificateholders should be aware, however, that the OID Regulations do not adequately address certain issues relevant to prepayable securities, such as the Regular Certificates. To the extent such issues are not addressed in such regulations, it is anticipated that the Trustee will apply the methodology described in the Conference Committee Report to the 1986 Act. No assurance can be provided that the Internal Revenue Service will not take a different position as to those matters not currently addressed by the OID Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing the Internal Revenue Service to apply or depart from the OID Regulations where necessary or appropriate to ensure a reasonable tax result in light of the applicable statutory provisions. A tax result will not be considered unreasonable under the anti- abuse rule in the absence of a substantial effect on the present value of a taxpayer's tax liability. Investors are advised to consult their own tax advisors as to the discussion herein and the appropriate method for reporting interest and original issue discount with respect to the Regular Certificates. Each Regular Certificate (except to the extent described below with respect to a Regular Certificate on which principal is distributed in a single installment or by lots of specified principal amounts upon the request of a Certificateholder or by random lot (a "Non-Pro Rata Certificate")) will be treated as a single installment obligation for purposes of determining the original issue discount includible in a Regular Certificateholder's income. The total amount of original issue discount on a Regular Certificate is the excess of the "stated redemption price at maturity" of the Regular Certificate over its "issue price." The issue price of a Class of Regular Certificates offered pursuant to this Prospectus generally is the first price at which a substantial amount of such Class is sold to the public (excluding bond houses, brokers and underwriters). Although unclear under the OID Regulations, it is anticipated that the Trustee will treat the issue price of a Class as to which there is no substantial sale as of the issue date or that is retained by the Seller as the fair market value of that Class as of the issue date. The issue price of a Regular Certificate also includes any amount paid by an initial Regular 64
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Certificateholder for accrued interest that relates to a period prior to the issue date of the Regular Certificate, unless the Regular Certificateholder elects on its federal income tax return to exclude such amount from the issue price and to recover it on the first Distribution Date. The stated redemption price at maturity of a Regular Certificate always includes the original principal amount of the Regular Certificate, but generally will not include distributions of interest if such distributions constitute "qualified stated interest." Under the OID Regulations, qualified stated interest generally means interest payable at a single fixed rate or a qualified variable rate (as described below) provided that such interest payments are unconditionally payable at intervals of one year or less during the entire term of the Regular Certificate. Because there is no penalty or default remedy in the case of nonpayment of interest with respect to a Regular Certificate, it is possible that no interest on any Class of Regular Certificates will be treated as qualified stated interest. However, except as provided in the following three sentences or in the applicable Prospectus Supplement, because the underlying Mortgage Loans provide for remedies in the event of default, it is anticipated that the Trustee will treat interest with respect to the Regular Certificates as qualified stated interest. Distributions of interest on a Compound Interest Certificate, or on other Regular Certificates with respect to which deferred interest will accrue, will not constitute qualified stated interest, in which case the stated redemption price at maturity of such Regular Certificates includes all distributions of interest as well as principal thereon. Likewise, it is anticipated that the Trustee will treat an interest-only Class or a Class on which interest is substantially disproportionate to its principal amount (a so-called "super-premium" Class) as having no qualified stated interest. Where the interval between the issue date and the first Distribution Date on a Regular Certificate is shorter than the interval between subsequent Distribution Dates, the interest attributable to the additional days will be included in the stated redemption price at maturity. Under a de minimis rule, original issue discount on a Regular Certificate will be considered to be zero if such original issue discount is less than 0.25% of the stated redemption price at maturity of the Regular Certificate multiplied by the weighted average maturity of the Regular Certificate. For this purpose, the weighted average maturity of the Regular Certificate is computed as the sum of the amounts determined by multiplying the number of full years (i.e., rounding down partial years) from the issue date until each distribution in reduction of stated redemption price at maturity is scheduled to be made by a fraction, the numerator of which is the amount of each distribution included in the stated redemption price at maturity of the Regular Certificate and the denominator of which is the stated redemption price at maturity of the Regular Certificate. The Conference Committee Report to the 1986 Act provides that the schedule of such distributions should be determined in accordance with the assumed rate of prepayment of the Mortgage Loans (the "Prepayment Assumption") and the anticipated reinvestment rate, if any, relating to the Regular Certificates. The Prepayment Assumption with respect to a Series of Regular Certificates will be set forth in the applicable Prospectus Supplement. Holders generally must report de minimis original issue discount pro rata as principal payments are received, and such income will be capital gain if the Regular Certificate is held as a capital asset. Under the OID Regulations, however, Regular Certificateholders may elect to accrue all de minimis original issue discount as well as market discount and market premium, under the constant yield method. See "--Election to Treat All Interest Under the Constant Yield Method." A Regular Certificateholder generally must include in gross income for any taxable year the sum of the "daily portions," as defined below, of the original issue discount on the Regular Certificate accrued during an accrual period for each day on which it holds the Regular Certificate, including the date of purchase but excluding the date of disposition. The Trustee will treat the monthly period ending on the day before each Distribution Date as the accrual period. With respect to each Regular Certificate, a calculation will be made of the original issue discount that accrues during each successive full accrual period (or shorter period from the date of original issue) that ends on the day before the related Distribution Date on the Regular Certificate. The Conference Committee Report to the 1986 Act states that the rate of accrual of original issue discount is intended to be based on the Prepayment Assumption. Other than as discussed below with respect to a Non-Pro Rata Certificate, the original issue discount accruing in a full accrual period would be the excess, if any, of (i) the sum of (a) the present value of all of the remaining distributions to be made on the Regular Certificate as of the end of that accrual period, and (b) the distributions made on the Regular Certificate during the accrual period 65
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that are included in the Regular Certificate's stated redemption price at maturity, over (ii) the adjusted issue price of the Regular Certificate at the beginning of the accrual period. The present value of the remaining distributions referred to in the preceding sentence is calculated based on (i) the yield to maturity of the Regular Certificate at the issue date, (ii) events (including actual prepayments) that have occurred prior to the end of the accrual period, and (iii) the Prepayment Assumption. For these purposes, the adjusted issue price of a Regular Certificate at the beginning of any accrual period equals the issue price of the Regular Certificate, increased by the aggregate amount of original issue discount with respect to the Regular Certificate that accrued in all prior accrual periods and reduced by the amount of distributions included in the Regular Certificate's stated redemption price at maturity that were made on the Regular Certificate in such prior periods. The original issue discount accruing during any accrual period (as determined in this paragraph) will then be divided by the number of days in the period to determine the daily portion of original issue discount for each day in the period. With respect to an initial accrual period shorter than a full accrual period, the daily portions of original issue discount must be determined according to an appropriate allocation under any reasonable method. Under the method described above, the daily portions of original issue discount required to be included in income by a Regular Certificateholder generally will increase to take into account prepayments on the Regular Certificates as a result of prepayments on the Mortgage Loans that exceed the Prepayment Assumption, and generally will decrease (but not below zero for any period) if the prepayments are slower than the Prepayment Assumption. An increase in prepayments on the Mortgage Loans with respect to a Series of Regular Certificates can result in both a change in the priority of principal payments with respect to certain Classes of Regular Certificates and either an increase or decrease in the daily portions of original issue discount with respect to such Regular Certificates. In the case of a Non-Pro Rata Certificate, it is anticipated that the Trustee will determine the yield to maturity of such Certificate based upon the anticipated payment characteristics of the Class as a whole under the Prepayment Assumption. In general, the original issue discount accruing on each Non-Pro Rata Certificate in a full accrual period would be its allocable share of the original issue discount with respect to the entire Class, as determined in accordance with the preceding paragraph. However, in the case of a distribution in retirement of the entire unpaid principal balance of any Non-Pro Rata Certificate (or portion of such unpaid principal balance), (a) the remaining unaccrued original issue discount allocable to such Certificate (or to such portion) will accrue at the time of such distribution, and (b) the accrual of original issue discount allocable to each remaining Certificate of such Class (or the remaining unpaid principal balance of a partially redeemed Non-Pro Rata Certificate after a distribution of principal has been received) will be adjusted by reducing the present value of the remaining payments on such Class and the adjusted issue price of such Class to the extent attributable to the portion of the unpaid principal balance thereof that was distributed. The Depositor believes that the foregoing treatment is consistent with the "pro rata prepayment" rules of the OID Regulations, but with the rate of accrual of original issue discount determined based on the Prepayment Assumption for the Class as a whole. Investors are advised to consult their tax advisors as to this treatment. Acquisition Premium A purchaser of a Regular Certificate at a price greater than its adjusted issue price but less than its stated redemption price at maturity will be required to include in gross income the daily portions of the original issue discount on the Regular Certificate reduced pro rata by a fraction, the numerator of which is the excess of its purchase price over such adjusted issue price and the denominator of which is the excess of the remaining stated redemption price at maturity over the adjusted issue price. Alternatively, such a subsequent purchaser may elect to treat all such acquisition premium under the constant yield method, as described below under the heading "-- Election to Treat All Interest Under the Constant Yield Method." Variable Rate Regular Certificates Regular Certificates may provide for interest based on a variable rate. Under the OID Regulations, interest is treated as payable at a variable rate if, generally, (i) the issue price does not exceed the original principal 66
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balance by more than a specified amount and (ii) the interest compounds or is payable at least annually at current values of (a) one or more "qualified floating rates," (b) a single fixed rate and one or more qualified floating rates, (c) a single "objective rate," or (d) a single fixed rate and a single objective rate that is a "qualified inverse floating rate." A floating rate is a qualified floating rate if variations in the rate can reasonably be expected to measure contemporaneous variations in the cost of newly borrowed funds, where such rate is subject to a fixed multiple that is greater than 0.65 but not more than 1.35. Such rate may also be increased or decreased by a fixed spread or subject to a fixed cap or floor, or a cap or floor that is not reasonably expected as of the issue date to affect the yield of the instrument significantly. An objective rate is any rate (other than a qualified floating rate) that is determined using a single fixed formula and that is based on objective financial or economic information, provided that such information is not (i) within the control of the issuer or a related party or (ii) unique to the circumstances of the issuer or a related party. A qualified inverse floating rate is a rate equal to a fixed rate minus a qualified floating rate that inversely reflects contemporaneous variations in the cost of newly borrowed funds; an inverse floating rate that is not a qualified inverse floating rate may nevertheless be an objective rate. A Class of Regular Certificates may be issued under this Prospectus that does not have a variable rate under the foregoing rules, for example, a Class that bears different rates at different times during the period it is outstanding such that it is considered significantly "front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is possible that such a Class may be considered to bear "contingent interest" within the meaning of the OID Regulations. The OID Regulations, as they relate to the treatment of contingent interest, are by their terms not applicable to Regular Certificates. However, if final regulations dealing with contingent interest with respect to Regular Certificates apply the same principles as the OID Regulations, such regulations may lead to different timing of income inclusion than would be the case under the OID Regulations for non-contingent debt instruments. Furthermore, application of such principles could lead to the characterization of gain on the sale of contingent interest Regular Certificates as ordinary income. Investors should consult their tax advisors regarding the appropriate treatment of any Regular Certificate that does not pay interest at a fixed rate or variable rate as described in this paragraph. Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that qualifies as a variable rate under the OID Regulations that is tied to current values of a variable rate (or the highest, lowest or average of two or more variable rates, including a rate based on the average cost of funds of one or more financial institutions), or a positive or negative multiple of such a rate (plus or minus a specified number of basis points), or that represents a weighted average of rates on some or all of the Mortgage Loans, including such a rate that is subject to one or more caps or floors, or (ii) bearing one or more such variable rates for one or more periods, or one or more fixed rates for one or more periods, and a different variable rate or fixed rate for other periods, qualifies as a regular interest in a REMIC. Accordingly, unless otherwise indicated in the applicable Prospectus Supplement, it is anticipated that the Trustee will treat Regular Certificates that qualify as regular interests under this rule in the same manner as obligations bearing a variable rate for original issue discount reporting purposes. The amount of original issue discount with respect to a Regular Certificate bearing a variable rate of interest will accrue in the manner described above under "--Original Issue Discount," with the yield to maturity and future payments on such Regular Certificate generally to be determined by assuming that interest will be payable for the life of the Regular Certificate based on the initial rate (or, if different, the value of the applicable variable rate as of the pricing date) for the relevant Class. Unless required otherwise by applicable final regulations, it is anticipated that the Trustee will treat such variable interest as qualified stated interest, other than variable interest on an interest-only or super-premium Class, which will be treated as non-qualified stated interest includible in the stated redemption price at maturity. Ordinary income reportable for any period will be adjusted based on subsequent changes in the applicable interest rate index. Although unclear under the OID Regulations, unless required otherwise by applicable final regulations, it is anticipated that the Trustee will treat Regular Certificates bearing an interest rate that is a weighted average of the net interest rates on Mortgage Loans as having qualified stated interest, except to the extent that initial "teaser" rates cause sufficiently "back- loaded" interest to create more than de minimis original issue discount. The yield on such Regular Certificates for purposes of accruing original issue discount will be a hypothetical 67
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fixed-rate based on the fixed rates, in the case of fixed rate Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in the case of adjustable-rate Mortgage Loans. In the case of adjustable-rate Mortgage Loans, the applicable index used to compute interest on the Mortgage Loans in effect on the pricing date (or possibly the issue date) will be deemed to be in effect beginning with the period in which the first weighted average adjustment date occurring after the issue date occurs. Adjustments will be made in each accrual period either increasing or decreasing the amount of ordinary income reportable to reflect the actual Pass-Through Rate on the Regular Certificates. Market Discount A purchaser of a Regular Certificate also may be subject to the market discount rules of Code Sections 1276 through 1278. Under these sections and the principles applied by the OID Regulations in the context of original issue discount, "market discount" is the amount by which the purchaser's original basis in the Regular Certificate (i) is exceeded by the then-current principal amount of the Regular Certificate, or (ii) in the case of a Regular Certificate having original issue discount, is exceeded by the adjusted issue price of such Regular Certificate at the time of purchase. Such purchaser generally will be required to recognize ordinary income to the extent of accrued market discount on such Regular Certificate as distributions includible in the stated redemption price at maturity thereof are received, in an amount not exceeding any such distribution. Such market discount would accrue in a manner to be provided in Treasury regulations and should take into account the Prepayment Assumption. The Conference Committee Report to the 1986 Act provides that until such regulations are issued, such market discount would accrue either (i) on the basis of a constant interest rate, or (ii) in the ratio of stated interest allocable to the relevant period to the sum of the interest for such period plus the remaining interest as of the end of such period, or in the case of a Regular Certificate issued with original issue discount, in the ratio of original issue discount accrued for the relevant period to the sum of the original issue discount accrued for such period plus the remaining original issue discount as of the end of such period. Such purchaser also generally will be required to treat a portion of any gain on a sale or exchange of the Regular Certificate as ordinary income to the extent of the market discount accrued to the date of disposition under one of the foregoing methods, less any accrued market discount previously reported as ordinary income as partial distributions in reduction of the stated redemption price at maturity were received. Such purchaser will be required to defer deduction of a portion of the excess of the interest paid or accrued on indebtedness incurred to purchase or carry a Regular Certificate over the interest distributable thereon. The deferred portion of such interest expense in any taxable year generally will not exceed the accrued market discount on the Regular Certificate for such year. Any such deferred interest expense is, in general, allowed as a deduction not later than the year in which the related market discount income is recognized or the Regular Certificate is disposed of. As an alternative to the inclusion of market discount in income on the foregoing basis, the Regular Certificateholder may elect to include market discount in income currently as it accrues on all market discount instruments acquired by such Regular Certificateholder in that taxable year or thereafter, in which case the interest deferral rule will not apply. See "-- Election to Treat All Interest Under the Constant Yield Method" below regarding an alternative manner in which such election may be deemed to be made. By analogy to the OID Regulations, market discount with respect to a Regular Certificate will be considered to be zero if such market discount is less than 0.25% of the remaining stated redemption price at maturity of such Regular Certificate multiplied by the weighted average maturity of the Regular Certificate (determined as described above in the third paragraph under "-- Original Issue Discount") remaining after the date of purchase. It appears that de minimis market discount would be reported in a manner similar to de minimis original issue discount. See "--Original Issue Discount" above. Treasury regulations implementing the market discount rules have not yet been issued, and therefore investors should consult their own tax advisors regarding the application of these rules. Investors should also consult Revenue Procedure 92-67 concerning the elections to include market discount in income currently and to accrue market discount on the basis of the constant yield method. Premium A Regular Certificate purchased at a cost greater than its remaining stated redemption price at maturity generally is considered to be purchased at a premium. If the Regular Certificateholder holds such Regular 68
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Certificate as a "capital asset" within the meaning of Code Section 1221, the Regular Certificateholder may elect under Code Section 171 to amortize such premium under the constant yield method. Such election will apply to all debt obligations acquired by the Regular Certificateholder at a premium held in that taxable year or thereafter, unless revoked with the permission of the Internal Revenue Service. Final Treasury Regulations issued under Code Section 171 do not by their terms apply to prepayable debt instruments such as the Regular Certificates. However, the Conference Committee Report to the 1986 Act indicates a Congressional intent that the same rules that apply to the accrual of market discount on installment obligations will also apply to amortizing bond premium under Code Section 171 on installment obligations such as the Regular Certificates, although it is unclear whether the alternatives to the constant interest method described above under "--Market Discount" are available. Amortizable bond premium will be treated as an offset to interest income on a Regular Certificate, rather than as a separate deduction item. See "--Election to Treat All Interest Under the Constant Yield Method" below regarding an alternative manner in which the Code Section 171 election may be deemed to be made. Election to Treat All Interest Under the Constant Yield Method A holder of a debt instrument such as a Regular Certificate may elect to treat all interest that accrues on the instrument using the constant yield method, with none of the interest being treated as qualified stated interest. For purposes of applying the constant yield method to a debt instrument subject to such an election, (i) "interest" includes stated interest, original issue discount, de minimis original issue discount, market discount and de minimis market discount, as adjusted by any amortizable bond premium or acquisition premium and (ii) the debt instrument is treated as if the instrument were issued on the holder's acquisition date in the amount of the holder's adjusted basis immediately after acquisition. It is unclear whether, for this purpose, the initial Prepayment Assumption would continue to apply or if a new prepayment assumption as of the date of the holder's acquisition would apply. A holder generally may make such an election on an instrument by instrument basis or for a class or group of debt instruments. However, if the holder makes such an election with respect to a debt instrument with amortizable bond premium or with market discount, the holder is deemed to have made elections to amortize bond premium or to report market discount income currently as it accrues under the constant yield method, respectively, for all premium bonds held or market discount bonds acquired by the holder in the same taxable year or thereafter. The election is made on the holder's federal income tax return for the year in which the debt instrument is acquired and is irrevocable except with the approval of the Internal Revenue Service. Investors should consult their own tax advisors regarding the advisability of making such an election. Treatment of Losses Regular Certificateholders will be required to report income with respect to Regular Certificates on the accrual method of accounting, without giving effect to delays or reductions in distributions attributable to defaults or delinquencies on the Mortgage Loans, except to the extent it can be established that such amounts are uncollectible. Accordingly, the holder of a Regular Certificate, particularly a Subordinated Certificate, may have income, or may incur a diminution in cash flow as a result of a default or delinquency, but may not be able to take a deduction (subject to the discussion below) for the corresponding loss until a subsequent taxable year. In this regard, investors are cautioned that while they may generally cease to accrue interest income if it reasonably appears that the interest will be uncollectible, the Internal Revenue Service may take the position that original issue discount must continue to be accrued in spite of its uncollectibility until the debt instrument is disposed of in a taxable transaction or becomes worthless in accordance with the rules of Code Section 166. To the extent the rules of Code Section 166 regarding bad debts are applicable, it appears that Regular Certificateholders that are corporations or that otherwise hold the Regular Certificates in connection with a trade or business should in general be allowed to deduct as an ordinary loss such loss with respect to principal sustained during the taxable year on account of any such Regular Certificates becoming wholly or partially worthless, and that, in general, Regular Certificateholders that are not corporations and do not hold the Regular Certificates in connection with a trade or business should be allowed to deduct as a short-term capital loss any loss sustained during the taxable year on account of a portion of any such Regular Certificates becoming wholly worthless. Although the matter is not free from doubt, such non- corporate Regular Certificateholders should be allowed a bad debt deduction at 69
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such time as the principal balance of such Regular Certificates is reduced to reflect losses resulting from any liquidated Mortgage Loans. The Internal Revenue Service, however, could take the position that non-corporate holders will be allowed a bad debt deduction to reflect such losses only after all the Mortgage Loans remaining in the Trust Estate have been liquidated or the applicable Class of Regular Certificates has been otherwise retired. The Internal Revenue Service could also assert that losses on the Regular Certificates are deductible based on some other method that may defer such deductions for all holders, such as reducing future cash flow for purposes of computing original issue discount. This may have the effect of creating "negative" original issue discount which would be deductible only against future positive original issue discount or otherwise upon termination of the Class. Regular Certificateholders are urged to consult their own tax advisors regarding the appropriate timing, amount and character of any loss sustained with respect to such Regular Certificates. While losses attributable to interest previously reported as income should be deductible as ordinary losses by both corporate and non-corporate holders, the Internal Revenue Service may take the position that losses attributable to accrued original issue discount may only be deducted as capital losses in the case of non-corporate holders who do not hold the Regular Certificates in connection with a trade or business. Special loss rules are applicable to banks and thrift institutions, including rules regarding reserves for bad debts. Such taxpayers are advised to consult their tax advisors regarding the treatment of losses on Regular Certificates. Sale or Exchange of Regular Certificates If a Regular Certificateholder sells or exchanges a Regular Certificate, the Regular Certificateholder will recognize gain or loss equal to the difference, if any, between the amount received and its adjusted basis in the Regular Certificate. The adjusted basis of a Regular Certificate generally will equal the cost of the Regular Certificate to the seller, increased by any original issue discount or market discount previously included in the seller's gross income with respect to the Regular Certificate and reduced by amounts included in the stated redemption price at maturity of the Regular Certificate that were previously received by the seller, by any amortized premium and by any recognized losses. Except as described above with respect to market discount, and except as provided in this paragraph, any gain or loss on the sale or exchange of a Regular Certificate realized by an investor who holds the Regular Certificate as a capital asset will be capital gain or loss and will be long-term or short-term depending on whether the Regular Certificate has been held for the applicable holding period (as described below). Such gain will be treated as ordinary income (i) if a Regular Certificate is held as part of a "conversion transaction" as defined in Code Section 1258(c), up to the amount of interest that would have accrued on the Regular Certificateholder's net investment in the conversion transaction at 120% of the appropriate applicable federal rate under Code Section 1274(d) in effect at the time the taxpayer entered into the transaction minus any amount previously treated as ordinary income with respect to any prior disposition of property that was held as part of such transaction, (ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has made an election under Code Section 163(d)(4) to have net capital gains taxed as investment income at ordinary income rates, or (iii) to the extent that such gain does not exceed the excess, if any, of (a) the amount that would have been includible in the gross income of the holder if its yield on such Regular Certificate were 110% of the applicable federal rate as of the date of purchase, over (b) the amount of income actually includible in the gross income of such holder with respect to such Regular Certificate. In addition, gain or loss recognized from the sale of a Regular Certificate by certain banks or thrift institutions will be treated as ordinary income or loss pursuant to Code Section 582(c). Long-term capital gains of certain non- corporate taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary income or short-term capital gains of such taxpayers (39.6%) for property held for more than one year. The maximum tax rate for corporations is the same with respect to both ordinary income and capital gains. Taxation of Residual Certificates Taxation of REMIC Income Generally, the "daily portions" of REMIC taxable income or net loss will be includible as ordinary income or loss in determining the federal taxable income of holders of Residual Certificates ("Residual Holders"), and 70
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will not be taxed separately to the REMIC Pool. The daily portions of REMIC taxable income or net loss of a Residual Holder are determined by allocating the REMIC Pool's taxable income or net loss for each calendar quarter ratably to each day in such quarter and by allocating such daily portion among the Residual Holders in proportion to their respective holdings of Residual Certificates in the REMIC Pool on such day. REMIC taxable income is generally determined in the same manner as the taxable income of an individual using the accrual method of accounting, except, in addition to certain other adjustments, that (i) the limitations on deductibility of investment interest expense and expenses for the production of income do not apply, (ii) all bad loans will be deductible as business bad debts and (iii) the limitation on the deductibility of interest and expenses related to tax-exempt income will apply. The REMIC Pool's gross income includes interest, original issue discount income and market discount income, if any, on the Mortgage Loans, reduced by amortization of any premium on the Mortgage Loans, plus income from amortization of issue premium, if any, on the Regular Certificates, plus income on reinvestment of cash flows and reserve assets, plus any cancellation of indebtedness income upon allocation of realized losses to the Regular Certificates. The REMIC Pool's deductions include interest and original issue discount expense on the Regular Certificates, servicing fees on the Mortgage Loans, other administrative expenses of the REMIC Pool and realized losses on the Mortgage Loans. The requirement that Residual Holders report their pro rata share of taxable income or net loss of the REMIC Pool will continue until there are no Certificates of any Class of the related Series outstanding. The taxable income recognized by a Residual Holder in any taxable year will be affected by, among other factors, the relationship between the timing of recognition of interest and original issue discount or market discount income or amortization of premium with respect to the Mortgage Loans, on the one hand, and the timing of deductions for interest (including original issue discount) or income from amortization of issue premium on the Regular Certificates on the other hand. In the event that an interest in the Mortgage Loans is acquired by the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid, the Residual Holder may recognize taxable income without being entitled to receive a corresponding amount of cash because (i) the prepayment may be used in whole or in part to make distributions in reduction of principal on the Regular Certificates and (ii) the discount on the Mortgage Loans which is includible in income may exceed the deduction allowed upon such distributions on those Regular Certificates on account of any unaccrued original issue discount relating to those Regular Certificates. When there is more than one Class of Regular Certificates that distribute principal sequentially, this mismatching of income and deductions is particularly likely to occur in the early years following issuance of the Regular Certificates when distributions in reduction of principal are being made in respect of earlier Classes of Regular Certificates to the extent that such Classes are not issued with substantial discount or are issued at a premium. If taxable income attributable to such a mismatching is realized, in general, losses would be allowed in later years as distributions on the later maturing Classes of Regular Certificates are made. Taxable income may also be greater in earlier years than in later years as a result of the fact that interest expense deductions, expressed as a percentage of the outstanding principal amount of such a Series of Regular Certificates, may increase over time as distributions in reduction of principal are made on the lower yielding Classes of Regular Certificates, whereas, to the extent the REMIC Pool consists of fixed- rate Mortgage Loans, interest income with respect to any given Mortgage Loan will remain constant over time as a percentage of the outstanding principal amount of that loan. Consequently, Residual Holders must have sufficient other sources of cash to pay any federal, state, or local income taxes due as a result of such mismatching or unrelated deductions against which to offset such income, subject to the discussion of "excess inclusions" below under "--Limitations on Offset or Exemption of REMIC Income." The timing of such mismatching of income and deductions described in this paragraph, if present with respect to a Series of Certificates, may have a significant adverse effect upon a Residual Holder's after-tax rate of return. In addition, a Residual Holder's taxable income during certain periods may exceed the income reflected by such Residual Holder for such periods in accordance with generally accepted accounting principles. Investors should consult their own accountants concerning the accounting treatment of their investment in Residual Certificates. Basis and Losses The amount of any net loss of the REMIC Pool that may be taken into account by the Residual Holder is limited to the adjusted basis of the Residual Certificate as of the close of the quarter (or time of disposition of 71
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the Residual Certificate if earlier), determined without taking into account the net loss for the quarter. The initial adjusted basis of a purchaser of a Residual Certificate is the amount paid for such Residual Certificate. Such adjusted basis will be increased by the amount of taxable income of the REMIC Pool reportable by the Residual Holder and will be decreased (but not below zero), first, by a cash distribution from the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable by the Residual Holder. Any loss that is disallowed on account of this limitation may be carried over indefinitely with respect to the Residual Holder as to whom such loss was disallowed and may be used by such Residual Holder only to offset any income generated by the same REMIC Pool. A Residual Holder will not be permitted to amortize directly the cost of its Residual Certificate as an offset to its share of the taxable income of the related REMIC Pool. However, that taxable income will not include cash received by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool will have the effect of amortization of the issue price of the Residual Certificates over their life. However, in view of the possible acceleration of the income of Residual Holders described above under "--Taxation of REMIC Income," the period of time over which such issue price is effectively amortized may be longer than the economic life of the Residual Certificates. A Residual Certificate may have a negative value if the net present value of anticipated tax liabilities exceeds the present value of anticipated cash flows. The REMIC Regulations appear to treat the issue price of such a residual interest as zero rather than such negative amount for purposes of determining the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations states that the Internal Revenue Service may provide future guidance on the proper tax treatment of payments made by a transferor of such a residual interest to induce the transferee to acquire the interest, and Residual Holders should consult their own tax advisors in this regard. Further, to the extent that the initial adjusted basis of a Residual Holder (other than an original holder) in the Residual Certificate is greater than the corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the Residual Holder will not recover a portion of such basis until termination of the REMIC Pool unless future Treasury regulations provide for periodic adjustments to the REMIC income otherwise reportable by such holder. The REMIC Regulations currently in effect do not so provide. See "--Treatment of Certain Items of REMIC Income and Expense" and "Market Discount" below regarding the basis of Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a Residual Certificate" below regarding possible treatment of a loss upon termination of the REMIC Pool as a capital loss. Treatment of Certain Items of REMIC Income and Expense It is anticipated that the Trustee will compute REMIC income and expense in accordance with the Code and applicable regulations. However, the authorities regarding the determination of specific items of income and expense are subject to differing interpretations. The Trustee makes no representation as to the specific method that it will use for reporting income with respect to the Mortgage Loans and expenses with respect to the Regular Certificates and different methods could result in different timing of reporting of taxable income or net loss to Residual Holders or differences in capital gain versus ordinary income. Original Issue Discount and Premium. Generally, the REMIC Pool's deductions for original issue discount and income from amortization of issue premium will be determined in the same manner as original issue discount income on Regular Certificates as described above under "--Taxation of Regular Certificates-- Original Issue Discount" and "--Variable Rate Regular Certificates," without regard to the de minimis rule described therein, and "--Premium." Market Discount. The REMIC Pool will have market discount income in respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in such Mortgage Loans is generally the fair market value of the Mortgage Loans immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations provide that such basis is equal in the aggregate to the issue prices of all regular and residual interests in the REMIC Pool. The accrued 72
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portion of such market discount would be recognized currently as an item of ordinary income in a manner similar to original issue discount. Market discount income generally should accrue in the manner described above under "--Taxation of Regular Certificates--Market Discount." Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans exceeds the unpaid principal balances thereof, the REMIC Pool will be considered to have acquired such Mortgage Loans at a premium equal to the amount of such excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair market value of the Mortgage Loans, based on the aggregate of the issue prices of the regular and residual interests in the REMIC Pool immediately after the transfer thereof to the REMIC Pool. In a manner analogous to the discussion above under "--Taxation of Regular Certificates-- Premium," a person that holds a Mortgage Loan as a capital asset under Code Section 1221 may elect under Code Section 171 to amortize premium on Mortgage Loans originated after September 27, 1985 under the constant yield method. Amortizable bond premium will be treated as an offset to interest income on the Mortgage Loans, rather than as a separate deduction item. Because substantially all of the mortgagors on the Mortgage Loans are expected to be individuals, Code Section 171 will not be available for premium on Mortgage Loans originated on or prior to September 27, 1985. Premium with respect to such Mortgage Loans may be deductible in accordance with a reasonable method regularly employed by the holder thereof. The allocation of such premium pro rata among principal payments should be considered a reasonable method; however, the Internal Revenue Service may argue that such premium should be allocated in a different manner, such as allocating such premium entirely to the final payment of principal. Limitations on Offset or Exemption of REMIC Income A portion (or all) of the REMIC taxable income includible in determining the federal income tax liability of a Residual Holder will be subject to special treatment. That portion, referred to as the "excess inclusion," is equal to the excess of REMIC taxable income for the calendar quarter allocable to a Residual Certificate over the daily accruals for such quarterly period of (i) 120% of the long-term applicable federal rate that would have applied to the Residual Certificate (if it were a debt instrument) on the Startup Day under Code Section 1274(d), multiplied by (ii) the adjusted issue price of such Residual Certificate at the beginning of such quarterly period. For this purpose, the adjusted issue price of a Residual Certificate at the beginning of a quarter is the issue price of the Residual Certificate, plus the amount of such daily accruals of REMIC income described in this paragraph for all prior quarters, decreased by any distributions made with respect to such Residual Certificate prior to the beginning of such quarterly period. Accordingly, the portion of the REMIC Pool's taxable income that will be treated as excess inclusions will be a larger portion of such income as the adjusted issue price of the Residual Certificates diminishes. The portion of a Residual Holder's REMIC taxable income consisting of the excess inclusions generally may not be offset by other deductions, including net operating loss carryforwards, on such Residual Holder's return. However, net operating loss carryovers are determined without regard to excess inclusion income. Further, if the Residual Holder is an organization subject to the tax on unrelated business income imposed by Code Section 511, the Residual Holder's excess inclusions will be treated as unrelated business taxable income of such Residual Holder for purposes of Code Section 511. In addition, REMIC taxable income is subject to 30% withholding tax with respect to certain persons who are not U.S. Persons (as defined below under "--Tax- Related Restrictions on Transfer of Residual Certificates--Foreign Investors"), and the portion thereof attributable to excess inclusions is not eligible for any reduction in the rate of withholding tax (by treaty or otherwise). See "--Taxation of Certain Foreign Investors--Residual Certificates" below. Finally, if a real estate investment trust or a regulated investment company owns a Residual Certificate, a portion (allocated under Treasury regulations yet to be issued) of dividends paid by the real estate investment trust or regulated investment company could not be offset by net operating losses of its shareholders, would constitute unrelated business taxable income for tax-exempt shareholders, and would be ineligible for reduction of withholding to certain persons who are not U.S. Persons. The SBJPA of 1996 has eliminated the special rule permitting Section 593 institutions ("thrift institutions") to use net operating losses and other allowable deductions to offset their excess 73
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inclusion income from Residual Certificates that have "significant value" within the meaning of the REMIC Regulations, effective for taxable years beginning after December 31, 1995, except with respect to Residual Certificates continuously held by a thrift institution since November 1, 1995. In addition, the SBJPA of 1996 provides three rules for determining the effect of excess inclusions on the alternative minimum taxable income of a Residual Holder. First, alternative minimum taxable income for a Residual Holder is determined without regard to the special rule, discussed above, that taxable income cannot be less than excess inclusions. Second, a Residual Holder's alternative minimum taxable income for a taxable year cannot be less than the excess inclusions for the year. Third, the amount of any alternative minimum tax net operating loss deduction must be computed without regard to any excess inclusions. These rules are effective for taxable years beginning after December 31, 1986, unless a Residual Holder elects to have such rules apply only to taxable years beginning after August 20, 1996. Tax-Related Restrictions on Transfer of Residual Certificates Disqualified Organizations. If any legal or beneficial interest in a Residual Certificate is transferred to a Disqualified Organization (as defined below), a tax would be imposed in an amount equal to the product of (i) the present value of the total anticipated excess inclusions with respect to such Residual Certificate for periods after the transfer and (ii) the highest marginal federal income tax rate applicable to corporations. The REMIC Regulations provide that the anticipated excess inclusions are based on actual prepayment experience to the date of the transfer and projected payments based on the Prepayment Assumption. The present value rate equals the applicable federal rate under Code Section 1274(d) as of the date of the transfer for a term ending with the last calendar quarter in which excess inclusions are expected to accrue. Such rate is applied to the anticipated excess inclusions from the end of the remaining calendar quarters in which they arise to the date of the transfer. Such a tax generally would be imposed on the transferor of the Residual Certificate, except that where such transfer is through an agent (including a broker, nominee or other middleman) for a Disqualified Organization, the tax would instead be imposed on such agent. However, a transferor of a Residual Certificate would in no event be liable for such tax with respect to a transfer if the transferee furnishes to the transferor an affidavit stating that the transferee is not a Disqualified Organization and, as of the time of the transfer, the transferor does not have actual knowledge that such affidavit is false. The tax also may be waived by the Internal Revenue Service if the Disqualified Organization promptly disposes of the Residual Certificate and the transferor pays income tax at the highest corporate rate on the excess inclusion for the period the Residual Certificate is actually held by the Disqualified Organization. In addition, if a Pass-Through Entity (as defined below) has excess inclusion income with respect to a Residual Certificate during a taxable year and a Disqualified Organization is the record holder of an equity interest in such entity, then a tax is imposed on such entity equal to the product of (i) the amount of excess inclusions that are allocable to the interest in the Pass-Through Entity during the period such interest is held by such Disqualified Organization, and (ii) the highest marginal federal corporate income tax rate. Such tax would be deductible from the ordinary gross income of the Pass-Through Entity for the taxable year. The Pass-Through Entity would not be liable for such tax if it has received an affidavit from such record holder that it is not a Disqualified Organization or stating such holder's taxpayer identification number and, during the period such person is the record holder of the Residual Certificate, the Pass-Through Entity does not have actual knowledge that such affidavit is false. For taxable years beginning on or after January 1, 1998, if an "electing large partnership" holds a Residual Certificate, all interests in the electing large partnership are treated as held by Disqualified Organizations for purposes of the tax imposed upon a Pass-Through Entity by Section 860E(c) of the Code. An exception to this tax, otherwise available to a Pass-Through Entity that is furnished certain affidavits by record holders of interests in the entity and that does not know such affidavits are false, is not available to an electing large partnership. For these purposes, (i) "Disqualified Organization" means the United States, any state or political subdivision thereof, any foreign government, any international organization, any agency or instrumentality of any 74
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of the foregoing (provided, that such term does not include an instrumentality if all of its activities are subject to tax and a majority of its board of directors is not selected by any such governmental entity), any cooperative organization furnishing electric energy or providing telephone service to persons in rural areas as described in Code Section 1381(a)(2)(C), and any organization (other than a farmers' cooperative described in Code Section 521) that is exempt from taxation under the Code unless such organization is subject to the tax on unrelated business income imposed by Code Section 511, (ii) "Pass-Through Entity" means any regulated investment company, real estate investment trust, common trust fund, partnership, trust or estate and certain corporations operating on a cooperative basis, and (iii) an "electing large partnership" means any partnership having more than 100 members during the preceding tax year (other than certain service partnerships and commodity pools), which elect to apply simplified reporting provisions under the Code. Except as may be provided in Treasury regulations, any person holding an interest in a Pass-Through Entity as a nominee for another will, with respect to such interest, be treated as a Pass-Through Entity. The Pooling and Servicing Agreement with respect to a Series will provide that no legal or beneficial interest in a Residual Certificate may be transferred or registered unless (i) the proposed transferee furnishes to the Depositor and the Trustee an affidavit providing its taxpayer identification number and stating that such transferee is the beneficial owner of the Residual Certificate and is not a Disqualified Organization and is not purchasing such Residual Certificate on behalf of a Disqualified Organization (i.e., as a broker, nominee or middleman thereof) and (ii) the transferor provides a statement in writing to the Depositor and the Trustee that it has no actual knowledge that such affidavit is false. Moreover, the Pooling and Servicing Agreement will provide that any attempted or purported transfer in violation of these transfer restrictions will be null and void and will vest no rights in any purported transferee. Each Residual Certificate with respect to a Series will bear a legend referring to such restrictions on transfer, and each Residual Holder will be deemed to have agreed, as a condition of ownership thereof, to any amendments to the related Pooling and Servicing Agreement required under the Code or applicable Treasury regulations to effectuate the foregoing restrictions. Information necessary to compute an applicable excise tax must be furnished to the Internal Revenue Service and to the requesting party within 60 days of the request, and the Seller or the Trustee may charge a fee for computing and providing such information. Noneconomic Residual Interests. The REMIC Regulations would disregard certain transfers of Residual Certificates, in which case the transferor would continue to be treated as the owner of the Residual Certificates and thus would continue to be subject to tax on its allocable portion of the net income of the REMIC Pool. Under the REMIC Regulations, a transfer of a noneconomic residual interest (as defined below) to a Residual Holder (other than a Residual Holder who is not a U.S. Person, as defined below under "--Foreign Investors") is disregarded for all federal income tax purposes if a significant purpose of the transferor is to impede the assessment or collection of tax. A residual interest in a REMIC (including a residual interest with a positive value at issuance) is a "noneconomic residual interest" unless, at the time of the transfer, (i) the present value of the expected future distributions on the residual interest at least equals the product of the present value of the anticipated excess inclusions and the highest federal corporate income tax rate in effect for the year in which the transfer occurs, and (ii) the transferor reasonably expects that the transferee will receive distributions from the REMIC at or after the time at which taxes accrue on the anticipated excess inclusions in an amount sufficient to satisfy the accrued taxes on each excess inclusion. The anticipated excess inclusions and the present value rate are determined in the same manner as set forth above under "--Disqualified Organizations." The REMIC Regulations explain that a significant purpose to impede the assessment or collection of tax exists if the transferor, at the time of the transfer, either knew or should have known that the transferee would be unwilling or unable to pay taxes due on its share of the taxable income of the REMIC. A safe harbor is provided if (i) the transferor conducted, at the time of the transfer, a reasonable investigation of the financial condition of the transferee and found that the transferee historically had paid its debts as they came due and found no significant evidence to indicate that the transferee would not continue to pay its debts as they came due in the future, and (ii) the transferee represents to the transferor that it understands that, as the holder of the non-economic residual interest, the transferee may incur tax liabilities in excess of any cash flows generated by the interest and that the transferee intends to pay taxes associated with holding the residual interest as they become due. The Pooling and 75
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Servicing Agreement with respect to each Series of Certificates will require the transferee of a Residual Certificate to certify to the matters in the preceding sentence as part of the affidavit described above under the heading "--Disqualified Organizations." Foreign Investors. The REMIC Regulations provide that the transfer of a Residual Certificate that has "tax avoidance potential" to a "foreign person" will be disregarded for all federal tax purposes. This rule appears intended to apply to a transferee who is not a U.S. Person (as defined below), unless such transferee's income is effectively connected with the conduct of a trade or business within the United States. A Residual Certificate is deemed to have tax avoidance potential unless, at the time of the transfer, (i) the future value of expected distributions equals at least 30% of the anticipated excess inclusions after the transfer, and (ii) the transferor reasonably expects that the transferee will receive sufficient distributions from the REMIC Pool at or after the time at which the excess inclusions accrue and prior to the end of the next succeeding taxable year for the accumulated withholding tax liability to be paid. If the non-U.S. Person transfers the Residual Certificate back to a U.S. Person, the transfer will be disregarded and the foreign transferor will continue to be treated as the owner unless arrangements are made so that the transfer does not have the effect of allowing the transferor to avoid tax on accrued excess inclusions. The Prospectus Supplement relating to the Certificates of a Series may provide that a Residual Certificate may not be purchased by or transferred to any person that is not a U.S. Person or may describe the circumstances and restrictions pursuant to which such a transfer may be made. The term "U.S. Person" means a citizen or resident of the United States, a corporation, partnership (except to the extent provided in applicable Treasury Regulations) or other entity created or organized in or under the laws of the United States or any political subdivision thereof, an estate that is subject to U.S. federal income tax regardless of the source of its income, or a trust if a court within the United States is able to exercise primary supervision over the administration of such trust, and one or more such U.S. Persons have the authority to control all substantial decisions of such trust (or, to the extent provided in applicable Treasury regulations, certain trusts in existence on August 20, 1996 which are eligible to elect to be treated as U.S. Persons). Sale or Exchange of a Residual Certificate Upon the sale or exchange of a Residual Certificate, the Residual Holder will recognize gain or loss equal to the excess, if any, of the amount realized over the adjusted basis (as described above under "--Basis and Losses") of such Residual Holder in such Residual Certificate at the time of the sale or exchange. In addition to reporting the taxable income of the REMIC Pool, a Residual Holder will have taxable income to the extent that any cash distribution to it from the REMIC Pool exceeds such adjusted basis on that Distribution Date. Such income will be treated as gain from the sale or exchange of the Residual Certificate. It is possible that the termination of the REMIC Pool may be treated as a sale or exchange of a Residual Holder's Residual Certificate, in which case, if the Residual Holder has an adjusted basis in its Residual Certificate remaining when its interest in the REMIC Pool terminates, and if it holds such Residual Certificate as a capital asset under Code Section 1221, then it will recognize a capital loss at that time in the amount of such remaining adjusted basis. Any gain on the sale of a Residual Certificate will be treated as ordinary income (i) if a Residual Certificate is held as part of a "conversion transaction" as defined in Code Section 1258(c), up to the amount of interest that would have accrued on the Residual Certificateholder's net investment in the conversion transaction at 120% of the appropriate applicable Federal rate in effect at the time the taxpayer entered into the transaction minus any amount previously treated as ordinary income with respect to any prior disposition of property that was held as a part of such transaction or (ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has made an election under Code Section 163(d)(4) to have net capital gains taxed as investment income at ordinary income rates. In addition, gain or loss recognized from the sale of a Residual Certificate by certain banks or thrift institutions will be treated as ordinary income or loss pursuant to Code Section 582(c). The Conference Committee Report to the 1986 Act provides that, except as provided in Treasury regulations yet to be issued, the wash sale rules of Code Section 1091 will apply to dispositions of Residual Certificates 76
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where the seller of the Residual Certificate, during the period beginning six months before the sale or disposition of the Residual Certificate and ending six months after such sale or disposition, acquires (or enters into any other transaction that results in the application of Code Section 1091) any residual interest in any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is economically comparable to a Residual Certificate. Mark to Market Regulations The Internal Revenue Service has issued final regulations (the "Mark to Market Regulations") under Code Section 475 relating to the requirement that a securities dealer mark to market securities held for sale to customers. This mark-to-market requirement applies to all securities of a dealer, except to the extent that the dealer has specifically identified a security as held for investment. The Mark to Market Regulations provide that, for purposes of this mark-to-market requirement, a Residual Certificate is not treated as a security and thus may not be marked to market. The Mark to Market Regulations apply to all Residual Certificates acquired on or after January 4, 1995. Taxes That May Be Imposed on the REMIC Pool Prohibited Transactions Income from certain transactions by the REMIC Pool, called prohibited transactions, will not be part of the calculation of income or loss includible in the federal income tax returns of Residual Holders, but rather will be taxed directly to the REMIC Pool at a 100% rate. Prohibited transactions generally include (i) the disposition of a qualified mortgage other than for (a) substitution within two years of the Startup Day for a defective (including a defaulted) obligation (or repurchase in lieu of substitution of a defective (including a defaulted) obligation at any time) or for any qualified mortgage within three months of the Startup Day, (b) foreclosure, default, or imminent default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool, or (d) a qualified (complete) liquidation, (ii) the receipt of income from assets that are not the type of mortgages or investments t