-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
Um3bfwCAbzmUUHrGv49P90mSKW9DK+QVqnH523FQnpkD6Pyl+FbEdcwbPupcD4/T
uePCOwizEdasrpBfMQfYQQ==
<SEC-DOCUMENT>0000950136-03-003185.txt : 20031224
<SEC-HEADER>0000950136-03-003185.hdr.sgml : 20031224
<ACCEPTANCE-DATETIME>20031224123628
ACCESSION NUMBER: 0000950136-03-003185
CONFORMED SUBMISSION TYPE: 424B5
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20031224
SERIAL COMPANY:
COMPANY DATA:
COMPANY CONFORMED NAME: ABN AMRO MORT SEC MULTI CLASS MORT PSTHR CERTS SER 2003-13
CENTRAL INDEX KEY: 0001274440
STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189]
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B5
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-101550-13
FILM NUMBER: 031073378
BUSINESS ADDRESS:
STREET 1: 135 S LASALLE STREET
CITY: CHICAGO
STATE: IL
ZIP: 60603
</SERIAL-COMPANY>
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ABN AMRO MORTGAGE CORP
CENTRAL INDEX KEY: 0000943489
STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189]
IRS NUMBER: 363886007
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 424B5
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-101550
FILM NUMBER: 031073377
BUSINESS ADDRESS:
STREET 1: 135 S LASALLE STREET
CITY: CHICAGO
STATE: IL
ZIP: 60603
BUSINESS PHONE: 2129042000
MAIL ADDRESS:
STREET 1: 235 S LASALLE ST
CITY: CHICAGO
STATE: IL
ZIP: 60603
</SEC-HEADER>
<DOCUMENT>
<TYPE>424B5
<SEQUENCE>1
<FILENAME>file001.txt
<DESCRIPTION>DEFINITIVE MATERIALS
<TEXT>
<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-101550
[ABN-AMRO LOGO OMITTED]
PROSPECTUS SUPPLEMENT DATED DECEMBER 23, 2003
(TO PROSPECTUS DATED JANUARY 23, 2003)
$352,904,666
ABN AMRO MORTGAGE CORPORATION
DEPOSITOR
WASHINGTON MUTUAL MORTGAGE SECURITIES CORP.
SELLER AND SERVICER
MULTI-CLASS MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2003-13
The trust will hold one pool of conventional, fixed-rate first lien residential
mortgage loans.
The trust will issue these classes of certificates that are offered under this
prospectus supplement:
o 13 classes of senior certificates
o 3 classes of subordinated certificates
Credit enhancement for all of these certificates will be provided by additional
subordination.
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-10 IN
THIS PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
Credit Suisse First Boston LLC will purchase the offered certificates and,
together with ABN AMRO Financial Services, Inc., will offer 13 classes of senior
certificates and 3 classes of subordinated certificates to the public at varying
prices to be determined at the time of sale. From the sale of the offered
certificates, ABN AMRO Mortgage Corporation will receive their principal amount,
plus any accrued interest, less expenses.
NEITHER THE SEC 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 ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
----------------------------------------
CREDIT SUISSE FIRST BOSTON ABN AMRO FINANCIAL SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Summary.....................................................................S-1
Risk Factors...............................................................S-10
The Trust..................................................................S-17
Description of the Mortgage Pool...........................................S-17
General.................................................................S-17
Additional Information..................................................S-19
Description of the Certificates............................................S-20
General.................................................................S-20
Book-Entry Registration.................................................S-20
Definitive Certificates.................................................S-21
Transfer Restrictions...................................................S-22
Available Distribution Amount...........................................S-22
Advances................................................................S-24
Glossary of Definitions Relating to the
Priority of Distributions.............................................S-24
Priority of Distributions...............................................S-31
Subordination and Allocation of Losses..................................S-34
The Class R Certificate.................................................S-36
Last Scheduled Distribution Date........................................S-36
Optional Termination....................................................S-36
Servicing..................................................................S-37
WMMSC's Delinquency, Loss and
Foreclosure Experience................................................S-37
Servicing Duties, Compensation and
Expenses..............................................................S-38
Special Servicing Agreements............................................S-39
Reports to Certificateholders ..........................................S-39
Prepayment and Yield Considerations........................................S-39
General.................................................................S-39
Principal Prepayments and Compensating
Interest..............................................................S-40
The Subordinate Certificates............................................S-40
Rate of Payments........................................................S-41
Special Sensitivities...................................................S-41
Prepayment Speed Assumption and
Modeling Assumptions..................................................S-42
Yield Considerations of the Interest Only
Certificates and Principal Only
Certificates..........................................................S-44
Yield Considerations with Respect to the
Adjustable Rate Certificates..........................................S-45
Additional Yield Considerations
Applicable Solely to the Class R
Certificate...........................................................S-47
Reports to Certificateholders...........................................S-47
Additional Information..................................................S-47
Legal Aspects of the Mortgage Loans under
California Law..........................................................S-47
Federal Income Tax Consequences............................................S-47
Withholding Considerations..............................................S-49
Special Tax Considerations Applicable to
the Residual Certificate..............................................S-49
Legal Investment Aspects...................................................S-51
ERISA Considerations.......................................................S-52
Underwriter's PTE.......................................................S-52
Method of Distribution.....................................................S-55
Legal Matters..............................................................S-56
Certificate Ratings........................................................S-56
INDEX OF SIGNIFICANT
DEFINITIONS.............................................................S-57
APPENDIX A - Scheduled Principal
Balance Table............................................................A-1
APPENDIX B - Declining Balance
Tables...................................................................B-1
APPENDIX C - Loan Information...............................................C-1
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We describe the offered certificates in two separate documents that
progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to this series of
certificates; and (2) this prospectus supplement, which describes the specific
terms of this series of securities and may be different from the information in
the prospectus.
IF THE DESCRIPTION OF THE TERMS OF THE CERTIFICATES VARIES BETWEEN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN
THIS PROSPECTUS SUPPLEMENT.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The preceding Table of Contents and the Table of
Contents included in the accompanying prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Significant
Definitions" in this prospectus supplement and under the caption "Index to
Prospectus Definitions" in the accompanying prospectus.
----------------------------------
<PAGE>
THE SERIES 2003-13 MULTI-CLASS MORTGAGE PASS-THROUGH CERTIFICATES
<TABLE>
<CAPTION>
LAST
SCHEDULED
ORIGINAL PRINCIPAL INTEREST INTEREST DISTRIBUTION
CLASS OR NOTIONAL AMOUNT(1) PRINCIPAL TYPE(2) RATE TYPE(2) FITCH(3) MOODY'S(3) DATE(4)
- ------------------------------------------------------------------------------------------------------------------------------------
OFFERED CERTIFICATES:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A-1 $ 40,000,000 SUPER SENIOR/ACCRETION DIRECTED(5) 5.50% FIXED AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-2 28,373,000 SENIOR/ACCRETION DIRECTED 5.50% FIXED AAA AAA FEBRUARY 25, 2018
- ------------------------------------------------------------------------------------------------------------------------------------
A-3 24,249,000 SENIOR/ACCRUAL 5.50% FIXED AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-4 29,323,850 SUPER SENIOR/LOCKOUT(5) 5.50% FIXED AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-5 2,210,139 SENIOR/ACCRUAL 5.50% FIXED AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-6 207,487,020 SENIOR 5.50% FIXED AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-7 4,878,279 SENIOR MEZZANINE/LOCKOUT(5) 5.50% FIXED AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-8 5,000,000 SENIOR 5.25% FIXED AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-9 500,000 SENIOR/FLOATER (6) ADJUSTABLE AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-10 500,000 SENIOR/INVERSE FLOATER/NOTIONAL (6) ADJUSTABLE/IO AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-P 2,193,666 SENIOR/PRINCIPAL ONLY 0.00% PO AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
A-X 236,623 SENIOR/NOTIONAL 5.50% FIXED/IO AAA AAA JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
M 5,497,510 SENIOR SUBORDINATE 5.50% FIXED AA -- JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
B-1 2,128,068 SENIOR SUBORDINATE 5.50% FIXED A -- JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
B-2 1,064,034 SENIOR SUBORDINATE 5.50% FIXED BBB -- JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
R 100 SENIOR/RESIDUAL 5.50% FIXED AAA -- JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OFFERED: (7) $ 352,904,666
- ------------------------------------------------------------------------------------------------------------------------------------
NON-OFFERED CERTIFICATES: (8)
- ------------------------------------------------------------------------------------------------------------------------------------
B-3 $ 709,356 JUNIOR SUBORDINATE 5.50% FIXED BB -- JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
B-4 532,017 JUNIOR SUBORDINATE 5.50% FIXED B -- JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
B-5 532,018 JUNIOR SUBORDINATE 5.50% FIXED -- -- JANUARY 25, 2034
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NON-OFFERED: $ 1,773,391
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL: (7) $ 354,678,057
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) THESE AMOUNTS ARE APPROXIMATE. THEY ARE SUBJECT TO AN UPWARD OR
DOWNWARD ADJUSTMENT OF NO MORE THAN 5%, DEPENDING ON THE TOTAL
PRINCIPAL AMOUNT OF THE MORTGAGE LOANS DELIVERED AT CLOSING. AMOUNT IS
"NOTIONAL" IF SO INDICATED UNDER PRINCIPAL TYPE.
(2) SEE PAGE S-6 IN THIS PROSPECTUS SUPPLEMENT FOR A MORE COMPLETE
DESCRIPTION OF THE PRINCIPAL TYPES AND INTEREST TYPES.
(3) SEE "CERTIFICATE RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
(4) THE ACTUAL FINAL PAYMENT TO ANY CLASS OF CERTIFICATES COULD BE
SIGNIFICANTLY EARLIER.
(5) A CERTAIN PORTION OF REALIZED LOSSES OTHERWISE ALLOCABLE TO THE CLASS
A-1 CERTIFICATES AND CLASS A-4 CERTIFICATES WILL BE ALLOCATED TO THE
CLASS A-7 CERTIFICATES UNTIL THE CLASS PRINCIPAL BALANCE OF THE CLASS
A-7 CERTIFICATES IS REDUCED TO ZERO AS DESCRIBED IN THIS PROSPECTUS
SUPPLEMENT.
<TABLE>
<CAPTION>
(6) ADJUSTABLE RATE CERTIFICATES: INITIAL INTEREST RATE FORMULA MAXIMUM MINIMUM
----------------------------- --------------------- ------- ------- -------
<S> <C> <C> <C> <C>
CLASS A-9 1.55% LIBOR + 0.45% 8.00% 0.45%
CLASS A-10 6.45% 7.55% - LIBOR 7.55% 0.00%
</TABLE>
(7) EXCLUDES NOTIONAL BALANCES.
(8) THE INFORMATION PRESENTED FOR THE NON-OFFERED CERTIFICATES IS PROVIDED
SOLELY TO ASSIST THE READER'S UNDERSTANDING OF THE OFFERED
CERTIFICATES.
-i-
<PAGE>
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. To understand the terms of the certificates, carefully read
this entire document and the accompanying prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
TITLE OF Multi-Class Mortgage Pass- TRUSTEE: U.S. Bank National Association
SERIES: Through Certificates Series
2003-13
DISTRIBUTION The 25th day of each month,
DEPOSITOR: ABN AMRO Mortgage DATES: beginning in January 2004. If the
Corporation 25th day is not a business day, then
135 South LaSalle Street the distribution date will be the next
Suite 925 business day.
Chicago, Illinois 60603
(312) 904-2000
SELLER: Washington Mutual CUT-OFF DATE: December 1, 2003
Mortgage Securities Corp.
1201 Third Avenue CLOSING DATE: On or about December 23, 2003
Seattle, Washington 98101
(206) 377-8555
UNDERWRITERS: Credit Suisse First Boston LLC
ORIGINATOR: ABN AMRO Mortgage ABN AMRO Financial Services, Inc.
Group, Inc.
SERVICER: Washington Mutual
Mortgage Securities Corp.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
OFFERED CERTIFICATES
The Trustee will execute, authenticate and deliver the certificates
under a Pooling and Servicing Agreement dated as of the Cut-Off Date among ABN
AMRO Mortgage Corporation, as depositor, U.S. Bank National Association, as
trustee, and Washington Mutual Mortgage Securities Corp., or WMMSC, as seller
and servicer.
The certificates will represent all of the beneficial ownership
interest in the trust. ABN AMRO Mortgage Corporation will deposit the mortgage
loans composing the pool into the trust.
Sometimes we refer to the certificates by their principal or interest
types. Since some classes of certificates have the characteristics of more than
one category, they appear more than once in the categories presented in the
chart on the following page.
S-1
<PAGE>
- -----------------------------------------------
CERTIFICATE TYPES
- -----------------------------------------------
Class A A-1, A-2, A-3, A-4,
Certificates: A-5, A-6, A-7, A-8,
A-9, A-10, A-X and
A-P
- -----------------------------------------------
Subordinate M, B-1, B-2, B-3,
Certificates: B-4 and B-5
- -----------------------------------------------
Senior Subordinate
Certificates: M, B-1 and B-2
- -----------------------------------------------
Junior Subordinate
Certificates: B-3, B-4 and B-5
- -----------------------------------------------
Residual
Certificate: R
- -----------------------------------------------
Senior Certificates: A and R
- -----------------------------------------------
Book-Entry A and Senior
Certificates: Subordinate
- -----------------------------------------------
Accretion Directed
Certificates: A-1 and A-2
- -----------------------------------------------
Accrual
Certificates: A-3 and A-5
- -----------------------------------------------
Adjustable Rate
Certificates: A-9 and A-10
- -----------------------------------------------
Lockout
Certificates: A-4 and A-7
- -----------------------------------------------
Interest Only
Certificates: A-10 and A-X
- -----------------------------------------------
Principal Only A-P
Certificates:
- -----------------------------------------------
RESIDUAL CLASS
The Class R certificate, having a principal amount of $100 and an
interest rate of 5.50%, will consist of:
o Component R-1, representing the
residual interest in REMIC I; and
o Component R-2, representing the residual interest in REMIC II.
BOOK-ENTRY REGISTRATION
The offered certificates (other than the Class R certificate) will be
available only in book-entry form through the facilities of the Depository Trust
Company, except under limited circumstances. See "Description of the
Certificates--Book-Entry Registration".
S-2
<PAGE>
THE MORTGAGE POOL
The mortgage pool will consist of conventional fixed rate residential
mortgage loans secured by first liens on one- to four-family residential
properties. ABN AMRO Mortgage Corporation expects the mortgage loans to have the
following characteristics:
SELECTED MORTGAGE POOL DATA AS OF DECEMBER 1, 2003
<TABLE>
<CAPTION>
RANGE OR TOTAL WEIGHTED
AVERAGE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Number of Mortgage Loans 716 ---
- -----------------------------------------------------------------------------------------------
Aggregate Unpaid Principal Balance $354,678,058(1) ---
- -----------------------------------------------------------------------------------------------
Unpaid Principal Balances $327,376 - $1,000,000(1) $495,360(2)
- -----------------------------------------------------------------------------------------------
Interest Rates 5.000% - 6.750% 5.987%
- -----------------------------------------------------------------------------------------------
Remaining Terms to Stated Maturity 294 - 360 358
- -----------------------------------------------------------------------------------------------
Loan Age 0 - 12 1
- -----------------------------------------------------------------------------------------------
Original Loan-to-Value Ratio 18.18% - 94.99% 70.24%
- -----------------------------------------------------------------------------------------------
FICO Scores 600 - 827(3) 738(3)
- -----------------------------------------------------------------------------------------------
Geographic Concentration of Mortgaged 49.88% CA ---
Properties in Excess of 5% of the Aggregate 6.36% NY
Unpaid Principal Balance 5.97% FL
- -----------------------------------------------------------------------------------------------
Maximum Five-Digit Zip Code Concentration 1.05% ---
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Approximate
(2) Average
(3) For mortgage loans that were scored.
Before the issuance of the offered certificates, we may remove mortgage
loans from the mortgage pool. We may also substitute new mortgage loans for
certain mortgage loans in the mortgage pool. This may result in changes in the
mortgage pool characteristics shown above and could affect the weighted average
lives and yields of the certificates.
S-3
<PAGE>
SUBORDINATION AND ALLOCATION OF LOSSES
The certificates shown in the second column in the table below will be
subordinated in their right to receive interest and principal payments. The
Subordinate certificates in the second column will bear all realized losses on
the mortgage loans before the certificates shown in the first column of the same
row, with limited exceptions for certain types of losses. The support provided
by the certificates shown in the second column of the same row is intended to
enhance the likelihood that the certificates shown in the first column of the
same row will receive expected monthly payments of interest and principal.
INITIAL
CLASS(ES) CREDIT SUPPORT SUPPORT
PERCENTAGE(1)
- ---------------------------------------------------------
SENIOR(2) Senior Subordinate and 2.95%
Junior Subordinate
- ---------------------------------------------------------
M B-1, B-2 and Junior 1.40%
Subordinate
- ---------------------------------------------------------
B-1 B-2 and Junior Subordinate 0.80%
- ---------------------------------------------------------
B-2 Junior Subordinate 0.50%
- ---------------------------------------------------------
(1) In each row, the initial class principal balance of the certificates listed
under "credit support" as a percentage of the balance of the mortgage pool, as
of the Cut-Off Date.
(2) A certain portion of all realized losses, other than excess losses,
otherwise allocable to the Class A-1 certificates and Class A-4 certificates
will be allocated to the Class A-7 certificates until the class principal
balance of the Class A-7 certificates is reduced to zero, as described in this
prospectus supplement.
CREDIT ENHANCEMENT
The Trustee will distribute mortgage loan prepayments among the classes
of certificates in a manner that will enhance the likelihood that investors in
the Senior certificates will be paid in full the amount of principal to which
they are entitled. During the first five years, the Trustee will generally
distribute all of the principal prepayments to the Senior certificates (other
than the Class A-4, Class A-7 and Interest Only certificates). Then, over the
following four years, the distribution of principal prepayments to those Senior
certificates will decrease as the Trustee begins to distribute an increasingly
larger portion of principal prepayments to the Subordinate certificates, until
the January 2013 distribution date when the Trustee will distribute principal
prepayments proportionately between the Senior and Subordinate certificates if
certain tests are met. The Class A-4 certificates and Class A-7 certificates
will receive no or a disproportionately small portion of scheduled principal
payments and principal prepayments during specified periods as described in this
prospectus supplement.
OPTIONAL TERMINATION
If the total outstanding principal balance of all the mortgage loans on
any distribution date is less than 5% of their total outstanding principal
balance as of the Cut-Off Date, the Servicer may, but is not required to,
repurchase the mortgage loans, provided that the fair market value of the
mortgage loans is at least equal to the repurchase price. If the Servicer does
repurchase the mortgage loans, the outstanding class principal balance of each
class of certificates will be paid in full together with accrued interest.
FEDERAL INCOME TAX TREATMENT
The offered certificates, other than the Class R certificate, will
represent ownership of REMIC regular interests. For federal income tax purposes,
these offered certificates will be treated as ownership of debt.
Certificateholders must include in income all interest and any original issue
discount on such offered certificates in accordance with the accrual method of
accounting, even if the certificateholder is otherwise a cash method taxpayer.
Certain classes of offered certificates will be treated as having been
issued with original issue discount; certain other classes of offered
certificates may be so treated as well. See "Federal Income Tax Consequences"
for information regarding the prepayment assumption that will be used in
determining the rate of accrual of original issue discount and
S-4
<PAGE>
market discount or premium (if any) for federal income tax purposes on the
offered certificates.
The Class R certificate represents ownership of two "non-economic"
residual interests under the REMIC rules. The taxation of the Class R
certificate is very complex and may entail significant adverse tax consequences.
Also, transfers of the Class R certificate are restricted. See "Federal Income
Tax Consequences" in this prospectus supplement and the prospectus.
LEGAL INVESTMENT
At the time of their issuance, the offered certificates (except the
Class B-1 certificates and Class B-2 certificates) will constitute
"mortgage-related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended. Investors should consult their own legal
counsel in determining the extent to which the offered certificates constitute
legal investments for them. See "Legal Investment Aspects".
ERISA CONSIDERATIONS
In general, the offered certificates, other than the Class R
certificate, will be eligible for purchase by retirement plans subject to ERISA.
Sales of the Class R certificate to such plans are prohibited, except as
permitted under "ERISA Considerations". Investors should consult with their
legal counsel with respect to the consequences under ERISA and the Internal
Revenue Code of the plan's acquisition and ownership of the certificates.
Any investor in the offered certificates, other than the Class R
certificate, will be deemed to make certain representations. See "ERISA
Considerations".
AVAILABLE DISTRIBUTION AMOUNT
On any distribution date, interest and principal distributions will be
made only up to the "AVAILABLE DISTRIBUTION AMOUNT" calculated for that
distribution date, which generally includes the following amounts net of
servicing fees:
o amounts received on the mortgage loans for scheduled principal and
interest payments due on the first day of the month (including advances
received from the Servicer);
o full prepayments received on the mortgage loans in the period from the
15th day of the preceding calendar month to the 14th day of the
calendar month of such distribution date (including compensating
interest received from the Servicer); and
o partial prepayments and any other unscheduled amounts received in
respect of the mortgage loans, including liquidation proceeds, in the
preceding calendar month.
AMOUNTS ALLOCATED TO INTEREST
On each distribution date, for each class of certificates entitled to
interest, interest will accrue in an amount determined by the follow ing
formula:
1/12 of the the related the pro rata share
applicable X class principal - allocated to such
interest rate or notional class of any
for each class balance prepayment
for each class interest shortfalls
not covered by
compensating
interest and
certain losses
attributable to
interest
Interest to be distributed on each class of interest bearing
certificates will include accrued but unpaid interest from prior distribution
dates (together with interest thereon at the applicable rate), but only up to
the Available Distribution Amount. Interest accrued on the Accrual Certificates
will not be paid to such class of certificates as interest until the principal
amount of the related Accretion Directed certificates is reduced to zero. The
claim to interest payments of the Senior certificates will take priority over
the Subordinate certificates' claim to both interest
S-5
<PAGE>
and principal payments. The claim to interest payments of each class of
Subordinate certificates will take priority over the claim to both interest and
principal payments of any class which is subordinated to it.
INTEREST ONLY CERTIFICATES
The Class A-10 certificates and Class A-X certificates are "INTEREST
ONLY" certificates. This means that the Trustee will distribute interest (based
upon its notional amount) but will not distribute principal to investors in the
Class A-10 certificates and Class A-X certificates.
On each distribution date, the Class A- 10 notional amount will be
equal to the class principal balance of the Class A-9 certificates.
On each distribution date, the Class A-X notional amount will be equal
to the total principal balance of the mortgage loans having Pass-Through Rates
greater than 5.50% multiplied by the following fraction:
Weighted Average
Pass-Through Rate
for all such loans minus 5.50%
------------------------------
5.50%
PRINCIPAL ONLY CERTIFICATES
The Class A-P certificates are "PRINCIPAL ONLY" certificates. This
means that the Trustee will not distribute interest to investors in the Class
A-P certificates.
The Trustee will distribute a fixed portion of the principal payments
received in respect of mortgage loans having Pass-Through Rates less than 5.50%
to investors in the Class A-P certificates. This portion is determined based on
the following fraction as to each such mortgage loan:
5.50% minus the
Pass-Through Rate on such mortgage loan
---------------------------------------
5.50%.
ACCRUAL AND ACCRETION DIRECTED CERTIFICATES
The Class A-3 certificates and Class A- 5 certificates are "ACCRUAL"
certificates. Interest accrued on these classes will be added to their
respective principal balances as described in this prospectus supplement rather
than distributed to the holders of these certificates on each distribution date
except as described below.
The Class A-1 certificates and Class A-2 certificates are "ACCRETION
DIRECTED" certificates. The Class A-1 certificates will receive distributions of
principal payable from the amounts of interest added to the principal balance of
the Class A-5 certificates; provided however, depending on the rate of
prepayments, the Class A-5 certificates may receive such accrued interest or a
portion thereof as a distribution of principal as described in this prospectus
supplement. The Class A-2 certificates will receive distributions of principal
payable from the amounts of interest added to the principal balance of the Class
A-3 certificates.
After the principal amount of the Class A-2 certificates is reduced to
zero, interest accrued on the Class A-3 certificates will be distributed on each
distribution date as interest to the Class A-3 certificates (to the extent
available) rather than added to its principal balance.
After the principal amount of the Class A-1 certificates is reduced to
zero, and so long as the class principal balance of the Class A-5 certificates
is still outstanding, interest accrued on the Class A-5 certificates will be
distributed on each distribution date as interest to the Class A-5 certificates
(to the extent available) rather than added to its principal balance.
ADJUSTABLE RATE CERTIFICATES
The Class A-9 certificates and Class A- 10 certificates are "ADJUSTABLE
RATE" certificates. On each distribution date specified, the Trustee will
distribute interest to the
S-6
<PAGE>
investors in the Adjustable Rate certificates based upon the formulas indicated
below. Such interest rates on the Adjustable Rate certificates will vary
depending on fluctuations of the one- month London interbank offered rate, or
"LIBOR".
On each distribution date, the amount of interest distributable to the
Class A-9 certificates will be determined by the following formula, which is
subject to a minimum rate of 0.45% per annum and a maximum rate of 8.00% per
annum:
LIBOR + 0.45%.
On each distribution date, the amount of interest distributable to the
Class A-10 certificates will be determined by the following formula, which is
subject to a minimum rate of 0.00% per annum and a maximum rate of 7.55% per
annum:
7.55% - LIBOR.
LOCKOUT CERTIFICATES
The Class A-4 certificates and Class A- 7 certificates are "LOCKOUT"
certificates. Prior to the distribution date in January 2009, the Trustee will
not distribute scheduled principal payments, the principal portion of
liquidation proceeds or principal prepayments to the investors in the Class A-4
certificates or Class A-7 certificates. On and after the distribution date in
January 2009, the Trustee will generally distribute their pro rata percentage of
scheduled principal payments and specified percentages of an increasing
percentage of principal prepayments and the principal portion of liquidation
proceeds to the investors in the Class A-4 certificates and Class A-7
certificates until they are entitled to their pro rata percentage of principal
prepayments and the principal portion of liquidation proceeds.
ALLOCATION OF PRINCIPAL CASH FLOWS
On each distribution date, the Trustee will distribute from the
Available Distribution Amount interest and principal to investors until the
certificate principal balance or notional balance of each certificate has been
reduced to zero. Only certain classes are due principal and/or interest on each
distribution date as described in this prospectus supplement. The calculation of
the amount of interest and principal that the Trustee will distribute is very
complex. The following two charts summarize the flow of payments.
S-7
<PAGE>
PRIORITY OF DISTRIBUTIONS PROVIDED THAT THE PRINCIPAL BALANCES OF THE
SUBORDINATE CERTIFICATES HAVE NOT BEEN REDUCED TO ZERO
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------- ----------------------------------------------------------------------------------------
Class A-P certificates -> A fixed fraction of the principal received on each mortgage loan which has a
Pass-Through Rate lower than 5.50%.
- ----------------------------------- ----------------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------------
-> Unpaid interest (plus interest thereon) and accrued interest pro rata based upon
Class A certificates (but not Class the amount of interest due each class, provided that interest then payable on the
A-P) and Class R certificate Accrual certificates shall be payable as principal to the related Accretion
Directed certificates as described in this prospectus supplement.
- ----------------------------------- ----------------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------------
-> A percentage of the total principal received on each mortgage loan (other than a
fixed fraction allocated to Class A-P certificates), related to the ratio of the
total outstanding principal balance of the Senior certificates to the aggregate
Class A certificates (but not Class scheduled principal balance of the mortgage loans immediately preceding the
A-10, Class A-X and Class A-P) and distribution date (other than a fixed fraction allocated to Class A-P certificates),
Class R certificate which may include, for a certain period of time, a disproportionately high
percentage of principal prepayments received in respect of the mortgage loans,
allocated among the Senior certificates, as described in this prospectus supplement.
- ----------------------------------- ----------------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------------
-> An amount equal to unreimbursed losses, if any, previously allocated to Class
Class A-P certificates A-P certificates for each mortgage loan which has a Pass-Through Rate lower
than 5.50%.
- ----------------------------------- ----------------------------------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------------
-> Interest and then a percentage of the total principal received on the mortgage
loans (other than the fixed fraction allocated to Class A-P certificates) related to
the ratio of the total outstanding principal balance of the Subordinate certificates
to the aggregate scheduled principal balance of the mortgage loans immediately
Subordinate Certificates preceding the distribution date (other than a fixed fraction allocated to Class A-
P certificates), which may include a disproportionately small allocation of
prepayments on the mortgage loans for a certain period of time, to be distributed
as follows:
- ----------------------------------- ----------------------------------------------------------------------------------------
o Class M accrued and unpaid interest (plus interest thereon), then principal
o Class B-1 accrued and unpaid interest (plus interest thereon), then principal
o Class B-2 accrued and unpaid interest (plus interest thereon), then principal
o Class B-3 accrued and unpaid interest (plus interest thereon), then principal
o Class B-4 accrued and unpaid interest (plus interest thereon), then principal
o Class B-5 accrued and unpaid interest (plus interest thereon), then principal
----------------------------------------------------------------------------------
To the Class A certificates and each class of the
Subordinate certificates in the order of seniority, the
amount of unreimbursed losses previously allocated to
each class.
------------------------------------------------------------
- ----------------------------------- ----------------------------------------------------------------------------------------
Class R certificate -> The remainder of the Available Distribution Amount, which is expected to be
zero.
- ----------------------------------- ----------------------------------------------------------------------------------------
</TABLE>
S-8
<PAGE>
PRIORITY OF DISTRIBUTIONS IN THE EVENT THAT THE PRINCIPAL BALANCES OF THE
SUBORDINATE CERTIFICATES HAVE BEEN REDUCED TO ZERO
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------- ------------------------------------------------------------
Class A-P certificates -> A fixed fraction of the principal received on each mortgage
loan which has a Pass-Through Rate lower than 5.50%.
- ------------------------------- ------------------------------------------------------------
- ------------------------------- ------------------------------------------------------------
Class A certificates (but not
Class A-P) and Class R -> Unpaid interest (plus interest thereon) and accrued interest
certificate pro rata based upon the amount of interest due each class.
- ------------------------------- ------------------------------------------------------------
- ------------------------------- ------------------------------------------------------------
Class A certificates (but not
Class A-10, Class A-X and The total principal received from the mortgage loans (other
Class A-P) and Class R -> than the fixed fraction allocated to Class A-P certificates)
certificate pro rata to each class.
- ------------------------------- ------------------------------------------------------------
- ------------------------------- ------------------------------------------------------------
Class A certificates and Class -> The amount of unreimbursed losses previously allocated to
R certificate each class, pro rata to each class.
- ------------------------------- ------------------------------------------------------------
- ------------------------------- ------------------------------------------------------------
Class R certificate -> The remainder of the Available Distribution Amount, which
is expected to be zero.
- ------------------------------- ------------------------------------------------------------
</TABLE>
S-9
<PAGE>
RISK FACTORS
The offered certificates may not be suitable investments for you. In
particular, you should not purchase certificates of any class unless you
understand and are able to bear the prepayment, credit, liquidity, and market
risks associated with that class.
The certificates are complex securities. You should possess, either
alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
prospectus in the context of your financial situation.
The yield of each class will depend upon the price you paid for your
certificates and the rate of principal payments and losses on the mortgage loans
(including prepayments, defaults and liquidations) as well as the actual
characteristics of the mortgage loans. The mortgage loans generally may be
prepaid at any time without penalty. Mortgage prepayment rates are likely to
fluctuate significantly from time to time. You should consider the associated
risks, including the following:
PREPAYMENTS ON THE o If the mortgage loans are prepaid at a
MORTGAGE LOANS MAY AFFECT rate faster than assumed, this may
THE YIELD ON YOUR reduce the yields of any classes of
CERTIFICATES. certificates (except for the Principal
Only certificates) purchased at a
premium over their principal balances.
o If the mortgage loans having
Pass-Through Rates higher than 5.50% per
annum are prepaid at a rate faster than
assumed, this may reduce the yield of
the Class A-X certificates and investors
in these certificates may not fully
recoup their initial investments.
o If the mortgage loans are prepaid at a
rate faster than assumed, this may
reduce the yield of the Class A-10
certificates and investors in these
certificates may not fully recoup their
initial investments.
o If the mortgage loans are prepaid at a
rate slower than assumed, this may
reduce the yields of any classes of
Senior certificates (except for the
Interest Only certificates) or any
Subordinate certificates purchased at a
discount to their principal balances.
o If the mortgage loans having
Pass-Through Rates less than 5.50% per
annum are prepaid at a rate slower than
assumed, this may reduce the yield of
the Class A-P certificates.
o The Accrual certificates will not be
entitled to receive any distributions of
interest for some period of time. These
certificates will likely experience
significant price and yield volatility.
As a result, the Accrual certificates
will be especially sensitive to the rate
of payment of principal (including
prepayments, defaults and liquidations)
on the mortgage loans, as the Accrual
certificates will be outstanding for a
longer period of time.
S-10
<PAGE>
o The Accretion Directed certificates will
amortize more quickly because the
Trustee will distribute certain amounts
of interest accrued on the Accrual
certificates as principal to the
Accretion Directed certificates for a
period of time.
o Any time your principal is repaid to you
at a time when you did not expect to
receive it, you may not be able to
reinvest your funds at the same or a
higher rate of return than the interest
rate on your certificates.
o The Class A-4 certificates and Class A-7
certificates will not be entitled to
receive any distributions of scheduled
principal payments, principal
prepayments or the principal portion of
liquidation proceeds prior to the
distribution date in January 2009. On
and after the distribution date in
January 2009, the Trustee will generally
distribute their pro rata percentages of
scheduled principal payments and
specified percentages of an increasing
percentage of principal prepayments and
the principal portion of liquidation
proceeds to the investors in the Class
A-4 certificates and Class A-7
certificates.
o If the actual characteristics and
behavior of the mortgage loans differ
from what you assumed, it can have a
significant effect on the weighted
average lives and yields of the related
classes of certificates.
o The rate of principal payments on pools
of mortgage loans varies among pools and
from time to time is influenced by a
variety of economic, demographic,
geographic, social, tax, legal and other
factors, including prevailing mortgage
market interest rates and the particular
terms of the mortgage loans. There is no
guarantee as to the actual rate of
prepayment on the mortgage loans, or
that the rate of prepayment will conform
to any model described in this
prospectus supplement or in the
prospectus. See "Prepayment and Yield
Considerations" in this prospectus
supplement and "Prepayment, Yield and
Maturity Considerations" in the
prospectus.
FLUCTUATIONS IN THE INTEREST o The Class A-9 certificates and Class
RATE OF THE CLASS A-9 A-10 certificates will accrue interest
CERTIFICATES AND CLASS A-10 at an adjustable rate determined
CERTIFICATES WILL AFFECT THE separately for each distribution date
YIELD ON THESE CERTIFICATES. according to LIBOR in the manner
described under "Description of the
Certificates." The interest rate on the
Class A-9 certificates will vary in
direct correlation with LIBOR. The
interest rate on the Class A-10
certificates will vary inversely with
LIBOR. Therefore, the yield to investors
on the Class A-9 certificates and Class
A-10 certificates will be sensitive to
fluctuations in LIBOR.
S-11
<PAGE>
LOSSES AND DELINQUENT o If, as a result of losses on liquidated
PAYMENTS ON THE MORTGAGE mortgage loans, the certificate
LOANS MAY AFFECT THE RETURN principal balances of the Junior
ON YOUR CERTIFICATE. Subordinate certificates are reduced to
zero, the yield on each class of the
Senior Subordinate certificates will be
extremely sensitive to losses on the
mortgage loans. If, as a result of
losses, the certificate principal
balances of the Senior Subordinate and
Junior Subordinate certificates are
reduced to zero, the yield on each class
of Senior certificates that is still
outstanding will be extremely sensitive
to realized losses, especially in the
case of the Class A-7 certificates. If
as a result of further realized losses,
the principal amount of the Class A-7
certificates is reduced to zero, the
yield on the Class A-1 certificates and
Class A-4 certificates will be extremely
sensitive to realized losses.
o Delinquencies that are not covered by
amounts advanced by the Servicer because
they are deemed non-recoverable will
adversely affect the yield on the Junior
Subordinate certificates, the Senior
Subordinate certificates and the Senior
certificates in that order. Because of
the priority of distribu tions,
shortfalls resulting from delinquencies
on the mortgage loans will be borne
first by the Junior Subordinate
certificates, second by the Senior
Subordinate certificates, each in the
reverse order of their seniority, and
third, pro rata, by the Senior
certificates.
o The yield on the Subordinate
certificates, in decreasing order of
their seniority, will be progressively
more sensitive to the rate and timing of
defaults and the severity of losses on
the mortgage loans. In general, losses
on the mortgage loans and the resulting
reduction in principal balance will mean
that less interest will accrue than
would otherwise be the case. The earlier
a loss and resulting reduction in
principal balance occurs, the greater
the effect on an investor's yield. The
yield on the Subordinate certificates
will also be affected by the dis
proportionate allocations of principal
prepayments and in some cases,
liquidation proceeds, to the Senior
certificates, net interest shortfalls,
and other cash shortfalls in available
funds.
THE SUBORDINATE CERTIFICATES o Investors who purchase Subordinate
ARE ESPECIALLY SENSITIVE TO certificates will not receive
LOSSES ON THE MORTGAGE LOANS. distributions of interest and principal
on any distribution date until after the
Senior certificates and the classes of
more senior Subordinate certificates
receive their distributions of interest
and principal. The Subordinate
certificates will bear losses and
delinquencies in reverse order of their
priority. Depending upon the timing of
defaults and severity of losses,
investors may realize a lower expected
return on their investment than they
originally anticipated. It
S-12
<PAGE>
may also take longer for investors
holding Subordinate certificates to
realize their expected return on their
investment.
IT MAY NOT BE POSSIBLE TO o The Underwriters intend to make a market
FIND AN INVESTOR TO PURCHASE for the purchase and sale of the offered
YOUR CERTIFICATES. certificates after their initial
issuance but have no obligation to do
so. There is no assurance that such a
secondary market will develop for any
class of certificates, or, if it
develops, that it will continue.
Consequently, investors may not be able
to sell their certificates readily or at
prices that will enable them to realize
their desired yield. The market values
of the certificates are likely to
fluctuate. These fluctuations may be
significant and could result in
significant losses to investors. The
secondary markets for mortgage-backed
securities have experienced periods of
illiquidity and can be expected to do so
in the future. Illiquidity means you may
not be able to find another investor to
buy your certificates, which can have a
severely adverse effect on the market
value of your certificates. Illiquidity
is more likely for classes that are
especially sensitive to prepayment,
credit, or interest rate risk, or that
have been structured to meet the
investment requirements of limited
categories of investors. However, any
class of certificates may experience
illiquidity.
THE CONCENTRATION OF o The concentration of the mortgage loans
MORTGAGE LOANS WITH CERTAIN with specific characteristics relating
CHARACTERISTICS MAY CHANGE to the types of properties, property
OVER TIME, WHICH MAY AFFECT characteristics and geographic location
THE TIMING AND AMOUNT OF are likely to change over time.
PAYMENTS ON YOUR Principal payments may affect the
CERTIFICATES. concentration levels. Principal payments
could include voluntary prepayments and
prepayments resulting from casualty or
condemnation, defaults and liquidations
and from repurchases and substitutions
due to breaches of representations and
warranties. Because principal payments
on the mortgage loans are payable to the
Subordinate certificates only after
payments are made to the Senior
certificates and to the Senior
certificates in varying orders of
priority, such Senior certificates that
have a later priority for principal
distributions and all of the Subordinate
certificates are more likely to be
exposed to any risks associated with
changes in concentrations of mortgage
loan or property characteristics.
PAYMENTS FROM THE o The certificates do not represent an
MORTGAGE LOANS ARE THE SOLE interest in or obligation of the
SOURCE OF PAYMENTS ON YOUR Depositor, the Servicer, the Trustee,
CERTIFICATES. the Underwriters or any of their agents
or affiliates. However, the Depositor
does have limited obligations with
respect to certain breaches of its
representations and warranties. No
governmental agency or instrumentality,
the Depositor, the Servicer, the
Trustee, the Underwriters nor any of
their agents or affiliates will
guarantee or insure either the
certificates or the mortgage loans.
Consequently, if payments on the
mortgage loans are
S-13
<PAGE>
insufficient or otherwise unavailable to
make all payments required on the
certificates, you will have no recourse
to the Depositor, the Servicer, the
Trustee, the Underwriters or any of
their agents or affiliates.
CURRENT OR FUTURE MILITARY o The effects that current or future
ACTION MAY REDUCE THE YIELD military action by the United States may
ON YOUR CERTIFICATES. have on the performance of the mortgage
loans cannot be determined at this time.
You should consider the possible effects
on delinquency, default and prepayment
experience of the mortgage loans.
Federal agencies and non- government
lenders may defer, reduce or forgive
payments and delay foreclosure
proceedings in respect of mortgage loans
to borrowers who may be in active
military service. In addition,
activation of a substantial number of
U.S. military reservists or members of
the National Guard may significantly
increase the proportion of mortgage
loans whose interest rates are reduced
by application of the Soldiers' and
Sailors' Civil Relief Act of 1940 or
similar state laws. The amount of
interest accrued on the certificates
will be reduced pro rata by any
reductions in the amount of interest
collectible as a result of application
of the Soldiers' and Sailors' Civil
Relief Act of 1940. In addition, certain
persons not covered by the Soldiers' and
Sailors' Civil Relief Act of 1940 may be
eligible for similar loan payment relief
under applicable state law.
THE RETURN ON YOUR o As of the Cut-Off Date, mortgaged
CERTIFICATES MAY BE properties located in the State of
PARTICULARLY SENSITIVE TO California secure approximately 49.88%
CHANGES IN THE REAL ESTATE of all mortgage loans. In addition,
MARKETS IN CERTAIN approximately 6.36% and 5.97% of all
GEOGRAPHICAL AREAS. mortgage loans as of the Cut-Off Date
are secured by mortgaged properties
located in New York and Florida,
respectively. If the residential real
estate market in a specific region
should experience an overall decline in
property values, the rates of
delinquency, foreclosure, bankruptcy and
loss on the mortgage loans secured by
mortgaged properties in that region may
be expected to increase, and may
increase substantially, as compared to
such rates in a stable or improving real
estate market. Furthermore, property in
certain regions may be more susceptible
than properties located in other parts
of the country to certain types of
uninsurable hazards, such as
earthquakes, floods, mudslides and other
natural disasters. Any risks associated
with mortgage loan concentration may
affect the yield to maturity of the
offered certificates to the extent
losses caused by these risks are not
covered by the subordination provided by
the Subordinate certificates.
THE CLASS R CERTIFICATE HAS o The Class R certificateholder will be
TAX IMPLICATIONS THAT ARE required to report on its federal income
DIFFERENT FROM THE OTHER tax returns as ordinary income its pro
CERTIFICATES. rata share of taxable income of the
REMICs regardless of the amount or
timing of its receipt of cash payments.
See
S-14
<PAGE>
"Federal Income Tax Consequences--
Qualification as a REMIC--Taxation of
Owners of Residual Certificates" in the
prospectus and "Federal Income Tax
Consequences--Special Tax Considerations
Applicable to the Residual Certificate"
in this prospectus supplement.
Accordingly, the Class R
certificateholder may have taxable
income and tax liabilities arising from
its investment during a taxable year in
excess of the cash received during that
period which results in a negative
after-tax return. The requirement that
the Class R certificateholder report its
pro rata share of the taxable income and
net loss of the REMICs will continue
until the class principal balances of
all classes of certificates have been
reduced to zero, even though the Class R
certificateholder has received full
payment of its stated interest and
principal. It is expected that all or a
substantial portion of the REMIC taxable
income of the Class R certificateholder
will be treated as "excess inclusion"
income to the holder which:
o will not be subject to offset by
losses from other activities;
o for a tax-exempt holder, will be
treated as unrelated business
taxable income; and
o for a foreign holder, will not
qualify for tax treaty rate
reduction or statutory exemption
for withholding tax.
An individual Class R certificateholder
may be limited in its ability to deduct
servicing fees and other non-interest
expenses of the REMIC. Because of the
special tax treatment of REMIC residual
interests, the taxable income arising in
a given year on a REMIC residual
interest will not be equal to the
taxable income associated with
investment in a corporate bond or
stripped instrument having similar cash
flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the
Class R certificate may be significantly
less than that of a corporate bond or
stripped instrument having similar cash
flow characteristics. See "Federal
Income Tax Consequences--Qualification
as a REMIC--Taxation of Owners of
Residual Certificates" in the prospectus
and "Federal Income Tax Consequences--
Special Tax Considerations Applicable to
the Residual Certificate" in this
prospectus supplement.
FACTORS THAT REDUCE o A decline in real estate values or
COLLECTIONS COULD CAUSE EARLY changes in mortgage market interest
REPAYMENT, DELAYED PAYMENT rates may affect the yield on your
OR REDUCED PAYMENT ON THE certificates. If the residential real
CERTIFICATES. estate market in the locale of
properties securing the mortgage loans
should experience an overall decline in
property values so that the outstanding
principal balances of the mortgage
loans, and any secondary financing on
the mortgaged properties, become equal
to or greater than the value of
mortgaged properties, the actual rates
of
S-15
<PAGE>
delinquencies, foreclosures and losses
could be higher than those now generally
experienced in the mortgage lending
industry. To the extent that these
losses are not covered by any applicable
insurance policies or other credit
enhancement, certificateholders will
bear all risk of loss resulting from
default by mortgagors. The amount of
losses will depend primarily upon the
value of the mortgaged properties for
recovery of the outstanding principal
balance and unpaid interest of the
defaulted mortgage loans.
THE BANKRUPTCY OR o If the Servicer becomes the subject of
INSOLVENCY OF THE SERVICER bankruptcy or similar proceedings, the
COULD FURTHER DELAY OR Trustee's claim to collections in the
REDUCE PAYMENTS TO YOU. Servicer's possession at the time of the
bankruptcy filing or other similar
filing may not be perfected. In this
event, funds available to pay principal
and interest on your certificates may be
delayed or reduced.
Additionally, if the Servicer defaults
on its obligations under the Pooling and
Servicing Agreement solely because it
becomes insolvent, the bankruptcy court
or other similar entity might have the
power to prevent the appointment of a
new servicer. In this event, the ability
of the Servicer to service the
receivables could be impaired by its
bankruptcy or insolvency and its actions
would be supervised by the bankruptcy
court or other similar entity, which
could cause delays in payments being
made on your certificates.
ATTEMPTED o We expect that the transfer of the
RECHARACTERIZATION OF THE mortgage loans from Washington Mutual
TRANSFER FROM WASHINGTON Mortgage Securities Corp., as seller, to
MUTUAL MORTGAGE SECURITIES ABN AMRO Mortgage Corporation, and from
CORP. TO THE DEPOSITOR AND ABN AMRO Mortgage Corporation, as
FROM THE DEPOSITOR TO THE Depositor, to the trust will each be
TRUST COULD DELAY OR REDUCE characterized as a sale. Each of
PAYMENTS TO YOU. Washington Mutual Mortgage Securities
Corp. and the Depositor have documented
its respective transfer as a sale.
However, a bankruptcy trustee or
creditor of Washington Mutual Mortgage
Securities Corp. may take the position
that the transfer of the mortgage loans
to ABN AMRO Mortgage Corporation should
be recharacterized as a pledge of the
mortgage loans to secure a loan. If so,
ABN AMRO Mortgage Corporation would be
required to go through court proceedings
to establish its rights to collections
on the mortgage loans. Similarly, a
bankruptcy trustee or creditor of the
Depositor may take the position that the
transfer of the mortgage loans to the
trust should be recharacterized as a
pledge of the mortgage loans to secure a
loan. If so, the Trustee would be
required to go through court proceedings
to establish its rights to collections
on the mortgage loans. If either or both
of these events occur, payments on your
certificates could be delayed or
reduced.
S-16
<PAGE>
THE TRUST
The primary assets of REMIC I will consist of a pool ("MORTGAGE POOL")
of mortgage loans ("LOANS"). REMIC I will also contain (1) certain insurance
policies related to the Loans, (2) any property which secured a Loan and which
is acquired by foreclosure or by deed in lieu of foreclosure after the Cut-Off
Date, (3) amounts held in the certificate account established by the Trustee to
facilitate distributions to certificateholders (the "CERTIFICATE ACCOUNT"), (4)
the rights of the Trustee to receive the proceeds of all insurance policies, if
any, required to be maintained pursuant to the Pooling and Servicing Agreement
and (5) certain other assets all as described in this prospectus supplement.
The Depositor will assign the Loans to the Trustee, together with all
principal and interest due on the Loans after the Cut-Off Date. The Trustee
will, concurrently with such assignment, authenticate and deliver the
certificates. Each Loan will be identified in a Loan schedule appearing as an
exhibit to the Pooling and Servicing Agreement which will specify with respect
to each Loan, among other things, the original principal balance and the
outstanding principal balance as of the close of business on the Cut-Off Date,
the term of the mortgage note, and the mortgage interest rate.
DESCRIPTION OF THE MORTGAGE POOL(1)
GENERAL
The Mortgage Pool will consist of Loans that have an aggregate
outstanding principal balance as of the Cut-Off Date, after deducting payments
due on or before that date, of approximately $354,678,058. Certain of the risks
of loss on certain Loans will be covered by primary insurance policies up to
specified limits.
First deeds of trust or other similar security instruments creating
first liens on one- to four-family residential properties secure the Loans. The
mortgaged properties may include detached homes, townhouses, individual
condominium units, and individual units in planned unit developments, so long as
the property subject to the lien of the related mortgage consists of no more
than four units, and has the additional characteristics described below and in
the prospectus.
The Depositor acquired all of the Loans included in the Mortgage Pool
pursuant to a mortgage loan purchase agreement, the "MORTGAGE LOAN PURCHASE
AGREEMENT", to be dated as of December 23, 2003, between the Seller and the
Depositor. The Seller acquired all of the Loans included in the
- ---------------
1/The description herein of the Mortgage Pool and the mortgaged properties is
based upon the Loans at the close of business on the Cut-Off Date, after
deducting the scheduled principal payments due on or before such date, whether
or not actually received. All references herein to principal balance refer to
the principal balance as of the Cut-Off Date, unless otherwise specifically
stated or required by the context. References herein to percentages of Loans
refer in each case to the percentage of the aggregate principal balance of the
Loans, based on the outstanding principal balances of the Loans after giving
effect to scheduled monthly payments due on or before the Cut-Off Date, whether
or not received. References to weighted averages refer, in each case, to
weighted averages by principal balance as of the Cut-Off Date of the related
Loans (determined as described in the preceding sentence). Prior to the issuance
of the certificates, Loans may be removed from the Mortgage Pool as a result of
principal prepayments in full, delinquencies or otherwise. In such event, other
Loans may be included in the Mortgage Pool. The Depositor believes that the
information set forth herein with respect to the Mortgage Pool is representative
of the characteristics of the Mortgage Pool as it will actually be constituted
at the time the certificates are issued, although the range of mortgage interest
rates and certain other characteristics of the Loans in the Mortgage Pool may
vary. See "--Additional Information".
S-17
<PAGE>
Mortgage Pool pursuant to a mortgage loan purchase agreement with ABN AMRO
Mortgage Group, Inc., an affiliate of the Depositor, who originated the Loans in
accordance with the underwriting standards described in "The Trusts--The
Loans--Loan Underwriting Policies" in the prospectus.
All of the Loans have FICO Scores. The weighted average FICO Score for
the Loans that were scored is approximately 738 "FICO SCORES" are statistical
credit scores obtained by many mortgage lenders in connection with a loan
application to help assess a borrower's creditworthiness as of the time the
score is obtained. FICO Scores are generated by models developed by a third
party and are made available to lenders through three national credit bureaus.
The models were derived by analyzing data on consumers to establish patterns
which are believed to be indicative of the borrower's probability of default.
The FICO Score is based on a borrower's historical credit data, including, among
other things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. FICO Scores range from approximately 250 to approximately 900, with
higher scores indicating an individual with a more favorable credit history
compared to an individual with a lower score. However, a FICO Score purports
only to be a measurement of the relative degree of risk a borrower represents to
a lender, meaning that a borrower with a higher score is statistically expected
to be less likely to default in payment than a borrower with a lower score. In
addition, it should be noted that FICO Scores were developed to indicate a level
of default probability over a two-year period, which does not correspond to the
life of a mortgage loan. Furthermore, FICO Scores were not developed
specifically for use in connection with mortgage loans, but for consumer loans
in general. Therefore, a FICO Score does not take into consideration the effect
of mortgage loan characteristics on the probability of repayment by the
borrower. The Depositor does not make any representations or warranties as to
the actual performance of any Loan or that a particular FICO Score will not
change over time or should be relied upon as a basis for an expectation that the
borrower will repay the Loan according to its terms.
The Depositor will assign the Loans to the Trustee for the ultimate
benefit of the certificateholders. The Servicer will service the Loans directly
as Servicer pursuant to the Pooling and Servicing Agreement, and will receive
compensation for such services. See "The Pooling and Servicing
Agreement--Assignment of Loans" in the prospectus.
Pursuant to the terms of the Mortgage Loan Purchase Agreement, the
Seller has made certain representations and warranties with respect to the Loans
which the Depositor will assign to the Trustee for the benefit of the
certificateholders. If the Seller breaches any of the representations and
warranties with respect to any Loan which materially and adversely affects (i)
the value of any of the Loans actually delivered or (ii) the interests of the
certificateholders therein, the Seller will be obligated to cure such breach in
all material respects or shall repurchase the Loan or any property acquired in
respect thereof.
In addition, the Depositor will make representations and warranties
regarding the Loans in the Pooling and Servicing Agreement, but its assignment
of the Loans to the Trustee will be without recourse and the Depositor's
obligations relating to the Loans will be limited to the representations and
warranties made by it under the Pooling and Servicing Agreement. If the
Depositor breaches any of the representations and warranties with respect to any
Loan which breach materially and adversely affects the interests of the
certificateholders in the related Loan, the Depositor will be obligated to cure
such breach in all material respects or shall repurchase the Loan or any
property acquired in respect thereof. The Servicer is required to make certain
advances of its own funds in respect of the Loans to the limited extent set
forth under "Servicing of the Loans--Advances" in the prospectus and
"Description of the Certificates--Advances" in this prospectus supplement.
S-18
<PAGE>
All of the Loans will have principal and interest payable on the first
day of each month, which day is called the due date. None of the Loans will have
an original scheduled maturity date later than December 1, 2033. All of the
Loans have an original term to maturity of not more than thirty (30) years. At
origination, based upon the lower of the purchase price paid for or the
appraisal of the mortgaged property securing each purchase Loan, or the
appraisal of the mortgaged property securing other types of Loans, the Loans had
approximate loan-to-value ratios as described in the table below.
- ------------------------------------------------------------------------------
Percentage of Loans
Approximate Loan-to-Value Ratio by Principal Balance
- ------------------------------------------------------------------------------
Less than or equal to 80% 97.34%
Greater than 80%, but less than or equal to 95% 2.66%
Greater than 95% 0.00%
- ------------------------------------------------------------------------------
The scheduled principal balance of a Loan as of any distribution date
is the unpaid principal balance of such Loan as specified in the amortization
schedule at the time relating thereto (before any adjustment to such schedule by
reason of bankruptcy or similar proceeding or any moratorium or similar waiver
or grace period) as of the first day of the month preceding the month of such
distribution date, after giving effect to any previously applied partial
principal prepayments, the payment of principal due on such first day of the
month and any reduction of the principal balance of such Loan by a bankruptcy
court, irrespective of any delinquency in payment by the related mortgagor.
All of the Loans having loan-to-value ratios greater than approximately
80% at origination are covered by primary mortgage insurance policies. No Loan
permits negative amortization or the deferral of accrued interest. None of the
mortgage loans secured by mortgaged property in the State of Georgia are subject
to the Georgia Fair Lending Act.
ADDITIONAL INFORMATION
Appendix C, attached hereto, sets forth in tabular format certain
information, as of the Cut-Off Date, with respect to the Loans.
Each mortgagor must maintain a standardized hazard insurance policy in
an amount equal to the maximum insurable value of the improvements securing such
Loan or the principal balance of such Loan, whichever is less. See "Servicing of
the Loans--Hazard Insurance" in the prospectus. No mortgage pool insurance
policy, special hazard insurance policy or mortgagor bankruptcy insurance will
be maintained with respect to the Mortgage Pool, nor will any Loan be insured by
the FHA or guaranteed by the VA.
The description in this prospectus supplement of the Mortgage Pool and
the mortgaged properties is based upon the Mortgage Pool, as presently
constituted. Prior to the issuance of the certificates, the Depositor may add or
remove Loans from the Mortgage Pool if it deems such addition or removal
necessary or appropriate.
S-19
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Trustee will execute, authenticate and deliver the certificates
pursuant to a Pooling and Servicing Agreement to be dated as of the Cut-Off Date
among ABN AMRO Mortgage Corporation, as Depositor, Washington Mutual Mortgage
Securities Corp., as Seller and Servicer, and U.S. Bank National Association, as
Trustee, a form of which is filed as an exhibit to the registration statement of
which this prospectus supplement is a part. Reference is made to the prospectus
for important additional information regarding the terms and conditions of the
Pooling and Servicing Agreement and the certificates. It is a condition to the
issuance of the offered certificates that they receive the ratings from one or
more of Fitch Ratings ("FITCH") and Moody's Investors Service, Inc. ("MOODY'S")
indicated under "Certificate Ratings". As of the date of their issuance, the
offered certificates, other than the Class B-1 and Class B-2 certificates, will
qualify as "mortgage related securities" within the meaning of the Secondary
Mortgage Market Enhancement Act of 1984.
The Servicer will be obligated to make advances with respect to
delinquent payments on the Loans as described under "--Advances".
The certificates, other than the Class R certificate, will evidence all
the beneficial ownership in a trust called REMIC II established by the Depositor
to hold the regular interests of REMIC I into which the Loans will be deposited.
Only the Senior certificates and Senior Subordinate certificates are
offered hereby. The Junior Subordinate certificates are not offered hereby. The
class principal balance for any class of certificates (other than the Interest
Only certificates) will equal the aggregate amount of principal to which such
class is entitled, after giving effect to prior (1) distributions of principal
to such class, (2) adjustments for accrued interest added to principal on the
Accrual certificates and (3) allocations of losses required to be borne by such
class. Notwithstanding the foregoing, the class principal balance of the most
subordinate class of certificates outstanding at any time is equal to the
aggregate principal balance of all of the Loans less the class principal balance
of all other classes of certificates senior to such certificates. As used in
this prospectus supplement, the principal balance of a class means the class
principal balance thereof.
The certificate principal balance for any certificate will be the
portion of the corresponding class principal balance represented by such
certificate. The aggregate initial certificate principal balance will be
approximately equal to the aggregate principal balance of the Loans as of the
Cut-Off Date. The offered certificates (other than the Class A-10, Class A-X
certificates and Class R certificate) are offered in minimum denominations
equivalent to at least $25,000 initial certificate principal balance each and
multiples of $1 in excess thereof. The Class A-10 certificates are offered in
minimum denominations equivalent to at least $500,000 initial class notional
amount each and multiples of $1 in excess thereof. The Class A-X certificates
are offered in minimum denominations equivalent to at least $100,000 initial
class notional amount and multiples of $1 in excess thereof. The Class R
certificate will be offered in registered, certificated form in a single
denomination of a 100% percentage interest.
BOOK-ENTRY REGISTRATION
A global certificate registered in the name of the nominee of The
Depository Trust Company, or DTC, will initially represent each class of
Book-Entry certificates. DTC has advised the Depositor that DTC's nominee will
be Cede & Co. ("CEDE"). Accordingly, Cede is expected to be the holder of record
of the Book-Entry certificates. Holders of the Book-Entry certificates may elect
to hold their certificates
S-20
<PAGE>
through DTC in the United States, or Clearstream Banking, societie anonyme,
formally known as Cedelbank SA ("Clearstream"), or Euroclear, in Europe if they
are participants of their systems, or indirectly through organizations which are
participants in their systems. Unless the events described in "--Definitive
Certificates" have occurred, the Trustee will not issue the Book-Entry
certificates in fully registered, certificated form as "DEFINITIVE
CERTIFICATES." For more information regarding DTC, Clearstream and Euroclear,
see "Pooling and Servicing Agreement--Book-Entry Registration" in the
prospectus.
Unless and until the Trustee issues Definitive Certificates, all
references in this prospectus supplement to actions by Book-Entry
certificateholders shall refer to actions taken by DTC upon instructions from
DTC participants. Further, all references in this prospectus supplement to
distributions, notices, reports, and statements to Book-Entry certificateholders
shall refer to distributions, notices, reports, and statements to Cede, as the
registered holder of the certificates, for distribution to Book-Entry
certificateholders in accordance with DTC procedures.
Unless the Trustee issues Definitive Certificates, certificateholders
will receive all distributions of principal and interest on the Book-Entry
certificates through DTC participants. Under a book-entry format,
certificateholders will receive payments after the related distribution date
because, while payments are required to be forwarded to Cede, as nominee for
DTC, on each distribution date, DTC will forward such payments to DTC
participants which thereafter will be required to forward them to indirect DTC
participants or certificateholders. It is anticipated that the sole
"Certificateholder" (as such term is used in the Pooling and Servicing
Agreement) for each class of Book-Entry certificates will be Cede, as nominee of
DTC, and that Book-Entry certificateholders will not be recognized by the
Trustee as certificateholders under the Pooling and Servicing Agreement.
Book-Entry certificateholders will be permitted to exercise the rights of
certificateholders under the Pooling and Servicing Agreement only indirectly
through DTC participants, who in turn will exercise their rights through DTC.
DEFINITIVE CERTIFICATES
The Trustee will issue the Book-Entry certificates as Definitive
Certificates to certificateholders or their nominees, rather than to DTC or its
nominee, only if (1) the Depositor advises the Trustee 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 or the Depositor is
unable to locate a qualified successor, (2) the Depositor, at its option, elects
to terminate the book-entry system through DTC or (3) after the occurrence of an
event of default under the Pooling and Servicing Agreement, any beneficial owner
materially and adversely affected thereby, may, at its option, request and,
subject to the rules and procedures set forth in the Pooling and Servicing
Agreement, receive a Definitive Certificate evidencing such beneficial owner's
percentage interest in the related class of certificates.
Upon notice of the occurrence of any of the events described in the
immediately preceding paragraph, DTC is required to notify all DTC participants
of the availability of Definitive Certificates. Upon surrender by DTC of the
global certificates and receipt from DTC of instructions for re-registration,
the Trustee will issue the Book-Entry certificates in the form of Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as certificateholders under the Pooling and Servicing
Agreement.
The Trustee (or its duly appointed paying agent, if any) will
distribute principal and interest on the Definitive Certificates, as well as the
other classes of certificates, directly to holders of such certificates in
accordance with the procedures set forth in this prospectus supplement and in
the Pooling and Servicing Agreement. The Trustee will distribute principal and
interest on each distribution date to
S-21
<PAGE>
holders in whose names such certificates (other than the Adjustable Rate
certificates) were registered at the close of business on the last business day
of the month preceding the month of such distribution date. The Trustee will
distribute principal and interest on each distribution date to holders of the
Adjustable Rate certificates in whose names such certificates were registered at
the close of business on the business day preceding such distribution date. The
Trustee will make distributions by wire transfer in immediately available funds
for the account of each such holder or, if a holder has not provided wire
instructions, by check mailed to the address of such holder as it appears on the
register maintained by the certificate registrar. The Trustee will make the
final payment on any certificate (whether a Definitive Certificate or the global
certificates registered in the name of Cede) only upon presentation and
surrender of such certificate at its offices or its agent's office or such
office or agency as is specified in the notice of final distribution to holders
of certificates being retired. The Trustee will provide such notice to
registered certificateholders not later than the fifteenth day of the month in
which all remaining outstanding certificates will be retired.
Definitive Certificates, as well as the Class R certificate, will be
transferable and exchangeable at the offices of the Trustee or its agent. The
Trustee may impose a reasonable service charge for any registration of transfer
or exchange, and the Trustee or such agent may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
TRANSFER RESTRICTIONS
Any investor in the offered certificates, other than the Class R
certificate, will be deemed to make certain representations described in this
prospectus supplement under "ERISA Considerations". The Class R certificate is
subject to transfer restrictions described in the prospectus under "ERISA
Considerations" and "Federal Income Tax Consequences--Qualification as a
REMIC--Taxation of Owners of Residual Certificates".
AVAILABLE DISTRIBUTION AMOUNT
The Available Distribution Amount for any distribution date will
generally include scheduled principal and interest payments due on the related
due date (whether paid by the mortgagor or advanced by the Servicer), partial
principal prepayments received in the previous calendar month (as set forth
below), prepayments in full received in the applicable Payoff Period to the
extent set forth below and amounts received with respect to liquidations of
Loans in the previous calendar month. Distributions will be made on each
distribution date by or on behalf of the Trustee to the certificateholders, as
specified in this prospectus supplement.
The "DUE DATE" related to each distribution date is the first day of
the month in which such distribution date occurs. The "DETERMINATION DATE" is a
day not later than the 10th day preceding the related distribution date in the
month in which such distribution date occurs.
The "AVAILABLE DISTRIBUTION AMOUNT" for any distribution date, as more
fully described in the Pooling and Servicing Agreement, will equal the sum of
the following amounts:
(1) the total amount of all cash received by or on behalf of the
Servicer with respect to the Loans by the Determination Date for
such distribution date and not previously distributed (including
Liquidation Proceeds), except:
o all scheduled payments of principal and interest collected but
due on a date after the related Due Date;
S-22
<PAGE>
o all partial principal prepayments received after the previous
calendar month (together with any interest payment received
with such prepayments to the extent that it represents the
payment of interest accrued on the Loans for the period after
the previous calendar month);
o all prepayments in full received after the applicable Payoff
Period (together with any interest payment received with such
prepayments in full to the extent that it represents the
payment of interest accrued on the Loans for the period after
the previous calendar month);
o interest payments received with prepayments in full received
during the applicable Payoff Period to the extent such
interest represents interest accrued on such Loan for the
period commencing on or after the first calendar day through
and including the 14th calendar day of the month of such
distribution date, which interest shall not be included in the
calculation of the Available Distribution Amount for any
distribution date;
o Liquidation Proceeds and insurance proceeds received on the
Loans after the previous calendar month;
o all amounts in the custodial account for principal and
interest which are due and reimbursable to the Servicer
pursuant to the terms of the Pooling and Servicing Agreement;
o the servicing fee for each Loan; and
o the excess, if any, of aggregate Liquidation Proceeds on the
Loans received during the previous calendar month over the
amount that would have been received if prepayments in full
had been made with respect to the Loans on the date such
Liquidation Proceeds were received ("EXCESS LIQUIDATION
PROCEEDS");
(2) all advances made by the Servicer to the Trustee on that
distribution date;
(3) any amounts payable as "COMPENSATING INTEREST" by the Servicer on
that distribution date which will be equal to the lesser of:
o any shortfall for the related month of interest collections
resulting from the timing of prepayments in full on the
related Loans made during the related Payoff Period, except
for prepayments in full received during the period from the
first through the 14th day of the month of the applicable
distribution date; and
o the sum of (a) one-twelfth of 0.03% of the aggregate
outstanding principal balance of each Loan on the second Due
Date preceding such distribution date, (b) any reinvestment
income realized by the Servicer relating to prepayments in
full on the related Loans made during the related Payoff
Period from investment of each such prepayment in full from
the date of receipt of such prepayment in full until the
business day immediately preceding the related distribution
date and (c) interest payments on such prepayments in full
received after the calendar month preceding the applicable
distribution date but before the 15th calendar day of the
calendar month of such distribution date; and
S-23
<PAGE>
(4) the total amount of any cash received by the Trustee or the
Servicer in respect of the obligation of the Depositor or the
Seller to repurchase any Loans.
ADVANCES
With respect to each Loan, the Servicer will make advances to the
Certificate Account on the business day before each distribution date to cover
any shortfall between (1) payments of principal and interest scheduled to be
received with respect to such Loan and (2) the amounts actually deposited in the
Certificate Account on account of such payments; provided, that the Servicer
determines on such distribution date, in good faith, that such advances will be
recoverable from insurance proceeds, Liquidation Proceeds or other amounts it
expects to receive with respect to that Loan. Advances are reimbursable to the
Servicer from cash in the custodial account prior to remittances by the Servicer
to the Trustee for payments to the certificateholders if the Servicer determines
that such advances will not be recoverable from insurance proceeds, Liquidation
Proceeds or other amounts recoverable with respect to the applicable Loan and so
notifies the Trustee.
GLOSSARY OF DEFINITIONS RELATING TO THE PRIORITY OF DISTRIBUTIONS
Certain definitions are necessary to understand the priority of
interest and principal distributions to the certificates. These terms are
defined below and highlighted within the various definitions:
"BANKRUPTCY COVERAGE" is expected to equal approximately $50,000 as of the
Cut-Off Date. The BANKRUPTCY COVERAGE will be reduced, from time to time, by the
amount of BANKRUPTCY LOSSES allocated to the certificates.
"BANKRUPTCY LOSSES" means any DEBT SERVICE REDUCTION or DEFICIENT VALUATIONS.
"CLASS A-9 INTEREST RATE" with respect to the initial distribution date is 1.55%
per annum, and as to any distribution date thereafter, will be a per annum rate
equal to LIBOR plus 0.45% (subject to a maximum rate of 8.00% per annum and a
minimum rate of 0.45% per annum).
"CLASS A-10 INTEREST RATE" with respect to the initial distribution date is
6.45% per annum, and as to any distribution date thereafter, will be a per annum
rate equal to 7.55% minus LIBOR (subject to a maximum rate of 7.55% per annum
and a minimum rate of 0.00% per annum).
"CLASS A-10 NOTIONAL AMOUNT" will initially be approximately $500,000 and with
respect to any distribution date thereafter will be equal to the class principal
balance of the Class A-9 certificates (prior to giving effect to principal
distributions to the Class A-9 certificates on such distribution date).
"CLASS A-X NOTIONAL AMOUNT" will initially be approximately $236,623, and with
respect to any distribution date will equal the total principal balance, as of
the 1st day of the month preceding such distribution date (after giving effect
to all payments scheduled to be made on such date whether or not received and as
reduced by any Payoff received until and including the 14th day of such prior
month), of the Premium Loans multiplied by the following fraction:
the weighted average of the PASS-THROUGH RATES of the
PREMIUM LOANS as of the first day of such month minus 5.50%
-----------------------------------------------------------
5.50%.
S-24
<PAGE>
"CREDIT SUPPORT DEPLETION DATE" is the first distribution date on which the
class principal balances of all of the Subordinate certificates have been or
will be reduced to zero.
"DEBT SERVICE REDUCTION" means any reduction of the amount of the monthly
payment on the related Loan made by a bankruptcy court in connection with a
personal bankruptcy of a mortgagor.
"DEFICIENT VALUATION" means in connection with a personal bankruptcy of a
mortgagor, the positive difference, if any, resulting from the outstanding
principal balance on a Loan less a bankruptcy court's valuation of the related
mortgaged property.
"DISCOUNT FRACTION" with respect to a DISCOUNT LOAN means the following
fraction:
5.50% minus the PASS-THROUGH RATE on such DISCOUNT LOAN
-------------------------------------------------------
5.50%.
"DISCOUNT FRACTIONAL PRINCIPAL AMOUNT" means the DISCOUNT FRACTION of the
principal received with respect to a DISCOUNT LOAN.
"DISCOUNT FRACTIONAL PRINCIPAL SHORTFALL" means an amount generally equal to the
sum of:
(1) the DISCOUNT FRACTION of any loss on a DISCOUNT LOAN other than a
Special Hazard Loss in excess of the Special Hazard Coverage, a
Fraud Loss in excess of the Fraud Coverage or a Bankruptcy Loss
in excess of the Bankruptcy Coverage as described in
"--Subordination and Allocation of Losses"; and
(2) the sum of amounts, if any, by which the foregoing amount on each
prior distribution date exceeded the amount actually distributed
in respect thereof on such prior distribution dates and not
subsequently distributed.
"DISCOUNT LOAN" means any Loan with a PASS-THROUGH RATE of less than 5.50% per
annum.
"EXCESS LOSS" means a Special Hazard Loss incurred on a Loan in excess of the
Special Hazard Coverage, a Fraud Loss incurred on a Loan in excess of the Fraud
Coverage and a Bankruptcy Loss incurred on a Loan in excess of the Bankruptcy
Coverage.
"FRAUD COVERAGE" is expected to equal approximately $3,546,780 as of the Cut-Off
Date. As of any date of determination after the Cut-Off Date, the FRAUD COVERAGE
will generally be equal to:
(1) before the third anniversary of the Cut-Off Date, an amount equal
to:
(a) 1.00% of the aggregate principal balance of all of the Loans as
of the Cut-Off Date, minus
(b) the aggregate amounts allocated to the certificates with respect
to FRAUD LOSSES on the Loans up to such date of determination;
(2) from the third to the fifth anniversary of the Cut-Off Date, an
amount equal to:
(a) 0.50% of the aggregate principal balance of all of the Loans as
of the most recent anniversary of the Cut-Off Date, minus
S-25
<PAGE>
(b) the aggregate amounts allocated to the certificates with respect
to FRAUD LOSSES on the Loans since the most recent anniversary of
the Cut-Off Date up to such date of determination; and
(3) on and after the fifth anniversary of the Cut-Off Date, the FRAUD
COVERAGE will be zero.
"FRAUD LOSSES" are losses on Loans arising from fraud, dishonesty or
misrepresentation of the mortgagor in the origination of such Loans.
"INTEREST ACCRUAL PERIOD" for each distribution date for all classes of
certificates (other than the Class A-9 certificates and Class A-10 certificates)
is the calendar month preceding the month in which such distribution date
occurs. The INTEREST ACCRUAL PERIOD for the Class A-9 certificates and Class
A-10 certificates for each distribution date is the period from the 25th day of
the month before the month in which such distribution date occurs, through the
24th day of the month in which such distribution date occurs. Interest will be
calculated on the basis of a 360-day year comprised of twelve 30-day months.
"LIBOR" means, with respect to the Adjustable Rate certificates, the one month
rate which appears on the Dow Jones Telerate System, page 3750, as of 11:00
a.m., London time on the LIBOR DETERMINATION DATE. If such rate is not provided,
LIBOR shall mean the rate determined by the Trustee (or a calculation agent on
its behalf) in accordance with the following procedure:
(i) The Trustee on the LIBOR DETERMINATION DATE will request the
principal London offices of each of four major reference banks in
the London interbank market, as selected by the Trustee, to
provide the Trustee with its offered quotation for deposits in
United States dollars for the upcoming one-month period,
commencing on the second LIBOR BUSINESS DAY immediately following
such LIBOR DETERMINATION DATE, to prime banks in the London
interbank market at approximately 11:00 a.m. London time on such
LIBOR DETERMINATION DATE and in a principal amount that is
representative for a single transaction in United States dollars
in such market at such time. If at least two such quotations are
provided, LIBOR determined on such LIBOR DETERMINATION DATE will
be the arithmetic mean of such quotations.
(ii) If fewer than two quotations are provided, LIBOR determined on
such LIBOR DETERMINATION DATE will be the arithmetic mean of the
rates quoted at approximately 11:00 a.m. in New York City on such
LIBOR DETERMINATION DATE by three major banks in New York City
selected by the Trustee for one-month United States dollar loans
to lending European banks, in a principal amount that is
representative for a single transaction in United States dollars
in such market at such time; provided, however, that if the banks
so selected by the Trustee are not quoting as mentioned in this
sentence, LIBOR determined on such LIBOR DETERMINATION DATE will
continue to be LIBOR as then currently in effect on such LIBOR
DETERMINATION DATE.
"LIBOR BUSINESS DAY" means any day on which dealings in United States dollars
are transacted in the London interbank market.
"LIBOR DETERMINATION DATE" means the second LIBOR BUSINESS DAY before the first
day of the related INTEREST ACCRUAL PERIOD.
S-26
<PAGE>
"LIQUIDATED LOAN" is a Loan as to which the Servicer has determined that all
amounts which it expects to recover from or on account of such Loan, whether
from insurance proceeds, LIQUIDATION PROCEEDS or otherwise, have been recovered.
"LIQUIDATION PRINCIPAL" is the principal portion of LIQUIDATION PROCEEDS
received with respect to each Loan which became a LIQUIDATED LOAN (but not in
excess of the principal balance thereof) during the calendar month preceding the
month of the related distribution date, exclusive of the DISCOUNT FRACTION of
LIQUIDATION PROCEEDS received with respect to each DISCOUNT LOAN, if any.
"LIQUIDATION PROCEEDS" are amounts received by the Servicer in connection with
the liquidation of a defaulted Loan whether through foreclosure or otherwise,
other than proceeds of insurance policies.
"LOCKOUT PERCENTAGE" (which cannot be greater than 100%) will equal for any
distribution date:
(1) the aggregate class principal balance of the Class A-4
certificates and Class A-7 certificates immediately preceding
such distribution date;
divided by:
(2) the aggregate scheduled principal balance of all Loans
immediately preceding such distribution date (exclusive of the
DISCOUNT FRACTION of the DISCOUNT LOANS).
"LOCKOUT PRINCIPAL AMOUNT" for any distribution date will equal the sum of:
(1) the product of (i) for any distribution date prior to the
distribution date in January 2009, 0%, and thereafter, the
LOCKOUT PERCENTAGE and the (ii) PRINCIPAL PAYMENT AMOUNT
(exclusive of the portion thereof attributable to the DISCOUNT
FRACTIONAL PRINCIPAL AMOUNT); and
(2) the product of:
(1) the LOCKOUT PERCENTAGE;
(2) the STEP DOWN PERCENTAGE; and
(3) the sum of:
(a) the PRINCIPAL PREPAYMENT AMOUNT (exclusive of the portion
thereof attributable to the DISCOUNT FRACTIONAL PRINCIPAL
AMOUNT); and (b) the LIQUIDATION PRINCIPAL.
"PASS-THROUGH RATE" for each Loan is equal to the mortgage interest rate thereon
less the servicing fee, which will range from 0.28% to 0.98%. The servicing fee
will have an initial weighted average of approximately 0.52% per annum.
"PAYOFF PERIOD" means with respect to the first distribution date, the period
from the Cut-Off Date through and including December 14, 2003, and with respect
to each distribution date thereafter, the period from and including the 15th day
of the calendar month preceding the month in which the related distribution date
occurs through and including the 14th day of the month of such distribution
date.
"PREMIUM LOAN" means any Loan with a PASS-THROUGH RATE in excess of 5.50% per
annum.
S-27
<PAGE>
"PREPAYMENT PERIOD" means with respect to each distribution date and each
partial principal prepayment on any Loan, the calendar month preceding the month
in which the related distribution date occurs.
"PRINCIPAL PAYMENT AMOUNT" is the sum, for any distribution date, of:
(1) scheduled principal payments on the Loans due on the related Due
Date;
(2) the principal portion of repurchase proceeds received with
respect to any Loan which was repurchased as permitted or
required by the Pooling and Servicing Agreement during the
calendar month preceding the month of the distribution date; and
(3) any other unscheduled payments of principal which were received
on the Loans during the preceding calendar month, other than
prepayments in full, partial principal prepayments or LIQUIDATION
PRINCIPAL.
"PRINCIPAL PREPAYMENT AMOUNT" for any distribution date is the sum of all
partial principal prepayments which were received during the applicable
PREPAYMENT PERIOD and all prepayments in full which were received during the
applicable PAYOFF PERIOD.
"PRO RATA ALLOCATION" means allocating the principal portion of certain losses
relating to a Loan to the Senior certificates (other than the Class A-P
certificates and Interest Only certificates) and/or to the Subordinate
certificates, as applicable, pro rata according to their outstanding certificate
principal balances or, in the case of the Accrual certificates, the certificate
principal balance of that Accrual certificate on the closing date, if lower
(except (1) if the loss is recognized with respect to a DISCOUNT LOAN, in which
event the DISCOUNT FRACTION of such loss will be allocated to the Class A-P
certificates, and the remainder of such loss will be allocated as described
above in this definition without regard to this parenthetical and (2)(a) all
realized losses, except Excess Losses, otherwise allocable to the Class A- 1
certificates will be allocated to the Class A-7 certificates up to an amount
equal to approximately 33.209% of the class principal balance of the Class A-7
certificates for such distribution date and up to a maximum aggregate amount
equal to approximately $1,620,028 and (b) all realized losses, except Excess
Losses, otherwise allocable to the Class A-4 certificates will be allocated to
the Class A-7 certificates up to an amount equal to approximately 66.791% of the
class principal balance of the Class A-7 certificates for such distribution date
and up to a maximum aggregate amount equal to approximately $3,258,251, in each
case until the class principal balance of the Class A-7 certificates has been
reduced to zero) in reduction thereof, and the allocation of the interest
portion of such losses to such certificates, as applicable (other than the
Principal Only certificates), pro rata according to the amount of interest
accrued but unpaid on each such class, in reduction thereof.
"SENIOR LIQUIDATION AMOUNT" is the aggregate, for each Loan which became a
LIQUIDATED LOAN during the calendar month preceding the month of the
distribution date, of the lesser of:
(1) the SENIOR PERCENTAGE of the principal balance of such Loan
(exclusive of the DISCOUNT FRACTION thereof, if applicable); and
(2) the SENIOR PREPAYMENT PERCENTAGE of the LIQUIDATION PRINCIPAL
with respect to such Loan.
S-28
<PAGE>
"SENIOR PERCENTAGE" as of the Closing Date will be approximately 97.03% and for
any distribution date will equal the sum of the class principal balances of the
Senior certificates (other than the Class A-P certificates) immediately
preceding such distribution date divided by the aggregate scheduled principal
balance of all Loans immediately preceding such distribution date (exclusive of
the DISCOUNT FRACTION of the principal balance of the DISCOUNT LOANS).
"SENIOR PREPAYMENT PERCENTAGE" is subject to certain conditions specified in the
Pooling and Servicing Agreement. It will generally be equal to the percentage
amount set forth in the table below, except that on any distribution date where
the SENIOR PERCENTAGE exceeds the initial SENIOR PERCENTAGE, then the SENIOR
PREPAYMENT PERCENTAGE for such distribution date will equal 100%.
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN SENIOR PREPAYMENT PERCENTAGE
----------------------------
<S> <C>
January 2004 through December 2008....... 100%
January 2009 through December 2009....... SENIOR PERCENTAGE + 70% of the SUBORDINATE PERCENTAGE
January 2010 through December 2010....... SENIOR PERCENTAGE + 60% of the SUBORDINATE PERCENTAGE
January 2011 through December 2011....... SENIOR PERCENTAGE + 40% of the SUBORDINATE PERCENTAGE
January 2012 through December 2012....... SENIOR PERCENTAGE + 20% of the SUBORDINATE PERCENTAGE
January 2013 and thereafter.............. SENIOR PERCENTAGE
</TABLE>
"SENIOR PRINCIPAL AMOUNT" for any distribution date will equal the sum of:
(1) the SENIOR PERCENTAGE of the PRINCIPAL PAYMENT AMOUNT (exclusive
of the portion thereof attributable to the DISCOUNT FRACTIONAL
PRINCIPAL AMOUNT);
(2) the SENIOR PREPAYMENT PERCENTAGE of the PRINCIPAL PREPAYMENT
AMOUNT (exclusive of the portion thereof attributable to the
DISCOUNT FRACTIONAL PRINCIPAL AMOUNT); and
(3) the SENIOR LIQUIDATION AMOUNT.
"SPECIAL HAZARD COVERAGE" is expected to equal approximately $2,057,133 as of
the Cut-Off Date. On each anniversary of the Cut-Off Date, the SPECIAL HAZARD
COVERAGE will be reduced, but not increased, to an amount equal to the lesser
of:
(1) the greatest of:
(a) the aggregate principal balance of the Loans located in the
single California zip code area containing the largest aggregate
principal balance of such Loans;
(b) 1.0% of the aggregate unpaid principal balance of the Loans; and
(c) twice the unpaid principal balance of the largest single Loan, in
each case calculated as of the due date in the immediately
preceding month; and
(2) the SPECIAL HAZARD COVERAGE as of the Cut-Off Date as reduced by
the SPECIAL HAZARD LOSSES allocated to the certificates since the
Cut-Off Date.
"SPECIAL HAZARD LOSSES" are losses relating to Loans that become liquidated and
have been the subject of certain hazards (including earthquakes, tidal waves and
related water damage) not insured against under any applicable insurance policy.
Special Hazard Losses do not include losses occasioned by war, civil
insurrection, certain government actions, errors in design, faulty workmanship
or materials (except under certain circumstances, nuclear reaction, chemical
contamination or waste by the mortgagor).
S-29
<PAGE>
"STEP DOWN PERCENTAGE" for any distribution date will be the percentage
indicated below:
STEP DOWN
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
----------
January 2004 through December 2008.................... 0%
January 2009 through December 2009.................... 30%
January 2010 through December 2010.................... 40%
January 2011 through December 2011.................... 60%
January 2012 through December 2012.................... 80%
January 2013 and thereafter........................... 100%
"SUBORDINATE LIQUIDATION AMOUNT" will equal the excess, if any, of the aggregate
LIQUIDATION PRINCIPAL for all Loans which became LIQUIDATED LOANS during the
calendar month preceding the month of the distribution date, minus the SENIOR
LIQUIDATION AMOUNT for such distribution date.
"SUBORDINATE PERCENTAGE" is equal to 100% minus the SENIOR PERCENTAGE.
Initially, the SUBORDINATE PERCENTAGE will be approximately 2.97%.
"SUBORDINATE PREPAYMENT PERCENTAGE" on any distribution date will equal 100%
minus the SENIOR PREPAYMENT PERCENTAGE. Initially the SUBORDINATE PREPAYMENT
PERCENTAGE will be 0%.
"SUBORDINATE PRINCIPAL AMOUNT" for any distribution date will be equal to the
sum of:
(1) the SUBORDINATE PERCENTAGE of the PRINCIPAL PAYMENT AMOUNT
(exclusive of the portion thereof attributable to the DISCOUNT
FRACTIONAL PRINCIPAL AMOUNT);
(2) the SUBORDINATE PRINCIPAL PREPAYMENT AMOUNT; and
(3) the SUBORDINATE LIQUIDATION AMOUNT;
provided, however, that the SUBORDINATE PRINCIPAL AMOUNT shall be reduced by the
amounts required to be distributed to the Class A-P certificates with respect to
the DISCOUNT FRACTIONAL PRINCIPAL SHORTFALL on such distribution date. Any
reduction in the SUBORDINATE PRINCIPAL AMOUNT pursuant to the provision above
shall offset the amount calculated pursuant to first clause (1), second clause
(3) and then clause (2), in each case of the definition thereof.
"SUBORDINATE PRINCIPAL PREPAYMENT AMOUNT" as of any distribution date is the
SUBORDINATE PREPAYMENT PERCENTAGE of the PRINCIPAL PREPAYMENT AMOUNT (exclusive
of the portion thereof attributable to the DISCOUNT FRACTIONAL PRINCIPAL
AMOUNT).
"SUBORDINATION LEVEL" on any specified date with respect to any class of
Subordinate certificates is the percentage obtained by dividing:
(1) the sum of the class principal balances of all classes of
certificates which are subordinate in right of payment to such
class as of such date before giving effect to distributions or
allocations of realized losses on the Loans on such date; by
(2) the sum of the class principal balances of all classes of
certificates as of such date before giving effect to
distributions or allocations of realized losses on the Loans on
such date.
S-30
<PAGE>
PRIORITY OF DISTRIBUTIONS
Commencing in January 2004, the Trustee will make distributions to
certificateholders on each distribution date which will be the 25th day of each
month, or if such 25th day is not a business day, on the immediately succeeding
business day. Before the Credit Support Depletion Date, the Trustee will make
such distributions to certificateholders in the following order and priority:
(1) first, the Discount Fractional Principal Amount for such
distribution date, to the Class A-P certificates;
(2) second, interest to the Senior certificates entitled to receive
accrued and unpaid interest; provided, however, that interest
accrued on the Class A-3 certificates and Class A-5 certificates
shall be distributed in the following manner:
(a) with respect to the Class A-1 certificates and Class A-5
certificates, until the earlier to occur of (i) the
distribution date on which the class principal balance of
the Class A-1 certificates has been reduced to zero or (ii)
the distribution date on which the class principal balance
of the Class A-5 certificates has been reduced to zero, the
aggregate amount of interest accrued on the Class A-5
certificates shall be payable as principal in the following
manner and order of priority:
(i) first, to the Class A-1 certificates, if the
aggregate principal balance of the Loans as of the
related Due Date (after giving effect to all payments
made as of the date specified in the Pooling and
Servicing Agreement) is greater than the scheduled
principal balance set forth in Appendix A for such
distribution date, until the class principal balance
thereof has been reduced to zero; and
(ii) second, to the Class A-5 certificates, until the
class principal balance thereof has been reduced to
zero; and
(b) with respect to the Class A-2 certificates and Class A-3
certificates, until the class principal balance of the Class
A-2 certificates has been reduced to zero, the aggregate
amount of interest accrued on the Class A-3 certificates
shall be payable as principal to the Class A-2 certificates
until the class principal balance thereof has been reduced
to zero;
(3) third, the Senior Principal Amount to the Senior certificates
then entitled to principal (other than the Class A-P
certificates), in the following order of priority:
(a) first, to the Class R certificate, until its class principal
balance has been reduced to zero;
(b) second, to the Class A-4 certificates and Class A-7
certificates, pro rata, up to the Lockout Principal Amount
for such distribution date, until their respective class
principal balances have been reduced to zero;
(c) third, concurrently as follows:
S-31
<PAGE>
(i) approximately 16.5402072521% of the Senior Principal
Amount distributable under clause (3)(c) shall be
distributed in the following manner and order of
priority:
(a) first, if the aggregate principal balance of
the Loans as of the related Due Date (after
giving effect to all payments made as of the
date specified in the Pooling and Servicing
Agreement) is greater than the scheduled
principal balance set forth in Appendix A
for such distribution date, to the Class A-1
certificates, until the class principal
balance thereof has been reduced to zero;
(b) second, to the Class A-5 certificates, until
the class principal balance thereof has been
reduced to zero; and
(c) third, to the Class A-1 certificates, until
the class principal balance thereof has been
reduced to zero; and
(ii) approximately 83.4597927479% of the Senior Principal
Amount distributable under clause (3)(c) shall be
distributed to the Class A-6, Class A-8 and Class A-9
certificates, pro rata, until their respective class
principal balances have been reduced to zero;
(d) fourth, to the Class A-2 certificates, until its class
principal balance has been reduced to zero;
(e) fifth, to the Class A-3 certificates, until its class
principal balance has been reduced to zero;
(f) sixth, to the Class A-4 certificates and Class A-7
certificates, pro rata, until their respective class
principal balances have been reduced to zero;
(4) fourth, the Discount Fractional Principal Shortfall to the Class
A-P certificates, but not more than an amount equal to the
Subordinate Principal Amount (without regard to the proviso of
such definition);
(5) fifth, to the Class M, Class B-1, Class B-2, Class B-3, Class B-4
and Class B-5 certificates, in that order of seniority, their
respective amount of accrued and unpaid interest and their pro
rata share, according to their outstanding class principal
balances, of the Subordinate Principal Amount; provided, however,
that on any distribution date on which the Subordination Level
for any class of Subordinate certificates is less than the
Subordination Level as of the Closing Date, the portion of the
Subordinate Principal Prepayment Amount otherwise allocable to
the class or classes of the Subordinate certificates junior to
such class will be allocated to the most senior class of
Subordinate certificates for which the Subordination Level is
less than such percentage as of the Closing Date and to the class
or classes of Subordinate certificates senior thereto, pro rata
according to the class principal balances of such classes;
(6) sixth, to the Senior certificates and Subordinate certificates,
in the order of their seniority, the amount of any unreimbursed
losses previously allocated to such certificates; and
S-32
<PAGE>
(7) seventh, to the Class R certificate, the remainder, if any, which
is expected to be zero, of the Available Distribution Amount.
On each distribution date on or after the Credit Support Depletion
Date, to the extent of the Available Distribution Amount on such distribution
date, distributions will be made to the Senior certificates in the following
order of priority:
(1) first, the Discount Fractional Principal Amount for such
distribution date, to the Class A-P certificates;
(2) second, to the Senior certificates (other than the Principal Only
certificates) accrued and unpaid interest pro rata according to
such amount payable to the extent of amounts available;
(3) third, to the Senior certificates (other than the Interest Only
certificates and Class A-P certificates), principal, pro rata,
according to their outstanding class principal balances;
(4) fourth, to each class of Senior certificates, pro rata, according
to their outstanding class principal balances, the amount of
unreimbursed losses previously allocated to each class; and
(5) fifth, to the Class R certificate, the remainder, if any, which
is expected to be zero, of the Available Distribution Amount.
With respect to each class of certificates (except for the Principal
Only certificates), interest will be passed through monthly on each distribution
date, commencing in January 2004. The Class A-3 certificates will not be
entitled to receive any distributions of interest until the principal balance of
the Class A-2 certificates has been reduced to zero. The Class A-5 certificates
will not be entitled to receive any distributions of interest until the class
principal balance of the Class A-1 certificates has been reduced to zero. Any
such accrued interest on the Accrual certificates distributed as principal will
be added to its class principal balance. With respect to each distribution date,
interest will accrue during the Interest Accrual Period in an amount determined
by the following formula:
1/12th of the the related class
applicable x principal balance or
interest rate for notional amount for
each class each class
For purposes of this formula, the notional amount on any distribution
date for the Class A-10 certificates and Class A-X certificates will be equal to
the Class A-10 Notional Amount and Class A-X Notional Amount, respectively.
The interest rates for the Senior (other than the Adjustable Rate
certificates) and Subordinate classes of certificates are fixed as set forth on
pages ii. The interest rate on the Class A-9 certificates and Class A-10
certificates will be equal to the Class A-9 Interest Rate and Class A-10
Interest Rate, respectively.
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
Adjustable Rate certificates for the related Interest Accrual Period will (in
the absence of manifest error) be final and binding.
S-33
<PAGE>
SUBORDINATION AND ALLOCATION OF LOSSES
The Subordinate certificates will be subordinate in right of payment to
and provide credit support to the Senior certificates. The Junior Subordinate
certificates will be subordinate in right of payment to and provide credit
support to the Senior Subordinate certificates. Each class of Senior Subordinate
certificates will be subordinate in right of payment to and provide credit
support to each class of Senior Subordinate certificates senior thereto. The
support provided by the Subordinate certificates is intended to enhance the
likelihood of regular receipt by the Senior certificates of the full amount of
the monthly distributions of interest and principal to which the Senior
certificates are entitled and to afford the Senior certificates protection
against certain losses. The protection afforded to the Senior certificates by
the Subordinate certificates will be accomplished by the preferential right on
each distribution date of the Senior certificates to receive distributions of
interest and principal before distributions of interest or principal to the
Subordinate certificates. The protection afforded a class of Senior Subordinate
certificates by the classes of Senior Subordinate certificates subordinate
thereto will be similarly accomplished by the preferential right of such classes
to receive distributions of principal and interest before distributions of
principal and interest to those classes of Senior Subordinate certificates
subordinate thereto. The support provided by the Junior Subordinate certificates
to the Senior Subordinate certificates is intended to enhance the likelihood of
regular receipt by such Senior Subordinate certificates of the full amount of
monthly distributions of interest and principal to which they are entitled and
to afford such certificateholders protection against certain losses. The
protection afforded to the Senior Subordinate certificates by the Junior
Subordinate certificates will be accomplished by the preferential right on each
distribution date of the Senior Subordinate certificates to receive
distributions of interest and principal prior to distributions of interest and
principal to such Junior Subordinate certificates.
Except for Excess Losses, any realized loss will be allocated among the
certificates, as follows:
(i) for losses allocable to principal:
o first, to the Junior Subordinate certificates, until the
aggregate of the class principal balances thereof has been
reduced to zero,
o second, to the Class B-2 certificates, until the class
principal balance thereof has been reduced to zero,
o third, to the Class B-1 certificates, until the class
principal balance thereof has been reduced to zero,
o fourth, to the Class M certificates, until the class
principal balance thereof has been reduced to zero, and
o fifth, to the Senior certificates, by Pro Rata Allocation,
until the aggregate of the class principal balances thereof
have been reduced to zero;
provided, however, that prior to the Credit Support Depletion
Date if the loss is recognized with respect to a Discount Loan,
the Discount Fraction of such loss will be allocated to the Class
A-P certificates and the remainder of such loss will be allocated
as described above in this clause (i); and
S-34
<PAGE>
(ii) for losses allocable to interest:
o first, to the Junior Subordinate certificates, in reduction of
accrued but unpaid interest thereon until the amount of
interest accrued on the Junior Subordinate certificates on
such distribution date has been reduced to zero,
o second, to the Class B-2 certificates, in reduction of accrued
but unpaid interest thereon until the amount of interest
accrued on the Class B-2 certificates on such distribution
date has been reduced to zero,
o third, to the Class B-1 certificates, in reduction of accrued
but unpaid interest thereon until the amount of interest
accrued on the Class B-1 certificates on such distribution
date has been reduced to zero,
o fourth, to the Class M certificates, in reduction of accrued
but unpaid interest thereon until the amount of interest
accrued on the Class M certificates on such distribution date
has been reduced to zero, and
o fifth, to the Senior certificates (other than the Principal
Only certificates), by Pro Rata Allocation, until the amount
of interest accrued on those Senior certificates on such
distribution date has been reduced to zero.
The allocation of the principal portion of any loss as described above
will be achieved by reducing the class principal balance of the related class by
the amount of such loss on the applicable distribution date. The amount paid on
any distribution date in respect of Discount Fractional Principal Shortfalls
will be applied to reduce the class principal balances of the Subordinate
certificates in inverse order of seniority.
On each distribution date, if the aggregate class principal balance of
all outstanding classes of certificates exceeds the aggregate principal balance
of the Loans (after giving effect to distributions of principal and the
allocation and reimbursement of all losses on the classes of certificates on
such distribution date, including any reductions in the class principal balances
of the Subordinate certificates as a result of any amounts paid in respect of
Discount Fractional Principal Shortfalls on that distribution date), such excess
will be deemed a principal loss and will be allocated as follows:
(1) first, to the Subordinate certificates in reverse order of
seniority until each of their class principal balances has been
reduced to zero, and
(2) second, to the Senior certificates (other than the Interest Only
certificates) pro rata according to their class principal
balances or, in the case of the Accrual certificates, the class
principal balances of those classes of certificates on the
Closing Date, if lower, in reduction thereof.
In the event of a personal bankruptcy of a mortgagor, the bankruptcy
court may establish a Deficient Valuation. The amount of the secured debt could
be reduced to such Deficient Valuation amount, and the holder of such Loan thus
would become an unsecured creditor to the extent the outstanding principal
balance of such Loan exceeds the value so assigned to the mortgaged property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding, including the reduction of the
amount of the Monthly Payment on the related Loan.
S-35
<PAGE>
Excess Losses will be allocated to the outstanding class or classes of
Senior certificates and to the Subordinate certificates by Pro Rata Allocation.
Special Hazard Coverage, Fraud Coverage or Bankruptcy Coverage may also
be reduced upon written confirmation from the Rating Agencies that such
reduction will not adversely affect the then current ratings assigned to the
offered certificates by the Rating Agencies. Such a reduction, in the event of
Special Hazard Losses, Fraud Losses or Bankruptcy Losses on the Loans, could
adversely affect the level of protection afforded the Senior certificates by
subordination of the Subordinate certificates or the level of protection
afforded the Senior Subordinate certificates by subordination of the Junior
Subordinate certificates.
THE CLASS R CERTIFICATE
The Class R certificate will be comprised of two Components: Component
R-1 and Component R-2. Component R-1 represents the residual interest in REMIC I
and Component R-2 represents the residual interest in REMIC II.
On each distribution date, in addition to payments of interest and
principal to the Class R certificate described in this prospectus supplement,
the Trustee will distribute any amounts remaining (which are expected to be
zero) in the Certificate Account from the Available Distribution Amount after
distributions of interest and principal on the certificates and payment of
expenses, if any, of REMIC II and (after the final distribution has been made
with respect to the certificates), to the Class R certificateholders, together
with Excess Liquidation Proceeds, if any. Distributions of such remaining
amounts (but not the Excess Liquidation Proceeds) with respect to the Class R
certificate will be subordinate to all payments required to be made with respect
to the other offered certificates.
Any amounts remaining in the Certificate Account upon reduction of the
aggregate class principal balance of the Certificates to zero, payment of any
outstanding expenses and termination of REMIC II will be distributable with
respect to the Class R certificate. Such remaining assets are expected to be
minimal. See "--Optional Termination".
LAST SCHEDULED DISTRIBUTION DATE
The last scheduled distribution date for the Senior certificates (other
than the Class A-2 certificates) and Subordinate certificates is the
distribution date in January 2034, which is the distribution date occurring in
the month following the original scheduled maturity date for the latest maturing
Loan.
The last scheduled distribution date for the Class A-2 certificates is
the distribution date in February 2018.
The actual last distribution date on any class of certificates will
depend on the rate of payments of principal on the Loans which, in turn, may be
influenced by a variety of economic, geographic and social factors, as well as
the level of prevailing interest rates. No assurance can be given as to the
actual payment experience with respect to the Loans.
OPTIONAL TERMINATION
On any distribution date after the first date on which the aggregate
outstanding principal balance of the Loans is less than 5% of the aggregate
principal balance of the Loans as of the Cut-Off Date, the Servicer may
repurchase the Loans and all property acquired in respect of any Loan remaining
in REMIC
S-36
<PAGE>
I, and thereby, effect the termination of REMIC I and REMIC II and the
retirement of the certificates; provided that the aggregate fair market value of
the Loans and such property is at least equal to the repurchase price described
in the next sentence. The repurchase price will equal the sum of (1) 100% of the
aggregate outstanding principal balance of such Loans (other than Liquidated
Loans), plus accrued interest thereon at the applicable interest rates through
the last day of the month of such repurchase, less any Bankruptcy Losses
realized with respect to the Loans not already allocated to the certificates and
(2) the fair market value of all other property. The repurchase price paid by
the Servicer will also include certain amounts owed by the Seller due to
breaches of certain representations and warranties made under the mortgage loan
purchase agreement that remain unpaid on the date of the optional termination,
which will be paid concurrently with such repurchase price. The Trustee will
treat the proceeds of such repurchase as a prepayment of the Loans for purposes
of distributions to certificateholders. Accordingly, an optional termination of
the REMIC II will cause the outstanding principal balance of the certificates to
be paid in full through the distribution of such proceeds and the allocation of
the associated realized losses, if any, on each mortgaged property in REMIC I
having a fair market value less than the aggregate principal balance of the
related Loan as of the time that REMIC I acquired such mortgaged property. Upon
payment in full of the certificates, the Trustee will terminate REMIC I and
REMIC II. In no event will either REMIC I or REMIC II continue beyond the
expiration of 21 years from the death of the survivor of certain persons
identified in the Pooling and Servicing Agreement. See "Description of
Certificates--Optional Termination of a Trust or Underlying Trust" in the
prospectus.
SERVICING
The Depositor acquired the Loans from Washington Mutual Mortgage
Securities Corp., who acquired the Loans from an affiliate of the Depositor, ABN
AMRO Mortgage Group, Inc. ("AAMG"). Pursuant to the Pooling and Servicing
Agreement, Washington Mutual Mortgage Securities Corp. will service the Loans
(in this capacity, also referred to as the Servicer).
WMMSC'S DELINQUENCY, LOSS AND FORECLOSURE EXPERIENCE
Delinquency and Foreclosure Statistics
The following table sets forth certain information, as reported to
WMMSC by its various servicers, concerning recent delinquency, loss and
foreclosure experience on mortgage loans included in various mortgage pools
underlying all series of WMMSC mortgage pass-through certificates with respect
to which one or more classes of certificates were publicly offered.
There can be no assurance that the delinquency, loss and foreclosure
experience set forth in the following table (which includes mortgage loans with
various terms to stated maturity and a variety of payment characteristics, such
as balloon loans and buydown loans) will be representative of the results that
may be experienced with respect to the mortgage loans serviced by WMMSC.
Delinquencies, losses and foreclosures generally are expected to occur more
frequently after the first full year of the life of a mortgage loan.
Accordingly, because a large number of mortgage loans included in the mortgage
pools underlying WMMSC's mortgage pass-through certificates have been recently
originated, the current level of delinquencies, losses and foreclosures may not
be representative of the levels that may be experienced over the lives of those
mortgage loans.
S-37
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended At or for the year ended At or for the quarter ended
December 31, 2001 December 31, 2002 September 30, 2003
------------------- ------------------- -------------------
By Dollar By Dollar By Dollar
Amount of Amount of Amount of
By No. of Loans By No. of Loans By No. of Loans
Loans (In Millions) Loans (In Millions) Loans (In Millions)
-------------- -------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL RATED MORTGAGE PASS-THROUGH
CERTIFICATES PORTFOLIO............. 110,236 $30,674.1 122,709 $47,538.8 101,687 $44,092.6
AVERAGE BALANCE(1)................. 105,313 25,446.2 117,878 39,918.7 114,890 47,746.0
PERIOD OF DELINQUENCY(2)
31-59 DAYS.................... 2,840 $605.0 2,406 $667.7 1,529 417.5
60-89 DAYS.................... 740 140.8 552 129.8 390 87.3
90 DAYS OR MORE............... 885 167.0 406 88.4 280 65.9
--------- ----------- --------- ---------- ---------- ------------
TOTAL DELINQUENT LOANS............. 4,465 $912.8 3,364 $885.9 2,199 $570.7
DELINQUENCY RATE................... 4.05% 2.98% 2.74% 1.86% 2.16% 1.29%
FORECLOSURES(3)................... 790 $135.0 1,089 $197.3 901 $167.7
FORECLOSURE RATIO(4)............... 0.72% 0.44% 0.89% 0.42% 0.89% 0.38%
COVERED LOSSES(5).................. $8.8 $17.3 $13.5
APPLIED LOSSES(6).................. $8.5 $16.5 $12.4
</TABLE>
Note: Due to rounding, totals may not equal sum of line items.
- --------
(1) Average balance for the period indicated is based on end of month
balances divided by the number of months in the period indicated.
(2) The indicated periods of delinquency are based on the number of days
past due, based on a 30-day month. No mortgage loan is considered
delinquent for the purpose of this table until one month has passed
after the related due date. A mortgage loan is no longer considered
delinquent once foreclosure proceedings have begun.
(3) Includes mortgage loans for which foreclosure proceedings had been
instituted or for which the related property had been acquired as of
the dates indicated.
(4) Foreclosures as a percentage of total mortgage loans at the end of each
period.
(5) Covered losses are gross losses (as defined below) realized during the
period indicated that were covered by credit enhancements obtained or
established for one or more pools of mortgage loans, exclusive of any
insurance (such as primary mortgage insurance or ordinary hazard
insurance) that was available for specific mortgage loans or mortgaged
properties. "Gross losses" are the sum for each mortgage loan
liquidated during the applicable period of the difference between (a)
the sum of the outstanding principal balance plus accrued interest,
plus all liquidation expenses related to the mortgage loan and (b) all
amounts received in connection with the liquidation of the related
mortgaged property, including insurance (such as primary mortgage
insurance or ordinary hazard insurance) available solely for the
mortgage loan or the related mortgaged property.
(6) Applied losses are covered losses that were applied against the
outstanding principal balance of the mortgage pass- through
certificates during the period indicated.
SERVICING DUTIES, COMPENSATION AND EXPENSES
Under the Pooling and Servicing Agreement, the Servicer may contract
with subservicers to perform some or all of its servicing duties. Regardless of
its servicing arrangements, the Servicer will remain liable for its servicing
duties and obligations under the Pooling and Servicing Agreement as if the
Servicer alone were servicing the Loans.
The Servicer will receive a servicing fee, which will range from 0.28%
to 0.98% per annum, with an initial weighted average of approximately 0.52% per
annum, for its services under the Pooling and Servicing Agreement. The servicing
fee will be calculated monthly as a per annum percentage of the outstanding
principal balance of each Loan. Out of this servicing fee, the Servicer will pay
fees to the Trustee and any subservicers.
In addition, the Servicer is obligated to remit Compensating Interest
to the Certificate Account on the day before each distribution date.
S-38
<PAGE>
The Servicer will pay all expenses incurred in connection with its
activities as Servicer. The Servicer is entitled to reimbursement for certain
expenses incurred by it in connection with the liquidation of defaulted Loans.
In addition, the Servicer is entitled to reimbursement of expenditures incurred
by it in connection with the restoration of a damaged mortgaged property.
SPECIAL SERVICING AGREEMENTS
The Pooling and Servicing Agreement permits the Servicer to enter into
a special servicing agreement with an unaffiliated holder of the Subordinate
certificates. Pursuant to this special servicing agreement, the holder may,
among other things, instruct the Servicer to commence or delay foreclosure
proceedings on delinquent Loans.
REPORTS TO CERTIFICATEHOLDERS
The Trustee or its designee will forward or cause to be forwarded with
each distribution or will make available through an internet website on a
distribution date to each holder of record of an offered certificate a report
setting forth certain information. In connection with providing access to such
internet website, the Trustee or its designee may require registration and the
acceptance of a disclaimer. For a description of the information contained in
such report, see "The Pooling and Servicing Agreement--Reports to the
Certificateholders" in the prospectus.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yield to maturity of each class of certificates will depend upon,
among other things, the price at which such certificates are purchased, the
applicable interest rate, the actual characteristics of the Loans, the rate of
principal payments (including principal prepayments) on the Loans and the rate
of liquidations on the Loans. The yield to maturity to holders of the
certificates (other than the Adjustable Rate certificates) will be lower than
the yield to maturity otherwise produced by the applicable interest rate and
purchase price of such certificates, because principal and interest
distributions will not be payable to such certificateholders until the 25th day
of the month following the month of accrual (without any additional distribution
of interest or earnings thereon with respect to such delay).
Any net interest shortfalls, as described under the heading
"Description of the Certificates--Priority of Distributions" in this prospectus
supplement, will adversely affect the yields on the offered certificates. In
addition, although all realized losses (other than Excess Losses) initially will
be borne by the Subordinate certificates, in the reverse order of their
numerical class designations (either directly or through distributions in
respect of Discount Fractional Principal Shortfalls on the Class A-P
certificates), Excess Losses will be allocated to the outstanding class or
classes of Senior certificates and to the Subordinate certificates by Pro Rata
Allocation. Moreover, since the Subordinate Principal Amount for each
distribution date will be reduced by the amount of any distributions on the
distribution date in respect of Discount Fractional Principal Shortfalls, the
amount distributable as principal on each distribution date to each class of
Subordinate certificates then entitled to a distribution of principal will be
less than it otherwise would be in the absence of the Discount Fractional
Principal Shortfalls. 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 realized
losses.
S-39
<PAGE>
PRINCIPAL PREPAYMENTS AND COMPENSATING INTEREST
When a mortgagor prepays a Loan in full between Due Dates for such
Loan, the mortgagor pays interest on the amount prepaid only to the date of
prepayment, instead of for the entire month. Also, when a partial principal
prepayment is made on a Loan together with the scheduled monthly payment for a
month on or after the related Due Date, the principal balance of the Loan is
reduced by the amount of the partial principal prepayment as of such Due Date.
However, the additional principal is not distributed to certificateholders until
the distribution date in the next month. Therefore, one month of interest
shortfall accrues on the amount of such partial principal prepayment.
The Servicer will pass through Compensating Interest to the
certificateholders to the limited extent and in the manner set forth below to
reduce the adverse effect on certificateholders from the deficiency in interest
payable as a result of a prepayment in full on a Loan between its Due Dates. The
Servicer is obligated to remit to the Certificate Account on the day before each
distribution date, an amount equal to the lesser of (a) any shortfall for the
related month in interest collections resulting from the timing of prepayments
in full on the related Loans made during the related Payoff Period, except for
prepayments in full received during the period from the 1st through the 14th day
of the month of the applicable distribution date and (b) the sum of (i)
one-twelfth of 0.03% of the aggregate outstanding principal balance of each Loan
on the second Due Date preceding such distribution date, (ii) any reinvestment
income realized by the Servicer relating to prepayments in full on the related
Loans made during the related Payoff Period from the investment of each such
prepayment in full from the date of receipt of such prepayment in full until the
business day immediately preceding the related distribution date and (iii)
interest payments on such prepayments in full received on or after the 1st
calendar day through and including the 14th calendar day of the calendar month
of the applicable distribution date. To the extent the interest payments
described in clause (iii) of the preceding sentence are not used to pay
Compensating Interest on any distribution date, such amounts will be payable to
the Servicer as additional servicing compensation. Full principal prepayments of
any Loans received during the period from the 1st calendar day through and
including the 14th calendar day of any month will be passed through to
certificateholders on the distribution date of the same month (except for full
principal prepayments received from the Cut-Off Date through December 14, 2003,
which will be passed through to certificateholders on the January 2004
distribution date), rather than on the distribution date of the following month,
together with a full month's interest for the prior month. Accordingly, no
Compensating Interest will be payable for full principal prepayments on Loans
received during that period. Full principal prepayments received during the
period from the 15th calendar day through the last calendar day of any month
will be passed through on the distribution date in the following month, and, in
order to provide for a full month's interest payment for the prior month,
Compensating Interest will be passed through to certificateholders for that
period.
To the extent that the amount allocated to pay Compensating Interest is
insufficient to cover the deficiency in interest payable as a result of a full
or partial principal prepayment on a Loan, such remaining deficiency will be
allocated to the certificates (other than the Principal Only certificates) pro
rata according to the amount of interest to which each related class of
certificates would otherwise be entitled in reduction thereof.
THE SUBORDINATE CERTIFICATES
The weighted average life of, and the yield to maturity on, the
Subordinate certificates, in decreasing order of their priority of
distributions, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Loans. If the
actual rate and severity of losses on the Loans is higher than those assumed by
a holder of a Subordinate certificate, the
S-40
<PAGE>
actual yield to maturity of such certificate may be lower than the yield
expected by such holder based on such assumption. The timing of losses on the
Loans will also affect an investor's actual yield to maturity, even if the rate
of defaults and severity of losses over the life of the Loans are consistent
with such investor's expectations. In general, the earlier a loss occurs, the
greater the effect on an investor's yield to maturity. Losses on the Loans will
reduce the class principal balances of the Subordinate certificates to the
extent of any losses allocated thereto without the receipt of cash attributable
to such reduction. See "Description of the Certificates--Subordination and
Allocation of Losses". As a result of such reductions, less interest will accrue
on such classes of Subordinate certificates than otherwise would be the case.
The yield to maturity of the Subordinate certificates will also be affected by
disproportionate allocations of principal prepayments to the Senior
certificates, net interest shortfalls and other cash shortfalls in the Available
Distribution Amount. See "Description of the Certificates--Subordination and
Allocation of Losses".
RATE OF PAYMENTS
The rate of principal payments on the certificates entitled to receive
principal generally is directly related to the rate of principal payments on the
Loans, which may be in the form of scheduled payments or principal prepayments.
See "Risk Factors" in this prospectus supplement and "Prepayment, Yield and
Maturity Considerations" in the prospectus. Mortgagors generally may prepay the
Loans at any time without penalty. A higher-than-anticipated rate of principal
prepayments would reduce the aggregate principal balance of the Loans more
quickly than expected. As a consequence, aggregate interest payments with
respect to the Loans would be substantially less than expected; therefore, a
higher rate of principal prepayments could result in a lower-than-expected yield
to maturity on each class of Senior certificates (except for the Class A-P
certificates) and any class of Subordinate certificates purchased at a premium,
and in certain circumstances such investors may not fully recoup their initial
investments. Conversely, a lower-than-anticipated rate of principal prepayments
would reduce the return to investors on any class of Senior certificates (except
for the Interest Only certificates) and any class of Subordinate certificates
purchased at a discount, in that principal payments with respect to the Loans
would occur later than anticipated. There can be no assurance that
certificateholders will be able to reinvest amounts received with respect to the
certificates at a rate which is comparable to the applicable interest rate.
Investors should fully consider all of the associated risks.
SPECIAL SENSITIVITIES
Because the Accrual certificates are not entitled to receive any
distributions of interest for some period of time, these certificates will
likely experience significant price and yield volatility. As a result, the
Accrual certificates will be especially sensitive to the rate of payment of
principal (including prepayments, defaults and liquidations) on the mortgage
loans, as the Accrual certificates may be outstanding for a longer period of
time.
The yield to maturity on the Class A-X certificates will be extremely
sensitive to the level of principal prepayments on the Premium Loans. The
interest payable to the Class A-X certificates is based on the excess of the
weighted average of the Pass-Through Rate for each Premium Loan over 5.50%.
Therefore, the yield to maturity on the Class A-X certificates will be adversely
affected as a result of faster-than-expected principal prepayments on the
Premium Loans. Prospective investors should fully consider the risks associated
with an investment in the Class A-X certificates, including the possibility that
if the rate of principal prepayments on the Premium Loans is rapid, such
investors may not fully recoup their initial investments.
S-41
<PAGE>
The yield to maturity on the Class A-P certificates will be extremely
sensitive to the level of principal prepayments on the Discount Loans. The
principal payable to the Class A-P certificates is derived from the Discount
Loans. Therefore, the yield to maturity on the Class A-P certificates will be
adversely affected by slower-than-expected principal prepayments on the Discount
Loans.
Because the interest payable on the Class A-X certificates is based
upon only the Premium Loans, and the principal distributable to the Class A-P
certificates is derived only from the Discount Loans, it is possible that
faster-than-expected principal prepayments on the Premium Loans may occur at the
same time as slower-than-expected principal prepayments on the Discount Loans,
which would result in a lower yield to maturity for the Class A-X certificates
and the Class A-P certificates.
PREPAYMENT SPEED ASSUMPTION AND MODELING ASSUMPTIONS
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this prospectus
supplement, except for the table set forth in Appendix A, (the "PREPAYMENT SPEED
ASSUMPTION" or "PSA") assumes that mortgages will prepay at an annual rate of
0.2% in the first month after origination, that the prepayment rate increases at
an annual rate of 0.2% per month up to the 30th month after origination and that
the prepayment rate is constant at 6% per annum in the 30th and later months
(this assumption is called "100% PSA"). For example, at 100% PSA, mortgages with
a loan age of three months (i.e. mortgages in their fourth month after
origination) are assumed to prepay at an annual rate of 0.8%. "0% PSA" assumes
no prepayments; "50% PSA" assumes prepayment rates equal to one-half times 100%
PSA; "200% PSA" assumes prepayment rates equal to two times 100% PSA; and so
forth. PSA is not a description of historical prepayment experiences or a
prediction of the mortgages' rate of prepayment.
The prepayment model used in this prospectus supplement with respect
the table set forth in Appendix A assumes a constant rate of prepayment ("CPR")
each month relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. An 8% CPR, assumes a
constant prepayment rate of 8% per annum of the outstanding principal balance of
such Loans. CPR is not a description of historical prepayment experiences or a
prediction of the mortgages' rate of prepayment. No representation is made that
the Loans will prepay at any given percentage of CPR.
PSA and CPR do not purport to be either an historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Pool, and there is no assurance that the Loans will prepay at any given
percentage of PSA or CPR. The actual rate of principal prepayments on the Loans
may be influenced by a variety of economic, geographic, social and other
factors. In general, if prevailing interest rates fall significantly below the
interest rates on the Loans, the Loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on the Loans. Conversely, if interest rates rise above the interest rates on the
Loans, the rate of prepayment would be expected to decrease. A comparatively low
interest rate environment may result in a higher-than- expected rate of
prepayments on the Loans and an earlier-than-expected retirement of the
certificates.
The Depositor makes no representation as to the specific factors that
will affect the prepayment of the Loans or the relative importance of such
factors. Factors not identified by the Depositor or discussed in this prospectus
supplement may significantly affect the prepayment rate of the Loans. In
particular, the Depositor makes no representation as to the percentage of the
principal amount of the Loans that will be paid as of any date or as to the
overall rate of prepayment.
S-42
<PAGE>
The tables set forth in Appendix C have been prepared on the basis of
the characteristics of the Loans that are expected to be included in the
Mortgage Pool, as described under "Description of the Mortgage Pool." The tables
set forth in Appendix B have been prepared assuming, among other things, the
following modeling assumptions (collectively, the "MODELING ASSUMPTIONS"):
o scheduled payments on all Loans are received on the first day of
each month beginning January 1, 2004,
o any prepayments in full on the Loans are received on the last day
of each month, beginning on December 31, 2003 and include a full
month's interest thereon,
o there are no defaults or delinquencies on the Loans,
o optional termination of the REMIC does not occur,
o there are no partial prepayments on the Loans and prepayments are
computed after giving effect to scheduled payments received on
the following day,
o the Loans prepay at the indicated constant percentages of PSA,
o the date of issuance for the certificates is December 30, 2003,
o cash distributions are received by the certificateholders on the
25th day of each month when due,
o the scheduled monthly payments for each Loan are computed based
upon its unpaid principal balance, mortgage interest rate and
amortized remaining term, such that the Loan will fully amortize
on its maturity date,
o the Loans were aggregated into assumed Loans having the following
characteristics:
ASSUMED LOAN CHARACTERISTICS FOR THE LOANS
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
CURRENT REMAINING
WEIGHTED AMORTIZED WEIGHTED
AVERAGE CURRENT TERM TO AVERAGE
MORTGAGE WEIGHTED AVERAGE MATURITY LOAN AGE
LOAN TYPE PRINCIPAL BALANCE INTEREST RATE PASS-THROUGH RATE (MONTHS) (MONTHS)
- --------- ----------------- ------------- ----------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Loans with a 5.50% $246,856,007.30 6.0765020305% 5.5000000000% 359 1
Pass-Through Rate.........
Discount Loans ........... $ 91,982,653.69 5.6488321521% 5.3688321521% 358 1
Premium Loans ............ $ 15,839,396.76 6.5621641546% 5.5821641546% 359 1
</TABLE>
Variations in actual prepayment experience may increase or decrease the
percentages of the original outstanding class principal balances and the
weighted average lives shown in the tables in Appendix B. Such variations may
occur even if the average prepayment experience of all the Loans equals the
indicated percentage of the Prepayment Speed Assumption. There is no assurance,
however, that prepayment of the Loans will conform to any given percentage of
the Prepayment Speed Assumption. The Depositor makes no representation that the
actual rates of prepayments on the Loans will in any way correspond to any of
the assumptions made in this prospectus supplement.
S-43
<PAGE>
Based on the foregoing assumptions, the tables in Appendix A indicate
the weighted average lives of the offered certificates (other than the Interest
Only certificates) and set forth the percentages of the initial class principal
balances of each such class of offered certificates that would be outstanding
after each of the distribution dates shown at various constant percentages of
the Prepayment Speed Assumption.
There are no historical prepayment data available for the Mortgage
Pool, and comparable data is not available because the Loans do not constitute a
representative sample of mortgage loans generally. In addition, historical data
available with respect to mortgage loans underlying mortgage pass-through
certificates issued by the Government National Mortgage Association, Fannie Mae
and Freddie Mac may not be comparable to prepayments expected to be experienced
by the Mortgage Pool because the Loans may have characteristics which differ
from the mortgage loans underlying certificates issued by these entities.
The Depositor makes no representation that the Loans will prepay in the
manner or at any of the rates assumed above. Each investor must make its own
decision as to the appropriate prepayment assumptions to be used in deciding
whether or not to purchase any of the certificates. Since the rate of principal
payments (including prepayments) with respect to, and repurchases of, the Loans
will significantly affect the yields to maturity on the offered certificates,
prospective investors are urged to consult their investment advisors as to both
the anticipated rate of future principal payments (including prepayments) on the
Loans and the suitability of the certificates to their investment objectives.
YIELD CONSIDERATIONS OF THE INTEREST ONLY CERTIFICATES AND PRINCIPAL ONLY
CERTIFICATES
The yield to maturity on the Class A-X certificates and Class A-P
certificates will be extremely sensitive to the level of principal prepayments
on certain of the Loans as described in "Prepayment and Yield
Considerations--Rate of Payments" and "--Special Sensitivities".
To illustrate the significance of different rates of prepayment on the
distributions to the Class A- X certificates and Class A-P certificates, the
following tables indicate the approximate pre-tax yields to maturity (on a
corporate bond equivalent basis) under the different constant percentages of PSA
indicated. Because the rate of distribution of interest on the Interest Only
certificates, and the rate of distribution of principal on the Principal Only
certificates will be directly related to the actual amortization (including
prepayments) of the Loans, which will include Loans that have remaining terms to
maturity shorter or longer than those assumed and interest rates higher or lower
than those assumed, the pre-tax yields to maturity on these certificates are
likely to differ from those shown in the following tables even if all the Loans
prepay at the indicated constant percentages of PSA. Any differences between
such assumptions and the actual characteristics and performance of the Loans and
of the certificates may result in yields to maturity being different from those
shown in such tables. Discrepancies between assumed and actual characteristics
and performances underscore the hypothetical nature of the tables, which are
provided only to give a general sense of the sensitivity of yields to maturity
in varying prepayment scenarios. In addition, it is highly unlikely that the
Loans will prepay at a constant level of PSA until maturity or that all of such
Loans will prepay at the same rate. The timing of changes to the rate of
principal prepayments may significantly affect the actual yield to maturity to
an investor, even if the average rate of principal prepayments is consistent
with an investor's expectation. In general, the earlier a payment of principal
of the Loans, the greater the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield to maturity of principal prepayments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the certificates will
not be equally offset by a subsequent like reduction (or increase) in the rate
of principal prepayments.
S-44
<PAGE>
In addition, the yield to maturity on the Class A-X certificates and
Class A-P certificates may be adversely affected if an optional termination of
REMIC II occurs.
The sensitivity tables for the Class A-X certificates and Class A-P
certificates set forth below are based on the Modeling Assumptions and assume
further that the certificates are purchased at prices equal to those set forth
in the tables plus accrued interest, if any. There can be no assurance that the
Loans will have the assumed characteristics, will prepay at any of the rates
shown in this prospectus supplement, or that the purchase prices of the
certificates will be as assumed or that the pre-tax yields to maturity will
correspond to any of the pre-tax yields shown in this prospectus supplement. In
addition to any other factors an investor may deem material, each investor must
make its own decision as to the appropriate prepayment assumptions to be used in
deciding whether or not to purchase a class of certificates.
The pre-tax yields for the Class A-X certificates and Class A-P
certificates could differ significantly from those shown in the tables below if
the Loans were to prepay at a different rate than shown.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE CLASS A-X CERTIFICATES TO
PRINCIPAL PREPAYMENTS AT AN ASSUMED PURCHASE PRICE OF 12.00%
PERCENTAGE OF PSA
------------------------------------------------------------
0% 100% 300% 400% 500%
------ ------ ------ ------ ------
Pre-Tax Yield..... 47.22% 42.60% 33.19% 28.40% 23.56%
- -------
(1) ON THE BASIS OF THE ASSUMPTIONS DESCRIBED BELOW, THE YIELD TO MATURITY ON
THE CLASS A-X CERTIFICATES WOULD BE APPROXIMATELY 0% IF PREPAYMENTS WERE TO
OCCUR AT A PREPAYMENT RATE OF APPROXIMATELY 973% PSA ASSUMING THE MODELING
ASSUMPTIONS AND PURCHASE PRICES ABOVE.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE CLASS A-P CERTIFICATES TO
PRINCIPAL PREPAYMENTS AT AN ASSUMED PURCHASE PRICE OF 66.00%
PERCENTAGE OF PSA
------------------------------------------------------------
0% 100% 300% 400% 500%
----- ----- ----- ------ ------
Pre-Tax Yield..... 2.30% 4.19% 8.59% 10.69% 12.68%
The pre-tax yields to maturity set forth in the preceding tables were
calculated by determining the monthly discount rates (whether positive or
negative) which, when applied to the assumed streams of cash flows to be paid on
the Class A-X certificates and Class A-P certificates, would cause the
discounted present values of such assumed streams of cash flows to equal the
assumed purchase price, including accrued interest if applicable. These monthly
discount rates were converted to corporate bond equivalent rates, which are
higher than the monthly discount rates because they are based on semiannual
compounding. These yields to maturity do not take into account the different
interest rates at which investors may be able to reinvest funds received by them
as distributions on the certificates and thus do not reflect the return on any
investment in the Class A-X certificates and Class A-P certificates when any
reinvestment rates other than the discount rates are considered.
YIELD CONSIDERATIONS WITH RESPECT TO THE ADJUSTABLE RATE CERTIFICATES
The significance of the effects of prepayments and changes in LIBOR on
the Class A-9 certificates and Class A-10 certificates is illustrated in the
following table, which shows the pre-tax yield
S-45
<PAGE>
(on a corporate bond equivalent basis) to the holders of these certificates
under different constant percentages of PSA and constant levels of LIBOR. The
yields of these certificates set forth in the following tables were calculated
using the modeling assumptions and further assuming the following:
o on each LIBOR Determination Date, LIBOR will be at the level
shown, except that the Class A-9 certificates and Class A-10
certificates will be at an initial fixed level as described in
this prospectus supplement; and
o the purchase price, including accrued interest, of the Class
A-9 certificates and Class A- 10 certificates is approximately
$500,107 and $40,447 respectively.
The yield to investors in the Adjustable Rate certificates will be
highly sensitive to the level of LIBOR and to the rate and timing of principal
payments (including prepayments) of the Loans, which generally can be prepaid at
any time without penalty.
Changes to LIBOR may not correlate with the 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 at
the same time as an increased level of LIBOR.
SENSITIVITY OF THE CLASS A-9 CERTIFICATES TO PREPAYMENTS AND LIBOR
(PRE-TAX YIELD TO MATURITY)
PERCENTAGE OF THE PSA
LIBOR 0% 100% 300% 400% 500%
- ----- -- ---- ---- ---- ----
1.10%.............. 1.56% 1.56% 1.56% 1.56% 1.56%
2.10%.............. 2.56% 2.55% 2.54% 2.54% 2.53%
3.10%.............. 3.56% 3.56% 3.53% 3.52% 3.52%
4.10%.............. 4.57% 4.56% 4.53% 4.51% 4.50%
7.55% and above ... 8.08% 8.05% 7.98% 7.95% 7.92%
SENSITIVITY OF THE CLASS A-10 CERTIFICATES TO PREPAYMENTS AND LIBOR
(PRE-TAX YIELD TO MATURITY)
PERCENTAGE OF THE PSA
LIBOR 0% 100% 300% 400% 500%
- ----- -- ---- ---- ---- ----
1.10%.............. 92.92% 87.17% 74.58% 67.80% 60.97%
2.10%.............. 76.87% 70.86% 57.36% 50.06% 42.78%
3.10%.............. 61.30% 54.95% 40.20% 32.19% 24.34%
4.10%.............. 46.19% 39.40% 22.80% 13.84% 5.25%
7.55% and above.... * * * * *
- -------
* These yields represent a loss of substantially all of the assumed purchase
price for such class of certificates.
The yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flows to be paid on the related Adjustable Rate certificates, would
cause the discounted present value of the assumed stream of cash flows to equal
the assumed purchase price of the related Adjustable Rate certificates,
indicated above and converting these monthly rates to corporate bond equivalent
rates. This calculation does not take into account variations that may occur in
the interest rates at which investors may be able to reinvest funds received by
them as
S-46
<PAGE>
payments of principal of and interest on the Adjustable Rate certificates and
consequently does not purport to reflect the return on any investment in the
Adjustable Rate certificates when such reinvestment rates are considered.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE CLASS R CERTIFICATE
A Class R certificateholder may have tax liabilities with respect to
its certificate during the early years of the REMICs' term that substantially
exceed any distributions payable thereon during any such period. In addition, a
Class R certificateholder may have tax liabilities with respect to its
certificate, the present value of which substantially exceeds the present value
of distributions payable thereon and of any tax benefits that may arise with
respect thereto. Accordingly, the after-tax rate of return on the Class R
certificate may be negative or may otherwise be significantly adversely
affected. The timing and amount of taxable income attributable to the Class R
certificate will depend on, among other things, the timing and amounts of
prepayments and losses experienced with respect to the Mortgage Pool.
A Class R certificateholder should consult its own tax advisor as to
the effect of taxes and the receipt of any payments made to such holder in
connection with the acquisition of interests in the Class R certificate on
after-tax rates of return on the Class R certificate. See "Federal Income Tax
Consequences" in this prospectus supplement and in the prospectus.
REPORTS TO CERTIFICATEHOLDERS
The Trustee or its designee will forward or cause to be forwarded with
each distribution or will make available through an internet website on a
distribution date to each holder of record of an offered certificate a report
setting forth certain information. In connection with providing access to such
internet website, the Trustee or its designee may require registration and the
acceptance of a disclaimer. For a description of the information contained in
such report, see "The Pooling and Servicing Agreement--Reports to the
Certificateholders" in the prospectus.
ADDITIONAL INFORMATION
The Depositor intends to file with the Securities and Exchange
Commission certain additional yield tables and other computational materials
with respect to one or more classes of the offered certificates on a Current
Report on Form 8-K. Credit Suisse First Boston LLC prepared such tables and
materials at the request of certain prospective investors, based on assumptions
provided by, and satisfying the special requirements of, such prospective
investors. Such tables and materials are preliminary in nature, and the
information contained therein is subject to, and superseded by, the information
in this prospectus supplement.
LEGAL ASPECTS OF THE MORTGAGE LOANS UNDER CALIFORNIA LAW
As of the Cut-Off Date, approximately 49.88% of the initial principal
balance of the Loans are secured by liens on mortgaged properties located in
California. See also "Legal Aspects of the Loans" in the prospectus.
FEDERAL INCOME TAX CONSEQUENCES
The Depositor will cause an election to be made to treat each of REMIC
I and REMIC II as a REMIC for federal income tax purposes. The certificates
issued by REMIC II, other than the Class R certificate, will be designated as
REMIC regular interests. As REMIC regular interests, such certificates
S-47
<PAGE>
will generally be treated as debt of REMIC II for federal income tax purposes.
Certificateholders will be required to include in income all interest and
original issue discount ("OID") on such certificates in accordance with the
accrual method of accounting regardless of the certificateholders' usual methods
of accounting. For federal income tax purposes, the Class R certificate will
represent beneficial ownership of two residual interests, each of which will
constitute the sole class of residual interests in each of REMIC I and REMIC II.
Upon the issuance of the certificates, Thacher Proffitt & Wood LLP will
deliver its opinion generally to the effect that, assuming a REMIC election is
made timely in the required form, and the Servicer complies with all provisions
of the Pooling and Servicing Agreement and certain representations in the
Pooling and Servicing Agreement are true, (1) REMIC I and REMIC II each will be
treated as a REMIC within the meaning of the REMIC provisions of the Internal
Revenue Code of 1986, as amended (the "CODE"), (2) the certificates (other than
the Class R certificate) will represent regular interests in REMIC II and (3)
Component R-1 of the Class R certificate will be the sole class of residual
interests in REMIC I and Component R-2 of the Class R certificate will be the
sole class of residual interests in REMIC II.
The Class A-3, Class A-5, Class A-10, Class A-X, Class A-P and Class
B-2 certificates will, and all other classes of offered certificates may, be
issued with OID. For purposes of determining the rate of accrual of OID, and
market discount or premium, if any, for federal income tax purposes on the
offered certificates, the prepayment assumption is 300% PSA, as described in
this prospectus supplement under "Prepayment and Yield Considerations". No
representation is made that the Loans will prepay at any given percentage of
PSA.
It is not entirely clear how income should be accrued with respect to
regular interest certificates such as the Interest Only certificates, the
payments on which consist of interest on notional principal amounts. In the
absence of definitive guidance, the most reasonable interpretation would be to
treat all of the income attributable to such payments as constituting OID, and
this is the position which will be taken by the REMIC. Among other
possibilities, the Internal Revenue Service could assert that the Interest Only
certificates should instead be taxable under certain rules applicable to debt
obligations providing for contingent payments.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID REGULATIONS") under Sections 1271 to 1275 of the Code addressing the
treatment of debt instruments issued with OID. You should be aware that the OID
Regulations and Section 1272(a)(6) of the Code do not adequately address issues
relevant to securities such as the certificates. Prospective purchasers of the
offered certificates are advised to consult their tax advisors concerning the
tax treatment of the certificates.
If actual prepayments differ sufficiently from the prepayment
assumption, the calculation of OID for certain offered certificates might
produce a negative number for certain accrual periods. In such event,
certificateholders will not be entitled to a deduction for such amount, but will
be required to carry such amount forward as an offset to OID, if any, accruing
in future accrual periods.
Certain classes of certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holders of a class of
certificates will be treated as holding a certificate with amortizable bond
premium will depend on the holder's purchase price and the distributions
remaining to be made on the certificate at the time of its acquisition by the
holder. Holders should consult their own tax advisors regarding the possibility
of making an election to amortize any such premium. See "Federal Income Tax
Consequences--Qualification as a REMIC--Taxation of Owners of Regular
Certificates" in the prospectus.
S-48
<PAGE>
The offered certificates will generally be treated as "qualifying real
property loans" for mutual savings banks and domestic building and loan
associations, "loans secured by an interest in real property" for domestic
building and loan associations, and "real estate assets" for real estate
investment trusts ("REITS") in the same proportion that the assets in the REMICs
would be so treated. In addition, interest on the offered certificates will
generally be treated as "interest on obligations secured by mortgages on real
property" for REITs to the extent that such offered certificates are treated as
"real estate assets". See "Federal Income Tax Consequences--Qualification as a
REMIC--Characterization of Investments in Certificates" in the prospectus.
WITHHOLDING CONSIDERATIONS
The Treasury Department has issued final regulations (the "FINAL
REGULATIONS") which make certain modifications to the withholding, backup
withholding, and information reporting rules described in the prospectus. The
Final Regulations attempt to unify certification requirements and modify
reliance standards. Prospective investors are urged to consult their own tax
advisors regarding the Final Regulations.
Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, the
tax rates applicable to backup withholding on payments made on the Certificates
are reduced to 28.0% for payments made on the certificates after May 28, 2003,
increasing to a rate of 31.0% after 2010. See "Federal Income Tax Consequences
Qualification as a REMICBackup Withholding" in the prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO THE RESIDUAL CERTIFICATE
A Class R certificateholder will be required to report on its federal
income tax returns as ordinary income its share of taxable income of each REMIC
regardless of the amount or timing of its receipt of cash payments. See "Federal
Income Tax Consequences-- Qualification as a REMIC--Taxation of Owners of
Residual Certificates" in the prospectus. The requirement that a Class R
certificateholder report its share of the taxable income and net loss of each
REMIC will continue until the class principal balances of all classes of
certificates have been reduced to zero, even though the Class R
certificateholder has received full payment of their stated interest and
principal.
A Class R certificateholder may be required to report an amount of
taxable income with respect to the early accrual periods that significantly
exceeds the amount of cash distributions received by such Class R
certificateholder with respect to such periods. Consequently, the Class R
certificateholder should have other sources of funds sufficient to pay any
federal income taxes due in the early years as a result of its ownership of
interests in such Class R certificate. In addition, the required inclusion of
this amount of taxable income during the early accrual periods and the deferral
of corresponding tax losses or deductions until later accrual periods or until
the ultimate sale or disposition of interests in the Class R certificate (or
possibly later under the "wash sale" rules of Section 1091 of the Code) may
cause the Class R certificateholder's after-tax rate of return to be zero or
negative even if the Class R certificateholder's pre-tax rate of return is
positive. That is, on a present value basis, the Class R certificateholder's
resulting tax liabilities could substantially exceed the sum of any tax benefits
and the amount of any cash distributions on such Class R certificate over its
life.
It is expected that all or a substantial portion of the REMIC taxable
income of a Class R certificateholder will be treated as "excess inclusion"
income to the holder in which case it could not be offset by losses from other
sources. For a Class R certificateholder that is subject to tax on unrelated
business taxable income (as defined by Code Section 511), an excess inclusion is
treated as unrelated business taxable income. With respect to a Class R
certificateholder that is a nonresident alien individual
S-49
<PAGE>
or foreign corporation generally subject to United States 30% withholding tax,
an excess inclusion will be subject to such tax and will be ineligible for any
statutory exemption or tax treaty reduction otherwise available to such Class R
certificateholder.
The Small Business Job Protection Act of 1996 eliminated the special
rule permitting Section 593 institutions ("THRIFT INSTITUTIONS") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from a REMIC residual certificate that has "significant value" within the
meaning of the REMIC Regulations (as defined in "Federal Income Tax
Consequences" in the prospectus), 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 Small Business Job Protection Act of 1996 provides
three rules for determining the effect of excess inclusions attributable to a
REMIC residual interest on the alternative minimum taxable income of the holder
of the interest. First, alternative minimum taxable income for such residual
holder is determined without regard to the special rule that taxable income
cannot be less than excess inclusions. Second, a residual holder's alternative
minimum taxable income for a tax year cannot be less than excess inclusions for
the year. Third, the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions.
The REMIC Regulations impose restrictions on the transfer or
acquisition of certain residual interests, including the Class R certificate. In
addition, the REMIC Regulations contain restrictions that apply to the transfer
of "noneconomic" residual interests to United States persons. Pursuant to the
Pooling and Servicing Agreement, the Class R certificate may not be transferred
to non-United States persons.
The REMIC Regulations provide that a transfer to a United States person
of "noneconomic" residual interests will be disregarded for federal income tax
purposes, and that the purported transferor of "noneconomic" residual interests
will continue to remain liable for any taxes due with respect to the income on
such residual interests, unless "no significant purpose of the transfer was to
impede the assessment or collection of tax". The Class R certificate will likely
constitute noneconomic residual interests during all of its term for purposes of
the REMIC Regulations and, accordingly, unless no significant purpose of a
transfer is to impede the assessment or collection of tax, a transfer of an
interest in the Class R certificate will likely be disregarded and purported
transferor will likely remain liable for any taxes due with respect to the
income of the Class R certificate. Any transfer of an interest in the Class R
certificate will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded. See "Federal Income Tax
Consequences--Qualification as a REMIC--Taxation of Owners of Residual
Certificates" in the prospectus.
As discussed above and in the prospectus, the rules for accrual of OID
with respect to certain classes of certificates are subject to significant
complexity and uncertainty. Because OID on certain certificates will be deducted
in determining REMIC taxable income, any changes required by the Internal
Revenue Service in the application of those rules to such certificates may
significantly affect the timing of the REMIC's OID deductions and therefore the
amount of taxable income allocable to a holder of an interest in the Class R
certificate.
An individual, trust or estate that holds (whether directly or
indirectly through certain pass- through entities) an interest in the Class R
certificate may have significant additional gross income with respect to, but
may be subject to limitations on the deductibility of, servicing and trustee's
fees and other administrative expenses properly allocable to the related REMIC
in computing such certificateholder's
S-50
<PAGE>
regular tax liability and will not be able to deduct such fees or expenses to
any extent in computing such certificateholder's alternative minimum tax
liability. Such expenses will be allocated for federal income tax information
reporting purposes entirely to the Class R certificate. See "Federal Income Tax
Consequences--Qualification as a REMIC--Taxation of Owners of Residual
Certificates and Pass- Through of Miscellaneous Itemized Deductions" in the
prospectus.
Because of the special tax treatment of REMIC residual interests, the
taxable income in a given year on a REMIC residual interest will not be equal to
the taxable income associated with an investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Class R certificate may be significantly
less than that of a corporate bond or stripped instrument having similar cash
flow characteristics. See "Federal Income Tax Consequences" in the prospectus.
A purchaser of an interest in the Class R certificate is strongly
advised to consult its own tax advisor as to the economic and tax consequences
of an investment in such certificate.
For further information regarding the federal income tax consequences
of investing in the Class R certificate, see "Prepayment Yield
Considerations--Additional Yield Considerations Applicable Solely to the Class R
Certificate" in this prospectus supplement and "Federal Income Tax
Consequences--Qualification as a REMIC--Taxation of Owners of Residual
Certificates" in the prospectus.
On July 21, 2003, the Internal Revenue Service issued proposed
regulations relating to the federal income tax treatment of "inducement fees"
received by transferees of non-economic REMIC residual interests. The proposed
regulations provide tax accounting rules for the inclusion of such fees in
income over an appropriate period, and clarify that inducement fees represent
income from sources within the United States. If these rules are finalized as
proposed, they will apply to taxable years ending on or after the date the final
regulations are published, and thus the rules in the proposed regulations may
apply to any inducement fee received in connection with the acquisition of any
class of securities that represent the residual interest in a REMIC. Prospective
purchasers of any such class of residual interest securities should consult with
their tax advisors regarding the effect of these proposed regulations.
LEGAL INVESTMENT ASPECTS
As of the date of their issuance, the offered certificates, other than
the Class B-1 certificates and Class B-2 certificates, will constitute
"mortgage-related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"), and as such will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions, life
insurance companies and pension funds) created pursuant to or existing under the
laws of the United States or of any state whose authorized investments are
subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
such entities. Under SMMEA, if a state enacted legislation before October 4,
1991 specifically limiting the legal investment authority of any of such
entities with respect to "mortgage-related securities", the offered
certificates, other than the Class B-1 and Class B-2 certificates, will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain states have enacted such legislation.
Investors should consult their own legal advisors in determining whether and to
what extent the offered certificates constitute legal investments for such
investors.
S-51
<PAGE>
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with the offered certificates, other than the Class B-1 and Class B-2
certificates, without limitation as to the percentage of their assets
represented thereby; federal credit unions may invest in the offered
certificates, other than the Class B-1 and Class B-2 certificates and national
banks may purchase the offered certificates, other than the Class B-1 and Class
B-2 certificates, for their own accounts without regard to the limitations
generally applicable to investment securities set forth in 12 U.S.C. 24
(Seventh); in each case subject to such regulations as the applicable federal
regulatory authority may prescribe. See "Legal Investment Matters" in the
prospectus.
Investors should consult their own legal advisors in determining
whether and to what extent the offered certificates constitute legal investments
for such investors.
ERISA CONSIDERATIONS
Any fiduciary of an employee benefit plan or other benefit plan or
arrangement which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Code, or other person that
proposes to use "plan assets" of any of the foregoing (each, a "PLAN") to
acquire any offered certificates should consult with its counsel with respect to
the potential consequences under ERISA and Section 4975 of the Code of the
acquisition and ownership of such certificates by, on behalf of, or with "plan
assets" of any Plan. See "ERISA Considerations" in the prospectus (but note that
the prospectus does not address the 2000 Amendment (as defined below)).
UNDERWRITER'S PTE
Credit Suisse First Boston LLC is the recipient of a final prohibited
transaction exemption, Prohibited Transaction Exemption 89-90, 54 Fed. Reg.
42,597 (1989) as amended by Prohibited Transaction Exemption 97-34, 62 Fed. Reg.
39,021 (1997) and Prohibited Transaction Exemption 2000- 58, 65 Fed. Reg. 67,765
(2000) (the "2000 AMENDMENT") and Prohibited Transaction Exemption 2002- 41, 67
Fed. Reg. 54,487 (2002) (the "2002 AMENDMENT") taken together, the
"UNDERWRITER'S PTE") which may afford protection from violations under Sections
406 and 407 of ERISA and Section 4975 of the Code for Plans that acquire offered
certificates. The receivables covered by the Underwriter's PTE include
obligations which are secured by residential real property including the Loans
securing the certificates. Plans that acquire offered certificates, other than
the Class R certificate, may be eligible for exemptive relief under the
Underwriter's PTE if the current requirements of the Underwriter's PTE, as
amended by the 2000 Amendment and 2002 Amendment which changed certain of the
technical requirements of the Underwriter's PTE (the prospectus, under the
heading "ERISA Considerations", does not address the 2000 Amendment or 2002
Amendment), are satisfied, including the following:
(a) the Plan is an "accredited investor" (as defined in Rule
501(a)(1) of Regulation D under the Securities Act of 1933, as
amended (the "ACT"));
(b) the acquisition of such certificates by the Plan is on terms
(including the price paid for the certificates) that are at least
as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(c) the sum of all payments made to and retained by the Underwriters
in connection with the distribution of such certificates
represents not more than reasonable compensation for underwriting
such certificates; the sum of all payments made to and retained
by the Depositor pursuant to the sale of the Loans to the trust
represents not more than the fair
S-52
<PAGE>
market value of the Loans, and the sum of all payments made to
and retained by the Depositor or any other servicer represents
not more than reasonable compensation for their services under
the Pooling and Servicing Agreement and reimbursement of their
reasonable expenses in connection therewith;
(d) the certificates acquired by the Plan have received a rating at
the time of their acquisition by the Plan from Moody's Investors
Service Inc., S&P or Fitch that is in the four highest generic
rating categories; and
(e) the Trustee is a substantial financial institution and is not an
affiliate of any other member of the Restricted Group (as defined
below) other than the underwriter;
(f) the trust satisfies the following requirements:
(i) the corpus of the trust consists solely of assets of the
type which have been included in other investment pools;
(ii) securities in these other investment pools have been rated
in one of the four highest generic rating categories of
one of the rating agencies specified above for at least
one year prior to the benefit plan's acquisition of the
certificates, and
(iii) securities evidencing interests in these other investment
pools have been purchased by investors other than benefit
plans for at least one year prior to any benefit plan's
acquisition of the certificates; and
(g) in the case of certain types of issuers, the pooling and
servicing agreement contains restrictions necessary to ensure
that the assets of the trust may not be reached by creditors of
the Depositor in the event of its bankruptcy or insolvency and
prohibits all parties from filing an involuntary bankruptcy or
insolvency petition against the trust, and a true sale opinion is
issued in connection with the transfer of the assets to the
trust.
The Underwriter's PTE will not provide exemptive relief for certain
transactions prohibited by Section 406(b)(1) and 406(b)(2) of ERISA or Section
4975(c)(1)(E) of the Code that may result from an investment of any "plan
assets" of any Plan in such certificates if:
(a) the Plan's investment in any class of such certificates exceeds
25% of the outstanding certificates of that class at the time of
acquisition;
(b) immediately after the acquisition, 25% or more of the Plan assets
with respect to which the investing fiduciary has discretionary
authority or renders investment advice are invested in
certificates evidencing interests in trusts sponsored or
containing assets sold by the Depositor or serviced by the
Servicer;
(c) the Plan is sponsored by the Seller, Depositor, the Underwriters,
the Trustee, any servicer, the obligor under any credit support
mechanism, or any mortgagor with respect to Loans constituting
more than 5% of the aggregate unamortized principal balance of
the assets of the trust on the Closing Date (a "MAJOR OBLIGOR")
or their affiliates (collectively, the "RESTRICTED GROUP");
S-53
<PAGE>
(d) the Plan fiduciary responsible for the decision to invest or any
of its affiliates is a Major Obligor; or
(e) in connection with an acquisition of certificates in the initial
issuance, less than 50% of each class of certificates in which
Plans have invested and less than 50% of the aggregate interests
in the trust are acquired by persons independent of members of
the Restricted Group.
The Underwriter's PTE will also apply to transactions in connection
with the servicing, management and operation of the trust, provided that, in
addition to the general requirements described above, (a) these transactions are
carried out in accordance with the terms of a binding pooling and servicing
agreement and (b) the pooling and servicing agreement is provided to, or
described in all material respects in the prospectus provided to, investing
benefit plans before the plans purchase the certificates issued to the trust.
Whether the conditions of the Underwriter's PTE will be satisfied with
respect to offered certificates of a particular class, other than the Class R
certificate, will depend upon the facts and circumstances existing at the time
the Plan acquires certificates of that class including that the rating on that
class be BBB- or higher. Any Plan fiduciary or other person that proposes to use
"plan assets" of any Plan to acquire such certificates in reliance upon the
Underwriter's PTE should determine whether such acquisition will satisfy all
applicable conditions and should consult with its counsel regarding other
factors that may affect the applicability of the Underwriter's PTE. Each
purchaser that proposes to purchase an offered certificate, other than the Class
R certificate, with the assets of a Plan shall be deemed to represent that each
such purchaser qualifies as an "accredited investor" as defined in Rule
501(a)(1) of Regulation D under the Securities Act. Purchasers of offered
certificates, other than the Class R certificate, should consider the
possibility that the rating of a certificate could change during the period the
security is held. If the rating were to decline below BBB-, the security could
no longer be re- sold to a Plan in reliance on the Underwriter's PTE.
If the ratings decline below one of the four highest generic rating
categories from S&P, Moody's or Fitch, each transferee will be deemed to
represent that either (a) it is not a "Plan" and is not using "plan assets" to
purchase such certificates or (b) it is an insurance company using assets of its
general account (within the meaning of Prohibited Transaction Class Exemption
95-60 ("PTCE 95-60")) to effect such purchase, and is eligible for and satisfies
all the requirements for exemptive relief under Sections I and III of PTCE
95-60.
Because the exemptive relief afforded by the Underwriter's PTE or any
similar exemption that might be available will not likely apply to the purchase,
sale or holding of the Class R certificate, transfers of that certificate to any
plan investor will not be registered by the Trustee unless the transferee
provides the Depositor, the Trustee and the Servicer with an opinion of counsel
satisfactory to those entities, which opinion will not be at the expense of
those entities, that the purchase of that certificate by or on behalf of the
plan investor:
S-54
<PAGE>
o is permissible under applicable law;
o will not constitute or result in a non-exempt prohibited transaction
under ERISA or Section 4975
of the Code; and
o will not subject the Depositor, the Trustee or the Servicer to any
obligation in addition to those undertaken in the pooling and servicing
agreement.
The sale of any certificate to a Plan is in no respect a representation
by the Underwriters that such an investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan or that such an investment is appropriate for Plans generally or any
particular Plan.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Depositor has agreed to sell to the Underwriters, and the
Underwriters have agreed to purchase, all of the offered certificates. The
aggregate proceeds (excluding accrued interest) to the Depositor from the sale
of the offered certificates, will be approximately 98.82% of the initial
aggregate certificate principal balance of the offered certificates. Expenses
are estimated to be $500,000. Under the terms and conditions of the Underwriting
Agreement, the Underwriters are committed to take and pay for all of such
offered certificates, if any are taken. Distribution of such offered
certificates will be made by the Underwriters from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The difference between the purchase price for the offered certificates
paid to the Depositor and the proceeds from the sale of such certificates
realized by the Underwriters will constitute underwriting discounts and
commissions. The Underwriters may effect such transactions by selling the
offered certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter for whom they act.
In the Underwriting Agreement, the Underwriters have severally, but not
jointly, agreed, subject to the terms and conditions set forth therein, to
purchase all of the offered certificates if any are purchased. In the event of
default by any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the underwriting commitment of the nondefaulting Underwriter may
be increased or the underwriting may be terminated.
The obligations of the Underwriters under the Underwriting Agreement
are subject to certain conditions precedent.
The Depositor has agreed to indemnify the Underwriters against certain
civil liabilities, including liabilities under the Act, or to contribute to
payments the Underwriters may be obligated to make in respect thereof.
ABN AMRO Financial Services, Inc. is an affiliate of the Depositor.
The Underwriters intend to make a market for the purchase and sale of
the offered certificates after their initial issuance but have no obligation to
do so. There is no assurance that such a secondary market will develop or, if it
develops, that it will continue.
S-55
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Marlene
Ellis, Counsel of the Depositor and by Thacher Proffitt & Wood LLP, New York,
New York. Thacher Proffitt & Wood LLP will also pass upon certain legal matters
for ABN AMRO Financial Services, Inc. McKee Nelson LLP, Washington, DC, will
pass upon certain legal matters on behalf of Credit Suisse First Boston LLC.
CERTIFICATE RATINGS
It is a condition to the issuance of the offered certificates that the
Senior certificates each be rated "AAA" by Fitch and "Aaa" by Moody's (except
that the Class R certificate will be rated solely by Fitch), that the Class M
certificates be rated not less than "AA" by Fitch, that the Class B-1
certificates be rated not less than "A" by Fitch; and that the Class B-2
certificates be rated not less than "BBB" by Fitch.
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. Each security rating should be evaluated independently
of any other security rating.
THE RATINGS ASSIGNED BY FITCH AND MOODY'S TO MORTGAGE PASS-THROUGH
CERTIFICATES ADDRESS THE LIKELIHOOD OF THE RECEIPT BY CERTIFICATEHOLDERS OF ALL
DISTRIBUTIONS TO WHICH SUCH CERTIFICATEHOLDERS ARE ENTITLED. FITCH'S AND MOODYS'
RATINGS ADDRESS THE STRUCTURAL AND LEGAL ASPECTS ASSOCIATED WITH THE
CERTIFICATES, INCLUDING THE NATURE OF THE UNDERLYING MORTGAGE LOANS. FITCH'S AND
MOODYS' RATINGS ON MORTGAGE PASS-THROUGH CERTIFICATES DO NOT REPRESENT ANY
ASSESSMENT OF THE LIKELIHOOD OR RATE OF PRINCIPAL PREPAYMENTS. THE RATINGS DO
NOT ADDRESS THE POSSIBILITY THAT CERTIFICATEHOLDERS MIGHT SUFFER A
LOWER-THAN-ANTICIPATED YIELD.
The ratings on the offered certificates address the likelihood of the
receipt by certificateholders of all distributions with respect to the
underlying Loans to which they are entitled. The ratings do not represent any
assessment of the likelihood that the rate of principal prepayments by
mortgagors might differ from those originally anticipated. As a result of such
differences in the rate of principal prepayments, certificateholders might
suffer a lower-than- anticipated yield to maturity. See "Risk Factors" and
"Prepayment and Yield Considerations".
The Interest Only certificates are extremely sensitive to prepayments,
which the rating on the securities does not address. If prepayments are faster
than anticipated, investors may fail to recover their initial investment.
The Principal Only certificates are extremely sensitive to prepayments,
which the rating on the securities does not address. If prepayments are slower
than anticipated, investors' yields may be adversely affected. The rating on the
Principal Only certificates only addresses the return of the principal balances
thereof.
The Depositor has not requested a rating on the offered certificates by
any rating agency other than Fitch and Moody's. 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 any such other
rating agency. A rating on the offered certificates by another rating agency, if
assigned at all, may be lower than the rating assigned to the offered
certificates by Fitch and Moody's.
S-56
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
Set forth below is a list of certain of the more significant terms used
in this prospectus supplement and the pages on which the definitions of such
terms may be found.
AAMG................................................................S-37
Accrual..............................................................S-6
Act.................................................................S-52
Adjustable Rate......................................................S-6
Available Distribution Amount..................................S-5, S-22
Bankruptcy Coverage.................................................S-24
Bankruptcy Losses...................................................S-24
Cede................................................................S-20
Certificate Account.................................................S-17
Class A-10 Interest Rate............................................S-24
Class A-10 Notional Amount..........................................S-24
Class A-9 Interest Rate.............................................S-24
Class A-X Notional Amount...........................................S-24
Closing Date.........................................................S-1
Code................................................................S-48
Compensating Interest...............................................S-23
CPR.................................................................S-42
Credit Support Depletion Date.......................................S-25
Cut-Off Date.........................................................S-1
Debt Service Reduction..............................................S-25
Deficient Valuation.................................................S-25
Definitive Certificates.............................................S-21
Determination Date..................................................S-22
Discount Fraction...................................................S-25
Discount Fractional Principal Amount................................S-25
Discount Fractional Principal Shortfall.............................S-25
Discount Loan.......................................................S-25
Distribution Dates...................................................S-1
Due Date............................................................S-22
ERISA...............................................................S-52
Excess Liquidation Proceeds.........................................S-23
Excess Loss.........................................................S-25
FICO Scores.........................................................S-18
Final Regulations...................................................S-49
Fitch...............................................................S-20
Fraud Coverage......................................................S-25
Fraud Losses........................................................S-26
Interest Accrual Period.............................................S-26
Interest Only........................................................S-6
IRS.................................................................S-48
LIBOR..........................................................S-7, S-26
LIBOR Business Day..................................................S-26
LIBOR Determination Date............................................S-26
Liquidated Loan.....................................................S-27
Liquidation Principal...............................................S-27
Liquidation Proceeds................................................S-27
S-57
<PAGE>
Loans...............................................................S-17
Lockout..............................................................S-7
Lockout Percentage..................................................S-27
Lockout Principal Amount............................................S-27
Major Obligor.......................................................S-53
Modeling Assumptions................................................S-43
Moody's.............................................................S-20
Mortgage Loan Purchase Agreement....................................S-17
Mortgage Pool.......................................................S-17
OID.................................................................S-48
OID Regulations.....................................................S-48
Pass-Through Rate...................................................S-27
Payoff Period.......................................................S-27
Plan................................................................S-52
Premium Loan........................................................S-27
Prepayment Period...................................................S-28
Prepayment Speed Assumption.........................................S-42
Principal Only.......................................................S-6
Principal Payment Amount............................................S-28
Principal Prepayment Amount.........................................S-28
Pro Rata Allocation.................................................S-28
PSA.................................................................S-42
PTCE 95-60..........................................................S-54
REITs...............................................................S-49
Restricted Group....................................................S-53
Seller...............................................................S-1
Senior Liquidation Amount...........................................S-28
Senior Percentage...................................................S-29
Senior Prepayment Percentage........................................S-29
Senior Principal Amount.............................................S-29
Servicer.............................................................S-1
SMMEA...............................................................S-51
Special Hazard Coverage.............................................S-29
Special Hazard Losses...............................................S-29
Step Down Percentage................................................S-30
Subordinate Liquidation Amount......................................S-30
Subordinate Percentage..............................................S-30
Subordinate Prepayment Percentage...................................S-30
Subordinate Principal Amount........................................S-30
Subordinate Principal Prepayment Amount.............................S-30
Subordination Level.................................................S-30
Thrift Institutions.................................................S-50
Underwriters.........................................................S-1
Underwriter's PTE...................................................S-52
S-58
<PAGE>
APPENDIX A
SCHEDULED PRINCIPAL BALANCE TABLE*
<TABLE>
<CAPTION>
PRINCIPAL
DISTRIBUTION DATE BALANCE
- ----------------- -------
<S> <C>
Initial Balance ............ $ 354,678,057.75
January 25, 2004 ........... 351,867,699.41
February 25, 2004 .......... 349,077,502.09
March 25, 2004 ............. 346,307,324.78
April 25, 2004 ............. 343,557,027.46
May 25, 2004 ............... 340,826,471.08
June 25, 2004 .............. 338,115,517.56
July 25, 2004 .............. 335,424,029.77
August 25, 2004 ............ 332,751,871.53
September 25, 2004 ......... 330,098,907.63
October 25, 2004 ........... 327,465,003.78
November 25, 2004 .......... 324,850,026.61
December 25, 2004 .......... 322,253,843.70
January 25, 2005 ........... 319,676,323.54
February 25, 2005 .......... 317,117,335.53
March 25, 2005 ............. 314,576,749.99
April 25, 2005 ............. 312,054,438.12
May 25, 2005 ............... 309,550,272.03
June 25, 2005 .............. 307,064,124.73
July 25, 2005 .............. 304,595,870.07
August 25, 2005 ............ 302,145,382.82
September 25, 2005 ......... 299,712,538.60
October 25, 2005 ........... 297,297,213.90
November 25, 2005 .......... 294,899,286.06
December 25, 2005 .......... 292,518,633.27
January 25, 2006 ........... 290,155,134.58
February 25, 2006 .......... 287,808,669.88
March 25, 2006 ............. 285,479,119.88
April 25, 2006 ............. 283,166,366.12
May 25, 2006 ............... 280,870,290.98
June 25, 2006 .............. 278,590,777.64
July 25, 2006 .............. 276,327,710.10
August 25, 2006 ............ 274,080,973.17
September 25, 2006 ......... 271,850,452.44
October 25, 2006 ........... 269,636,034.31
November 25, 2006 .......... 267,437,605.98
December 25, 2006 .......... 265,255,055.42
January 25, 2007 ........... 263,088,271.37
February 25, 2007 .......... 260,937,143.36
March 25, 2007 ............. 258,801,561.68
April 25, 2007 ............. 256,681,417.38
May 25, 2007 ............... 254,576,602.27
June 25, 2007 .............. 252,487,008.92
July 25, 2007 .............. 250,412,530.63
August 25, 2007 ............ 248,353,061.45
September 25, 2007 ......... 246,308,496.17
October 25, 2007 ........... 244,278,730.31
November 25, 2007 .......... 242,263,660.10
December 25, 2007 .......... 240,263,182.52
January 25, 2008 ........... 238,277,195.23
February 25, 2008 .......... 236,305,596.65
March 25, 2008 ............. 234,348,285.85
April 25, 2008 ............. 232,405,162.64
May 25, 2008 ............... 230,476,127.51
June 25, 2008 .............. 228,561,081.66
July 25, 2008 .............. 226,659,926.95
August 25, 2008 ............ 224,772,565.93
September 25, 2008 ......... 222,898,901.86
October 25, 2008 ........... 221,038,838.61
November 25, 2008 .......... 219,192,280.78
December 25, 2008 .......... 217,359,133.59
January 25, 2009 ........... 215,539,302.95
February 25, 2009 .......... 213,732,695.39
March 25, 2009 ............. 211,939,218.13
April 25, 2009 ............. 210,158,779.00
May 25, 2009 ............... 208,391,286.48
June 25, 2009 .............. 206,636,649.70
July 25, 2009 .............. 204,894,778.41
August 25, 2009 ............ 203,165,583.00
September 25, 2009 ......... 201,448,974.45
October 25, 2009 ........... 199,744,864.40
November 25, 2009 .......... 198,053,165.08
December 25, 2009 .......... 196,373,789.34
January 25, 2010 ........... 194,706,650.62
February 25, 2010 .......... 193,051,662.99
March 25, 2010 ............. 191,408,741.09
April 25, 2010 ............. 189,777,800.16
</TABLE>
* The aggregate principal balance for the Loans on each distribution date
were calculated assuming that the Loans are prepaid at a constant rate of
8% CPR.
A-1
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
DISTRIBUTION DATE BALANCE
- ----------------- -------
<S> <C>
May 25, 2010 ............... $ 188,158,756.05
June 25, 2010 .............. 186,551,525.17
July 25, 2010 .............. 184,956,024.52
August 25, 2010 ............ 183,372,171.68
September 25, 2010 ......... 181,799,884.80
October 25, 2010 ........... 180,239,082.60
November 25, 2010 .......... 178,689,684.36
December 25, 2010 .......... 177,151,609.94
January 25, 2011 ........... 175,624,779.73
February 25, 2011 .......... 174,109,114.69
March 25, 2011 ............. 172,604,536.33
April 25, 2011 ............. 171,110,966.70
May 25, 2011 ............... 169,628,328.39
June 25, 2011 .............. 168,156,544.55
July 25, 2011 .............. 166,695,538.84
August 25, 2011 ............ 165,245,235.45
September 25, 2011 ......... 163,805,559.11
October 25, 2011 ........... 162,376,435.08
November 25, 2011 .......... 160,957,789.12
December 25, 2011 .......... 159,549,547.51
January 25, 2012 ........... 158,151,637.07
February 25, 2012 .......... 156,763,985.08
March 25, 2012 ............. 155,386,519.38
April 25, 2012 ............. 154,019,168.27
May 25, 2012 ............... 152,661,860.56
June 25, 2012 .............. 151,314,525.58
July 25, 2012 .............. 149,977,093.11
August 25, 2012 ............ 148,649,493.45
September 25, 2012 ......... 147,331,657.37
October 25, 2012 ........... 146,023,516.14
November 25, 2012 .......... 144,725,001.47
December 25, 2012 .......... 143,436,045.60
January 25, 2013 ........... 142,156,581.18
February 25, 2013 .......... 140,886,541.39
March 25, 2013 ............. 139,625,859.82
April 25, 2013 ............. 138,374,470.56
May 25, 2013 ............... 137,132,308.14
June 25, 2013 .............. 135,899,307.56
July 25, 2013 .............. 134,675,404.25
August 25, 2013 ............ 133,460,534.11
September 25, 2013 ......... 132,254,633.48
October 25, 2013 ........... 131,057,639.14
November 25, 2013 .......... 129,869,488.32
December 25, 2013 .......... 128,690,118.66
January 25, 2014 ........... 127,519,468.27
February 25, 2014 .......... 126,357,475.67
March 25, 2014 ............. 125,204,079.81
April 25, 2014 ............. 124,059,220.06
May 25, 2014 ............... 122,922,836.23
June 25, 2014 .............. 121,794,868.53
July 25, 2014 .............. 120,675,257.60
August 25, 2014 ............ 119,563,944.48
September 25, 2014 ......... 118,460,870.62
October 25, 2014 ........... 117,365,977.91
November 25, 2014 .......... 116,279,208.59
December 25, 2014 .......... 115,200,505.36
January 25, 2015 ........... 114,129,811.27
February 25, 2015 .......... 113,067,069.79
March 25, 2015 ............. 112,012,224.78
April 25, 2015 ............. 110,965,220.51
May 25, 2015 ............... 109,926,001.59
June 25, 2015 .............. 108,894,513.07
July 25, 2015 .............. 107,870,700.35
August 25, 2015 ............ 106,854,509.21
September 25, 2015 ......... 105,845,885.82
October 25, 2015 ........... 104,844,776.73
November 25, 2015 .......... 103,851,128.84
December 25, 2015 .......... 102,864,889.45
January 25, 2016 ........... 101,886,006.18
February 25, 2016 .......... 100,914,427.07
March 25, 2016 ............. 99,950,100.49
April 25, 2016 ............. 98,992,975.18
May 25, 2016 ............... 98,043,000.22
June 25, 2016 .............. 97,100,125.06
July 25, 2016 .............. 96,164,299.51
August 25, 2016 ............ 95,235,473.72
September 25, 2016 ......... 94,313,598.17
October 25, 2016 ........... 93,398,623.72
November 25, 2016 .......... 92,490,501.54
December 25, 2016 .......... 91,589,183.17
January 25, 2017 ........... 90,694,620.45
February 25, 2017 .......... 89,806,765.60
March 25, 2017 ............. 88,925,571.13
April 25, 2017 ............. 88,050,989.92
May 25, 2017 ............... 87,182,975.15
June 25, 2017 .............. 86,321,480.33
July 25, 2017 .............. 85,466,459.31
August 25, 2017 ............ 84,617,866.24
September 25, 2017 ......... 83,775,655.61
October 25, 2017 ........... 82,939,782.22
November 25, 2017 .......... 82,110,201.17
December 25, 2017 .......... 81,286,867.90
January 25, 2018 ........... 80,469,738.14
February 25, 2018 .......... 79,658,767.94
March 25, 2018 ............. 78,853,913.64
April 25, 2018 ............. 78,055,131.90
May 25, 2018 ............... 77,262,379.68
June 25, 2018 .............. 76,475,614.24
July 25, 2018 .............. 75,694,793.13
August 25, 2018 ............ 74,919,874.21
September 25, 2018 ......... 74,150,815.62
October 25, 2018 ........... 73,387,575.79
November 25, 2018 .......... 72,630,113.46
December 25, 2018 .......... 71,878,387.64
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
DISTRIBUTION DATE BALANCE
- ----------------- -------
<S> <C>
January 25, 2019 ........... $71,132,357.63
February 25, 2019 .......... 70,391,983.01
March 25, 2019 ............. 69,657,223.64
April 25, 2019 ............. 68,928,039.69
May 25, 2019 ............... 68,204,391.56
June 25, 2019 .............. 67,486,239.97
July 25, 2019 .............. 66,773,545.87
August 25, 2019 ............ 66,066,270.53
September 25, 2019 ......... 65,364,375.44
October 25, 2019 ........... 64,667,822.41
November 25, 2019 .......... 63,976,573.49
December 25, 2019 .......... 63,290,590.97
January 25, 2020 ........... 62,609,837.46
February 25, 2020 .......... 61,934,275.78
March 25, 2020 ............. 61,263,869.03
April 25, 2020 ............. 60,598,580.58
May 25, 2020 ............... 59,938,374.03
June 25, 2020 .............. 59,283,213.25
July 25, 2020 .............. 58,633,062.36
August 25, 2020 ............ 57,987,885.72
September 25, 2020 ......... 57,347,647.96
October 25, 2020 ........... 56,712,313.93
November 25, 2020 .......... 56,081,848.75
December 25, 2020 .......... 55,456,217.77
January 25, 2021 ........... 54,835,386.59
February 25, 2021 .......... 54,219,321.03
March 25, 2021 ............. 53,607,987.17
April 25, 2021 ............. 53,001,351.32
May 25, 2021 ............... 52,399,380.03
June 25, 2021 .............. 51,802,040.07
July 25, 2021 .............. 51,209,298.46
August 25, 2021 ............ 50,621,122.43
September 25, 2021 ......... 50,037,479.45
October 25, 2021 ........... 49,458,337.23
November 25, 2021 .......... 48,883,663.68
December 25, 2021 .......... 48,313,426.94
January 25, 2022 ........... 47,747,595.39
February 25, 2022 .......... 47,186,137.62
March 25, 2022 ............. 46,629,022.43
April 25, 2022 ............. 46,076,218.85
May 25, 2022 ............... 45,527,696.12
June 25, 2022 .............. 44,983,423.70
July 25, 2022 .............. 44,443,371.26
August 25, 2022 ............ 43,907,508.68
September 25, 2022 ......... 43,375,806.06
October 25, 2022 ........... 42,848,233.69
November 25, 2022 .......... 42,324,762.09
December 25, 2022 .......... 41,805,361.97
January 25, 2023 ........... 41,290,004.25
February 25, 2023 .......... 40,778,660.06
March 25, 2023 ............. 40,271,300.71
April 25, 2023 ............. 39,767,897.73
May 25, 2023 ............... 39,268,422.85
June 25, 2023 .............. 38,772,847.98
July 25, 2023 .............. 38,281,145.25
August 25, 2023 ............ 37,793,286.97
September 25, 2023 ......... 37,309,245.64
October 25, 2023 ........... 36,828,993.96
November 25, 2023 .......... 36,352,504.82
December 25, 2023 .......... 35,879,751.29
January 25, 2024 ........... 35,410,706.66
February 25, 2024 .......... 34,945,344.35
March 25, 2024 ............. 34,483,638.03
April 25, 2024 ............. 34,025,561.50
May 25, 2024 ............... 33,571,088.77
June 25, 2024 .............. 33,120,194.04
July 25, 2024 .............. 32,672,851.67
August 25, 2024 ............ 32,229,036.21
September 25, 2024 ......... 31,788,722.38
October 25, 2024 ........... 31,351,885.09
November 25, 2024 .......... 30,918,499.41
December 25, 2024 .......... 30,488,540.59
January 25, 2025 ........... 30,061,984.07
February 25, 2025 .......... 29,638,805.43
March 25, 2025 ............. 29,218,980.44
April 25, 2025 ............. 28,802,485.05
May 25, 2025 ............... 28,389,295.35
June 25, 2025 .............. 27,979,387.62
July 25, 2025 .............. 27,572,738.29
August 25, 2025 ............ 27,169,323.98
September 25, 2025 ......... 26,769,121.44
October 25, 2025 ........... 26,372,107.61
November 25, 2025 .......... 25,978,259.57
December 25, 2025 .......... 25,587,554.58
January 25, 2026 ........... 25,199,970.05
February 25, 2026 .......... 24,815,483.55
March 25, 2026 ............. 24,434,072.80
April 25, 2026 ............. 24,055,715.68
May 25, 2026 ............... 23,680,390.23
June 25, 2026 .............. 23,308,074.64
July 25, 2026 .............. 22,938,747.25
August 25, 2026 ............ 22,572,386.55
September 25, 2026 ......... 22,208,971.20
October 25, 2026 ........... 21,848,479.98
November 25, 2026 .......... 21,490,891.83
December 25, 2026 .......... 21,136,185.85
January 25, 2027 ........... 20,784,341.28
February 25, 2027 .......... 20,435,337.48
March 25, 2027 ............. 20,089,154.00
April 25, 2027 ............. 19,745,770.50
May 25, 2027 ............... 19,405,166.79
June 25, 2027 .............. 19,067,322.82
July 25, 2027 .............. 18,732,218.70
August 25, 2027 ............ 18,399,834.64
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL
DISTRIBUTION DATE BALANCE
- ----------------- -------
<S> <C>
September 25, 2027 ......... $18,070,151.03
October 25, 2027 ........... 17,743,148.37
November 25, 2027 .......... 17,418,807.31
December 25, 2027 .......... 17,097,108.63
January 25, 2028 ........... 16,778,033.24
February 25, 2028 .......... 16,461,562.20
March 25, 2028 ............. 16,147,676.68
April 25, 2028 ............. 15,836,358.01
May 25, 2028 ............... 15,527,587.62
June 25, 2028 .............. 15,221,347.10
July 25, 2028 .............. 14,917,618.14
August 25, 2028 ............ 14,616,382.58
September 25, 2028 ......... 14,317,622.38
October 25, 2028 ........... 14,021,319.63
November 25, 2028 .......... 13,727,456.53
December 25, 2028 .......... 13,436,015.43
January 25, 2029 ........... 13,146,978.79
February 25, 2029 .......... 12,860,329.18
March 25, 2029 ............. 12,576,049.31
April 25, 2029 ............. 12,294,122.02
May 25, 2029 ............... 12,014,530.25
June 25, 2029 .............. 11,737,257.06
July 25, 2029 .............. 11,462,285.65
August 25, 2029 ............ 11,189,599.31
September 25, 2029 ......... 10,919,181.47
October 25, 2029 ........... 10,651,015.66
November 25, 2029 .......... 10,385,085.54
December 25, 2029 .......... 10,121,374.87
January 25, 2030 ........... 9,859,867.54
February 25, 2030 .......... 9,600,547.54
March 25, 2030 ............. 9,343,398.98
April 25, 2030 ............. 9,088,406.07
May 25, 2030 ............... 8,835,553.14
June 25, 2030 .............. 8,584,824.64
July 25, 2030 .............. 8,336,205.11
August 25, 2030 ............ 8,089,679.21
September 25, 2030 ......... 7,845,231.70
October 25, 2030 ........... 7,602,847.46
November 25, 2030 .......... 7,362,511.46
December 25, 2030 .......... 7,124,208.79
January 25, 2031 ........... 6,887,924.62
February 25, 2031 .......... 6,653,644.27
March 25, 2031 ............. 6,421,353.12
April 25, 2031 ............. 6,191,036.66
May 25, 2031 ............... 5,962,680.50
June 25, 2031 .............. 5,736,270.35
July 25, 2031 .............. 5,511,791.99
August 25, 2031 ............ 5,289,231.34
September 25, 2031 ......... 5,068,574.39
October 25, 2031 ........... 4,849,807.25
November 25, 2031 .......... 4,632,916.10
December 25, 2031 .......... 4,417,887.24
January 25, 2032 ........... 4,204,707.06
February 25, 2032 .......... 3,993,362.05
March 25, 2032 ............. 3,783,838.78
April 25, 2032 ............. 3,576,123.94
May 25, 2032 ............... 3,370,204.29
June 25, 2032 .............. 3,166,066.69
July 25, 2032 .............. 2,963,698.09
August 25, 2032 ............ 2,763,085.54
September 25, 2032 ......... 2,564,216.19
October 25, 2032 ........... 2,367,077.24
November 25, 2032 .......... 2,171,656.03
December 25, 2032 .......... 1,977,939.96
January 25, 2033 ........... 1,785,916.52
February 25, 2033 .......... 1,595,573.30
March 25, 2033 ............. 1,406,897.96
April 25, 2033 ............. 1,219,878.27
May 25, 2033 ............... 1,034,502.06
June 25, 2033 .............. 850,757.26
July 25, 2033 .............. 668,631.90
August 25, 2033 ............ 488,114.06
September 25, 2033 ......... 309,191.94
October 25, 2033 ........... 131,853.78
November 25, 2033 and
thereafter .............. 0.00
</TABLE>
A-4
<PAGE>
APPENDIX B
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS PERCENTAGES OF THE PREPAYMENT SPEED ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1
---------------------------------------------
DISTRIBUTION DATE 0% 100% 300% 400% 500%
- ----------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ....................... 100% 100% 100% 100% 100%
December 25, 2004 ........................ 98 96 91 89 87
December 25, 2005 ........................ 96 88 75 72 65
December 25, 2006 ........................ 93 78 57 45 34
December 25, 2007 ........................ 91 69 39 24 11
December 25, 2008 ........................ 88 60 23 8 0
December 25, 2009 ........................ 86 52 12 0 0
December 25, 2010 ........................ 83 44 4 0 0
December 25, 2011 ........................ 80 37 0 0 0
December 25, 2012 ........................ 77 31 0 0 0
December 25, 2013 ........................ 74 26 0 0 0
December 25, 2014 ........................ 71 20 0 0 0
December 25, 2015 ........................ 67 15 0 0 0
December 25, 2016 ........................ 63 10 0 0 0
December 25, 2017 ........................ 59 5 0 0 0
December 25, 2018 ........................ 55 1 0 0 0
December 25, 2019 ........................ 50 0 0 0 0
December 25, 2020 ........................ 46 0 0 0 0
December 25, 2021 ........................ 41 0 0 0 0
December 25, 2022 ........................ 35 0 0 0 0
December 25, 2023 ........................ 29 0 0 0 0
December 25, 2024 ........................ 23 0 0 0 0
December 25, 2025 ........................ 17 0 0 0 0
December 25, 2026 ........................ 10 0 0 0 0
December 25, 2027 ........................ 3 0 0 0 0
December 25, 2028 ........................ 0 0 0 0 0
December 25, 2029 ........................ 0 0 0 0 0
December 25, 2030 ........................ 0 0 0 0 0
December 25, 2031 ........................ 0 0 0 0 0
December 25, 2032 ........................ 0 0 0 0 0
December 25, 2033 ........................ 0 0 0 0 0
Weighted Average Life (in years) (1) ..... 14.9 6.8 3.6 2.9 2.5
<CAPTION>
CLASS A-2 CLASS A-3
-------------------------------------------- -----------------------------------------------
DISTRIBUTION DATE 0% 100% 300% 400% 500% 0% 100% 300% 400% 500%
- ----------------- -------- -------- -------- -------- -------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage .................... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 25, 2004 ..................... 95 95 95 95 95 106 106 106 106 106
December 25, 2005 ..................... 90 90 90 90 90 112 112 112 112 112
December 25, 2006 ..................... 85 85 85 85 85 118 118 118 118 118
December 25, 2007 ..................... 79 79 79 79 79 125 125 125 125 125
December 25, 2008 ..................... 73 73 73 73 31 132 132 132 132 132
December 25, 2009 ..................... 67 67 67 44 0 139 139 139 139 80
December 25, 2010 ..................... 60 60 60 0 0 147 147 147 120 28
December 25, 2011 ..................... 53 53 35 0 0 155 155 155 76 5
December 25, 2012 ..................... 45 45 0 0 0 164 164 153 52 0
December 25, 2013 ..................... 38 38 0 0 0 173 173 122 38 0
December 25, 2014 ..................... 29 29 0 0 0 183 183 98 28 0
December 25, 2015 ..................... 20 20 0 0 0 193 193 78 21 0
December 25, 2016 ..................... 11 11 0 0 0 204 204 62 15 0
December 25, 2017 ..................... 1 1 0 0 0 216 216 49 11 0
December 25, 2018 ..................... 0 0 0 0 0 217 217 38 8 0
December 25, 2019 ..................... 0 0 0 0 0 217 217 30 6 0
December 25, 2020 ..................... 0 0 0 0 0 217 217 24 4 0
December 25, 2021 ..................... 0 0 0 0 0 217 217 18 3 0
December 25, 2022 ..................... 0 0 0 0 0 217 217 14 2 0
December 25, 2023 ..................... 0 0 0 0 0 217 196 11 2 0
December 25, 2024 ..................... 0 0 0 0 0 217 170 8 1 0
December 25, 2025 ..................... 0 0 0 0 0 217 146 6 1 0
December 25, 2026 ..................... 0 0 0 0 0 217 123 5 1 0
December 25, 2027 ..................... 0 0 0 0 0 217 102 3 * 0
December 25, 2028 ..................... 0 0 0 0 0 217 82 2 * 0
December 25, 2029 ..................... 0 0 0 0 0 217 63 2 * 0
December 25, 2030 ..................... 0 0 0 0 0 217 45 1 * 0
December 25, 2031 ..................... 0 0 0 0 0 162 29 1 * 0
December 25, 2032 ..................... 0 0 0 0 0 79 13 * * 0
December 25, 2033 ..................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years) (1) .. 8.0 8.0 6.4 5.2 4.4 28.7 24.0 13.0 9.3 6.4
</TABLE>
- -------
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the net reduction, if any, of the Class Principal Balance
by the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the total net reductions of the Class Principal
Balance described in (i) above.
* Represents amounts greater than zero and less than 0.50% of the initial
aggregate Class Principal Balance outstanding.
B-1
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS PERCENTAGES OF THE PREPAYMENT SPEED ASSUMPTION
<TABLE>
<CAPTION>
CLASSES A-4 AND A-7
-----------------------------------------------
DISTRIBUTION DATE 0% 100% 300% 400% 500%
- ----------------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ....................... 100% 100% 100% 100% 100%
December 25, 2004 ........................ 100 100 100 100 100
December 25, 2005 ........................ 100 100 100 100 100
December 25, 2006 ........................ 100 100 100 100 100
December 25, 2007 ........................ 100 100 100 100 100
December 25, 2008 ........................ 100 100 100 100 100
December 25, 2009 ........................ 98 96 93 91 88
December 25, 2010 ........................ 96 92 84 80 75
December 25, 2011 ........................ 94 87 73 66 60
December 25, 2012 ........................ 92 81 61 52 42
December 25, 2013 ........................ 90 74 49 38 29
December 25, 2014 ........................ 87 68 39 28 20
December 25, 2015 ........................ 85 62 31 21 13
December 25, 2016 ........................ 82 56 25 15 9
December 25, 2017 ........................ 79 51 19 11 6
December 25, 2018 ........................ 76 46 15 8 4
December 25, 2019 ........................ 73 42 12 6 3
December 25, 2020 ........................ 69 37 9 4 2
December 25, 2021 ........................ 66 33 7 3 1
December 25, 2022 ........................ 62 29 6 2 1
December 25, 2023 ........................ 58 26 4 2 1
December 25, 2024 ........................ 53 22 3 1 *
December 25, 2025 ........................ 49 19 2 1 *
December 25, 2026 ........................ 44 16 2 1 *
December 25, 2027 ........................ 38 13 1 * *
December 25, 2028 ........................ 33 11 1 * *
December 25, 2029 ........................ 27 8 1 * *
December 25, 2030 ........................ 21 6 * * *
December 25, 2031 ........................ 14 4 * * *
December 25, 2032 ........................ 7 2 * * *
December 25, 2033 ........................ 0 0 0 0 0
Weighted Average Life (in years) (1) ..... 20.5 15.3 10.9 9.8 9.1
<CAPTION>
CLASS A-5 CLASSES A-6, A-8 AND A-9
---------------------------------------------- ---------------------------------------------
DISTRIBUTION DATE 0% 100% 300% 400% 500% 0% 100% 300% 400% 500%
- --------------------------------------- --------- --------- -------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage .................... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 25, 2004 ..................... 106 106 106 106 106 98 96 92 90 88
December 25, 2005 ..................... 112 112 79 0 0 97 89 75 69 62
December 25, 2006 ..................... 118 118 0 0 0 95 80 54 43 32
December 25, 2007 ..................... 125 125 0 0 0 93 72 37 22 10
December 25, 2008 ..................... 132 132 0 0 0 91 63 22 7 0
December 25, 2009 ..................... 139 139 0 0 0 89 56 12 0 0
December 25, 2010 ..................... 147 147 0 0 0 86 50 4 0 0
December 25, 2011 ..................... 155 155 0 0 0 84 44 0 0 0
December 25, 2012 ..................... 164 164 0 0 0 82 38 0 0 0
December 25, 2013 ..................... 173 173 0 0 0 79 33 0 0 0
December 25, 2014 ..................... 183 183 0 0 0 77 29 0 0 0
December 25, 2015 ..................... 193 193 0 0 0 74 24 0 0 0
December 25, 2016 ..................... 204 204 0 0 0 71 20 0 0 0
December 25, 2017 ..................... 216 216 0 0 0 67 17 0 0 0
December 25, 2018 ..................... 228 228 0 0 0 64 13 0 0 0
December 25, 2019 ..................... 241 182 0 0 0 60 10 0 0 0
December 25, 2020 ..................... 254 122 0 0 0 57 6 0 0 0
December 25, 2021 ..................... 269 65 0 0 0 52 3 0 0 0
December 25, 2022 ..................... 284 12 0 0 0 48 1 0 0 0
December 25, 2023 ..................... 300 0 0 0 0 44 0 0 0 0
December 25, 2024 ..................... 317 0 0 0 0 39 0 0 0 0
December 25, 2025 ..................... 334 0 0 0 0 33 0 0 0 0
December 25, 2026 ..................... 353 0 0 0 0 28 0 0 0 0
December 25, 2027 ..................... 373 0 0 0 0 22 0 0 0 0
December 25, 2028 ..................... 302 0 0 0 0 16 0 0 0 0
December 25, 2029 ..................... 176 0 0 0 0 9 0 0 0 0
December 25, 2030 ..................... 42 0 0 0 0 2 0 0 0 0
December 25, 2031 ..................... 0 0 0 0 0 0 0 0 0 0
December 25, 2032 ..................... 0 0 0 0 0 0 0 0 0 0
December 25, 2033 ..................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years) (1) .. 25.9 17.2 2.1 1.5 1.2 17.1 8.0 3.5 2.8 2.4
</TABLE>
- -------
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the net reduction, if any, of the Class Principal Balance
by the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the total net reductions of the Class Principal
Balance described in (i) above.
* Represents amounts greater than zero and less than 0.50% of the initial
aggregate Class Principal Balance outstanding.
B-2
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS PERCENTAGES OF THE PREPAYMENT SPEED ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-P
----------------------------------------------
DISTRIBUTION DATE 0% 100% 300% 400% 500%
- ----------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage ....................... 100% 100% 100% 100% 100%
December 25, 2004 ........................ 99 97 94 93 91
December 25, 2005 ........................ 97 92 82 77 72
December 25, 2006 ........................ 96 85 67 58 50
December 25, 2007 ........................ 94 79 54 44 35
December 25, 2008 ........................ 93 73 43 32 24
December 25, 2009 ........................ 91 67 35 24 16
December 25, 2010 ........................ 89 62 28 18 11
December 25, 2011 ........................ 87 57 22 13 8
December 25, 2012 ........................ 85 52 18 10 5
December 25, 2013 ........................ 83 48 14 7 4
December 25, 2014 ........................ 80 44 11 5 2
December 25, 2015 ........................ 78 40 9 4 2
December 25, 2016 ........................ 75 36 7 3 1
December 25, 2017 ........................ 73 33 6 2 1
December 25, 2018 ........................ 70 30 4 2 1
December 25, 2019 ........................ 67 27 4 1 *
December 25, 2020 ........................ 63 24 3 1 *
December 25, 2021 ........................ 60 21 2 1 *
December 25, 2022 ........................ 56 19 2 * *
December 25, 2023 ........................ 52 16 1 * *
December 25, 2024 ........................ 48 14 1 * *
December 25, 2025 ........................ 44 12 1 * *
December 25, 2026 ........................ 39 10 1 * *
December 25, 2027 ........................ 34 8 * * *
December 25, 2028 ........................ 29 7 * * *
December 25, 2029 ........................ 24 5 * * *
December 25, 2030 ........................ 18 4 * * *
December 25, 2031 ........................ 12 2 * * *
December 25, 2032 ........................ 6 1 * * *
December 25, 2033 ........................ 0 0 0 0 0
Weighted Average Life (in years) (1) ..... 18.9 11.2 5.6 4.5 3.8
<CAPTION>
CLASSES M, B-1 AND B-2 CLASS R
----------------------------------------------- ------------------------------------------
DISTRIBUTION DATE 0% 100% 300% 400% 500% 0% 100% 300% 400% 500%
- --------------------------------------- --------- --------- --------- -------- -------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage .................... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
December 25, 2004 ..................... 99 99 99 99 99 0 0 0 0 0
December 25, 2005 ..................... 97 97 97 97 97 0 0 0 0 0
December 25, 2006 ..................... 96 96 96 96 96 0 0 0 0 0
December 25, 2007 ..................... 95 95 95 95 95 0 0 0 0 0
December 25, 2008 ..................... 93 93 93 93 93 0 0 0 0 0
December 25, 2009 ..................... 91 90 86 84 82 0 0 0 0 0
December 25, 2010 ..................... 90 86 78 74 70 0 0 0 0 0
December 25, 2011 ..................... 88 81 68 61 55 0 0 0 0 0
December 25, 2012 ..................... 86 75 57 48 41 0 0 0 0 0
December 25, 2013 ..................... 84 69 45 36 28 0 0 0 0 0
December 25, 2014 ..................... 81 63 36 26 19 0 0 0 0 0
December 25, 2015 ..................... 79 58 29 20 13 0 0 0 0 0
December 25, 2016 ..................... 76 52 23 14 9 0 0 0 0 0
December 25, 2017 ..................... 74 47 18 11 6 0 0 0 0 0
December 25, 2018 ..................... 71 43 14 8 4 0 0 0 0 0
December 25, 2019 ..................... 68 39 11 6 3 0 0 0 0 0
December 25, 2020 ..................... 65 35 9 4 2 0 0 0 0 0
December 25, 2021 ..................... 61 31 7 3 1 0 0 0 0 0
December 25, 2022 ..................... 57 27 5 2 1 0 0 0 0 0
December 25, 2023 ..................... 54 24 4 1 1 0 0 0 0 0
December 25, 2024 ..................... 50 21 3 1 * 0 0 0 0 0
December 25, 2025 ..................... 45 18 2 1 * 0 0 0 0 0
December 25, 2026 ..................... 41 15 2 * * 0 0 0 0 0
December 25, 2027 ..................... 36 12 1 * * 0 0 0 0 0
December 25, 2028 ..................... 30 10 1 * * 0 0 0 0 0
December 25, 2029 ..................... 25 8 1 * * 0 0 0 0 0
December 25, 2030 ..................... 19 6 * * * 0 0 0 0 0
December 25, 2031 ..................... 13 3 * * * 0 0 0 0 0
December 25, 2032 ..................... 6 2 * * * 0 0 0 0 0
December 25, 2033 ..................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in years) (1) .. 19.2 14.4 10.3 9.3 8.6 0.1 0.1 0.1 0.1 0.1
</TABLE>
- -------
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the net reduction, if any, of the Class Principal Balance
by the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the total net reductions of the Class Principal
Balance described in (i) above.
* Represents amounts greater than zero and less than 0.50% of the initial
aggregate Class Principal Balance outstanding.
B-3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
APPENDIX C
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS OF MORTGAGE LOANS(1)
- ------------------------------------------------------------------------------
PERCENTAGE OF
AGGREGATE AGGREGATE
RANGE OF ORIGINAL NUMBER OF PRINCIPAL PRINCIPAL
LOAN-TO-VALUE RATIOS MORTGAGE BALANCE BALANCE
(%) LOANS OUTSTANDING OUTSTANDING
- ------------------------- ----------- ------------------- --------------
<S> <C> <C> <C>
0.001 - 50.000 ......... 49 $ 29,191,745.42 8.23%
50.001 - 55.000 ......... 32 17,326,367.66 4.89
55.001 - 60.000 ......... 41 21,758,576.23 6.13
60.001 - 65.000 ......... 50 24,337,054.56 6.86
65.001 - 70.000 ......... 100 56,823,098.06 16.02
70.001 - 75.000 ......... 108 50,899,343.90 14.35
75.001 - 80.000 ......... 312 144,897,072.11 40.85
80.001 - 85.000 ......... 4 1,665,189.72 0.47
85.001 - 90.000 ......... 18 7,102,352.53 2.00
90.001 - 95.000 ......... 2 677,257.56 0.19
--- ---------------- ------
Total: ................ 716 $ 354,678,057.75 100.00%
=== ================ ======
</TABLE>
(1) The weighted average original Loan-to-Value Ratio of the Loans is
expected to be approximately 70.24%.
<TABLE>
<CAPTION>
REMAINING TERMS TO MATURITY OF MORTGAGE LOANS(1)
- -------------------------------------------------------------------------------
PERCENTAGE OF
AGGREGATE AGGREGATE
REMAINING NUMBER OF PRINCIPAL PRINCIPAL
TERMS TO MORTGAGE BALANCE BALANCE
MATURITY (MONTHS) LOANS OUTSTANDING OUTSTANDING
- --------------------------- ----------- ------------------ --------------
<S> <C> <C> <C>
288.001 - 300.000 ......... 4 $ 1,686,782.54 0.48%
336.001 - 348.000 ......... 4 1,873,780.42 0.53
348.001 - 360.000 ......... 708 351,117,494.79 99.00
--- ---------------- ------
Total: .................. 716 $ 354,678,057.75 100.00%
=== ================ ======
</TABLE>
(1) As of the Cut-Off Date, the weighted average remaining term to maturity
of the Loans is expected to be approximately 358 months.
<TABLE>
<CAPTION>
MORTGAGE RATES OF MORTGAGE LOANS(1)
- ------------------------------------------------------------------------
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
MORTGAGE RATE (%) LOANS OUTSTANDING OUTSTANDING
- ------------------- ----------- ------------------- --------------
<S> <C> <C> <C>
5.000 ............. 2 $ 814,051.63 0.23%
5.250 ............. 8 3,977,593.39 1.12
5.375 ............. 6 2,914,255.62 0.82
5.500 ............. 28 14,104,443.22 3.98
5.625 ............. 33 16,699,160.30 4.71
5.750 ............. 108 53,473,149.53 15.08
5.875 ............. 143 75,974,129.62 21.42
6.000 ............. 96 49,934,987.03 14.08
6.125 ............. 90 41,480,548.42 11.70
6.250 ............. 113 52,825,559.05 14.89
6.375 ............. 56 26,640,783.18 7.51
6.500 ............. 20 9,680,839.12 2.73
6.625 ............. 9 4,439,973.61 1.25
6.750 ............. 4 1,718,584.03 0.48
--- ---------------- ------
Total: .......... 716 $ 354,678,057.75 100.00%
=== ================ ======
</TABLE>
(1) As of the Cut-Off Date, the weighted average Mortgage Rate of the Loans
is expected to be approximately 5.987%.
<TABLE>
<CAPTION>
MORTGAGE LOAN PRINCIPAL BALANCES OF MORTGAGE LOANS(1)
- -----------------------------------------------------------------------
PERCENTAGE OF
AGGREGATE AGGREGATE
RANGE OF NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE LOAN MORTGAGE BALANCE BALANCE
PRINCIPAL BALANCES ($) LOANS OUTSTANDING OUTSTANDING
- ------------------------ ----------- ------------------- --------------
<S> <C> <C> <C>
300,000.01 - 350,000.00 41 $ 14,046,539.83 3.96%
350,000.01 - 400,000.00 172 65,027,768.31 18.33
400,000.01 - 450,000.00 136 58,039,406.21 16.36
450,000.01 - 500,000.00 118 56,240,988.80 15.86
500,000.01 - 600,000.00 125 69,048,762.50 19.47
600,000.01 - 700,000.00 73 46,869,566.80 13.21
700,000.01 - 800,000.00 12 9,100,869.31 2.57
800,000.01 - 900,000.00 15 12,741,623.16 3.59
900,000.01 - 1,000,000.00 24 23,562,532.83 6.64
--- ---------------- ------
Total: ............... 716 $ 354,678,057.75 100.00%
=== ================ ======
</TABLE>
(1) As of the Cut-Off Date, the average Loan principal balance is expected to
be approximately $495,360.42.
<TABLE>
<CAPTION>
PURPOSE OF MORTGAGE LOANS
- ---------------------------------------------------------------------------
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
LOAN PURPOSE LOANS OUTSTANDING OUTSTANDING
- --------------------------- ----------- -------------------- --------------
<S> <C> <C> <C>
Purchase .................. 427 $ 211,210,185.12 59.55%
Refinance - Rate Term ..... 179 95,131,719.99 26.82
Refinance - Cashout ....... 104 45,363,390.35 12.79
Construction/Permanent..... 6 2,972,762.29 0.84
--- ----------------- ------
Total: .................. 716 $ 354,678,057.75 100.00%
=== ================= ======
</TABLE>
<TABLE>
<CAPTION>
DOCUMENTATION PROGRAMS FOR MORTGAGE LOANS
- --------------------------------------------------------------------------------
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
DOCUMENTATION TYPE LOANS OUTSTANDING OUTSTANDING
- -------------------------- ----------- -------------------- --------------
<S> <C> <C> <C>
Full/Alternative ......... 716 $ 354,678,057.75 100.00%
--- ---------------- ------
Total: ................. 716 $ 354,678,057.75 100.00%
=== ================ ======
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY TYPES OF MORTGAGE LOANS(1)
- ---------------------------------------------------------------------------
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
OCCUPANCY TYPE LOANS OUTSTANDING OUTSTANDING
- --------------------- ----------- -------------------- --------------
<S> <C> <C> <C>
Primary ............. 674 $ 333,203,568.64 93.95%
Second Home ......... 42 21,474,489.11 6.05
--- ---------------- ------
Total: ............ 716 $ 354,678,057.75 100.00%
=== ================ ======
</TABLE>
(1) Based upon representations of the related mortgagors at the time of
origination.
<TABLE>
<CAPTION>
TYPES OF MORTGAGED PROPERTIES OF MORTGAGE LOANS
- ---------------------------------------------------------------------------
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
PROPERTY TYPE LOANS OUTSTANDING OUTSTANDING
- --------------------------- ----------- -------------------- --------------
<S> <C> <C> <C>
Single Family Detached..... 512 $ 252,942,021.09 71.32%
Townhouse ................. 5 1,993,221.77 0.56
Condominium ............... 29 14,317,622.41 4.04
Condominium - High
Rise .................... 8 3,891,693.38 1.10
Two-to-Four Family ........ 10 4,865,565.62 1.37
Planned Unit
Development ............. 152 76,667,933.48 21.62
--- ----------------- ------
Total: .................. 716 $ 354,678,057.75 100.00%
=== ================= ======
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
- ------------------------------------------------------------------------------------
PERCENTAGE OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
GEOGRAPHIC MORTGAGE BALANCE BALANCE
DISTRIBUTION LOANS OUTSTANDING OUTSTANDING
- ------------------------------ ----------- -------------------- --------------
<S> <C> <C> <C>
California ................... 356 $ 176,929,227.83 49.88%
New York ..................... 48 22,548,897.32 6.36
Florida ...................... 44 21,176,580.19 5.97
Texas ........................ 22 12,512,076.71 3.53
Washington ................... 27 12,343,287.19 3.48
Virginia ..................... 26 11,822,353.01 3.33
Massachusetts ................ 21 11,001,773.55 3.10
Illinois ..................... 17 9,180,482.79 2.59
Colorado ..................... 18 8,107,080.53 2.29
Georgia ...................... 15 7,469,303.47 2.11
New Jersey ................... 14 7,100,386.83 2.00
North Carolina ............... 8 4,561,873.90 1.29
Maryland ..................... 8 3,955,976.30 1.12
Arizona ...................... 9 3,864,707.27 1.09
Oregon ....................... 8 3,862,257.14 1.09
Nevada ....................... 7 3,294,629.98 0.93
Pennsylvania ................. 7 2,986,295.44 0.84
Alabama ...................... 6 2,977,277.98 0.84
Wisconsin .................... 4 2,925,400.90 0.82
Minnesota .................... 6 2,774,919.01 0.78
Michigan ..................... 6 2,709,238.32 0.76
District of Columbia ......... 3 2,434,527.42 0.69
Connecticut .................. 4 2,049,250.23 0.58
Tennessee .................... 4 1,899,588.56 0.54
Indiana ...................... 3 1,887,279.01 0.53
New Mexico ................... 4 1,884,667.87 0.53
Kansas ....................... 3 1,610,823.23 0.45
Louisiana .................... 3 1,504,427.41 0.42
Ohio ......................... 3 1,173,895.31 0.33
Wyoming ...................... 1 998,980.45 0.28
Rhode Island ................. 1 956,762.60 0.27
Missouri ..................... 2 868,616.69 0.24
New Hampshire ................ 2 857,802.81 0.24
Montana ...................... 2 804,253.91 0.23
Delaware ..................... 1 463,900.00 0.13
Maine ........................ 1 433,000.00 0.12
Utah ......................... 1 381,628.72 0.11
Oklahoma ..................... 1 364,627.87 0.10
--- ---------------- ------
Total: ..................... 716 $ 354,678,057.75 100.00%
=== ================ ======
</TABLE>
(1) No more than approximately 1.05% of the Loans will be secured by
properties located in any one postal zip code area.
C-2
<PAGE>
ABN AMRO MORTGAGE CORPORATION, DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
ISSUABLE IN SERIES BY SEPARATE TRUSTS
----------
EACH SERIES OF CERTIFICATES:
o will consist of one or more classes of mortgage pass-through certificates
representing interests in the assets of a trust;
o will receive principal and interest only from payments collected on the
assets of the related trust; and
o will not be insured or guaranteed by any government agency or
instrumentality and will not be obligations of ABN AMRO Mortgage
Corporation or any related companies.
EACH TRUST:
o will own a pool of mortgage assets sold to the trust by ABN AMRO Mortgage
Corporation that may include:
-- mortgage loans;
-- certificates backed by mortgage loans;
-- principal and interest payments due on these mortgage assets
o will include mortgage loans secured by first liens on:
-- one- to four-family residential properties; and
-- rights to own and occupy apartments in cooperative buildings.
----------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is January 23, 2003.
<PAGE>
TABLE OF CONTENTS
Page
----
Description of the Certificates................................................1
Source of Funds for Payment...............................................1
Form of Certificates......................................................2
Classes of Certificates...................................................3
Distributions of Principal and Interest...................................6
General..............................................................6
Distributions of Interest............................................8
Distributions of Principal...........................................8
Example of Distributions..................................................9
Optional Termination of a Trust or Underlying Trust......................11
The Trusts....................................................................12
General..................................................................12
The Loans................................................................14
Description of the Loans............................................14
Payment Provisions of the Loans.....................................15
Loan Underwriting Policies..........................................18
Mortgage Certificates....................................................20
Description of the Mortgage Certificates............................20
Substitution of Mortgage Certificates...............................25
The Depositor.................................................................25
Use of Proceeds...............................................................26
Credit Enhancement............................................................27
Types of Enhancements....................................................27
Subordination............................................................27
Shifting Interest Credit Enhancement.....................................28
Cross-Support............................................................29
Pool Insurance...........................................................29
Special Hazard Insurance.................................................30
Bankruptcy Bond..........................................................30
Reserve Fund.............................................................31
Overcollateralization....................................................31
Letter of Credit.........................................................32
Surety Bond..............................................................32
Other Insurance, Guarantees and Similar Instruments or Agreements........32
Prepayment, Yield and Maturity Considerations.................................33
General..................................................................33
Determination of Pass-Through Rates.................................33
Determination of Remittance Rate....................................33
Yield....................................................................34
Price...............................................................34
Effective Pass-Through Rate.........................................34
Other Yield Considerations..........................................35
Prepayment Considerations................................................37
General.............................................................37
Substitutions.......................................................38
Loan Assumptions....................................................38
ARMs................................................................39
Foreclosures........................................................40
Pre-Funding.........................................................40
Prepayment Assumptions..............................................41
Optional Termination................................................41
Distributions on the Certificates.............................................41
Servicing of the Loans........................................................43
Collection and Other Servicing Procedures................................43
Primary Mortgage Insurance...............................................46
Hazard Insurance.........................................................47
Unanticipated Recoveries of Losses on the Loans..........................48
Advances.................................................................49
Payments on Mortgage Assets..............................................49
Administration Fees, Compensation and Payment of Expenses................50
Resignation of the Master Servicer; Scope of Indemnities.................51
Back-Up Master Servicer..................................................52
Special Servicing Agreements.............................................52
Servicing of the Underlying Loans........................................52
The Pooling and Servicing Agreement...........................................52
Assignment of Loans......................................................52
Representations and Warranties...........................................54
Repurchase or Substitution...............................................57
Forward Commitments: Pre-Funding Account.................................57
Adjustment to Administration Fees in Connection with Prepayment
Interest Shortfall....................................................58
Book-Entry Registration..................................................58
Global Clearance, Settlement and Tax Documentation Procedures............62
Initial Settlement..................................................63
Secondary Market Trading............................................63
U.S. Federal Income Tax Documentation Requirements..................65
Definitive Certificates..................................................67
Evidence as to Compliance................................................67
Reports to Certificateholders............................................67
<PAGE>
TABLE OF CONTENTS
Reports to the Trustee...................................................69
Events of Default........................................................69
Rights Upon Event of Default.............................................69
Amendment................................................................70
Termination..............................................................71
Governing Law............................................................71
Legal Aspects of the Loans....................................................72
General .................................................................72
Foreclosure..............................................................72
Rights of Redemption.....................................................73
Anti-Deficiency Legislation and Other Limitations on Lenders.............74
Junior Liens; Rights of Senior Lienholders...............................75
"Due-on-Sale" Clauses....................................................76
Environmental Legislation................................................78
Subordinate Financing....................................................78
Applicability of Usury Laws..............................................79
Enforceability of Some Provisions........................................79
Legal Aspects of the Loans Under California Law..........................80
Co-op Loans..............................................................80
Legal Investment Matters......................................................81
ERISA Considerations..........................................................83
General .................................................................83
Publicly-Offered Securities..............................................84
Prohibited Transaction Exemption 83-1....................................84
Underwriter Exemption....................................................87
Federal Income Tax Consequences...............................................89
General .................................................................89
REMIC .................................................................90
Classification of REMICs............................................90
Qualification as a REMIC.................................................91
Characterization of Investments in Certificates.....................92
Taxation of Owners of Regular Certificates..........................93
Constant Yield Election.............................................96
Effects of Defaults and Delinquencies...............................97
Taxation of Owners of Residual Certificates.........................97
Pass-Through of Miscellaneous Itemized Deductions..................100
Sales of Certificates..............................................101
Prohibited Transactions and Other REMIC-Level Taxes................102
Tax on Transfers of Residual Certificates to Certain Organizations.102
Disregard of Some Types of Transfers...............................103
Termination ......................................................104
Reporting and Other Administrative Matters.........................105
Backup Withholding.................................................106
Purchase of Both Regular and Residual Certificates.................107
Investment in Certificates Not Representing Interests in a REMIC........107
Classification of Trust and Characterization of Investment in
Certificates....................................................107
Taxation of Owners of P&I Certificates.............................108
Taxation of Owners of IO Certificates..............................112
Administration Fee, Voluntary Advances and Subordinated Amount.....114
Sales of Certificates..............................................115
Reporting ......................................................116
Backup Withholding.................................................117
Foreign Investors..................................................117
State Tax Considerations.....................................................117
Plan of Distribution.........................................................117
Legal Matters................................................................119
Rating.......................................................................120
Where You Can Find More Information..........................................120
ABN AMRO Mortgage Corporation...........................................120
Additional Information Relating to the Mortgage Certificates............121
<PAGE>
----------------------------------------------
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We describe the offered certificates in two separate documents that
progressively provide more detail: (1) this prospectus, which provides general
information, some of which may not apply to all series of certificates; and (2)
the prospectus supplement for a series of certificates, which describes the
specific terms of that series of securities and may be different from the
information in the prospectus. Neither this prospectus nor any prospectus
supplement will contain all the information included in the registration
statement. The registration statement also includes copies of the various
contracts and documents referred to in this prospectus and any prospectus
supplement. You may obtain copies of these documents for review. See "Where You
Can Find More Information."
IF THE DESCRIPTION OF THE TERMS OF THE CERTIFICATES VARIES BETWEEN THE
PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN
THE PROSPECTUS SUPPLEMENT.
We include cross-references in each prospectus supplement and in this
prospectus to captions in these materials where you can find further related
discussions. The Table of Contents which appears before this page and the Table
of Contents included in each 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" in
this prospectus and in the prospectus supplement for each series.
----------------------------------------------
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The certificates comprising each series will represent the entire
beneficial ownership interest in a distinct trust (the "TRUST") that will issue
those certificates. The Trust will be comprised primarily of mortgage assets
(the "MORTGAGE ASSETS") consisting of:
o mortgage loans (the "LOANS") secured by first liens on one- to
four-family residential properties and rights to own and occupy
apartments in cooperative buildings,
o mortgage certificates (the "MORTGAGE CERTIFICATES") secured by
mortgage loans (the "UNDERLYING LOANS"), and
o the principal and interest payments due on the Mortgage Assets.
One or more entities, which may include an affiliate of ABN AMRO Mortgage
Corporation (the "DEPOSITOR"), will be specified in the prospectus supplement as
the master servicer (the "MASTER SERVICER") for a series of certificates. Each
series of certificates will be issued under a separate pooling and servicing
agreement (the "POOLING AND SERVICING AGREEMENT") entered into among ABN AMRO
Mortgage Corporation, as Depositor, the Master Servicer, and a commercial bank
or trust company acting as trustee (the "TRUSTEE") for the benefit of
certificateholders of the related series.
The provisions of each Pooling and Servicing Agreement will vary depending
upon the nature of the certificates to be issued and the nature of the related
Trust. This prospectus summarizes the material provisions which may appear in
each Pooling and Servicing Agreement. The prospectus supplement for a series of
certificates will describe any other material provisions of the Pooling and
Servicing Agreement relating to that series. On written request, the Depositor
will provide certificateholders with a copy of the Pooling and Servicing
Agreement for any series without charge. You should send your request to ABN
AMRO Mortgage Corporation, 135 South LaSalle Street, Suite 925, Chicago,
Illinois 60603, Attention: Maria Fregosi - Director - ABN AMRO Mortgage
Operations. The Depositor will file the Pooling and Servicing Agreement relating
to a series of certificates with the SEC within 15 days after the date of
issuance of a series of certificates. See "The Trusts--General."
SOURCE OF FUNDS FOR PAYMENT
The certificates of a series will be entitled to payment only from the
proceeds from the Mortgage Assets included in the Trust issuing that series. You
will not be entitled to payments from the Mortgage Assets included in any other
Trust established by the Depositor. The certificates are not obligations of ABN
AMRO Mortgage Corporation or any of its affiliates. The certificates will not be
guaranteed by any governmental agency or any other entity.
-1-
<PAGE>
The Depositor and the Master Servicer of the Mortgage Assets for a Trust
will each have limited obligations to the Trust.
o The Depositor's obligations will be limited to repurchasing Mortgage
Assets in the Trust or substituting different Mortgage Assets into the
Trust if the Depositor breaches its representations and warranties
concerning the Mortgage Assets.
o The only obligations of the Master Servicer for the Trust will be its
contractual servicing and/or master servicing obligations. This may
include an obligation to make advances of delinquent installments of
principal, interest or both under limited circumstances.
The prospectus supplement may describe additional obligations of the
Depositor and the Master Servicer to the Trust. You should refer to "The Pooling
and Servicing Agreement--Repurchase or Substitution" and "Servicing of the Loans
- --Advances" in this prospectus.
The Mortgage Assets in the Trust will not be insured or guaranteed by any
governmental agency or any other entity. You may experience delays in
distributions on your certificates or losses on your certificates if:
o delinquent payments or losses on defaulted Loans are not advanced by
the Master Servicer or another person or paid from any credit
enhancement arrangement in your Trust;
o payments on Mortgage Certificates are delayed or the Mortgage
Certificates experience losses.
FORM OF CERTIFICATES
The certificates of each series will be issued in fully registered
certificated or book-entry form only. The minimum original principal balance or
notional balance that may be represented by a certificate is referred to as its
denomination. Each prospectus supplement will specify the minimum denominations
for that series. The original principal balance of each certificate will equal
the aggregate distributions of principal to which that certificate is entitled.
Unless otherwise stated in the prospectus supplement, interest distributions on
each certificate that is not entitled to distributions of principal will be
calculated based on the notional balance of the certificate. The notional
balance will not evidence an interest in or entitlement to distributions of
principal. It will be used solely for convenience in determining the interest
payable on the certificate, the denomination of the certificate and the voting
rights of its holder. You will not receive payment of the notional balance of
your certificate.
When we refer to interests in the certificates, we sometimes reference two
different types of interests. The first is a "FRACTIONAL UNDIVIDED INTEREST"
which means the percentage of the principal portion of a Trust evidenced by a
certificate. The second term is "PERCENTAGE INTEREST" which means the percentage
that a certificate represents of a particular class of certificates. When we
refer to a "RESIDUAL HOLDER," we are referring to a certificateholder entitled
to receive the
-2-
<PAGE>
"residual interest" in the REMIC as defined in Section 860G(a)(2) of the
Internal Revenue Code of 1986, as amended (the "CODE").
Except for global certificates described in the next paragraph, you may
transfer and exchange your certificates on a certificate register to be
maintained at the corporate trust office of the Trustee or an office or agency
maintained by the Trustee for that purpose. Unless otherwise stated in the
prospectus supplement, the Trustee will not charge a fee for any registration of
transfer or exchange of certificates, but may require you to pay an amount
sufficient to cover any tax or other governmental charge. Before a certificate
is properly presented for transfer, the Master Servicer, the Trustee, the
certificate registrar and any of their agents may treat the person in whose name
a certificate is registered as the owner of the certificate for the purpose of
receiving distributions of principal and interest and for all other purposes
under the Pooling and Servicing Agreement.
For the classes of certificates specified in the applicable prospectus
supplement, investors will not have the right to receive physical certificates
evidencing their ownership except under limited circumstances. Instead, the
Trust will issue the certificates in the form of global certificates, which will
be held by The Depository Trust Company, known as DTC, or its nominee or a
similar institution. Financial institutions that are direct or indirect
participants in DTC will record beneficial ownership of a certificate by
individual investors in the authorized denominations.
CLASSES OF CERTIFICATES
Each series of certificates will be issued in one or more classes. Each
class of certificates may have multiple components and may be entitled to
receive all amounts payable on a specific group of assets in the related Trust.
The certificates of each class will be entitled to receive:
o any distributions from the Mortgage Assets of the Trust that are
allocable to principal, in the aggregate amount of the original
principal balance, if any, of that class of certificates; and
o any distributions from the Mortgage Assets of the Trust that are
allocable to interest on the principal balance or notional balance of
the certificates at the interest rate, if any, payable on that class
of certificates.
If stated in the prospectus supplement, the certificates will have an
aggregate original principal balance equal to the aggregate unpaid principal
balance of the Loans and Mortgage Certificates as of the close of business on
the first day of the month of creation of the Trust (the "CUT-OFF DATE") after
deducting payments of principal due on or before, and prepayments of principal
received before, the Cut-off Date. The principal balance of a Loan refers to the
scheduled principal balance remaining to be paid at the close of business on the
Cut-Off Date:
o reduced by all amounts collected by the Master Servicer and allocable
to principal of that Loan;
-3-
<PAGE>
o plus for any Loan which is not payable in self amortizing payments,
the shortfall, if any, in interest that is added to the principal
balance of the Loan.
The principal balance of a Mortgage Certificate refers to the principal
balance remaining to be paid at the close of business on the Cut-Off Date;
o reduced by distributions of principal made after the Cut-Off Date and
any allocation of losses;
o plus, any interest not distributed that may be added to the principal
balance of the Mortgage Certificate.
If a Trust or underlying trust includes Loans or Underlying Loans with payments
due on a day other than on the first day of each month, the prospectus
supplement will more fully describe any resulting effect on certificateholders.
Each class of certificates may bear interest at a different Remittance
Rate. The "REMITTANCE RATE" will equal the rate of interest payable on each
Mortgage Asset in the Trust minus the Master Servicer's administration fee, the
servicing fee of any third party servicer of the Loans and any other amounts
stated in the prospectus supplement. If stated in the prospectus supplement, the
original principal balance of the certificates and the interest rate on the
classes of certificates will be determined based on the cash flows on the
Mortgage Assets.
In addition, the related prospectus supplement will specify whether the
Pooling and Servicing Agreement will provide that all or a portion of principal
collected on the Mortgage Assets may be retained by the Trustee and held in
temporary investments, including mortgage loans, for a specified period prior to
being used to distribute payments of principal to certificateholders.
The result of any retention and temporary investment of principal by the
Trustee would be to slow the repayment rate of the related certificates relative
to the repayment rate of the related Mortgage Assets, or to attempt to match the
repayment rate of the related certificates to a repayment schedule established
at the time the certificates are issued. Any feature of this type applicable to
any certificates may terminate, resulting in the current funding of principal
payments to the related certificateholders and an acceleration of the repayment
of those certificates upon the occurrence of specified events described in the
related prospectus supplement.
Each series of certificates may include different classes of certificates
that have different rights to receive or not receive distributions of principal
and interest on each "DISTRIBUTION DATE" as specified in the prospectus
supplement. The prospectus supplement for each series will outline these classes
and their rights. A summary of some of the possible categories of certificates
and their rights are described below:
Senior and Subordinated Certificates. The rights of a "SENIOR" certificate
to receive any or a specified portion of distributions will be superior to the
rights of a "SUBORDINATE" certificate up
-4-
<PAGE>
to an amount specified in the related prospectus supplement (the "SUBORDINATED
AMOUNT"). See "Credit Enhancements--Subordination."
Accrual Certificates. Interest will accrue at the applicable Remittance
Rate on "ACCRUAL" certificates, but the Trustee will not distribute interest
until the termination of the accrual period specified in the prospectus
supplement. Instead, the amount of interest accrued during the accrual period
will be added to the principal balance of the certificate.
Accretion Directed Certificates. In addition to receiving distributions of
principal on the Mortgage Assets, "ACCRETION DIRECTED" certificates are entitled
to receive principal distributions from the interest accrued but not paid to the
Accrual certificates.
Principal Only Certificates. "PRINCIPAL ONLY" certificates are entitled to
receive distributions of principal on Mortgage Assets, but not to receive
distributions of interest.
Interest Only Certificates. "INTEREST ONLY" certificates are entitled to
receive distributions of interest on the Mortgage Assets, but not distributions
of principal. These certificates will be denominated in notional balances. The
notional balance is the amount specified on the certificate, reduced by
distributions allocable to principal on the corresponding class or classes, all
as described in the prospectus supplement. The Trustee will calculate each
Interest Only Certificate's pro rata share of the interest distributions on the
Mortgage Assets by multiplying the amount of interest by the following fraction:
notional balance of the Interest Only certificate
--------------------------------------------------
notional balance of all Interest Only certificates of its class
Stripped Certificates. "STRIPPED" certificates may consist of the
following:
o Principal Only certificates;
o Interest Only certificates;
o certificates entitled to distributions of principal with
disproportionate or nominal interest distributions; or
o certificates entitled to distributions of interest with
disproportionate or nominal principal distributions.
Sequential Pay Certificates. "SEQUENTIAL PAY" certificates receive
distributions of principal in order so that no class will receive a principal
distribution until classes having earlier scheduled maturity dates or prior
designations have been fully repaid.
Prepayment Certificates. "PREPAYMENT" certificates are entitled to minimum
distributions of principal based on the assumption that the Loans in the related
Trust or the Underlying Loans related to the Mortgage Certificates in the
related Trust prepay at a rate specified in the prospectus supplement.
Distributions of principal to these certificates will commence on the
Distribution Date specified in the prospectus supplement.
-5-
<PAGE>
Residual Certificates. A series of REMIC certificates will include a class
of "RESIDUAL" certificates representing the right to receive, in addition to any
other distributions to which they are entitled in accordance with their terms,
distributions of all of the Surplus, if any, for each Distribution Date. The
"SURPLUS" for a series of REMIC certificates as of any Distribution Date equals
the amount by which the sum of distributions, payments and other amounts
received exceeds the sum of (1) the amount required to be distributed to
certificateholders on that Distribution Date and (2) expenses described in the
prospectus supplement. In addition, after the aggregate principal balances of
all of the certificates other than the Residual certificates have been fully
repaid, the holders of the Residual certificates will be the sole owners of the
related Trust and will have sole rights to the Loans and/or Mortgage
Certificates and other assets remaining in the Trust. Some or all of the
Residual certificates of a series may be offered by the related prospectus
supplement; if so, the terms of the Residual certificates will be described in
the prospectus supplement. Any qualifications on direct or indirect ownership of
Residual certificates offered by a prospectus supplement, as well as
restrictions on the transfer of the Residual certificates, will be described in
the related prospectus supplement. If the Residual certificates are not so
offered, the Depositor may, but need not, sell some or all of the Residual
certificates on or after the date of original issuance of a series in
transactions exempt from registration under the Securities Act of 1933 and
otherwise under circumstances that will not adversely affect the REMIC status of
the Trust. If Residual certificates offered by this prospectus and the related
prospectus supplement have a certificate balance or a Remittance Rate,
references in this prospectus to distributions on certificates and related
matters should be interpreted to include Residual certificates, as appropriate.
Non-Accelerated Certificates. "NON-ACCELERATED" certificates are entitled
to distributions of principal according to a repayment schedule established at
the time the certificates are issued. The scheduled repayment rate of the
certificates is intended to be slower than the repayment rate of the related
Mortgage Assets.
Each class of certificates that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that may change from time
to time:
o in accordance with a schedule;
o in reference to a widely published interest rate index like the London
Interbank Offered Rate (LIBOR); or
o as otherwise specified in the prospectus supplement.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
GENERAL
The Trustee will distribute principal and interest at the applicable
Remittance Rate, if any, on the certificates out of funds available on the
Distribution Dates specified in the prospectus supplement. Distribution Dates
may be monthly, quarterly, semiannually or at another interval specified in the
prospectus supplement. The Trustee will make distributions to the persons in
whose names the certificates are registered at the close of business on the last
business day of the month
-6-
<PAGE>
before the Distribution Date (each, a "RECORD DATE"). Unless otherwise specified
in the prospectus supplement, distributions will begin in the month after the
month in which the Cut-off Date occurs. The Trustee will distribute funds by
check or money order mailed to the person entitled to receive them at the
address appearing in the certificate register. The prospectus supplement may
also specify that in the case of certificates that are of a specified minimum
denomination, upon written request by the certificateholder, the Trustee will
remit funds by wire transfer or by other means agreed upon. The Trustee will
make the final distribution in retirement of the certificates only upon
presentation and surrender of the certificates at the office or agency of the
Trustee specified in the final distribution notice to certificateholders. The
Trustee will make all distributions on global certificates held by DTC to DTC,
which will credit the accounts of its direct participants. If you hold an
interest in a global certificate, you will have to rely on your financial
intermediary to forward you payments. The Pooling and Servicing Agreement may
permit the Trustee to appoint a paying agent for purposes of remitting
distributions.
The Trustee will make distributions on the certificates out of, and only to
the extent of, funds in a separate account established and maintained under the
Pooling and Servicing Agreement for the benefit of holders of the certificates
of the related series (the "CERTIFICATE ACCOUNT"). The Trustee will distribute
principal, principal prepayments, scheduled payments of principal and interest
in the manner specified in the prospectus supplement. Unless otherwise stated in
the prospectus supplement, distributions to any class of certificates will be
made pro rata to all certificateholders of that class.
Unless otherwise specified in the related prospectus supplement, the
Pooling and Servicing Agreement will provide that amounts deposited in the
Certificate Account may be invested in the following "ELIGIBLE INVESTMENTS":
o direct obligations of, or guaranteed as to full and timely payment of
principal and interest by, the United States or any United States
agency or instrumentality;
o direct obligations of, or guaranteed as to timely payment of principal
and interest by, FHLMC, FNMA or the Federal Farm Credit System,
qualified by a rating agency as investment grade;
o demand and time deposits in or certificates of deposit of, or bankers'
acceptances issued by, a qualified bank or trust company, savings and
loan association or savings bank;
o general obligations of or obligations guaranteed by any state of the
United States or the District of Columbia with an investment grade
rating;
o investment grade commercial or finance company paper;
o guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation rated in one of the two highest rating
levels available to the issuers by each rating agency at the time of
the investment; and
o other obligations that are acceptable as Eligible Investments to each
of the rating agencies rating then rating the certificate series as
provided in the related Pooling and Servicing Agreement.
-7-
<PAGE>
Eligible Investments made by the Trustee must mature no later than the business
day before the next Distribution Date. If a REMIC election (see "Federal Income
Tax Consequences") is made for a series of certificates, then:
o earnings on those Eligible Investments will belong to the Depositor
unless otherwise specified in the related prospectus supplement; and
o investments will be so that they qualify as "permitted investments"
(as defined in Section 860G(a)(5) of the Code) and the Trustee will
not sell these investments if the sale would cause any part of the
proceeds to be subject to the 100 Percent Tax on Prohibited
Transactions imposed by Section 860F(a)(1) of the Code or would be to
cause a loss of REMIC status.
DISTRIBUTIONS OF INTEREST
Each class of certificates of a series will accrue interest from the date
and at the fixed or adjustable Remittance Rate described in the prospectus
supplement. For each Distribution Date, unless described differently in the
prospectus supplement, interest will accrue on each class of certificates
entitled to interest from the first day to the last day of the month before the
month in which the distribution occurs (each, an "ACCRUAL PERIOD"). Interest
will accrue on the aggregate principal balance of your certificate, or if your
certificate is an Interest Only class, interest will accrue on its notional
balance. To the extent funds are available, the Trustee will distribute interest
accrued during each Accrual Period on the Distribution Dates specified in the
prospectus supplement. The Trustee will distribute interest until the aggregate
principal balance of a class of certificates is reduced to zero or, in the case
of Interest Only classes, until the aggregate notional balance of the
certificates is reduced to zero. Distributions of interest on each class of
Accrual certificates will commence only after the occurrence of the events
specified in the prospectus supplement. Before any of the specified events
occur, the aggregate principal balance of any class of Accrual certificates will
increase on each Distribution Date by the amount of interest that would have
been distributed to that class. Any class of Accrual certificates will
thereafter accrue interest on its outstanding principal balance. Interest
accrued but not paid to the Accrual certificates may be distributed as principal
to some classes of Accretion Directed certificates. Each prospectus supplement
may provide for interest to accrue and/or to be distributed differently from the
description in this paragraph.
DISTRIBUTIONS OF PRINCIPAL
Unless otherwise stated in the prospectus supplement, the outstanding
principal balance of any class of certificates at any point in time will be:
o the original principal balance of that class of certificates; minus
o all distributions of principal made on those certificates; minus
o all realized losses allocated to that class; plus
o in the case of Accrual certificates, all interest accrued, but not
then paid less its allocable share of shortfalls.
-8-
<PAGE>
The aggregate amount of principal distributable for a certificate series
will generally be equal to the amount of principal received on the Mortgage
Assets in the related Trust. The prospectus supplement will specify the method
by which the Master Servicer will calculate principal distributions and the
manner in which that amount will be allocated among the classes of certificates
entitled to distributions of principal. The Trustee will distribute principal on
a pro rata basis among certificates of the same class entitled to receive
distributions. The certificate balance of a class or classes of certificates may
increase in accordance with any negative amortization experienced by the
Mortgage Assets in the related Trust.
The "DUE DATE" related to each Distribution Date is the first day of the
month in which that Distribution Date occurs. The "DETERMINATION DATE" is a day
not later than the 10th day before the related Distribution Date in the month in
which the Distribution Date occurs.
If stated in the prospectus supplement, one or more classes of Senior
certificates may be entitled to receive all or a disproportionate percentage of
Principal Prepayments. "PRINCIPAL PREPAYMENTS" consist of the payments or other
recoveries of principal on a Loan that are received in advance of their
scheduled Due Dates and not accompanied by amounts of interest representing
scheduled interest due after the month in which the payment was received. The
allocation of Principal Prepayments to the Senior classes will accelerate the
reduction of the principal balance of the relevant Senior class while
simultaneously increasing the interests in the Trust held by the Subordinate
classes. Increasing the interests of the Subordinate certificates relative to
that of the Senior certificates is intended to preserve the benefits to the
Senior certificates of the subordination provided by the Subordinate
certificates. See "Credit Enhancement--Subordination."
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of hypothetical distributions on
a series of certificates. The chart assumes the certificates are issued in
October 1999, are paid monthly and relate to a Trust comprised of Mortgage
Assets. All references to the Trust, certificateholders, Mortgage Assets and
Certificate Account refer to those related to a series of certificates. We have
assumed that all dates are business days.
October 1...... Cut-off Date. The Trust will include the aggregate unpaid
principal balance of the Mortgage Assets, after deducting
principal payments due and payable on or before October 1, and
Principal Prepayments received before October 1. These deducted
principal payments, interest payments and Principal Prepayments
will not be included in the Trust or passed through to
certificateholders. They will be paid to the Depositor when
received.
-9-
<PAGE>
October 1-31... Principal Prepayments received by the Master Servicer during
this period would be credited to the Certificate Account for
distribution to certificateholders on the November 25
Distribution Date. When a Loan is prepaid in full or
liquidated, interest on the amount prepaid or liquidated is
collected only to the date of prepayment or liquidation. Unless
otherwise specified in the prospectus supplement, to the extent
funds are available from the current administration fees, and
in order to minimize a shortfall in interest payable to
Certificateholders, the Master Servicer will make an additional
payment to certificateholders on any Loan that is prepaid or
liquidated by October 31. The payment may be in an amount up to
the amount necessary to assure that on the related Distribution
Date the funds available for distribution will include one
month's interest at the Pass-Through Rate for each prepaid or
liquidated Loan. For example, assume a mortgagor prepays a
mortgage in full on October 10. The prepayment includes
interest from October 1 to October 10. The Master Servicer will
make an additional payment to certificateholders to minimize
the interest shortfall from October 11 to October 31.
October 31..... Record Date. Distributions on November 25 will be made to
certificateholders of record at the close of business on the
last business day of October.
November 1-15.. The Master Servicer receives scheduled payments of principal
and interest due November 1, and deposits these amounts in a
custodial account as they are received. Under the terms of the
related mortgage, the Master Servicer may collect a late charge
on payments received after their due date and any applicable
grace period. The Master Servicer, or servicer, will retain
these late charges as additional servicing compensation.
-10-
<PAGE>
November 15.... Determination Date. On November 15, the Master Servicer
determines the aggregate amount of collections available for
distribution to certificateholders on the Distribution Date and
provides the Trustee with a report outlining these amounts and
the Trustee will determine amounts payable on the certificates.
These amounts will include:
o scheduled principal payments and principal prepayments that
are distributable on the November Distribution Date,
o the amount of funds the Master Servicer is required to
advance for scheduled payments due on November 1 but not
received by the close of business on the Determination Date,
and
o the portion of current administrative fees that it will
distribute in order to minimize prepayment interest
shortfalls on any Loan that is prepaid by October 31.
November 24.... Withdrawal date. On the business day before the Distribution
Date, the Master Servicer transfers amounts to be distributed
to certificateholders to the Certificate Account.
November 25.... Distribution Date. The Trustee will distribute to
certificateholders the aggregate amounts described in the
notice it received from the Master Servicer, unless provided
otherwise in the prospectus supplement.
OPTIONAL TERMINATION OF A TRUST OR UNDERLYING TRUST
Unless otherwise specified in the prospectus supplement, the Depositor, the
Master Servicer or the Residual Holder may, at its option, effect early
termination of the Trust, by purchasing all of the Mortgage Assets in the Trust.
The Depositor or the Master Servicer may exercise this option on any
Distribution Date after the aggregate outstanding principal balance of the
Mortgage Assets is less than a specified percentage of the aggregate outstanding
principal balance of the Mortgage Assets as of the Cut-off Date as specified in
the prospectus supplement. The Trustee will apply the proceeds of this sale on
that Distribution Date to each certificate entitled to distributions. The
proceeds realized upon an early termination may be less than the total principal
balance of all outstanding certificates plus accrued and unpaid interest. In
this case, the resulting shortfall will be allocated among the certificates as
described in the prospectus supplement.
We anticipate that the Depositor or the Master Servicer will buy the assets
in the Trust for a price equal to the sum of the following:
o the principal balance of each Mortgage Asset, plus accrued interest
thereon at the applicable Pass-Through Rate; plus
o the fair market value of all acquired property in respect of any
Mortgage Assets; minus
o unreimbursed monthly advances of principal or interest by the Master
Servicer.
-11-
<PAGE>
The Trust will sell the Mortgage Assets in connection with any early
termination without representation or warranty, except as to the Trust's title,
and without recourse. No holder of any class of certificates will be entitled to
any share of unanticipated recoveries received after the termination of the
Trust. See "Servicing of the Loans--Unanticipated Recoveries of Losses on the
Mortgage Assets" in this prospectus.
The Master Servicer of the Underlying Loans held in an underlying trust
which secures the Mortgage Certificates or another party may have the ability to
terminate the underlying trust on any Distribution Date after the aggregate
outstanding principal balance of the Underlying Loans is less than a specified
percentage of the aggregate outstanding principal balance of the Underlying
Loans as of a specified date. The proceeds realized upon an early termination of
the Underlying Loans may be less than the total principal balance of the
Mortgage Certificates secured by those loans plus accrued and unpaid interest.
THE TRUSTS
GENERAL
The Trust issuing a series of certificates may include the following
assets:
o the Mortgage Assets consisting of Loans and Mortgage Certificates
backed by Underlying Loans;
o amounts held from time to time in the Certificate Account and any
segregated account established by the Master Servicer in connection
with a particular form of credit enhancement for a particular series
(the "PRE-FUNDING ACCOUNT");
o all payments, except for any exclusions identified in the prospectus
supplement, in respect of the Mortgage Assets, adjusted for the
applicable Pass-Through Rates;
o all property acquired by foreclosure or deed in lieu of foreclosure
for any property that secured a Loan;
o all rights of the Depositor under any primary mortgage insurance
policies and any other insurance policies required to be maintained in
respect of the Loans;
o the Depositor's rights and remedies under any purchase agreement by
which it acquires the Mortgage Assets; and
o rights under any form of credit enhancement specified in the
prospectus supplement.
The Depositor will purchase or acquire each Loan from a qualified lender or
mortgage asset seller pursuant to a mortgage loan purchase agreement. Qualified
lenders and mortgage asset sellers may be affiliates of the Depositor. Each Loan
will have been originated or purchased by a qualified lender. All qualified
lenders will be or will have been at the time of the origination of the Loans
either:
(1) mortgagees approved by the Secretary of Housing and Urban Development
("HUD"), the Federal Home Loan Mortgage Corporation ("FHLMC"), or the
-12-
<PAGE>
Federal National Mortgage Association ("FNMA"), or state-chartered or
federally-chartered savings and loan associations, banks or similar
financial institutions whose deposits or accounts are insured by
either the Savings Association Insurance Fund (the "SAIF") or the Bank
Insurance Fund (the "BIF") administered by the Federal Deposit
Insurance Corporation (the "FDIC"); or
(2) originated or underwritten by an entity employing underwriting
standards consistent with the underwriting standards of an institution
described in subclause (1) above.
The Depositor has approved, or will approve, individual institutions as
eligible qualified lenders by applying specific criteria, including the
qualified lender's depth of mortgage origination experience, servicing
experience and financial stability. In general, each qualified lender must have
experience in originating residential mortgages and net worth acceptable to the
Depositor and must use the services of qualified underwriters, appraisers and
attorneys. However, from time to time, the Depositor may purchase Loans for
inclusion in a Trust from lenders not meeting the generally applicable criteria
described above. In each of these cases, the Depositor must review the lender
and find it acceptable. In connection with these types of purchases by the
Depositor, the Depositor will reunderwrite the applicable Loans. See "--Loan
Underwriting Policies" below.
The prospectus supplement for each certificate series will include
information describing the Mortgage Assets. If definitive information respecting
the final pool of Mortgage Assets is not known at the time the related series of
certificates initially is offered, information of the nature described below for
the anticipated pool will be provided in the prospectus supplement. Definitive
information for the final pool will be described in a report on Form 8-K and
filed with the Securities and Exchange Commission within fifteen days after the
initial issuance of the certificates. The definitive description of the mortgage
asset pool will specify:
o the range of the aggregate outstanding scheduled principal balance of
the Mortgage Assets at origination and as of the Cut-off Date;
o any special payment features of the Mortgage Assets;
o years of origination of the Loans;
o insurance policies, letters of credit or other terms of credit
enhancement, if any, applicable to any Mortgage Asset;
o the original maturities of the Loans and the last maturity date of the
latest maturing in the Trust;
o mortgage interest rates borne by the Loans and for adjustable rate
Loans:
o the initial and current mortgage interest rates;
o the index or formula used to calculate the adjustable mortgage
interest rate;
o the weighted average minimum and maximum rates and maximum
adjustment; and
o the frequency of interest rate adjustments;
o original loan-to-value ratios;
o distribution by number and aggregate unpaid principal balance of the
types of properties securing the Loans; and
o geographical distribution of the Loans by state.
-13-
<PAGE>
The definitive description of the pool of Mortgage Assets comprising a
Trust will also specify the original principal balance, or, in the case of
Interest Only certificates, the notional balance, of each class of certificates
on the date of issuance of the certificates, and information regarding the exact
amount of any forms of credit enhancement, if applicable.
THE LOANS
DESCRIPTION OF THE LOANS
The Loans will be evidenced by promissory notes secured by mortgages or
deeds of Trust. The mortgages create first liens on one- to four-unit
residential properties, condominium units, townhouses and units located within
planned unit developments ("PUDS") and that are secured by shares of cooperative
corporations ("CO-OP LOANS").
The Loans will be "conventional" Loans which means they will not be insured
or guaranteed by any governmental agency. The mortgaged properties securing the
Loans may be located in any jurisdiction within the United States and many
include investment properties and vacation and second homes. Unless otherwise
stated in the prospectus supplement, the Loans will have the following
characteristics:
o initial principal balances at origination of not more than $2,000,000;
o monthly payments due on the first day of each month;
o 5- to 40-year term at origination;
o adjustable or fixed rates of interest;
o level or variable monthly payments over the term of the Loan; and
o secured by a lien on the underlying mortgaged property or by a
leasehold interest in the property.
Unless otherwise specified in the related prospectus supplement, in
connection with the Loans secured by a leasehold interest, the related seller
shall have represented to the Depositor that, among other things:
o the use of leasehold estates for residential properties is an accepted
practice in the area where the related mortgaged property is located;
o residential property in such area consisting of leasehold estates is
readily marketable;
o the lease is recorded and, to the knowledge of the related seller, no
party is in any way in breach of any provision of such lease;
o to the knowledge of the related seller, the leasehold is in full force
and effect and the related leasehold estate is not subject to any
prior lien or encumbrance by which the leasehold could be terminated
or subject to any charge or penalty; and
o the remaining term of the lease does not terminate less than five
years after the maturity date of such mortgage loan.
-14-
<PAGE>
Unless otherwise stated in the prospectus supplement, the loan-to-value
ratio of any Loan will be determined by dividing (1) the original principal
balance of the Loan by (2) the original value of the related mortgaged property.
The principal balance of the Loan, for purposes of computation of the
loan-to-value ratio of any Loan, will include any part of an origination fee or
closing costs that have been financed. The original value of a mortgaged
property is:
o in the case of a purchase money Loan, the lesser of the appraised
value of the mortgaged property and the selling price; and
o in the case of any non-purchase money Loan, the value of the mortgaged
property, based on the appraised value determined in an appraisal
obtained at the time of refinancing or origination of the loan or the
sales price, if the mortgaged property was purchased within the
previous twelve months.
PAYMENT PROVISIONS OF THE LOANS
Each Loan may be fully amortizing or may be a balloon loan. A "BALLOON
LOAN" is a Loan that requires the borrower to make a substantial payment on the
Loan's stated maturity date. The ability of a borrower to make a balloon payment
will frequently depend upon the borrower's ability to refinance the Loan. Each
Balloon Loan may require payment of a premium or a yield maintenance penalty in
connection with a prepayment. The prospectus supplement will describe any
balloon loans, any applicable prepayment premiums or yield maintenance penalties
and the allocation of any premiums or penalties.
A Trust may contain buydown loans. A "BUYDOWN LOAN" is a Loan that includes
a provision whereby the originator or a third party partially subsidizes the
monthly payments of the mortgagor during the early years of the Loan. At the
time of origination of the Loan, the originator or a third party establishes a
buydown fund from which the difference in the amount of principal and interest
due on the Loan and the payment due from the mortgagor will be made. A buydown
fund will be in an amount equal either to the discounted value or full aggregate
amount of future payment subsidies. The underlying assumption of buydown plans
is that the income of the mortgagor will increase during the buydown period as a
result of normal increases in compensation and of inflation. As a result, the
mortgagor should be able to meet the full mortgage payments at the end of the
buydown period. To the extent that a mortgagor does not experience an increase
in income, the possibility of defaults on buydown loans is increased. The
prospectus supplement will contain information for any buydown loan concerning
limitations on the interest rate paid by the mortgagor initially, on annual
increases in the interest rate and on the length of the buydown period.
The Loans in any Trust may include loans that bear simple interest at fixed
annual rates (the "FIXED-RATE LOANS") and have original terms up to 40 years.
These Loans provide for monthly payments of principal and interest in
substantially equal installments for the contractual term of the mortgage note
in sufficient amounts to fully repay the principal amount of the note by
maturity.
The Loans may include fully or negatively amortizing adjustable rate loans
("ARMS"). Unless otherwise specified in the related prospectus supplement, ARMs
eligible for inclusion in a
-15-
<PAGE>
Trust provide for a fixed initial mortgage interest rate for an initial period
of time ranging from 1 month to 120 months. Thereafter, the mortgage interest
rates are subject to periodic adjustment based on changes in a formula or index
(the "INDEX"). The Index applicable as of any interest adjustment date will be
the most recent index figure available during a period specified in the
prospectus supplement. A lender may set the initial mortgage interest rate
independently of the Index otherwise applicable at the time of origination. The
initial mortgage interest rate is based on competitive factors and on other
various factors including the lender's:
o lending policy at the time of origination;
o availability of funds for lending purposes;
o rate of return obtainable on other investments; and
o cost of doing business.
The initial mortgage interest rate may be higher for mortgage loans with a
relatively higher loan-to- value ratio. After the initial period, the mortgage
interest rates are adjusted periodically to a rate equal to the Index plus a
fixed percentage spread over the Index established contractually for each ARM at
the time of its origination (the "GROSS MARGIN"). Some ARMs can be converted
into Fixed- Rate Loans at the option of the mortgagor subject to any maximum
rate, minimum rate and maximum adjustment. The mortgagor's option to convert is
usually limited to a set period after origination and the fulfillment of
specific conditions described in the related mortgage note. To the extent
specified in the related prospectus supplement, any ARM converted to a
fixed-rate mortgage may be subject to repurchase by the Depositor. In addition,
some ARMs and Fixed Rate Loans may provide for no accrual of interest or
payments of interest only for a specified period of time. Following such initial
period, the monthly payment with respect to each such Loan will be increased to
an amount sufficient to fully amortize the principal balance of such Loan over
the remaining term of the Loan and to pay interest at the applicable mortgage
interest rate.
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, many ARMs provide that the mortgage
interest rate may not be adjusted to a rate above a lifetime maximum rate or
below a lifetime minimum rate. In addition, some ARMs provide for limitations on
the maximum amount by which mortgage interest rates may adjust for any single
adjustment period. These limits are established at the time of origination of
the ARM and are based on a variety of factors, including competitive conditions
at the time of origination in the area in which the mortgaged property is
located. Because of the maximum rate, minimum rate and, if applicable, the
periodic maximum adjustment, the mortgage interest rate in effect from time to
time on an ARM may not be equal to the applicable Index plus the Gross Margin.
The mortgage interest rates on ARMs that do not provide for negative
amortization adjust at specified intervals which will be specified in the
prospectus supplement. To accommodate changes in the adjustable mortgage
interest rate, the monthly payment for an ARM which does not provide for
negative amortization will be adjusted at the time the rate adjustment occurs to
an amount that would fully repay the Loan over its remaining term at the
mortgage interest rate in effect as of the adjustment date. The Loans which
comprise any Trust may have been originated at
-16-
<PAGE>
different times, and therefore the monthly payments on these Loans will adjust
periodically in different months.
Some ARMs are payable in self amortizing payments of principal and
interest. Other ARMs ("NEGATIVELY AMORTIZING ARMS") instead provide for
limitations on changes in the monthly payment on the ARMs ("PAYMENT CAPS").
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to repay the Loan by its maturity at the
mortgage interest rate in effect in any particular month. If a monthly payment
is not sufficient to pay the interest accruing on a Negatively Amortizing ARM,
the amount of the shortfall in interest ("DEFERRED INTEREST") is added to the
principal balance of the Loans, causing negative amortization of the Loan, and
will be repaid through future monthly payments. If a monthly payment exceeds the
sum of the interest accrued at the applicable mortgage interest rate and the
principal payment which would have been necessary to repay the outstanding
principal balance over the remaining term of the loan, the excess reduces the
principal balance of the ARM. See "Prepayment, Yield and Maturity
Considerations-- Prepayment Considerations." Negatively Amortizing ARMs do not
provide for the extension of their original maturity to accommodate changes in
their mortgage interest rate. All of the limitations on periodic increases in
interest rates and on changes in monthly payments protect borrowers from
unlimited interest rate and payment increases. For any Trust that includes ARMs,
the related prospectus supplement will specify whether the Trust includes
Negatively Amortizing ARMs.
The Loans included in a Trust are by their terms assumable under limited
conditions. However, they also contain "due-on-sale" provisions under which the
Loans become due and payable, at the option of the mortgage holder, upon the
sale of the related mortgaged property. We expect that the Master Servicer will
enforce "due-on-sale" provisions on most Fixed-Rate Loans and some ARMs. In
instances where the Master Servicer does not enforce these provisions, the
prospective purchaser must meet the Master Servicer's creditworthiness standards
or the Master Servicer must reasonably believe that it may be restricted by law
from enforcing a due-on-sale clause. In addition, applicable law at the time of
transfer must not limit the Master Servicer's ability to make the interest rate
and payment adjustments permitted by the related mortgage note. Upon any
assumption, the Master Servicer may enter into an assumption and modification
agreement with the person to whom the property has been or is about to be
conveyed, pursuant to which that person becomes liable under the promissory note
evidencing the Loan. If a REMIC election is made for the related Trust, in
connection with any assumption or substitution agreement, the Master Servicer
may not change the interest rate of the related mortgage note. The person
assuming the Loan will generally pay a fee based on a percentage of the
outstanding principal balance of the Loan. The Master Servicer will retain this
fee as additional servicing compensation. In some cases the maximum rate or
minimum rate applicable to ARMs may change upon assumption. Upon assumption, the
terms of Fixed-Rate Loans generally are not modified to current market rates,
unless the loan bears a higher interest rate than the prevailing market rate.
For a description of circumstances in which the Master Servicer may be unable to
enforce due-on-sale clauses, see "Legal Aspects of the Loans--'Due on Sale'
Clauses".
-17-
<PAGE>
LOAN UNDERWRITING POLICIES
The Loans to be included in each Trust will be subject to the various
credit, appraisal and underwriting standards described in this section. The
Depositor's credit, appraisal and underwriting standards for the Loans will
generally conform to those published in the Depositor's selling guide. We refer
to the Depositor's selling guide, together with the Depositor's servicing guide,
as modified from time to time, as the "GUIDE". The credit, appraisal and
underwriting standards in the Guide are continuously revised based on
opportunities and prevailing conditions in the residential mortgage market and
the market for the Depositor's mortgage pass-through certificates. The Loans may
be underwritten by the Depositor or by designated third parties.
In addition, the Depositor may purchase Loans which do not conform to the
underwriting standards described in the Guide. The Depositor may purchase these
Loans from qualified lenders and mortgage asset sellers who will represent that
the Loans have been originated in accordance with credit, appraisal and
underwriting standards agreed to by the Depositor. The Depositor will generally
review only a limited portion of these Loans for conformity with the applicable
credit, appraisal and underwriting standards. The Depositor may also purchase
Loans from qualified lenders and mortgage asset sellers who will represent that
the Loans were originated pursuant to credit, appraisal and underwriting
standards determined by a mortgage insurance company acceptable to the
Depositor. The Depositor will accept a certification from the insurance company
as to a Loan's insurability in a mortgage pool as evidence that the Loan
conforms to applicable underwriting standards. The certificates will likely have
been issued before the purchase of the Loans by the Depositor. The Depositor
will perform only random quality assurance reviews on Loans delivered with this
certification.
The credit, appraisal and underwriting standards utilized in negotiated
transactions and the credit, appraisal and underwriting standards of insurance
companies issuing certificates may vary substantially from the credit, appraisal
and underwriting standards described in the Guide. All of the credit, appraisal
and underwriting standards will provide an underwriter with sufficient
information to evaluate the borrower's repayment ability and the adequacy of the
mortgaged property as collateral. Due to the variety of underwriting standards
and review procedures that may be applicable to the Loans included in any Trust,
the prospectus supplement will not distinguish among the various credit,
appraisal and underwriting standards applicable to the Loans nor describe any
review for compliance with applicable credit, appraisal and underwriting
standards performed by the Depositor. Moreover, we cannot assure you that every
Loan was originated in conformity with the applicable credit, appraisal and
underwriting standards in all material respects, or that the quality or
performance of Loans underwritten pursuant to varying standards as described
above will be equivalent under all circumstances.
The Depositor's underwriting standards are intended to evaluate the
prospective mortgagor's credit standing and repayment ability, and the value and
adequacy of the proposed mortgaged property as collateral. The Depositor expects
that each prospective mortgagor will be required to complete an application
which will include information about the applicant's assets, liabilities,
income, credit history, employment history and other related items, and furnish
an authorization to
-18-
<PAGE>
apply for a credit report which summarizes the mortgagor's credit history. In
order to establish the prospective mortgagor's ability to make timely payments,
the Depositor will, unless otherwise waived as described below, require evidence
regarding the mortgagor's employment, income and assets, and of the amount of
deposits made to financial institutions where the mortgagor maintains demand or
savings accounts. The Depositor may purchase Loans which were originated under a
limited mortgage documentation program. However, the mortgagors on these types
of loans must have a good credit history and be financially capable of making a
larger cash down payment in a purchase, or be willing to finance less of the
appraised value, in a refinancing, than would otherwise be required by the
Depositor. Currently, the Depositor's underwriting standards provide that under
this type of program, only Loans with specified loan-to-value ratios will
qualify for purchase. If the Loan qualifies, the Depositor may waive some of its
documentation requirements including eliminating verification of assets, income
and employment for the prospective mortgagor.
The Depositor's underwriting standards generally follow guidelines
acceptable to FNMA and FHLMC. In determining the adequacy of the property as
collateral, an independent appraisal is generally made of each property
considered for financing. The appraiser may be required to inspect the property
and verify that it is in good condition and that construction, if new, has been
completed. Alternatively, the appraisal may be conducted by comparing values of
similar properties in an automated system or electronic data base, inspecting
the exterior of the property or another method described in the Guide. The
appraisal is based on the appraiser's judgment of values, giving appropriate
weight to both the market value of comparable homes and the cost of replacing
the property. The Depositor expects that the underwriting standards will require
that the underwriters be satisfied that the value of the property being financed
supports, and will continue to support, the outstanding Loan balance, and
provides sufficient value to mitigate the effects of adverse shifts in real
estate values.
Some states where the mortgaged properties may be located are
"anti-deficiency" states where, in general, lenders providing credit on one- to
four-family properties look solely to the property for repayment in the event of
foreclosure. See "Legal Aspects of the Mortgage Loans--Anti-Deficiency
Legislation and Other Limitations on Lenders." The Depositor expects that the
underwriting standards applied to the Loans will require that the underwriters
be satisfied 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. The general appreciation of real estate
values experienced in the past has been a factor in limiting the general loss
experience on conventional one- to-four-unit residential first mortgage loans.
We cannot assure you, however, that the past pattern of appreciation in value of
the real property securing these loans will continue.
The Depositor will obtain representations and warranties from the
applicable qualified lender that the Loan was originated in accordance with the
underwriting guidelines described above or other policies that the Depositor may
require or approve from time to time. The qualified lender providing this
representation may or may not be the party that originated the Loan. The
Depositor will review, or cause to be reviewed, all or a representative sample
of the Loans, and perform other reviews that it deems appropriate to determine
compliance with these standards. The Depositor will have 90 days
-19-
<PAGE>
following delivery of a certificate series to complete its review. If the
Depositor finds any Loan fails to comply with these standards, the mortgage
asset seller must repurchase the defective Loan or provide a substitute Loan.
However, the mortgage asset seller will not be obligated to make a repurchase or
substitution if it can demonstrate to the satisfaction of the Depositor that the
defective Loan is includible in the pool. See "The Pooling and Servicing
Agreement--Repurchase or Substitution."
The underwriting policies described in this section may be varied for
particular certificate series to the extent described in the prospectus
supplement.
MORTGAGE CERTIFICATES
DESCRIPTION OF THE MORTGAGE CERTIFICATES
All of the Mortgage Certificates will be registered in the name of the
Trustee or its nominee or, in the case of Mortgage Certificates issued only in
book-entry form, a financial intermediary that is a member of the Federal
Reserve System or of a clearing corporation on the books of which the security
is held. In some cases the financial intermediary may be the Trustee. Each
Mortgage Certificate will evidence an interest in a Trust consisting of a pool
of Mortgage Assets and/or in principal distributions and interest distributions
thereon.
The descriptions of Government National Mortgage Association ("GNMA"),
FHLMC, FNMA and Private certificates in this section are descriptions of
certificates representing proportionate interests in a pool of mortgage loans
and in the payments of principal and interest thereon. These issuers may also
issue asset-backed securities that represent a right to receive distributions
of:
o interest only; or
o principal only; or
o disproportionate distributions of principal or interest; or
o principal and/or interest prior or subsequent to distributions on
other certificates representing interests in the same pool of mortgage
loans.
In addition, any of these issuers may issue certificates representing
interests in mortgage loans having characteristics that are different from the
types of mortgage loans described below. The terms of any Mortgage Certificates
to be included in a Trust and the Underlying Loans will be described in the
prospectus supplement. The descriptions that follow are subject to modification
in each prospectus supplement as appropriate to reflect the terms of the
Mortgage Certificates that are actually included in a Trust.
GNMA. GNMA is a wholly owned corporate instrumentality of the United States
within HUD. Section 306(g) of Title III of the National Housing Act of 1934, as
amended (the "HOUSING ACT"), authorizes GNMA to guarantee the timely payment of
the principal of and interest on certificates that are based on and backed by a
pool of loans. The pool will consist of:
-20-
<PAGE>
o loans insured by the United States Federal Housing Administration (the
"FHA") under the Housing Act or Title V of the Housing Act of 1949
("FHA LOANS");
o loans guaranteed by the United States Department of Veteran Affairs
(the "VA") under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code; or
o other eligible loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under a guaranty, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount.
GNMA Certificates. All of the GNMA certificates will be mortgage-backed
certificates issued and serviced by GNMA- or FNMA-approved mortgage servicers.
The mortgage loans underlying GNMA certificates may consist of:
o FHA Loans secured by mortgages on one- to four-family residential
properties or multi- family residential properties,
o loans secured by mortgages on one- to four-family residential
properties or multi-family residential properties,
o mortgage loans which are partially guaranteed by the VA, and
o other mortgage loans eligible for inclusion in mortgage pools
underlying GNMA certificates.
Each GNMA certificate provides for the payment by or on behalf of the
issuer of the GNMA certificate to the registered certificateholder of monthly
payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of:
o the monthly scheduled principal and interest payments on each
underlying eligible mortgage loan, less
o servicing and guaranty fees aggregating the excess of the interest on
each underlying mortgage loan over the GNMA certificate pass-through
rate.
In addition, each payment to a GNMA certificateholder will include
proportionate pass- through payments of any prepayments of principal on the
underlying loans, and the holder's proportionate interest in the remaining
principal balance in the event of a foreclosure or other disposition of any
underlying loan.
Unless otherwise specified in the related prospectus supplement, the GNMA
certificates included in a Trust may be issued under either or both of the GNMA
I program and the GNMA II program. All mortgages underlying a particular GNMA I
certificate must be of the same type. An example of type would be "single-family
level payment mortgage loans." The mortgages must also have the same annual
interest rate, except for pools of mortgage loans secured by mobile homes.
-21-
<PAGE>
The annual interest rate on each GNMA I certificate is one-half percentage point
less than the annual interest rate on the mortgage loans included in the pool of
mortgages backing the GNMA I certificate. Mortgages underlying a particular GNMA
II certificate must also be of the same type, but may have annual interest rates
that vary from each other by up to one percentage point. The annual interest
rate on each GNMA II certificate will be between one-half percentage point and
one and one-half percentage points less than the highest annual interest rate on
any mortgage loan included in the pool of mortgages backing the GNMA II
certificate.
GNMA will have approved the issuance of each of the GNMA certificates in
accordance with a guaranty agreement between GNMA and the Master Servicer of the
mortgage loans underlying the GNMA certificate. Pursuant to the guaranty
agreement, the servicer is required to advance its own funds in order to make
timely payments of all amounts due on the GNMA certificate, even if the payments
received by the servicer on the mortgage loans backing the GNMA certificate are
less than the amounts due on the GNMA certificate. If a servicer is unable to
make payments on a GNMA certificate as it becomes due, it must promptly notify
GNMA and request GNMA to make the payment. Upon notification and request, GNMA
will make the payments directly to the registered holder of the GNMA
certificate. If no payment is made by the servicer and it fails to notify and
request GNMA to make the payment, the registered holder of the GNMA certificate
has recourse only against GNMA to obtain the payment. The registered holder is
entitled to proceed directly against GNMA under the terms of each GNMA
certificate or the guaranty agreement or contract relating to the GNMA
certificate for any amounts that are not paid when due under the GNMA
certificate.
FHLMC. FHLMC is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"FHLMC ACT"). FHLMC is a stockholder-owned corporation. FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of urgently needed housing. It seeks to provide an enhanced degree
of liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional one-to-four-unit residential
first mortgages. The principal activity of FHLMC currently consists of:
o the purchase of first lien conventional one- to four-unit residential
mortgage loans,
o the purchase of participation interests in these types of loans, and
o the resale of the purchased mortgage loans in the form of mortgage
securities.
FHLMC is confined to purchasing, so far as practicable, conventional
one-to-four-unit residential first mortgage loans and participation interests in
conventional one-to-four-unit residential first mortgage loans which it deems to
be of the quality, type and class as to generally meet the purchase standards
imposed by private institutional mortgage investors.
FHLMC Certificates. FHLMC certificates represent an undivided interest in a
group of mortgage loans purchased by FHLMC. Mortgage loans underlying the FHLMC
certificates included in a Trust will consist principally of fixed or
adjustable-rate mortgage loans with original terms to
-22-
<PAGE>
maturity of approximately 5, 7, 15, 20 and 30 years. First liens on one- to
four-family residential properties secure these loans.
FHLMC certificates are issued and maintained and may be transferred only on
the book-entry system of a Federal Reserve Bank and may only be held of record
by entities eligible to maintain book-entry accounts at a Federal Reserve Bank.
Beneficial owners will hold FHLMC certificates ordinarily through one or more
financial intermediaries. The rights of a beneficial owner of a FHLMC
certificate against FHLMC or a Federal Reserve Bank may be exercised only
through the Federal Reserve Bank on whose book-entry system the certificate is
held.
Under its cash and guarantor programs, FHLMC guarantees to each registered
holder of a FHLMC certificate the timely payment of interest at the rate
provided for by the FHLMC certificate on the registered holder's pro rata share
of the outstanding unpaid principal balance of the related mortgage loans,
whether or not received. FHLMC also guarantees to each registered holder
ultimate collection of all principal of the related mortgage loans, without any
offset or deduction, to the extent of the holder's pro rata share. It does not
guarantee the timely payment of scheduled principal. Pursuant to its guarantees,
FHLMC generally indemnifies holders of FHLMC certificates against any diminution
in principal by reason of charges for property repairs, maintenance and
foreclosure. FHLMC may remit the amount due on account of its guarantee of
ultimate collection of principal at any time after default on an underlying
mortgage loan, but not later than 30 days following the latest to occur of:
o foreclosure sale,
o payment of a claim by any mortgage insurer, or
o the expiration of any right of redemption.
In any event, FHLMC shall remit the guaranteed amount no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal or for payment of principal due on the maturity of the mortgage. In
taking actions regarding the collection of principal after default on the
mortgage loans underlying FHLMC certificates, including the timing of demand for
acceleration, FHLMC reserves the right to exercise its servicing judgment on the
mortgages in the same manner as for mortgages that it has purchased but not
sold. In lieu of guaranteeing only the ultimate collection of principal payments
in the manner described above, FHLMC may, but will not be obligated to, enter
into one or more agreements with the issuer and the Trustee of the FHLMC
certificates pursuant to which FHLMC will agree to guarantee the timely receipt
of scheduled principal payments. If this type of agreement is entered into and
is applicable to all or any part of the FHLMC certificates included in a Trust,
its existence will be disclosed in the prospectus supplement.
Under its Gold PC Program, FHLMC guarantees to each registered holder of a
FHLMC certificate the timely payment of interest calculated in the same manner
as described above. In addition, it guarantees timely installments of scheduled
principal calculated on the basis of the weighted average remaining term to
maturity of the mortgage loans in the pool underlying the related FHLMC
certificate.
-23-
<PAGE>
FHLMC certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States.
FNMA. FNMA is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended. FNMA was originally established in 1938 as a United States
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder-owned and privately managed corporation by
legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing. Operating
nationwide, FNMA helps to redistribute mortgage funds from capital-surplus to
capital-short areas. In addition, FNMA issues mortgage-backed securities
primarily in exchange for pools of mortgage loans from lenders.
FNMA Certificates. FNMA certificates represent fractional interests in a
pool of mortgage loans formed by FNMA.
FNMA guarantees to each registered holder of a FNMA certificate that it
will distribute amounts representing scheduled principal and interest at the
applicable pass-through rate on the underlying loans, whether or not received.
It also guarantees each holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not the full principal amount is actually recovered. If FNMA were unable to
perform its obligations, distributions on FNMA certificates would consist solely
of payments and other recoveries on the underlying mortgage loans. Accordingly,
delinquencies and defaults would affect monthly distributions to holders of FNMA
certificates. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States. The FNMA certificates are not guaranteed by the United
States and do not constitute debts or obligations of the United States.
Private Certificates. Each "PRIVATE" certificate will evidence an undivided
interest in a pool of:
o FNMA certificates,
o FHLMC certificates,
o GNMA certificates,
o mortgage loans, or
o any combination of FNMA, FHLMC and GNMA certificates and mortgage
loans.
-24-
<PAGE>
We expect that Private certificates will be issued pursuant to participation or
agreements entered into from time to time between the related seller and the
related trustee or custodian for the certificates. In addition, an affiliate of
the seller or of the Depositor under the agreement may be a Master Servicer for
these certificates or for the mortgage loans in which the Mortgage Certificates
represent a beneficial interest. The mortgage loans underlying the Private
certificates may be subserviced by one or more loan servicing institutions under
the supervision of the Master Servicer. Each Private certificate will have been
acquired in a secondary transaction and not from the issuer or any affiliate of
the issuer of the Private certificate. Unless otherwise specified in the related
prospectus supplement, each Private certificate will evidence an interest in, or
will be secured by a pledge of mortgage loans that conform to the descriptions
of Loans in this prospectus. Each Private certificate included in any Trust that
is not a FNMA, FHLMC or GNMA certificate must either: (1) have been previously
registered under the Securities Act of 1933 or (2) if not registered, be
eligible for sale under Rule 144(k) under the Securities Act of 1933.
We expect that all collections received by the servicers on the mortgage
loans securing the Private Certificates will be deposited with the trustee for
the Private certificates. However, the Master Servicer will be entitled to
retain servicing fees and other amounts specified in the related Pooling and
Servicing Agreement from collections. Monthly distributions of the principal and
interest components of the collections will be made to the Trustee for the
certificates of the related series for deposit into the Certificate Account for
that series.
More specific information concerning the Private certificates underlying a
particular series of certificates, the mortgage loans underlying those Private
certificates, and related servicing and insurance, subordination or other credit
support arrangements will be described in the prospectus supplement.
SUBSTITUTION OF MORTGAGE CERTIFICATES
The Pooling and Servicing Agreement for a series that includes Mortgage
Certificates may permit substitution of Mortgage Certificates if the seller of
the Mortgage Certificates breaches a representation or warranty, or the
documentation related to any Mortgage Certificate is incomplete. The prospectus
supplement for each series will further describe the conditions under which a
substitution may occur.
THE DEPOSITOR
The Depositor was incorporated in Delaware in 1991 and is a wholly owned
limited purpose indirect subsidiary of ABN AMRO Bank N.V. The limited purposes
of the Depositor are, in general:
o to acquire, own, pledge and sell mortgage loans and certificates
representing proportionate interests in pools of mortgage loans;
-25-
<PAGE>
o to issue, acquire, own, pledge and sell mortgage pass-through
securities which represent ownership interests in mortgage loans and
certificates representing proportionate interests in pools of mortgage
loans, collections thereon and related properties; and
o to engage in any acts which are incidental to, or necessary, suitable
or convenient to accomplish the foregoing.
We do not expect that the Depositor will have any business operations other than
offering series of certificates and related activities. The principal executive
offices of the Depositor are located at 135 South LaSalle Street, Suite 925,
Chicago, Illinois 60603, and its telephone number is (312) 904- 2000.
Unless otherwise specified in the related prospectus supplement, neither
the Depositor, its parents nor any of the Depositor's affiliates will insure or
guarantee distributions on the certificates of any series. As described in this
prospectus, the only obligations of the Depositor will be pursuant to
representations and warranties related to the Mortgage Assets. See "Pooling and
Servicing Agreement--Representations and Warranties." The Depositor will have no
ongoing servicing responsibilities or other responsibilities for any Mortgage
Asset. The Depositor does not have nor is it expected in the future to have any
significant assets with which to meet any obligations with respect to any Trust.
If the Depositor were required to repurchase or substitute a Mortgage Asset, its
only source of funds to make the required payment would be funds obtained from
the related Mortgage Asset seller or, if applicable, the Master Servicer or the
servicer.
USE OF PROCEEDS
Unless otherwise stated in the prospectus supplement, the Depositor will
use substantially all of the net proceeds from sales of certificates to purchase
Mortgage Assets or to reimburse itself for previous purchases of Mortgage
Assets. Reimbursement amounts to the Depositor may include the following:
o amounts sufficient to repay any loans made to the Depositor to
facilitate mortgage asset purchases;
o the costs of carrying the Mortgage Assets until the sale of the
certificates; and
o expenses connected with pooling the Mortgage Assets and issuing the
certificates.
Any remaining proceeds will be used by the Depositor for its general
corporate purposes which are related to the activities described above.
-26-
<PAGE>
CREDIT ENHANCEMENT
TYPES OF ENHANCEMENTS
Credit enhancement may be provided for one or more classes of a series of
certificates or for the Mortgage Assets in the related Trust. Credit enhancement
may be in one or more of the following forms:
o the subordination of one or more classes of the certificates of the
series;
o the use of a cross-support feature;
o a pool insurance policy;
o a special hazard insurance policy;
o a bankruptcy bond;
o the establishment of one or more reserve funds;
o shifting interest credit enhancement;
o overcollateralization;
o letters of credit;
o surety bond; or
o another method of credit enhancement described in the related
prospectus supplement.
Unless otherwise stated in the prospectus supplement, any credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the certificates and
interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement,
certificateholders will bear their allocable share of deficiencies.
SUBORDINATION
If so stated in the prospectus supplement, distributions in respect of
scheduled principal, Principal Prepayments, interest or any combination of these
items that otherwise would have been payable to one or more classes of
Subordinate certificates of a series will instead be payable to holders of one
or more classes of Senior certificates of that series under the circumstances
and to the extent specified in the prospectus supplement. If stated in the
prospectus supplement, delays in receipt of scheduled payments on the Loans and
losses on defaulted Loans will be borne first by the various classes of
Subordinate certificates and thereafter by the various classes of Senior
certificates, in each case under the circumstances and subject to the
limitations specified in the prospectus supplement. The prospectus supplement
may limit the subordination of payments to Subordinate certificateholders that
the Trustee will distribute to Senior certificateholders as follows:
o limiting the aggregate distributions from delinquent payments on the
Loans over the lives of the certificates or at any time,
o limiting the aggregate losses in respect of defaulted Loans which must
be borne by the Subordinate certificates by virtue of subordination.
-27-
<PAGE>
If aggregate distributions in respect of delinquent payments on the Loans or
aggregate losses in respect of these Loans were to exceed the total amounts
payable and available for distribution to holders of Subordinate certificates
or, if applicable, were to exceed the specified maximum amount, holders of
Senior certificates could experience losses on the certificates.
In addition to or in lieu of the foregoing, if so stated in the prospectus
supplement, the Trustee may deposit all or any portion of distributions
otherwise payable to holders of Subordinate certificates on any Distribution
Date into one or more reserve funds established by the Trustee. See "--Reserve
Fund."
The prospectus supplement may specify that one or more classes of
certificates will bear the risk of specified losses on defaulted Loans not
covered by other forms of credit enhancement prior to other classes of
certificates. This subordination might be effected by reducing the principal
balance of the Subordinate certificates on account of losses, thereby decreasing
the proportionate share of distributions allocable to the Subordinate
certificates, or by another means specified in the prospectus supplement.
If stated in the prospectus supplement, various classes of Senior
certificates and Subordinate certificates may themselves be subordinate in their
right to receive distributions to other classes of Senior and Subordinate
certificates, respectively, through a cross-support mechanism or otherwise.
Unless otherwise stated in the prospectus supplement, the Pooling and
Servicing Agreement may permit the Master Servicer, at its option, to grant to
the holders of some classes of Subordinate certificates particular rights in
connection with the foreclosure of defaulted Loans in the related Trust. See
"Servicing of the Loans--Collection and Other Servicing Procedures."
SHIFTING INTEREST CREDIT ENHANCEMENT
The protection afforded to the Senior certificateholders of a series of
certificates by the subordination feature described above under "Subordination"
will be effected by the preferential right of the Senior certificateholders to
receive current distributions from the Trust. Also, if specified in the related
prospectus supplement, the subordination feature will be enhanced by
distributing to one or more classes of Senior certificates on specified
Distribution Dates, as payments of principal, specified Principal Prepayments in
the pool of Mortgage Assets under the circumstances and for the period of time
set forth in the prospectus supplement ("SHIFTING INTEREST CREDIT ENHANCEMENT").
Shifting Interest Credit Enhancement will have the effect of accelerating the
repayment of the Senior certificates while increasing the respective interest
evidenced by the Subordinate certificates in the related Trust. Increasing the
respective interest of the Subordinate certificates relative to that of the
Senior certificates is intended to preserve the availability of the
subordination provided by the Subordinate certificates.
-28-
<PAGE>
CROSS-SUPPORT
If stated in the prospectus supplement, the Trustee may issue different
classes of certificates of the series that evidence a beneficial ownership in
separate groups of assets included in a Trust. In this case, credit enhancement
may be provided by a cross-support feature which may require the Trustee to make
distributions on certificates evidencing beneficial ownership of one or more
asset groups prior to distributions to certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust. The prospectus
supplement for a series which includes a cross- support feature will describe
the manner and conditions for applying the cross-support feature.
If stated in the prospectus supplement, the coverage provided by one or
more forms of credit enhancement may apply concurrently to two or more separate
Trusts. If applicable, the prospectus supplement will identify the Trusts to
which the credit enhancement relates and the manner of determining the amount of
the coverage provided and the application of coverage to the identified Trusts.
POOL INSURANCE
In order to decrease the likelihood that certificateholders will experience
losses in respect of the Mortgage Assets, if stated in the prospectus
supplement, the Depositor will obtain one or more pool insurance policies. The
pool insurance policy will, subject to the limitations described in the
prospectus supplement, cover loss by reason of default in payments on the Loans
up to the amounts specified in the prospectus supplement and for the periods
specified in the prospectus supplement. The Master Servicer will agree to use
its best reasonable efforts to maintain in effect any pool insurance policy and
to present claims thereunder to the pool insurer on behalf of itself, the
Trustee and the certificateholders. The pool insurance policy, however, is not a
blanket policy against loss. Claims under a pool insurance policy may only be
made respecting particular defaulted Loans and only upon satisfaction of
specific conditions precedent described below. The pool insurance policy, if
any, will not cover losses due to a failure to pay or denial of a claim under a
primary mortgage insurance policy, irrespective of the reason therefore.
Unless otherwise stated in the prospectus supplement, the original amount
of coverage under any pool insurance policy will be reduced over the life of the
related series of certificates by the aggregate dollar amount of claims paid
less the aggregate of the net amounts realized by the pool insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
expenses incurred by the Master Servicer on the foreclosed properties for the
following:
o hazard insurance premiums;
o amounts paid for property taxes that have been approved by the pool
insurer;
o the discharge of liens;
o expenses required to preserve and repair the properties;
o foreclosure costs; and
o accrued interest on delinquent Loans to the date of payment of the
claim.
-29-
<PAGE>
See "Legal Aspects of the Loans--Foreclosure." Accordingly, if aggregate net
claims paid under any pool insurance policy reach the original policy limit,
coverage under that pool insurance policy will be exhausted and any further
losses will be borne by one or more classes of certificateholders.
Since any mortgage pool insurance policy may require that the property
subject to a defaulted Loan be restored to its original condition prior to
claiming against the pool insurer, the policy may not provide coverage against
hazard losses. As described under "Servicing of the Loans--Hazard Insurance,"
the hazard policies concerning the Loans typically exclude from coverage
physical damage resulting from a number of causes. Even when the damage is
covered, the hazard policies may afford recoveries which are significantly less
than the full replacement cost of losses. Even if special hazard insurance is
applicable as specified in the prospectus supplement, no coverage in respect of
special hazard losses will cover all risks, and the amount of any coverage will
be limited. See "Special Hazard Insurance" below. As a result, some hazard risks
will not be insured against and will therefore be borne by certificateholders.
SPECIAL HAZARD INSURANCE
In order to decrease the likelihood that certificateholders will experience
losses in respect of the Loans, if specified in the prospectus supplement, the
Depositor will obtain one or more special hazard insurance policies on the
Loans. The special hazard insurance policy will, subject to limitations
described below and in the prospectus supplement, protect holders of
certificates from loss by reason of damage to mortgaged properties caused by
specified hazards (including earthquakes and, to a limited extent, tidal waves
and related water damage) not covered in the standard form of hazard insurance
policy for the respective states in which the mortgaged properties are located
or under flood insurance policies, if any, covering the mortgaged properties. It
also protects holders from loss from partial damage caused by reason of the
application of the co-insurance clause contained in hazard insurance policies.
Any special hazard insurance policy may not cover losses occasioned by war,
civil insurrection, specified governmental actions, errors in design, faulty
workmanship or materials (except under specific circumstances), nuclear
reaction, flood (if the mortgaged property is located in a federally designated
flood area), chemical contamination and other risks. Aggregate claims under each
special hazard insurance policy may be limited to a specified percentage of the
aggregate principal balance as of the Cut-off Date of the Loans. Any special
hazard insurance policy may also provide that no claim may be paid unless hazard
and, if applicable, flood insurance on the mortgaged property has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer. The terms of any special hazard insurance policy will be more
fully described in the prospectus supplement.
BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the mortgaged property securing the related Loan at an
amount less than the then outstanding principal balance of the Loan secured by
the mortgaged property and could reduce the secured debt to that value. In this
case, the holder of the Loan would become an unsecured creditor to the extent of
the difference between the outstanding principal balance of the Loan and the
reduced secured
-30-
<PAGE>
debt. In addition, the bankruptcy court can make other modifications of the
terms of a Loan, including reducing the monthly payments required to be made by
the borrower. See "Legal Aspects of the Loans--Enforceability of Some
Provisions." If so stated in the related prospectus supplement, the Depositor
will obtain a bankruptcy bond or similar insurance contract for proceedings of
borrowers under the Bankruptcy Code. The bankruptcy bond will cover specified
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal of and interest on a Loan or a reduction by the court of the principal
amount of a Loan. It will also cover some amounts of unpaid interest on the
amount of a principal reduction from the date of the filing of a bankruptcy
petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related prospectus supplement. Payments made under the bankruptcy bond
will reduce the coverage amounts unless otherwise stated in the related
prospectus supplement, and will not be restored.
In lieu of a bankruptcy bond, the Depositor may obtain a limited guarantee
to cover bankruptcy-related losses.
RESERVE FUND
If so specified in the related prospectus supplement for a series of
certificates, the Master Servicer will establish and maintain a reserve fund
(the "RESERVE FUND") with the Trustee. The prospectus supplement will state
whether or not the Reserve Fund will be part of the Trust assets. Unless
otherwise specified in the related prospectus supplement, the Depositor will
make an initial cash deposit to the Reserve Fund equal to the amount specified
in the related prospectus supplement. Following the initial issuance of the
certificates and until the balance of the Reserve Fund equals the amount
specified in the prospectus supplement (the "SPECIFIED RESERVE FUND BALANCE"),
the Trustee or the applicable paying agent will withhold distributions of
principal and interest otherwise available to the Subordinate certificateholders
and deposit those amounts in the Reserve Fund. After the Specified Reserve Fund
Balance is attained, the Trustee or the applicable paying agent will withhold
distributions of principal only from the Subordinate certificateholders and
deposit those amounts in the Reserve Fund as necessary to maintain the Specified
Reserve Fund Balance applicable at the time. Amounts in the Reserve Fund, if
any, will be transferred to the Certificate Account for distribution to Senior
certificateholders to the extent required to make full distributions to them on
a particular Distribution Date. The related prospectus supplement will set forth
when and to what extent the Specified Reserve Fund Balance may be reduced. The
Prospectus Supplement will further specify how any funds remaining in the
Reserve Fund will be distributed after termination of the Trust or reduction of
the Subordinated Amount to zero.
OVERCOLLATERALIZATION
Credit enhancement for a series of Certificates may be provided by
overcollateralization. Principal and/or interest collections on the Mortgage
Assets may exceed principal and/or interest payments on the certificates for the
related Distribution Date. These excess amounts may be deposited into the
Reserve Fund or applied as a payment of principal on the certificates. To the
-31-
<PAGE>
extent these amounts are applied as principal payments on the certificates, the
effect will be to reduce the principal balance of the certificates relative to
the outstanding balance of the Mortgage Assets.
LETTER OF CREDIT
Credit enhancement for a series of certificates may be provided by the
issuance of a letter of credit by a bank or financial institution specified in
the prospectus supplement. The maximum obligation of the issuer of the letter of
credit will be to honor requests for payment in an aggregate fixed dollar
amount, net of unreimbursed payments under the letter of credit, equal to the
percentage described in the prospectus supplement of the aggregate principal
balance on the related Cut-off Date of the Mortgage Assets evidenced by each
series. The duration of coverage and the amount and frequency and circumstances
of any reduction in coverage provided by the letter of credit for a series of
certificates will be in compliance with the requirements established by the
rating agency or agencies rating the series, and will be described in the
prospectus supplement.
SURETY BOND
If so specified in the related prospectus supplement for a series of
certificates, credit enhancement may be provided in the form of a surety bond
issued by an insurer named in the prospectus supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If stated in the prospectus supplement, the related Trust may also include
insurance, guarantees or similar arrangements for the purpose of:
o maintaining timely payments or providing protection against losses on
the assets included in a Trust;
o paying administrative expenses; or
o establishing a minimum reinvestment rate on the payments made in
respect of the assets or principal payment rate on the assets.
These arrangements may include agreements under which certificateholders
are entitled to receive amounts deposited in various accounts held by the
Trustee based on the terms specified in the prospectus supplement. In addition,
unless otherwise provided in the prospectus supplement, at any time a surety
bond, letter of credit or other form of credit enhancement may be substituted
for the credit support arrangement in effect initially for the series to the
extent permitted by the rating agency or agencies rating the certificate series,
without resulting in a downgrading of the current rating of the certificates of
that series.
-32-
<PAGE>
PREPAYMENT, YIELD AND MATURITY CONSIDERATIONS
GENERAL
DETERMINATION OF PASS-THROUGH RATES
Unless otherwise specified in the related prospectus supplement, the
"PASS-THROUGH RATE" for each Loan will equal the mortgage interest rate on the
Loan less the servicing fee due to the Master Servicer for that Loan (the
"ADMINISTRATION FEE") and for each Mortgage Certificate will equal the interest
rate on the Mortgage Certificate less the Administration Fee. The Administration
Fee will be specified in the Pooling and Servicing Agreement. It may be uniform
for all Loans in a pool or may vary on a loan-by-loan basis. For ARMs, the
Administration Fee, will generally vary on a loan-by-loan basis to produce a
uniform margin (the "NET MARGIN") by which the Pass-Through Rate for each Loan
in a Trust will exceed the applicable Index for the loan. For example, if the
Net Margin for a class or series of certificates were established to be 125
basis points over the Index applicable to the ARMs included in the Trust for
that class or series, an individual Loan whose terms provide for a mortgage
interest rate of 200 basis points over the applicable Index would be assigned an
Administration Fee totaling 75 basis points. Similarly, a Loan whose mortgage
interest rate is 175 basis points over the Index would be assigned an
Administration Fee totaling 50 basis points. The prospectus supplement will
specify whether the Administration Fee assigned to a Loan at the time of
formation of a Trust will be fixed throughout the term of the related Pooling
and Servicing Agreement or will vary. If the lifetime maximum rate or the
periodic maximum adjustment applicable to a Loan prevents its mortgage interest
rate from adjusting at any adjustment date to the full extent of the Index plus
the Gross Margin applicable to that loan, the Pass-Through Rate for the loan may
be less than the Index plus the Net Margin. Similarly, if the lifetime minimum
rate or, if applicable, the periodic maximum adjustment prevents the mortgage
interest rate from fully adjusting, the Pass-Through Rate for the loan may
exceed the Index plus the Net Margin.
DETERMINATION OF REMITTANCE RATE
Unless otherwise specified in the related prospectus supplement, the
Remittance Rate for each class of certificates of a series will, for Trusts
consisting of ARMs, and may, for Trusts consisting of Fixed-Rate Loans, be all,
or a portion specified in the related prospectus supplement, of the weighted
average of the Pass-Through Rates of the Loans included in the Trust. The
weighted average Pass-Through Rate for Trusts comprised of ARMs generally will
change with any changes in the adjustable mortgage interest rates borne by or
accruing on the underlying ARMs and may change with principal prepayments,
negative amortization or accelerated repayment of the ARMs. The weighted average
Pass-Through Rate for a Trust consisting of Fixed-Rate Loans with different
Pass-Through Rates may change due to differing prepayment rates and differing
repayment rates of the Loans included in the Trust.
-33-
<PAGE>
YIELD
The following discussions of yield considerations is intended to be
general in nature and reference is made to the discussion in each prospectus
supplement regarding yield and prepayment considerations and other risks.
The yield on any certificate will depend on, among other things, the
price paid by the certificateholder, the Remittance Rate of the certificate, the
weighted average life and the prepayment experience of the Mortgage Assets
represented by the certificate. The actual yield to maturity realized on the
certificates listed below may be dramatically affected by the prepayment
experience or repurchases of the Mortgage Assets comprising the related Trust:
o certificates offered at a discount from or premium over its
original principal amount,
o Interest Only certificates, or
o certificates offered with a lower proportionate share of the
principal amount of the Mortgage Assets.
In extreme cases, holders of some certificates could fail to recoup their
investment.
PRICE
Prepayments of principal in whole or in part or accelerated repayment,
if any, on the Mortgage Assets comprising a Trust will:
o increase the yield to maturity on a certificate purchased at a
price less than the aggregate principal balance of the Mortgage
Assets represented by that certificate, and
o decrease the yield to maturity on a certificate purchased at a
price equal to, slightly less than (due to effects of payment
delays), or greater than the aggregate principal balance of the
Mortgage Assets represented by that certificate. However, the
amount of interest payable in connection with prepayments as
described in the prospectus supplement may alter the effect on
the price of certificates.
Additionally, and as more fully described in the prospectus supplement,
if any certificate is offered without any principal amount or with a lower
disproportionate share of the principal amount of the underlying Mortgage
Assets, the yield realized on the certificate will be extremely sensitive to
levels of prepayments of the Mortgage Assets represented by that certificate. In
extreme cases, holders of these certificates could fail to recoup their original
investment.
EFFECTIVE PASS-THROUGH RATE
Each monthly interest payment on a Loan is calculated as 1/12 of the
applicable mortgage interest rate times the outstanding principal balance of the
Loan on the first day of the month. The Pass-Through Rate for each Loan will be
similarly calculated on a loan-by-loan basis, after subtracting the
Administration Fee applicable to each Loan from the applicable mortgage interest
-34-
<PAGE>
rate, unless otherwise specified in the related prospectus supplement. In the
case of a Trust with a range of Pass-Through Rates, disproportionate prepayments
of Loans with higher Pass-Through Rates will result in a lower effective
Remittance Rate to certificateholders.
Except as otherwise specified in the prospectus supplement, the
interest accrual period for your certificates will be from the first day of each
month through the end of the month, but the Trustee will not distribute that
interest until a later date which is the Distribution Date occurring in the
following month. As a result, the effective yield to maturity on certificates
entitled to interest distributions will be slightly lower than the yield
otherwise produced by the applicable Remittance Rate and the applicable purchase
prices of certificates.
When a mortgagor prepays the entire Loan prior to the next scheduled
Due Date, the mortgagor pays interest on the amount prepaid only to the date of
prepayment. In addition, a mortgagor may make a partial prepayment that reduces
the principal balance of the related Loan as of a date prior to the Due Date of
the payment. In this case, on the next Due Date, the mortgagor would not pay
interest on the amount of the partial prepayment. The difference between one
full month's interest at the applicable Pass-Through Rate and the amount of
interest actually paid by the mortgagor is referred to as "PREPAYMENT INTEREST
SHORTFALL". Unless otherwise specified in the related prospectus supplement, in
order to prevent certificateholders from being adversely affected by a
Prepayment Interest Shortfall, the Master Servicer may forego all or a portion
of the current Administration Fees as compensating interest, so that up to a
full month's interest payment will be passed through to the certificateholders.
To the extent sufficient current Administration Fees due to the Master Servicer
are not available to cover compensating interest, the yield to
certificateholders will be slightly less than it would be if the current
administration fees were adequate to cover compensating interest. See
"Description of the Certificates--Example of Distributions." The occurrence of
any of the following events may also reduce the amount of interest passed
through to certificateholders and any resulting shortfall will be borne by
certificateholders:
o the payment of a claim under insurance policies or the purchase
of a defaulted Loan by a private mortgage insurer, or
o a reduction in the interest rate of any Loan due to the
application of the Soldiers' and Sailors' Civil Relief Act of
1940.
OTHER YIELD CONSIDERATIONS
Mortgage Interest Rates on Negatively Amortizing ARMs. Since a portion
of the interest accrued on Negatively Amortizing ARMs may be deferred and
payable at a future time, the interest paid by a mortgagor on this type of Loan
on a given Due Date (the "INTEREST REMITTANCE AMOUNT") may not be equal to
interest at the applicable Pass-Through Rate on the Loan. During periods of
negative amortization, any Deferred Interest that is added to the principal
balance of a Loan bears interest at the applicable mortgage interest rate. The
distribution to certificateholders of the Interest Remittance Amount, rather
than interest calculated at the applicable Pass-Through Rate, will not
materially affect the yield to certificateholders if the certificates are
purchased at or near par. Negative Amortization will lengthen the average life
of the certificates, and if the certificates are
-35-
<PAGE>
purchased at a discount or premium, a yield effect can occur. See "--Price" and
"--Prepayment Considerations." Any Deferred Interest will be includible in
taxable income of classes entitled thereto as it accrues, rather than when it is
received. See "Federal Income Tax Consequences."
Mortgage Interest Rates on Non Negatively Amortizing ARMs. The mortgage
interest rates on ARMs adjust periodically in response to movements in the
applicable Index. In addition, because ARMs included in a Trust may have
different origination dates, the mortgage interest rates on the ARMs comprising
a Trust will not necessarily adjust on the same dates. Accordingly, the yield to
certificateholders on Trusts comprised of ARMs will be adjusted on a delayed
basis relative to movements in the applicable Index.
ARMs. In the case of a Trust containing ARMs, the readjustment
mechanics of the ARM could affect the yield on the related series of
certificates. In the event that despite prevailing market interest rates the
mortgage interest rate on an ARM cannot increase due to the maximum rate or, if
applicable, the maximum adjustment, the yield on the related certificates could
be impacted adversely. Conversely, should the mortgage interest rate on an ARM
not be able to decrease due to the minimum rate or, if applicable, the maximum
adjustment at a time when market interest rates are below that level, the yield
on the related certificates could be higher than that which would otherwise be
the case. In that event, the mortgagor may be more likely to prepay the Loan in
full and obtain financing at a lower rate. In addition, to the extent that a
Payment Cap on a Negatively Amortizing ARM restricts an increase in the related
mortgagor's monthly payment or because the adjustable mortgage interest rate
changes more frequently than the adjustments in a monthly payment, Deferred
Interest could result and impact the yield on the related certificates.
Distribution Shortfalls. The Trustee will use the following funds to
make distributions to certificateholders:
o the aggregate amount of payments received from mortgagors on the
Loans;
o any servicing advances;
o funds otherwise payable to the Subordinate certificateholders;
and
o monies available in the Reserve Fund.
If these amounts are insufficient to make full distributions to the Senior
certificateholders, unless otherwise specified in the related prospectus
supplement, the amount of the shortfall together with interest at the related
applicable Remittance Rates, will be added to the amount the Senior certificate-
holders are entitled to receive on the next Distribution Date. The allocation of
any shortfall and shortfall recoveries between the classes of Senior
certificates, and the effect of any shortfall on yield will be discussed in the
prospectus supplement relating to those certificates.
Classes of Certificates. The certificates of a series may consist of
one or more classes, in which each class will evidence interests in specified
allocations of the principal payments only, or of the interest payments only, or
both principal and interest payments in respect of the Mortgage Assets in the
related Trust. If certificates are subdivided, the yield of any class evidencing
interest payments only will be adversely impacted by prepayments in full and
partial prepayments. If
-36-
<PAGE>
appropriate, the prospectus supplement for that series will offer examples of
cash flows on the certificates, based on specified mortgage interest rates.
PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and weighted average lives of the certificates
will be affected primarily by the rate and timing of principal payments received
on or in respect of the Mortgage Assets included in the related Trust. The
yields to investors will be sensitive in varying degrees to the rate of
prepayments on the Mortgage Assets. The extent to which the yield to maturity of
a certificate is sensitive to prepayments will depend upon the degree to which
it is purchased at a discount or premium. In the case of certificates purchased
at a premium, faster than anticipated rates of principal payments on the
Mortgage Assets could result in actual yields to investors that are lower than
the anticipated yields. In the case of some classes of these certificates,
investors could fail to recover their investments. In the case of certificates
purchased at a discount, slower than anticipated rates of principal payments on
the Mortgage Assets could result in actual yields to investors that are lower
than the anticipated yields. This could result in an extension of the weighted
average lives of these certificates. Principal payments will include:
o scheduled payments;
o Principal Prepayments;
o prepayments resulting from foreclosure, condemnation and other
dispositions of the mortgaged properties and include amounts paid
by insurers under insurance policies;
o repurchases by the Depositor of any Loan as to which there has
been a material breach of warranty or defect in documentation or
deposit of additional amounts in respect of delivery of a
substitute loan; and
o repurchases by the Depositor or the Master Servicer of all of the
certificates or all of the Mortgage Assets resulting from an
optional termination of a Trust.
The yield to maturity and weighted average lives of the certificates
may also be affected by the amount and timing of delinquencies and losses on the
Mortgage Assets.
A number of social, economic, tax, geographic, demographic, legal and
other factors may influence prepayments, delinquencies and losses on the
Mortgage Assets. These factors may include:
o the age of the Loans and/or Underlying Loans;
o the geographic distribution of mortgaged properties;
o the terms of the mortgages;
o the characteristics of the mortgagors;
o homeowner mobility;
o economic conditions generally and in the geographic area in which
the mortgaged properties are located;
-37-
<PAGE>
o enforceability of due-on-sale clauses;
o servicing decisions;
o prevailing mortgage market interest rates in relation to the
interest rates on the Loans and/or the Underlying Loans;
o the availability of mortgage funds;
o the use of second or home equity loans by mortgagors;
o the availability of refinancing opportunities; and
o the use of the properties as second or vacation homes.
The rate of principal prepayments on pools of conventional housing
loans has fluctuated significantly in recent years. Generally, if prevailing
interest rates were to fall significantly below the interest rates on the Loans
and/or Underlying Loans, the Loans and/or Underlying Loans would be expected to
prepay at higher rates than if prevailing rates were to remain at or above the
interest rates on the Loans and/or Underlying Loans. During these periods, the
yields at which an investor in the certificates may be able to reinvest amounts
received as payments on the investor's certificates may be lower than the yield
on those certificates. Conversely, if interest rates were to rise above the
interest rates on the Loans and/or Underlying Loans, the Loans and/or Underlying
Loans would be expected to prepay at lower rates than if prevailing rates were
to remain at or below interest rates on the Loans and/or Underlying Loans.
During these periods, the amount of payments available to an investor for
reinvestment at these high rates may be relatively low. The Loans and/or
Underlying Loans will not prepay at any constant rate, nor will all of the Loans
and/or Underlying Loans prepay at the same rate at any one time. The timing of
changes in the rate of prepayments may significantly affect a
certificateholder's actual yield to maturity, even if the average rate of
principal payments is consistent with a certificateholder's expectation. In
general, the earlier a prepayment of principal the greater the effect on the
certificateholder's yield to maturity. As a result, the effect on a
certificateholder's yield of principal payments occurring at a rate higher or
lower than the rate anticipated by the investor during the period immediately
following the issuance of the related series of certificates will not be offset
by a subsequent like reduction or increase in the rate of principal payments.
SUBSTITUTIONS
Substitutions of Loans by the Depositor under the conditions in the
Pooling and Servicing Agreement may also be treated as partial prepayments. If
the principal balance of the substituted loan is less than the principal balance
of the Loan replaced, the Depositor must pay the Trust the difference. The
Trustee will pass this amount through to the certificateholders as a prepayment.
LOAN ASSUMPTIONS
The Loans may allow the mortgagor to sell the mortgaged property and
have the purchaser assume the mortgagor's obligations under the mortgage.
Assumptions of the Loans will reduce the level of principal prepayments in the
related Trust that would otherwise occur if the Loans had been accelerated. To
the extent it has knowledge of any conveyance or prospective conveyance by any
mortgagor of the related mortgaged property, the Master Servicer will retain the
right to accelerate
-38-
<PAGE>
the maturity of the Loan under any applicable "due-on-sale" clause if credit or
other factors warrant enforcement. However, the Loans provide for assumption by
qualifying buyers, and the Master Servicer may in some cases encourage the
assumption of Loans by persons meeting relevant underwriting standards. In no
event will the Master Servicer exercise any right of acceleration if prohibited
by law. If the Master Servicer determines not to enforce a "due-on-sale" clause,
it will enter into an assumption and modification agreement with the person to
whom the property has been conveyed or is proposed to be conveyed, pursuant to
which that person becomes liable under the Loan. Any fees collected by the
Master Servicer in connection with the execution of an assumption agreement may
be retained by the Master Servicer or the applicable Servicer as additional
servicing compensation. See "Servicing of the Loans--Collection and Other
Servicing Procedures."
ARMS
The maximum and minimum rates, maximum adjustments, Gross Margins,
Payment Caps and other features of the ARM programs of mortgage lenders during
recent years have significantly varied in response to market conditions like
interest rates, consumer demand and regulatory restrictions. The lack of
uniformity of the terms and provisions of ARM programs have made it impractical
to compile meaningful comparative data on prepayment rates of ARMs and
accordingly, there can be no certainty as to the rate of prepayments on ARMs in
either stable or changing interest rate environments. The ARMs comprising a
Trust or underlying the Mortgage Certificates comprising a Trust may experience
a rate of principal prepayments which is different from the principal prepayment
rate for ARMs included in any other Trust for other adjustable rate mortgages
having different or similar characteristics and for fixed-rate mortgages. In
addition, we cannot assure you that any Trust will conform to past prepayment
experience or any published prepayment forecast.
As described under "The Trusts--The Loans--Payment Provisions of the
Loans" if interest rates rise without a simultaneous increase in the related
monthly payments, Deferred Interest and negative amortization may result in the
case of Negatively Amortizing ARMs. However, borrowers may pay amounts in
addition to their monthly payments in order to avoid negative amortization. In
the case of Negatively Amortizing ARMs, borrowers may pay amounts in addition to
their monthly payments in order to avoid negative amortization or they may incur
negative amortization. To the extent that any of the Loans or any Underlying
Loans negatively amortize, the amount of the negative amortization is added to
the outstanding principal balance and future interest accruals are computed on
the higher outstanding principal balance and a smaller portion of the monthly
payment is applied to principal than is necessary to repay the unpaid principal
over its remaining term. Accordingly, the weighted average life of these Loans
will be increased beyond that which would otherwise be the case. During a period
of declining interest rates, the portion of each monthly payment in excess of
scheduled interest and principal will be applied to reduce the outstanding
principal balance on the related Negatively Amortizing ARM, thereby resulting in
accelerated repayment of the Loan. This will shorten the weighted average life
of the Negatively Amortizing ARMs. The application of partial prepayments to
reduce the principal amount of a Negatively Amortizing ARM will tend to reduce
the weighted average life of the Loan and may adversely affect the yield to (1)
holders of certificates which purchased their certificates at a premium, (2)
holders
-39-
<PAGE>
of classes with lower proportionate shares of the principal amount in the
underlying Mortgage Assets, and (3) holders of Interest Only certificates.
The pooling of Negatively Amortizing ARMs having monthly payment
adjustment dates in different months, together with different initial mortgage
rates, maximum rates, minimum rates and stated maturity dates, could result in
some Negatively Amortizing ARMs experiencing negative amortization while the
amortization of other Negatively Amortizing ARMs is accelerated. The weighted
average life of certificates of a series will reflect a composite of the
repayment and prepayment characteristics of the Mortgage Assets in the related
Trust.
FORECLOSURES
The number of foreclosures and the principal amount of the Loans and
Underlying Loans foreclosed in relation to Loans and Underlying Loans which are
repaid in accordance with their terms will affect the weighted average life of
the Mortgage Assets in the Trust and that of the related series of certificates.
Servicing decisions made regarding the Loans and Underlying Loan, may also have
an impact upon the payment behavior of particular Trusts. See "Servicing of the
Loans--Collection and Other Servicing Procedures" and "Servicing of the
Underlying Loans." These servicing decisions may include:
o the use of payment plans prior to demand for acceleration,
o the restructuring of Loans or Underlying Loans in bankruptcy
proceedings,
o the Master Servicer's servicing policy to generally not accept
payment from the mortgagor of less than the total scheduled
monthly payment due on a Loan.
Servicing policies and decisions that result in foreclosures may
adversely affect the return:
o to holders of certificates which purchased their certificates at
a premium, if any,
o the return on classes with lower proportionate shares of the
principal amount of the interest in the underlying Loans, if any,
and
o the return on Interest Only classes, if any.
PRE-FUNDING
As may be described in the prospectus supplement relating to any
series, the related Pooling and Servicing Agreement may provide for a
pre-funding period. During this period, all or a portion of the principal
collected on the Mortgage Assets may be applied by the Trustee to the
acquisition of additional Mortgage Assets during a specified period rather than
used to fund payments of principal to certificateholders during that period.
This will result in the related certificates possessing an interest-only period,
also commonly referred to as a revolving period, which will be followed by a
repayment period. Any interest-only or revolving period may, upon the occurrence
of specified events to be described in the related prospectus supplement,
terminate prior to the end of the specified period and result in the earlier
than expected repayment of the related certificates.
-40-
<PAGE>
PREPAYMENT ASSUMPTIONS
The prospectus supplement for a series of Sequential Pay certificates
may contain a table setting forth percentages of the initial certificate balance
of each class expected to be outstanding after each of the dates shown in the
table. The table will be based upon a number of assumptions stated in the
prospectus supplement, including assumptions that prepayments on the Underlying
Loans or on the Loans are made at rates corresponding to various percentages of
the prepayment model specified in the prospectus supplement. It is unlikely,
however, that the prepayment of the Underlying Loans, or of the Loans underlying
any series will conform to any of the percentages of the prepayment model
described in the table.
OPTIONAL TERMINATION
The Depositor, Master Servicer, or another third party may have the
option to repurchase the Mortgage Assets comprising part of a Trust when the
aggregate outstanding principal balance of the Mortgage Assets is less than a
specified percentage of the aggregate outstanding principal balance of the
Mortgage Assets as of the related Cut-off Date. See "Description of the
Certificates-- Optional Termination of a Trust, --Optional Termination of an
Underlying Trust" in this prospectus and "Description of the
Certificates--Optional Termination" in the prospectus supplement. The Depositor
or a mortgage asset seller may also be required to repurchase Mortgage Assets
from any pool because of breaches in its representations and warranties to the
Trustee. Any repurchases will shorten the weighted average lives of the
certificates.
The prospectus supplement relating to a series of certificates will
discuss in greater detail the effect of the rate and timing of principal
payments, prepayments, delinquencies and losses on the yield, weighted average
lives and maturities of the certificates.
DISTRIBUTIONS ON THE CERTIFICATES
Unless otherwise specified in the prospectus supplement, on each
applicable Distribution Date the Trustee will distribute the Available
Distribution Amount from the Certificate Account to certificateholders, in most
cases, through DTC and its participants.
The "AVAILABLE DISTRIBUTION AMOUNT" for any Distribution Date, as more
fully described in the Pooling and Servicing Agreement, will equal the sum of
the following amounts:
(1) the total amount of all cash received by or on behalf of the Master
Servicer for the Mortgage Assets by the Determination Date and not
previously distributed, including amounts received in connection with
the liquidation of defaulted Loans whether through trustee's sale,
foreclosure sale, proceeds of insurance policies, condemnation
proceeds or otherwise ("LIQUIDATION PROCEEDS") except:
o all scheduled payments of principal and interest collected but
due on a date after the related Due Date;
-41-
<PAGE>
o all partial principal prepayments received after the previous
calendar month, together with any interest payment received with
the prepayments to the extent that it represents the payment of
interest accrued on the Loans for the period after the previous
calendar month;
o all prepayments in full received after the applicable calendar
month immediately before the Determination Date, together with
any interest payment received with the prepayments in full to the
extent that it represents the payment of interest accrued on the
Loans for the period after the previous calendar month;
o Liquidation Proceeds received on the Loans after the previous
calendar month;
o all amounts in the separate account established and maintained by
the Master Servicer for collection purposes (the "CUSTODIAL
ACCOUNT FOR P&I") which are due and reimbursable to the Master
Servicer pursuant to the terms of the Pooling and Servicing
Agreement;
o the Administration Fee for each Loan; and
o the excess, if any, of the total amount received in connection
with the liquidation of defaulted Loans received during the
previous calendar month over the amount that would have been
received if prepayments in full had been made on these Loans on
the date that the liquidation proceeds were received ("EXCESS
LIQUIDATION PROCEEDS");
(2) all advances made by the Master Servicer to the Trustee on that
Distribution Date;
(3) any amounts payable as compensating interest by the Master Servicer on
that Distribution Date; and
(4) the total amount of any cash received by the Trustee or the Master
Servicer in respect of the obligation of the Depositor or the seller
to repurchase any Mortgage Assets.
Unless otherwise provided in the applicable prospectus supplement, the
term "PREPAYMENT PERIOD" shall refer to the calendar month before the
Distribution Date.
Distributions on the certificates on each Distribution Date will
generally be allocated to each certificate entitled to receive a distribution on
the basis of the Percentage Interest of the Trust which each certificate
represents or their outstanding principal amounts or notional amounts.
However, a prospectus supplement may alter these general distribution
methods by providing for the subordination of the rights of any classes of
Subordinate certificates to receive current distributions. If the Mortgage
Assets for a series have adjustable or variable interest rates, then the
Remittance Rate of the Certificates for that series will also vary, due to
changes in those rates and due to prepayments of Loans and/or Underlying Loans
comprising the related Mortgage Assets. If the Mortgage Assets for a series have
fixed interest rates, then the Remittance Rate on Certificates of the related
series may be fixed, or may vary, to the extent prepayments cause changes in the
weighted average interest rate of the Mortgage Assets. If the Mortgage Assets
have lifetime or
-42-
<PAGE>
periodic adjustment caps on their respective interest rates, then the Remittance
Rate on the Certificates of the related series may also reflect these caps.
Distributions of interest on certificates which receive interest will
be made periodically at the intervals and at the Remittance Rate specified or
determined in the manner described in the related prospectus supplement.
Interest on the certificates will be calculated on the basis of a 360-day year
consisting of twelve 30-day months unless otherwise specified in the related
prospectus supplement.
Funds available in the Certificate Account together with any amounts
transferred from any Reserve Fund or applicable credit enhancement may not
always be sufficient to make the full distribution to certificateholders on any
Distribution Date. In this case, the Trustee will distribute available funds to
the certificateholders of each class in accordance with their respective
interests. The subordinate certificateholders, if any, will not, subject to the
limitations described in the related prospectus supplement, receive any amount
of distributions until senior certificateholders receive the amount of present
distributions due them and the amount of distributions owed them which were not
timely distributed and to which they are entitled. If specified in the related
prospectus supplement, the difference between the amount which
certificateholders would have received if there had been sufficient eligible
funds available for distribution and the amount actually distributed will be
included in the calculation of the amount which the certificateholders are
entitled to receive on the next Distribution Date.
SERVICING OF THE LOANS
One or more entities, which may include an affiliate of the Depositor,
will be named in the related prospectus supplement as the Master Servicer. The
Master Servicer will be responsible for the servicing and administration of the
Loans as described in the related prospectus supplement. Any Master Servicer or
any successor Master Servicer may contract with Master Servicers, who also may
be qualified lenders or mortgage asset sellers, to perform all or a portion of
the servicing functions on behalf of the Master Servicer.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer will make reasonable efforts to collect all
payments called for under the Loans and any applicable credit enhancement. It
will also follow collection procedures that are consistent with the Pooling and
Servicing Agreement and as it follows on its own conventional one- to-four-unit
residential first Loans. Consistent with the above, the Master Servicer may, in
its discretion, (1) waive any assumption fee, late payment charge or other
charge in connection with a Loan; and (2) arrange a schedule, running for no
more than 180 days after the Due Date for payment of any installment on any
mortgage note, for the liquidation of delinquent items.
Some of the Loans may provide for payment by the mortgagor to the
Master Servicer of amounts to be used for payment of taxes, assessments, hazard
insurance premiums or comparable items for the account of the mortgagor. These
amounts, if any, will not become part of the Trust
-43-
<PAGE>
assets and certificateholders will possess no interest in them. The Master
Servicer may deal with these amounts in accordance with its normal servicing
procedures.
The Master Servicer will be responsible for servicing and administering
the Loans, but will be permitted to enter into a servicing agreement with a
qualified lender or another eligible institution to perform all or part of its
functions under its supervision that it would otherwise be required to perform.
The Master Servicer or the servicer will diligently perform all
services and duties specified in the Pooling and Servicing Agreement, or
servicing agreement, in the same manner as prudent mortgage lending institutions
would perform for mortgages of the same type as the Loans in those jurisdictions
where the related mortgaged properties are located. The Master Servicer will
monitor the performance of the servicer and will have the right to remove any
servicer at any time if it considers removal to be in the best interest of the
certificateholders. The duties to be performed by the Master Servicer, directly
or through the servicer, will include collection and remittance of principal and
interest payments, collection of insurance claims and, if necessary,
foreclosure. If the Master Servicer terminates a servicing agreement, it shall
either perform the servicing function itself or transfer it to a substitute
servicer. The Master Servicer will be entitled to retain the portion of the
servicing fee paid to the servicer under a terminated servicing agreement if the
Master Servicer elects to perform the servicing functions itself.
The Master Servicer will be paid an Administration Fee for the
performance of its services and duties under the Pooling and Servicing Agreement
as specified in the related prospectus supplement. Additionally, the Master
Servicer or the servicer may be entitled to retain late charges, assumption fees
and similar charges to the extent collected from mortgagors.
In servicing ARMs, the Master Servicer will on occasion accommodate
borrower inquiries regarding the notice of interest rate adjustments by
deferring the effective date of the adjustment and requesting the borrower to
agree to reduce the notice period provided in the related mortgage note. The
result of any deferrals of the effective date of rate adjustments to Loans
included in a Trust, during periods of rising interest rates, may be to reduce
the yield to investors in certificates evidencing interests in that Trust.
The Master Servicer will be obligated to follow the practices and
procedures as it deems necessary or advisable and as are normal and usual in its
general mortgage servicing activities to realize upon defaulted Loans. However,
in the case of damage to a mortgaged property, the Master Servicer is not
required to expend its own funds in connection with foreclosure or to restore
any damaged property unless it reasonably determines (1) that foreclosure and/or
restoration will increase the liquidation proceeds to certificateholders after
reimbursement to the Master Servicer for its expenses and (2) that the expenses
will be recoverable to it through liquidation proceeds of the sale of the
mortgaged property. If the Master Servicer has expended its own funds to restore
damaged property, it will be entitled to charge the Certificate Account, out of
the related liquidation proceeds, an amount equal to expenses incurred by it.
-44-
<PAGE>
In realizing upon a defaulted Loan, the Master Servicer may:
o directly or through a local assignee, sell the property at a
foreclosure or trustee's sale;
o negotiate with the mortgagor for a deed in lieu of foreclosure;
or
o if a deficiency judgment is available against the mortgagor or
other person, foreclose against the property and proceed for the
deficiency against the appropriate person.
We anticipate that in most cases the Master Servicer will not seek deficiency
judgments against defaulting mortgagors. See "Legal Aspects of the
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders" for a
description of the limited availability of deficiency judgments.
The Depositor and/or the Master Servicer will be entitled to elect to
purchase defaulted Loans or Loans as to which the related mortgagor has tendered
a deed in lieu of foreclosure from the Trust for a purchase price equal to the
principal balance plus accrued and unpaid interest on the Loan. If the Master
Servicer purchases a Loan, any gain realized in a liquidation proceeding on the
Loan will not be paid to the Trust. If the Master Servicer does not purchase the
Loan, any gain realized in a liquidation proceeding on the Loan will be paid to
the Trust for distribution to the certificateholders, less reasonable
reimbursement to the Master Servicer for its expenses. If the Trust elects to be
treated as a REMIC, the gain would become an asset of the REMIC Residual Holders
to the extent the gain is not necessary to make payments due to the holders of
regular interests. Often, the holder of property acquired through foreclosure
maximizes recovery by providing financing to a new purchaser. The Trustee will
not be empowered to provide this financing and the Master Servicer may, but will
not be obligated to do so. This may result in a Trust experiencing greater
losses on defaulted Loans than might otherwise be the case.
For a series of certificates for which a REMIC election is made, if the
Trustee acquires ownership of any mortgaged property as a result of a default or
imminent default of any Loan secured by that mortgaged property, the Trustee
will be required to dispose of the property within two years after the date on
which it acquired ownership of the property.
The Master Servicer will not be obligated to foreclose on any mortgaged
property which it believes may be contaminated with or affected by hazardous or
toxic wastes, materials or substances. See "Legal Aspects of the
Loans--Environmental Legislation." The Master Servicer will not be liable to the
certificateholders of a series if it fails to foreclose on a mortgaged property
securing a Loan in the related Trust which it believes may be contaminated or
affected, even if the mortgaged property is, in fact, not contaminated or
affected. If the Master Servicer does not foreclose on the mortgaged property in
this instance, the certificateholders of the related series may experience a
loss on the related Loan. In addition, the Master Servicer will not be liable to
the certificateholders if, based on its belief that no contamination or effect
exists, it forecloses on a mortgaged property and takes title to the mortgaged
property on behalf of the related Trustee, and thereafter the mortgaged property
is determined to be contaminated or affected.
Unless otherwise stated in the prospectus supplement relating to a
series of certificates, if the Master Servicer determines that all amounts which
it expects to recover from or on account of a
-45-
<PAGE>
Loan have been recovered, its obligation, if any, to advance delinquent
installments of principal, interest or both on that Loan will cease. The
principal balance of the Loan will then be allocated in reduction of the
principal balance of the certificates of the related series in the manner in
which losses are allocated as specified in the prospectus supplement.
For a series of certificates that includes subordination as a form of
credit enhancement, until the Subordinated Amount is reduced to zero, and
provided any special loss limitation has not been exceeded, Senior
certificateholders will not realize a loss on a defaulted Loan if Liquidation
Proceeds are less than the sum of the principal balance of the defaulted Loan
and the Master Servicer's expenses.
The Master Servicer will maintain with one or more depository
institutions one or more accounts into which it will deposit all payments of
taxes, insurance premiums, assessments or comparable items received for the
account of the mortgagors. The Master Servicer may withdraw amounts from these
accounts only to effect the following:
o payment of taxes, insurance premiums, assessments or comparable
items;
o reimbursement to itself, or the applicable Master Servicer, out
of related collections for any cost incurred in paying taxes,
insurance premiums and assessments or comparable items;
o refunds to mortgagors for any amounts determined to be overages;
o payment of interest to mortgagors on balances in these accounts
to the extent required by law;
o withdraw interest or other income which may lawfully be retained
by the Trust for deposit into the Certificate Account; and
o clear and terminate the accounts at termination of the Trust.
PRIMARY MORTGAGE INSURANCE
The Loans in a Trust will not have loan-to-value ratios in excess of
100% of the original value of the mortgaged property unless otherwise specified
in the prospectus supplement. Generally, Loans that the Depositor acquires do
not have loan-to-value ratios in excess of 95% of the original value of the
mortgaged property. The prospectus supplement for a series will describe the
extent to which a Trust includes Loans with loan-to-value ratios exceeding 95%.
Unless otherwise stated in the prospectus supplement, each Loan will have
primary mortgage insurance if the original principal amount of the loan exceeds
80% of the original value of the mortgaged property. The mortgagor is generally
required to continue this coverage until the outstanding principal amount of the
loan equals or is less than 80% of the greater of the original value of the
mortgaged property and, if permitted under any pool insurance policy obtained
for a series, the then current value of the property as evidenced by an
appraisal. A primary mortgage insurance policy may provide that, as an
alternative to paying a claim thereunder, the mortgage insurer will have the
right to purchase the Loan following the receipt of a notice of default. The
mortgage insurer may have a purchase right after the borrower has failed to make
three scheduled monthly payments, or one payment if it is the first payment due
on the Loan, or after any foreclosure or other proceeding affecting the Loan or
the mortgaged
-46-
<PAGE>
property has been commenced. The proceeds of any purchase will be distributed to
certificateholders on the applicable Distribution Date. A mortgage insurer may
be more likely to exercise its purchase option when prevailing interest rates
are low relative to the interest rate borne by the defaulted Loan, in order to
reduce the aggregate amount of accrued interest that the insurer would be
obligated to pay upon payment of a claim.
HAZARD INSURANCE
The Master Servicer will cause to be maintained for each Loan a hazard
insurance policy providing for no less than the coverage of the standard form of
fire insurance policy with extended coverage in the applicable state. The
coverage will be in an amount equal to the lesser of (1) the principal balance
of the Loan; and (2) the replacement cost of the improvements securing the Loan.
All amounts collected by the Master Servicer under any hazard policy will be
credited to the Custodial Account for P&I except for amounts to be applied to
the restoration or repair of the mortgaged property or released to the mortgagor
in accordance with the Master Servicer's normal servicing procedures. The Master
Servicer may satisfy its obligation relating to the maintenance of hazard
insurance by maintaining a blanket policy insuring against hazard losses on all
the Loans. The Master Servicer will pay the premium amount for any blanket
policy it maintains. The blanket policy may contain a deductible clause, in
which case the Master Servicer will be required to credit to the Custodial
Account for P&I the amounts which would have been payable by the insurer but for
the deductible clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightening, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans will be underwritten by
different insurers and therefore do not contain identical terms and conditions,
the basic terms are dictated by applicable law. Most policies typically do not
cover any physical damages resulting from the following: war, revolution,
governmental actions, flood and other water-related causes, earth movement,
including earthquakes, landslides and mud flows, nuclear reactions, hurricanes,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases, vandalism. The foregoing list is merely indicative of some kinds of
uninsured risks and is not intended to be all- inclusive. If any mortgaged
property was located in a federally designated special flood hazard area at the
time of origination, the Master Servicer will cause to be maintained a flood
insurance policy on the mortgaged property up to the maximum amount available or
to the full amount of the related Loan. The Depositor may also purchase special
hazard insurance against some or all of the uninsured risks described in this
paragraph. See "Credit Enhancement--Special Hazard Insurance."
Most of the properties securing the Loans in a Trust will be covered by
homeowners' insurance policies, which, in addition to the standard form of fire
and extended coverage, provide coverage for other types of risks. These
homeowners' policies typically contain a coinsurance clause which in effect
requires the insured at all times to carry insurance of a specified percentage,
generally 80% to 90%, of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage,
-47-
<PAGE>
then the insurer's liability in the event of partial loss will not exceed the
greater of (1) the actual cash value (generally defined as replacement cost at
the time and place of loss, less physical depreciation) of the improvements
damaged or destroyed, or (2) a proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance the Master Servicer is required to
cause to be maintained on the improvements securing the Loans declines as the
principal balances owing on the Loans decrease, if the residential properties
securing the Loans appreciate in value over time, the effect of coinsurance in
the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damaged property. However, for a series of
certificates that includes subordination as a form of credit enhancement, Senior
certificates may not realize a loss resulting from uninsured hazard losses or
the application of coinsurance provisions. The Trustee will distribute the full
distribution amounts due on the Senior certificates until the Subordinated
Amount is reduced to zero, so long as the following conditions are met:
o any applicable special loss limitation described in the related
prospectus supplement has not been exceeded, and
o there are sufficient funds otherwise due on the Subordinate
certificates or held in the Reserve Fund, if any, to pay the
distribution amount due to the Senior certificates.
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative apartment relating to any
Co-op Loan. Generally, the cooperative itself is responsible for maintenance of
hazard insurance for the property owned by the cooperative and the
tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a Co-op Loan do not maintain this insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's cooperative apartment or the
cooperative building could significantly reduce the value of the collateral
securing that Co-op Loan.
UNANTICIPATED RECOVERIES OF LOSSES ON THE LOANS
To the extent and in the manner specified in the prospectus supplement,
the principal balance of classes of certificates may be reduced by allocating
losses of principal to them that occur in connection with liquidation on the
Loans in the related Trust (a "REALIZED LOSS"). Unless otherwise stated in the
prospectus supplement, holders of certificates that had previously been
allocated a Realized Loss may receive distributions if the Master Servicer
subsequently recovers an amount (an "UNANTICIPATED RECOVERY") in respect of that
Loan. Unanticipated Recoveries may result from events like an unanticipated
insurance settlement, tax refund or mortgagor bankruptcy distribution. To the
extent a certificate has been transferred, the holder that receives an
Unanticipated Recovery may be different from the holder who was allocated a
Realized Loss. The Trustee will distribute to the holders of each outstanding
class to which the Realized Loss had previously been allocated, its share of the
Unanticipated Recovery up to the amount of the loss previously allocated to that
class. The Trustee will make this distribution on the Distribution Date in the
calendar month following receipt of the Unanticipated Recovery. Any
distributions of Unanticipated Recoveries will not
-48-
<PAGE>
reduce the principal balances of the class of certificates receiving the
recoveries. However, no certificateholder will be entitled to receive any share
of an Unanticipated Recovery following the Distribution Date on which the
principal balance of its certificate has been reduced to zero, including
following the termination of the Trust. See "The Pooling and Servicing
Agreement--Termination" in this prospectus.
ADVANCES
Unless otherwise stated in the prospectus supplement, if any borrower
fails to make any payment of principal or interest required under the terms of a
Loan, the Master Servicer will be obligated to advance the entire amount of that
payment net of the applicable Administration Fee. This obligation to advance
will be limited to amounts which the Master Servicer reasonably believes will be
recoverable by it out of liquidation proceeds or otherwise in respect of the
Loan. In addition, the Master Servicer may make advances from funds on deposit
in the Certificate Account.
The Master Servicer will make advances in order to maintain a regular
flow of scheduled interest and principal payments to holders of the relevant
classes of certificates. These advances do not represent an obligation of any
Master Servicer to guarantee or insure against losses.
The Master Servicer may recover advances without interest from amounts
which represent late recoveries of principal and/or interest on, or liquidation
proceeds or insurance proceeds from, the Loan as to which the advance was made.
If these amounts are insufficient to reimburse the Master Servicer, the amount
of the deficiency will be characterized as a non-recoverable advance. The Master
Servicer may reimburse itself for non-recoverable advances out of any funds in
the Custodial Account for P&I or the Certificate Account. If the Master Servicer
makes an advance on any Distribution Date, it will be included with the
distribution to the certificateholders on that Distribution Date. If the Trustee
purchases any foreclosed property and the property becomes part of the Trust,
the Master Servicer will continue to make advances on the property as if the
Loan were still outstanding in the manner described above. At the time the
Trustee sells the property, the Master Servicer may reimburse itself for these
advances in an amount not to exceed the sale price. Additionally, if specified
in the related prospectus supplement, the Trustee, on behalf of the Master
Servicer, may make advances.
Any obligation to make advances may be limited to amounts due holders
of Senior certificates of the related series or may be limited to specified
periods or otherwise as specified in the prospectus supplement.
PAYMENTS ON MORTGAGE ASSETS
The Pooling and Servicing Agreement for each Trust will require that
the Master Servicer establish and maintain a Custodial Account for P&I. The
Master Servicer will credit to the Custodial Account for P&I on a daily basis
the collections received by it after the Cut-off Date, as well as scheduled
payments of principal and interest due after the Cut-off Date, but received
before the Cut- off Date. These amounts include:
-49-
<PAGE>
o all mortgagor payments on account of principal, including
principal prepayments by mortgagors, on the Loans and payments on
account of principal on the Mortgage Certificates;
o all mortgagor payments on account of interest on the Loans and
payments on account of interest on the Mortgage Certificates,
which may be net of administration fees the Master Servicer is
entitled to retain;
o all liquidation proceeds net of unpaid administration fees;
o all proceeds received by the Master Servicer under any title,
hazard or other insurance policy covering any Loan or the related
mortgaged property, 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
Master Servicer's normal servicing procedures;
o all repurchase proceeds of Loans;
o Unanticipated Recoveries; and
o all other amounts required to be deposited in the Custodial
Account for P&I pursuant to the Pooling and Servicing Agreement.
The Master Servicer is authorized to make withdrawals from the
Custodial Account for P&I for various purposes outlined in the Pooling and
Servicing Agreement. The Master Servicer may invest funds held in the Custodial
Account for P&I in Eligible Investments.
On the business day before each Distribution Date, the Master Servicer
will transfer amounts to be distributed to certificateholders from the Custodial
Account for P&I and any amounts required to be transferred from the Reserve Fund
to the Certificate Account.
ADMINISTRATION FEES, COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related prospectus supplement, the
Master Servicer is entitled to receive an Administration Fee for each Loan,
which may be variable, as described in the Pooling and Servicing Agreement. The
Master Servicer's aggregate Administration Fee for any month may be reduced to
cover a Prepayment Interest Shortfall. The Master Servicer may either retain the
Administration Fees to which it is entitled before making required deposits to
the Certificate Account or may withdraw them from the Certificate Account.
Since the Administration Fee is a percentage of the then outstanding
principal balance of each Loan each month, the Master Servicer's aggregate
compensation will decrease as the Loans are repaid. In addition to the
Administration Fees, the Master Servicer will retain all assumption fees, late
payment charges and other charges, to the extent collected from mortgagors.
The Master Servicer will pay some of the expenses incurred in
connection with its servicing of the Loans, including, without limitation,
payment of the fees and disbursements of the Trustee and independent
accountants, and payment of expenses incurred in connection with distributions
and reports to certificateholders.
-50-
<PAGE>
The Master Servicer is entitled to reimbursement for some types of
expenses incurred by it in connection with the liquidation of defaulted Loans,
including under some circumstances reimbursement of expenditures incurred by it
in connection with the restoration of mortgaged properties. The Master
Servicer's right of reimbursement for these amounts is senior to the rights of
certificateholders to receive any related amounts resulting from the liquidation
of a defaulted loan. The Master Servicer is also entitled to reimbursement from
the Certificate Account for advances.
RESIGNATION OF THE MASTER SERVICER; SCOPE OF INDEMNITIES
Unless otherwise specified in the applicable prospectus supplement, a
Master Servicer may not resign from its duties unless performance of its duties
is no longer permissible under applicable law or is in material conflict by
reason of applicable law with any other activities of a type and nature
presently carried on by it. No resignation will become effective until the
Trustee or a successor Master Servicer has assumed the Master Servicer's duties
under the Pooling and Servicing Agreement. If a Master Servicer resigns for any
of these reasons, it is possible that the Trustee would be unable or unwilling
to assume responsibility for servicing the Loans under the Pooling and Servicing
Agreement and would seek to appoint another institution as servicer. The Master
Servicer may arrange for its duties under the Pooling and Servicing Agreement to
be performed by a sub- servicer, so long as the Master Servicer remains
responsible for the performance of its duties.
The Pooling and Servicing Agreement for each Trust will also provide
that neither the Master Servicer nor any director, officer, employee or agent of
the Master Servicer will be under any liability to the Trust or the
certificateholders for any action taken or for refraining from the taking of any
action in good faith and without gross negligence or willful misconduct or for
errors in judgment. The Pooling and Servicing Agreement will further provide
that the Master Servicer and any director, officer, employee or agent of any
Master Servicer is entitled to indemnification by the related Trust 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, except for any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence of the Master Servicer in the
performance of its duties or by reason of reckless disregard of its duties. In
addition, the Pooling and Servicing Agreement provides that the Master Servicer
is not under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its servicing responsibilities under the agreement
and which in its opinion may involve it in any expense or liability. Any Master
Servicer may, however, in its discretion, subject to the terms and conditions of
the Pooling and Servicing Agreement, undertake any action which it may deem
necessary or desirable in respect of the agreement and the rights and duties of
the parties thereto and the interests of the certificateholders thereunder. In
this event, the legal expenses and costs of this action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust and the
Master Servicer and the other Master Servicer, if any, will be entitled to be
reimbursed therefor and charge the Certificate Account for the reimbursement,
the right of reimbursement being prior to the rights of certificateholders to
receive any amounts in the Certificate Account.
-51-
<PAGE>
If the Master Servicer reorganizes, including as a result of a merger,
consolidation or transfer of its assets, any person succeeding to the business
of the Master Servicer will be the Master Servicer's successor under the Pooling
and Servicing Agreement.
BACK-UP MASTER SERVICER
If so specified in the related prospectus supplement, pursuant to the
Pooling and Servicing Agreement relating to any series, the Trustee or another
successor Master Servicer appointed pursuant to the agreement will serve as
back-up Master Servicer (the "BACK-UP MASTER SERVICER") and assume the duties of
the Master Servicer after a notice of termination of the Master Servicer or if
the Master Servicer fails to perform its duties. The back-up Master Servicer
shall have no liability for any act of the Master Servicer prior to its
assumption of duties.
SPECIAL SERVICING AGREEMENTS
The Pooling and Servicing Agreement may permit the Master Servicer to
enter into a special servicing agreement with an unaffiliated holder of
subordinated mortgage pass-through certificates. Pursuant to the agreement, the
holder may instruct the Master Servicer and if applicable, any sub- servicer, to
commence or delay foreclosure proceedings on delinquent Loans.
SERVICING OF THE UNDERLYING LOANS
The Mortgage Certificates will have been issued pursuant to a pooling
and servicing agreement, an indenture or similar agreement. Unless otherwise
specified in the related prospectus supplement, the seller/servicer of the
Underlying Loans will have entered into the agreement with a trustee and a
servicer. The servicer named in the agreement, along with any subservicers, as
applicable, will service the Underlying Loans in accordance with the terms of
the agreement.
THE POOLING AND SERVICING AGREEMENT
The following, together with the description of the Pooling and
Servicing Agreement in the prospectus supplement, describes the material
provisions of the Pooling and Servicing Agreement relating to a series of
certificates. The summaries do not purport to be complete and are subject to,
and qualified in their entirety by reference to, the provisions of the Pooling
and Servicing Agreements. Where particular provisions or terms used in the
Pooling and Servicing Agreements are referred to, these provisions or terms are
as specified in the Pooling and Servicing Agreements.
ASSIGNMENT OF LOANS
At the time of issuance of each series of certificates, the Depositor
will cause the Loans, including loans underlying Mortgage Certificates,
comprising the Trust to be assigned to the Trustee for that series, together
with all principal and interest due on the Loans subsequent to the Cut-off Date.
The Trustee will, in exchange for the Trust and concurrently with the
assignment, execute and deliver the certificates to a certificate registrar
appointed pursuant to the Pooling and Servicing
-52-
<PAGE>
Agreement for authentication and delivery to the Depositor or its designee. Each
Loan will be identified in a schedule appearing as an exhibit to the Pooling and
Servicing Agreement. The schedule will include information about each Loan
including the following:
o principal balance as of the Cut-off Date;
o current mortgage interest rate and Pass-Through Rate;
o current scheduled monthly payment of principal and interest;
o stated maturity;
o Administration Fee;
o original Loan-to-Value Ratio; and
o if the Loan is an ARM, its applicable Index, its Gross Margin,
its lifetime minimum rate (if any), its lifetime maximum rate,
its periodic maximum adjustment, the frequency of its interest
rate adjustment and its first monthly payment adjustment date.
The Trustee for a series of certificates will be authorized to appoint
one or more custodians, which may include affiliates of the Depositor or the
Trustee (together, the "CUSTODIANS"), under a custodial agreement to maintain
possession of and review the documents for the Loans, as the agent of the
Trustee. Any custodial agreement will be on terms to which the Depositor, the
Trustee and each custodian shall agree.
In addition, the Depositor will deliver to the Trustee for each Loan
the following documents:
o the mortgage note endorsed without recourse in blank or to the
order of the Trustee,
o the original mortgage with evidence of recording,
o an Officer's certificate to the effect that a title insurance
policy was issued and remains in full force and effect or the
original title insurance policy, or in the event the original
title policy is not available, any one of an original title
binder, an original preliminary title report or an original title
commitment or a copy certified by the title company with the
original policy to follow within 180 days, and
o an assignment of the mortgage in recordable form unless otherwise
described in the related prospectus supplement.
The Pooling and Servicing Agreement will generally require that the
assignment of each mortgage be properly recorded and delivered to the Trustee
within one year following the issuance of the certificates; provided that
assignments of mortgages need not be recorded in any state for which the
Depositor delivers to the Trustee an opinion of counsel to the effect that
recordation of the assignments is not necessary to secure or perfect the
interest in the mortgaged properties in the name of the Trustee.
Because assignments by the Depositor to the Trustee of the Loans
secured by mortgaged properties located in some states may not be recorded, it
might be possible for the Depositor to transfer the Loans to bona fide
purchasers for value without notice, notwithstanding the Trustee's rights.
However, in most instances the Depositor would not be able to deliver the
original documents evidencing the mortgage notes or the mortgages because under
the terms of the mortgage
-53-
<PAGE>
loan purchase agreement and any custodial agreement, these documents are to be
retained in the possession of the Trustee or the specified Custodian, except
when released to the Depositor in connection with its servicing activities.
Moreover, under the law of California and some other states, a subsequent
transferee who failed to obtain delivery of the original evidence of
indebtedness would not, in the absence of special facts, be able to defeat the
Trustee's interest in a Loan so long as evidence of indebtedness remained in the
possession of the Trustee.
Unless otherwise specified in the related prospectus supplement, the
Trustee or specified Custodian will review and hold the documents relating to
the Loans in Trust for the benefit of the certificateholders. If any document is
found by the Trustee or specified Custodian (within 45 days or within a longer
specified period for assignments that must be recorded) to be defective in any
material respect and the Depositor does not cure the defect within 90 days after
notice by the Trustee has been given to the Depositor within the relevant
period, the Depositor will either:
o within the three month period commencing on the closing date of
the sale of the related series of certificates repurchase the
related Loan at a price, unless otherwise specified in the
related prospectus supplement, equal to the principal balance of
the Loan, plus accrued interest on the principal balance at the
mortgage interest rate to the next scheduled Due Date, or
o within the three month period commencing on the closing date of
the sale of the related series of certificates (or within the two
year period commencing on the closing date if the related Loan is
a "defective obligation" within the meaning of the Code) unless
otherwise provided in the related prospectus supplement,
substitute a different Loan upon satisfaction of the conditions
described in the agreement.
Except as otherwise specified in the related prospectus supplement, this
repurchase or substitution obligation constitutes the sole remedy available to
the certificateholders or the Trustee for a material defect in a constituent
document. The related prospectus supplement will specify any restrictions for
repurchases, substitutions and any alternative arrangements.
REPRESENTATIONS AND WARRANTIES
Unless otherwise specified in the related prospectus supplement, the
Depositor will represent and warrant to the Trustee in the Pooling and Servicing
Agreement, or will assign the representations and warranties of the mortgage
asset seller related to the Loans comprising the Mortgage Assets in a Trust,
upon delivery of the Loans to the Trustee hereunder, among other things:
o that the information described in the schedule of Loans appearing
as an exhibit to the Pooling and Servicing Agreement is correct
in all material respects at the date or dates respecting which
the information is furnished;
o that as of the date of the transfer of the Loans to the Trustee,
the Depositor is the sole owner and holder of each Loan free and
clear of all liens, pledges, charges or security interests of any
nature and has full right and authority, subject to no interest
or participation of, or agreement with, any other party, to sell
and assign the same;
-54-
<PAGE>
o that as of the date of initial issuance of the certificates, no
payment of principal of or interest on or in respect of any Loan
is more than 89 days past due from the due date of the Loan;
o that to the best of the Depositor's knowledge, as of the date of
the transfer of the Loans to the Trustee, there is no valid
offset, defense or counterclaim to any mortgage note or mortgage;
o that as of the date of the initial issuance of the certificates,
there is no proceeding pending, or to the best of the Depositor's
knowledge, threatened for the total or partial condemnation of
any of the mortgaged property and the mortgaged property is free
of material damage and in good repair and neither the mortgaged
property nor any improvement located on or being part of the
mortgaged property is in violation of any applicable zoning law
or regulation;
o that each Loan complies in all material respects with applicable
state or federal laws, regulations and other requirements,
pertaining to usury, equal credit opportunity and disclosure laws
and each Loan was not usurious at the time of origination;
o that to the best of the Depositor's knowledge, as of the date of
the initial issuance of the certificates, all insurance premiums
previously due and owing on the mortgaged property have been paid
and all taxes and government assessments previously due and
owing, and which may become a lien against the mortgaged property
have been paid;
o that each mortgage note and the related mortgage are genuine and
each is a legal, valid and binding obligation of the maker
thereof, enforceable in accordance with its terms except as
enforcement may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting the enforcement of
creditors' rights generally and by general equity principles
(regardless of whether enforcement is considered in a proceeding
in equity or at law); all parties to the mortgage note and the
mortgagor had legal capacity to execute the mortgage note and the
mortgage; and each mortgage note and mortgage have been duly and
properly executed by the mortgagor;
o that each mortgage is a valid and enforceable first lien on the
property securing the related mortgage note, and that each Loan
is covered by an ALTA mortgagee title insurance policy or other
form of policy or insurance generally acceptable to FNMA or
FHLMC, issued by, and is a valid and binding obligation of, a
title insurer acceptable to FNMA or FHLMC insuring the
originator, its successors and assigns, as to the lien of the
mortgage in the original principal amount of the Loan subject
only to:
o the lien of current real property taxes and assessments not
yet due and payable;
o covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date
of recording of the mortgage acceptable to mortgage lending
institutions in the area in which the mortgaged property is
located or specifically referred to in the appraisal
performed in connection with the origination of the related
Loan; and
o other matters to which like properties are commonly subject
which do not individually, or in the aggregate, materially
interfere with the benefits of the security intended to be
provided by the mortgage;
-55-
<PAGE>
o that as of the initial issuance of the certificates, neither the
Depositor nor any prior holder of any mortgage has, except as the
mortgage file may reflect, modified the mortgage in any material
respect; satisfied, canceled or subordinated the mortgage in
whole or in part; released the mortgaged property in whole or in
part from the lien of the mortgage; or executed any instrument of
release, cancellation, modification or satisfaction;
o that each mortgaged property consists of a fee simple estate, a
leasehold estate, or condominium form of ownership in real
property, or a share interest in a cooperative corporation in the
case of a Co-op Loan;
o the condominium projects that include the condominiums that are
the subject of any Co- op Loan are generally acceptable to FNMA
and FHLMC;
o no foreclosure action is threatened or has been commenced (except
for the filing of any notice of default) on any Loan; and except
for payment delinquencies not in excess of 91 days, to the best
of the Depositor's knowledge, there is no default, breach,
violation or event of acceleration existing under any mortgage or
the related mortgage note and no event which, with the passage of
time or with notice and the expiration of any grace or cure
period, would constitute a default, breach, violation or event of
acceleration; and the Depositor has not waived any default,
breach, violation or event of acceleration;
o that each Loan was originated on FNMA or FHLMC uniform
instruments for the state in which the mortgaged property is
located;
o that based upon a representation by each mortgagor at the time of
origination or assumption of the applicable Loan, the percentage
of the Loans measured by principal balance secured by
owner-occupied residences and by non-owner-occupied residences or
by primary residences and by second homes do not exceed specified
percentages;
o that an appraisal of each mortgaged property was conducted at the
time of origination of the related Loan;
o that no Loan had a loan-to-value ratio at origination in excess
of 100%;
o that the Loans were not selected in a manner to adversely affect
the interests of the certificateholders and the Depositor knows
of no conditions which reasonably would cause it to expect any
Loan to become delinquent or otherwise lose value;
o each Loan was either (1) originated directly by or closed in the
name of either: (a) a savings and loan association, savings bank,
commercial bank, credit union, insurance company, or similar
institution which is supervised and examined by a federal or
state authority or (b) a mortgagee approved by the Secretary of
Housing and Urban Development pursuant to Sections 203 and 211 of
the National Housing Act or (2) originated or underwritten by an
entity employing underwriting standards consistent with the
underwriting standards of an institution as described in
subclause (1)(a) or (1)(b) above;
o each Loan is a "qualified mortgage" within the meaning of Section
860G of the Code without regard to ss. 1.860G-2(f) of the REMIC
Provisions or any similar rule; and
o each Loan that has a Loan-to-Value Ratio in excess of 80% is
covered by a primary mortgage insurance policy.
-56-
<PAGE>
REPURCHASE OR SUBSTITUTION
Unless otherwise specified in the related prospectus statement, within 90
days of the discovery by the Depositor or the applicable mortgage asset seller
of a breach of any representation or warranty which materially and adversely
affects the interests of the certificateholders, or the Depositor's or the
mortgage asset seller's receipt of a notice from the Trustee or a Custodian, and
without regard to any limitation contained in the representation or warranty
concerning the knowledge of the Depositor as to facts stated in the
representation or warranty, the Depositor or the applicable mortgage asset
seller will cure the breach or either (1) repurchase the Loan at a price equal
to the principal balance of the Loan plus accrued interest on the principal
balance at the mortgage interest rate to the next scheduled Due Date of or (2)
within the three month period commencing on the closing date of the sale of the
related series of certificates (or within the two year period commencing on the
closing date if the related Loan is a "defective obligation" within the meaning
of the Code) unless otherwise provided in the related prospectus supplement,
substitute a different Loan upon satisfaction of the conditions described in the
Pooling and Servicing Agreement. Except as otherwise specified in the related
prospectus supplement, this repurchase and substitution obligation constitutes
the sole remedy available to the certificateholders or the Trustee for this type
of breach. The related prospectus supplement will specify any restrictions for
repurchases, substitution and any alternative arrangements.
FORWARD COMMITMENTS: PRE-FUNDING ACCOUNT
If specified in the prospectus supplement relating to any series, the
Trustee or the Master Servicer may, on behalf of the related Trust, enter into
an agreement (each, a "FORWARD PURCHASE AGREEMENT") with the Depositor whereby
the Depositor will agree to transfer additional Loans to the Trust following the
date on which the Trust is established and the related certificates are issued.
The Trust may enter into Forward Purchase Agreements to permit the acquisition
of additional Loans that could not be delivered by the Depositor or have not
formally completed the origination process, in each case prior to the date on
which the certificates are delivered to the certificateholders (the "CLOSING
DATE"). Any Forward Purchase Agreement will require that any Loans transferred
to a Trust conform to the requirements specified in the Forward Purchase
Agreement. If a Forward Purchase Agreement is to be utilized, and unless
otherwise specified in the related prospectus supplement, the Trustee will be
required to deposit in the Pre-Funding Account all or a portion of the proceeds
received by the Trustee in connection with the sale of one or more classes of
certificates of the related series.
The additional Loans will be transferred to the related Trust in exchange
for money released to the Depositor from the related Pre-Funding Account. Each
Forward Purchase Agreement will set a specified period during which any
transfers must occur. The Forward Purchase Agreement or the related Pooling and
Servicing Agreement will require that, if all moneys originally deposited to the
Pre-Funding Account are not used by the end of the specified period, then any
remaining moneys will be applied as a mandatory prepayment of the related class
or classes of certificates as specified in the related prospectus supplement.
The reinvestment risk associated with this type of prepayment will be borne by
the holders of the certificates issued by the applicable Trust.
-57-
<PAGE>
Unless otherwise specified in the related prospectus supplement, the
specified period for the acquisition by a Trust of additional Loans will not
exceed three months from the date the Trust is established. The amount that may
be initially deposited into a Pre-Funding Account may be up to 25% of the
principal amount of the certificates issued by the related Trust. The amounts on
deposit in any Pre-Funding Account may be invested only in investments deemed
acceptable by the rating agencies as consistent with the applicable ratings on
the certificates. The underwriting standards for additional Loans that will be
acquired with amounts from the Pre-Funding Account will be in accordance with
the standards set forth under "The Trusts--Loan Underwriting Policies."
In addition, following the transfer of additional Loans to the applicable
Trust, the characteristics of the entire pool of Loans included in the Trust may
vary significantly from those of the initial Loans transferred to the Trust.
Accordingly, it is possible that the credit quality of the pool, as a whole, may
differ due to the transfer of additional Loans to the Trust. In no event will
any Loans be transferred to the Trust if the transfer would cause a downgrade of
the ratings of the related certificates. The transfer of additional Loans to the
Trust may also result in an accelerated rate of payment to the applicable
certificateholders caused by an increased level of defaults on the Loans.
Certificateholders will bear all reinvestment risk associated with a higher than
expected rate of payment of the certificates. In addition, if the certificates
were purchased at a premium, a higher than expected rate of payment would result
in a reduction in the yield to maturity of any class of certificates to which
these payments are distributed.
ADJUSTMENT TO ADMINISTRATION FEES IN CONNECTION WITH PREPAYMENT INTEREST
SHORTFALL
Unless otherwise stated in the prospectus supplement, the Master Servicer
may forego all or a portion of its Administration Fee to minimize the adverse
effect of Prepayment Interest Shortfall to certificateholders. See "Prepayment,
Yield and Maturity Considerations--Yield--Effective Pass-Through Rate."
BOOK-ENTRY REGISTRATION
Certificate owners may hold their interests in the offered certificates
through DTC, in the United States, or Clearstream, Luxembourg (previously known
as Cedelbank) or the Euroclear System, in Europe, if they are participants in
those systems, or indirectly through organizations that are participants in
those systems. Cede & Co., as nominee for DTC, will hold the offered
certificates. Clearstream, Luxembourg and Euroclear will hold omnibus positions
on behalf of their respective participants, through customers' securities
accounts in Clearstream, Luxembourg's and Euroclear's names on the books of
their respective depositaries. The depositaries in turn will hold the positions
in customers' securities accounts in the depositaries' names on the books of
DTC.
DTC has advised us and the underwriters that it is:
o a limited-purpose trust company organized under the New York Banking
Law;
o a "banking organization" within the meaning of the New York Banking
Law;
o a member of the Federal Reserve System;
-58-
<PAGE>
o a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
o a "clearing agency" registered under the provisions of Section 17A of
the Securities Exchange Act of 1934.
DTC holds securities for its participants and facilitates the clearance and
settlement among its participants of securities transactions, including
transfers and pledges, in deposited securities through electronic book-entry
changes in its participants' accounts. This eliminates the need for physical
movement of securities certificates. DTC participants include securities brokers
and dealers, banks, trust companies, clearing corporations and other
organizations. Indirect access to the DTC system is also available to others
including securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a participant, either directly
or indirectly. The rules applicable to DTC and its participants are on file with
the SEC and are also available upon request to DTC.
Transfers between participants on the DTC system will occur under DTC
rules. Transfers between participants on the Clearstream, Luxembourg system and
participants on the Euroclear system will occur under their rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected by DTC under DTC rules on behalf of the relevant European international
clearing system by that system's depositary. However, these cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in that system under its rules
and procedures and within its established deadlines, European time. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment under normal procedures for same-day
funds settlement applicable to DTC. Clearstream, Luxembourg participants and
Euroclear participants may not deliver instructions directly to their system's
depositary.
Because of time-zone differences, credits of securities in Clearstream,
Luxembourg or Euroclear as a result of a transaction with a DTC participant will
be made during the subsequent securities settlement processing, dated the
business day following the DTC settlement date. The credits for any transactions
in these securities settled during this processing will be reported to the
relevant Clearstream, Luxembourg participant or Euroclear participant on that
business day. Cash received in Clearstream, Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream, Luxembourg participant or a
Euroclear participant to a DTC participant will be received and available on the
DTC settlement date. However, it will not be available in the relevant
Clearstream, Luxembourg or Euroclear cash account until the business day
following settlement in DTC.
-59-
<PAGE>
Purchases of offered certificates held through the DTC system must be made
by or through DTC participants, which will receive a credit for the offered
certificates on DTC's records. The ownership interest of each actual certificate
owner is in turn to be recorded on the DTC participants' and indirect
participants' records. Certificate owners will not receive written confirmation
from DTC of their purchase. However, certificate owners are expected to receive
written confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC participant or indirect participant
through which the certificate owner entered into the transaction. Transfers of
ownership interests in the offered certificates are to be accomplished by
entries made on the books of DTC participants acting on behalf of certificate
owners. Certificate owners will not receive certificates representing their
ownership interest in offered certificates unless use of the book-entry system
for the offered certificates is discontinued.
To facilitate subsequent transfers, all securities deposited by DTC
participants with DTC are registered in the name of DTC's nominee, Cede & Co.
The deposit of securities with DTC and their registration in the name of Cede &
Co. does not change beneficial ownership. DTC has no knowledge of the actual
certificate owners of the offered certificates. DTC's records reflect only the
identity of the DTC participants to whose accounts the offered certificates are
credited, which may or may not be the actual beneficial owners of the
certificates. The DTC participants will remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC participants,
by DTC participants to indirect participants, and by DTC participants and
indirect participants to certificate owners will be governed by arrangements
among them and by any statutory or regulatory requirements in effect from time
to time.
Neither DTC nor Cede & Co. will consent or vote on behalf of the offered
certificates. Under its usual procedures, DTC mails an omnibus proxy to the
issuer as soon as possible after the record date, which assigns Cede & Co.'s
consenting or voting rights to those DTC participants to whose accounts the
offered certificates are credited on the record date, identified in a listing
attached to the proxy.
Principal and interest payments on the offered certificates will be made to
DTC. DTC's practice is to credit its participants' accounts on the applicable
Distribution Date according to their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payment on that
Distribution Date. Payments by DTC participants to certificate owners will be
governed by standing instructions, customary practices, and any statutory or
regulatory requirements as may be in effect from time to time. These payments
will be the responsibility of the DTC participant and not of DTC, the Trustee or
the Depositor. Payment of principal and interest to DTC is the responsibility of
the Trustee. DTC is responsible for disbursing payments made to it to DTC
participants. Disbursement of these payments to certificate owners is the
responsibility of DTC participants and indirect participants.
DTC may discontinue providing its services as securities Depository for the
offered certificates at any time by giving reasonable notice to the Depositor or
the Trustee. Under these
-60-
<PAGE>
circumstances, if a successor securities Depository is not obtained, definitive
certificates are required to be printed and delivered.
According to DTC, the foregoing information about DTC has been provided to
us for informational purposes only and is not a representation, warranty, or
contract modification of any kind.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional Depository. Clearstream, Luxembourg holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg participants through
electronic book-entry changes in accounts of Clearstream, Luxembourg
participants, thereby eliminating the need for physical movement of
certificates. Transactions may be settled in Clearstream, Luxembourg in any of
32 currencies, including United States dollars.
Clearstream, Luxembourg participants are financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, and clearing corporations. Indirect access to Clearstream, Luxembourg
is also available to others, including banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Clearstream, Luxembourg participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for its
participants and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment. This
eliminates the need for physical movement of certificates. Transactions may be
settled in any of 32 currencies, including United States dollars.
The Euroclear System is operated by Euroclear Bank S.A./N.V., the Euroclear
operator, under contract with Euroclear Clearance System, Societe Cooperative, a
Belgium cooperative corporation, the Euroclear cooperative. All operations are
conducted by the Euroclear operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear operator,
not the Euroclear cooperative. The board of the Euroclear cooperative
establishes policy for the Euroclear System.
Euroclear participants include banks-- including central banks-- securities
brokers and dealers and other professional financial intermediaries. Indirect
access to the Euroclear System is also available to other firms that maintain a
custodial relationship with a Euroclear participant, either directly or
indirectly.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System. These terms and conditions
govern transfers of securities and cash within the Euroclear System, withdrawal
of securities and cash from the Euroclear System, and receipts of payments for
securities in the Euroclear System. All securities in the Euroclear System are
held on a fungible basis without attribution of specific certificates to
specific securities clearance accounts.
-61-
<PAGE>
The Euroclear operator acts under these terms and conditions only on behalf of
Euroclear participants and has no record of or relationship with persons holding
through Euroclear participants.
Distributions on the offered certificates held through Clearstream,
Luxembourg or Euroclear will be credited to the cash accounts of Clearstream,
Luxembourg participants or Euroclear participants according to the relevant
system's rules and procedures, to the extent received by its depositary. These
distributions must be reported for tax purposes under United States tax laws and
regulations. Clearstream, Luxembourg or the Euroclear operator, as the case may
be, will take any other action permitted to be taken by a certificateholder on
behalf of its participants only as permitted by its rules and procedures, and
only if its depositary is able to take these actions on its behalf through DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to these
procedures to facilitate transfers of offered certificates among participants of
DTC, Clearstream, Luxembourg and Euroclear, they are not obligated to perform
these procedures. Additionally, these procedures may be discontinued at any
time.
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
In most circumstances, the certificates offered by this prospectus will be
issued only as global certificates which are registered and held by a
depository. Certificate owners of the global certificates may hold their global
certificates through any of DTC, Clearstream, Luxembourg or Euroclear. The
global certificates will be tradeable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding global certificates
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way under their normal rules and operating procedures and under conventional
eurobond practice, which is seven calendar day settlement.
Secondary market trading between investors holding global certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or Euroclear
and DTC participants holding global certificates will be effected on a
delivery-against-payment basis through the respective depositaries of
Clearstream, Luxembourg and Euroclear and the DTC participants.
Non-U.S. holders of global certificates may have to pay U.S. withholding
taxes unless the holders meet the requirements for exemption from the tax and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
-62-
<PAGE>
INITIAL SETTLEMENT
All global certificates will be held in book-entry form by DTC in the name
of Cede & Co., as nominee of DTC. Certificate owners' interests in the global
certificates will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective depositaries, which in turn will hold their positions
in accounts as DTC participants.
Certificate owners electing to hold their global certificates through DTC
will follow the settlement practices applicable to U.S. corporate debt
obligations. Certificate owner securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Certificate owners electing to hold their global certificates through
Clearstream, Luxembourg or Euroclear accounts will follow the settlement
procedures applicable to conventional eurobonds, except that there will be no
temporary global security and no "lock-up" or restricted period. Global
certificates will be credited to the securities custody accounts on the
settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to U.S. corporate
debt obligations in same-day funds.
Trading between Clearstream, Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When global certificates are to be transferred from the account of a
DTC participant to the account of a Clearstream, Luxembourg participant or a
Euroclear participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg participant or
Euroclear participant at least one business day before settlement. Clearstream,
Luxembourg or Euroclear will instruct the respective Depositary, as the case may
be, to receive the global certificates against payment. Payment will include
interest accrued on the global certificates from and including the last coupon
payment date to and excluding the settlement date. Payment will then be made by
the respective Depositary to the DTC participant's account against delivery of
the global certificates. After settlement has been completed, the global
certificates will be credited to the respective clearing system and by the
clearing system, under its usual procedures, to the Clearstream, Luxembourg
-63-
<PAGE>
participant's or Euroclear participant's account. The global certificates credit
will appear the next day accounting to European time, and the cash debit will be
back-valued to, and interest on the global certificates will accrue from, the
value date. The value date would be the day before the day that settlement
occurred in New York. If the trade fails and settlement is not completed on the
intended value date, the Clearstream, Luxembourg or Euroclear cash debit will be
valued instead on the actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the global certificates are
credited to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Clearstream, Luxembourg participants or Euroclear
participants can elect not to pre-position funds and allow that credit line to
be drawn upon the finance settlement. Under this procedure, Clearstream,
Luxembourg participants or Euroclear participants purchasing global certificates
would incur overdraft charges for one day, assuming they cleared the overdraft
when the global certificates were credited to their accounts. However, interest
on the global certificates would accrue from the value date. Therefore, in many
cases the investment income on the global certificates earned during that
one-day period may substantially reduce or offset the amount of the overdraft
charges, although this result will depend on each Clearstream, Luxembourg
participant's or Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending global certificates
to the respective Depositary for the benefit of Clearstream, Luxembourg
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participant a
cross-market transaction will settle no differently than a trade between two DTC
participants.
Trading between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which global certificates are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
participant. The seller will send instructions to Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg participant or Euroclear participant
at least one business day before settlement. In these cases, Clearstream,
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the bonds to the DTC participant's account against payment. Payment
will include interest accrued on the global certificates from and including the
last coupon payment date to and excluding the settlement date. The payment will
then be reflected in the account of the Clearstream, Luxembourg participant or
Euroclear participant the following day, and receipt of the cash proceeds in the
Clearstream, Luxembourg participant's or Euroclear participant's account would
be back-valued to the value date. The value date would be the day before the day
that
-64-
<PAGE>
settlement occurred in New York. Should the Clearstream, Luxembourg participant
or Euroclear participant have a line of credit with its respective clearing
system and elect to be in debit in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft charges
incurred over that one-day period. If the trade fails and settlement is not
completed on the intended value date, receipt of the cash proceeds in the
Clearstream, Luxembourg participant's or Euroclear participant's account would
instead be valued on the actual settlement date. Finally, day traders that use
Clearstream, Luxembourg or Euroclear and that purchase global certificates from
DTC participants for delivery to Clearstream, Luxembourg participants or
Euroclear participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for one day,
until the purchase side of the day trade is reflected in their Clearstream,
Luxembourg or Euroclear accounts, under the clearing system's customary
procedures;
(b) borrowing the global certificates in the U.S. from a DTC participant no
later than one day prior to settlement, which would give the global certificates
sufficient time to be reflected in their Clearstream, Luxembourg or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC participant is at least one
day before the value date for the sale to the Clearstream, Luxembourg
participant or Euroclear participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global certificates holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be required to pay the 30% U.S. withholding tax
that generally applies to payments of interest (including original issue
discount) on registered debt issued by U.S. Persons, unless (i) each clearing
system, bank or other financial institution that holds customers' securities in
the ordinary course of its trade or business in the chain of intermediaries
between that beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) that beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons (Form W-8 or new Form W-8BEN). Beneficial
owners of global certificates that are non-U.S. Persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status) or new Form W-8BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding). If the information shown on Form W-8
changes (or new Form W-8BEN), a new Form W-8 (or new Form W-8BEN) must be filed
within 30 days of that change.
Exemption for non-U.S. Persons with effectively connected income (Form 4224
or new Form W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank
with a U.S. branch, for
-65-
<PAGE>
which the interest income is effectively connected with its conduct of a trade
or business in the United States, can obtain an exemption from the withholding
tax by filing Form 4224 (Exemption from Withholding of Tax on Income Effectively
Connected with the Conduct of a Trade or Business in the United States) or New
Form W-8ECI (Certificate of Foreign Persons Claim for Exemption from Withholding
on Income Effectively Connected with the Conduct or Trade or Business in the
United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001 or new Form W-8BEN). Non-U.S. Persons that are beneficial owners of
global certificates residing in a country that has a tax treaty with the United
States can obtain an exemption or reduced tax rate (depending on the treaty
terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate) or
new Form W-8BEN. If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8 or
new Form W-8BEN. Form 1001 may be filed by the certificate owner or his agent
whereas new Form W-8BEN must be filed by the beneficial owner.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Certificate or in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year, but Forms W-8, 1001 and
4224 will not be effective after December 31, 2000.
A new Form W-8BEN, if furnished with a taxpayer identification number,
("TIN"), will remain in effect until the status of the beneficial owner changes,
or a change in circumstances makes any information on the form incorrect. A new
Form W-8BEN, if furnished without a TIN, and a new Form W-8ECI will remain in
effect for a period starting on the date the form is signed and ending on the
last day of the third succeeding calendar year, unless a change in circumstances
makes any information on the form incorrect.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision of the United States, (iii) an
estate, the income of which is includible in gross income for United States tax
purposes, regardless of its source, or (iv) a trust if a U.S. court is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust. This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the global certificates.
Certificate owners are advised to consult their own tax advisers for specific
tax advice concerning their holding and disposing of the global certificates.
-66-
<PAGE>
In 1997, final Treasury regulations were issued that modify the filing
requirements with which non-U.S. persons must comply in order to be entitled to
an exemption from U.S. withholding tax or a reduction to the applicable U.S.
withholding tax rate. Those persons currently required to file Form W-8 or Form
1001 will be required to file new Form W-8BEN, while those persons currently
required to file Form 4224 will be required to file new Form W-8ECI. These new
withholding regulations generally are effective for payments of interest due
after December 31, 2000, but Forms W-8, 1001 and 4224 filed before that date
will continue to be effective until the earlier of December 31, 2000 or the
current expiration date of those forms. Prospective investors are urged to
consult their tax advisors about the effect of these new withholding
regulations.
DEFINITIVE CERTIFICATES
We refer to certificates issued in fully registered, certificated form as
"DEFINITIVE CERTIFICATES." The certificates for any series will be issued as
Definitive Certificates, rather than in book entry form to DTC or its nominees,
only under the circumstances described in the related prospectus supplement.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement will provide that a firm of independent
public accountants will furnish a statement to the Trustee on or before April 30
of each year, beginning with April 30 in the year which begins not less than six
months after the date of the initial issue of certificates. The statement will
state that the firm has examined specific documents and records relating to the
servicing of the Loans of each series and that, either:
o on the basis of its examination conducted substantially in compliance
with the audit program for mortgages serviced for FHLMC, the firm is
of the opinion that servicing has been conducted in compliance with
the manner of servicing described in the Pooling and Servicing
Agreement except for exceptions as the firm believes to be immaterial
and other exceptions as are described in the statement; or
o that their examination conducted substantially in compliance with the
uniform single audit program for mortgage bankers disclosed no
exceptions or errors in the records relating to Loans serviced for
others that in their opinion are material and that the program
requires them to report.
The Pooling and Servicing Agreement will also require each Master Servicer to
provide the Trustee with an annual statement signed by an officer to the effect
that the Master Servicer has fulfilled its obligations under the Pooling and
Servicing Agreement throughout the preceding calendar year.
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise specified in the related prospectus supplement, the Master
Servicer will cause the Trustee to forward with each distribution to each
certificateholder of record a statement setting forth the following information
as to each class of certificates to the extent applicable:
-67-
<PAGE>
1. the amount, if any, of the distribution allocable to principal on the
Loans and Mortgage Certificates, separately identifying the aggregate
amount of any Principal Prepayments included in the distribution;
2. the amount of the distribution allocable to interest on the Loans and
Mortgage Certificates;
3. the amount of Deferred Interest, if any, added to the aggregate
principal balance of the Loans and Mortgage Certificates during that
month;
4. the aggregate amount of any advances included in the amounts actually
distributed;
5. the aggregate principal balance of the Loans as of the close of
business on the last day of the Prepayment Period prior to the
immediately preceding Due Date, after giving effect to payments
allocated to principal reported under clause (1) above and to amounts
of Deferred Interest, if any, added to principal under clause (3)
above;
6. the related amount of Administration Fees, as adjusted, pursuant to
the Pooling and Servicing Agreement, retained or withdrawn from the
Certificate Account by the Master Servicer and the amount of
additional servicing compensation received by the Master Servicer
attributable to penalties, fees, Excess Liquidation Proceeds and other
items;
7. the number and aggregate principal balances of Loans delinquent for
(a) one monthly payment, and (b) two monthly payments or (c) three or
more monthly payments, as of the close of business on the day prior to
the immediately preceding Due Date;
8. the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure in respect of any Loan as of
the close of business on the day prior to the immediately preceding
Due Date;
9. the amount of any withdrawal from the Reserve Fund, if any, since the
prior Distribution Date; and
10. the amount remaining in the Reserve Fund, if any, on the Distribution
Date after any withdrawal reported under clause (9) above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer will cause the Trustee to furnish customary
information as the Master Servicer deems necessary or desirable for
certificateholders to prepare their tax returns. Information in the monthly and
annual reports provided to the certificateholders will not have been examined
and reported upon by an independent public accountant. However, the Master
Servicer will provide to the Trustee annually a report by independent public
accountants regarding the Master Servicer's servicing of the Loans. See
"--Evidence as to Compliance".
So long as the certificates remain outstanding in book-entry form issued to
DTC, the Trustee will provide to DTC, its nominee and its participants, periodic
and annual reports regarding any Trust. DTC, its nominee and its participants,
may provide these reports to the beneficial owners of the certificates. The
reports will be prepared in accordance with generally accepted accounting
principles, but will not be examined and reported on by an independent public
accountant.
-68-
<PAGE>
REPORTS TO THE TRUSTEE
No later than 25 days after each Distribution Date, the Master Servicer
will provide the Trustee with a report, certified by a officer of the Master
Servicer. The report will set forth the status of the Certificate Account as of
the close of business on that Distribution Date, and should state that all
distributions required to be made by the Master Servicer under the Pooling and
Servicing Agreement have been made. If any required distribution has not been
made, the Master Servicer will specify in the report the nature and status of
the distribution and showing, for the period covered by the statement, the
aggregate of deposits into and withdrawals from the Certificate Account for each
category of deposits and withdrawals specified in the Pooling and Servicing
Agreement. The report will include information as to the aggregate unpaid
principal balances of all the Loans and Mortgage Certificates as of the day
prior to the immediately preceding applicable Due Date. Copies of the reports
may be obtained by certificateholders upon request in writing from the Trustee
or from the Master Servicer that is identified in the related prospectus
supplement.
EVENTS OF DEFAULT
Events of default under the Pooling and Servicing Agreement will consist
of:
o any failure by the Master Servicer to distribute or cause to be
distributed to certificate- holders any required payment which
continues unremedied for five days after the giving of written notice
of the failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by certificateholders holding certificates
evidencing Fractional Undivided Interests aggregating not less than
25% of the Trust or 51% of the Percentage Interest of any class of
certificates;
o any failure by the Master Servicer 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 60 days
after the giving of written notice of the failure to the Master
Servicer by the Trustee, or to the Master Servicer and the Trustee by
certificateholders holding certificates evidencing Fractional
Undivided Interests aggregating not less than 25% of the Trust or 51%
of the Percentage Interest of any class of certificates; and
o decrees or orders in any insolvency, readjustment of debt, marshaling
of assets and liabilities or similar proceedings and actions by the
Master Servicer indicating its insolvency, reorganization or inability
to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an event of default under the Pooling and Servicing Agreement
remains unremedied, the Trustee or certificateholders holding certificates
evidencing Fractional Undivided Interests aggregating not less than 25% of the
Trust or 51% of the Percentage Interest of any class of certificates may
terminate all of the rights and obligations of the Master Servicer under the
Pooling and Servicing Agreement. In this case, the Trustee will succeed to all
of the Master Servicer's responsibilities, duties and liabilities under the
Pooling and Servicing Agreement and will
-69-
<PAGE>
be entitled to monthly servicing compensation not to exceed the Administration
Fees. If the Trustee is unwilling or unable to so act, it may select, pursuant
to the public bid or another procedure described in the 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 $15,000,000 to act as successor to the Master Servicer under
the Pooling and Servicing Agreement. If the public bid procedure is used, the
successor Master Servicer would be entitled to servicing compensation in
amounts, up to the servicing compensation provided in the Pooling and Servicing
Agreement, as may be agreed by the Trustee, and the Depositor, or if the Trust
elects REMIC status, the Residual certificateholder. The Trust would be entitled
to receive the net profits, if any, realized from the sale of the servicing
rights and obligations under the Pooling and Servicing Agreement.
During the continuance of any Event of Default, the Trustee 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. Certificateholders
holding certificates evidencing Fractional Undivided Interests, aggregating not
less than 25% of the Trust or 51% of the Percentage Interest of each class of
certificates, 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 remedy or to exercise any of the trusts or powers
unless the certificateholders have offered the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred by
the Trustee. Also, the Trustee may decline to follow any 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, solely by virtue of its status as a
certificateholder, will have any right under the Pooling and Servicing Agreement
to institute any proceeding related to the Pooling and Servicing Agreement,
unless the certificateholder previously has given to the Trustee written notice
of default and unless certificateholders holding certificates evidencing
Percentage Interests aggregating not less than 25% of each class of certificates
have made written request upon the Trustee to institute the proceeding in its
own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 60 days thereafter has neglected or refused to
institute any proceeding.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Depositor, the
Master Servicer and the Trustee, without the consent of any of the
certificateholders:
o to cure any ambiguity;
o to correct or supplement any provision in the Pooling and Servicing
Agreement which may be inconsistent with any other provision of the
agreement;
o to permit the Trust to be subject to the REMIC Provisions under the
Code; and
-70-
<PAGE>
o to conform the terms of the Pooling and Servicing Agreement to the
terms described in the prospectus and the related prospectus
supplement.
The Pooling and Servicing Agreement may also be amended by the Depositor, the
Master Servicer and the Trustee with the consent of certificateholders holding
certificates evidencing Percentage Interests aggregating not less than 66-2/3%
of each class of certificates affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Pooling and Servicing Agreement or of modifying in any manner the rights of
certificateholders; but no amendment may:
o reduce in any manner the amount of, or delay the timing of, payments
received on Loans which are required to be distributed on any
certificate without the consent of such Class of certificateholders;
or
o reduce the percentages of certificates the certificateholders of which
are required to consent to this amendment without the consent of all
the certificateholders of the class or classes affected then
outstanding.
For purposes of giving any consent, any certificates registered in the name
of the Master Servicer or any of its affiliates shall be deemed not to be
outstanding.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate upon the payment to certificateholders of all amounts held by the
Master Servicer and required to be paid to them pursuant to the Pooling and
Servicing Agreement after the earlier of:
1. the final payment or other liquidation (or any advance made with
respect thereto) of the last mortgage asset subject thereto and the
disposition of all property acquired upon foreclosure or deed in lieu
of foreclosure of any mortgage asset; or
2. any optional termination of a trust as described in "Description of
the Certificates--Optional Termination of a Trust or Underlying
Trust."
In no event, however, will the Trust created by the Pooling and Servicing
Agreement continue beyond the expiration of 60 years from the date of execution
and delivery of the Pooling and Servicing Agreement. The Master Servicer 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 non book-entry certificates at an office or agency
of the Master Servicer specified in the notice of termination.
GOVERNING LAW
The Pooling and Servicing Agreement provides that it shall be construed in
accordance with the laws of the State of New York, and the obligations, rights
and remedies of the parties to the Pooling and Servicing Agreement will be
determined in accordance with these laws.
-71-
<PAGE>
LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of some of the legal
aspects of Loans which are general in nature. Because the legal aspects are
governed primarily by applicable state law, which may differ substantially from
state to state, the summaries do not purport to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Loans.
GENERAL
The Loans and the Loans underlying the Mortgage Certificates (other
than Co-op Loans) will be secured by either deeds of trust or mortgages,
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. 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, for the deed of trust, the directions of the beneficiary. There are
two parties to a mortgage: the mortgagor, who is the borrower and homeowner; and
the mortgagee, who is the lender. In a mortgage state instrument, 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; the borrower-homeowner called the trustor (similar to a mortgagor), a
lender called the beneficiary (similar to a mortgagee), and a third-party
grantee called the trustee. The lien created by the mortgage or deed of trust is
not prior to the lien for real estate taxes and assessments and other charges
imposed under governmental police powers. Priority between mortgages or deeds of
trust depends on their terms or the terms of separate subordination or
inter-creditor agreements, the knowledge of the parties in some cases and
generally on the order of recordation of the mortgage in the appropriate
recording office.
FORECLOSURE
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 some states,
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.
-72-
<PAGE>
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. State laws control the amount of foreclosure expenses and costs,
including attorneys' fees, which may be recovered by a lender.
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 to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming. After the completion of a judicial foreclosure proceeding, the
court 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.
In case of foreclosure under either a deed of trust or a mortgage, 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
maintaining hazard insurance and making necessary repairs at its own expense 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. Courts have applied equitable principles to a lender's utilization of
the foreclosure process in order to avert a mortgagor's loss of his residence
for technical or trivial defaults. Some courts have been faced with the issue of
whether the particular foreclosure statutes in their states meet federal or
state constitutional requirements for fair and adequate notice. In most
instances, these courts have upheld these notice provisions as being reasonable
or as not involving sufficient state action to invoke constitutional provisions.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and some foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
other states, this right of redemption applies only to sale following judicial
foreclosure, and not to sale pursuant to a non-judicial power of sale. In most
-73-
<PAGE>
states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the underlying
security; however, in some of these states, the lender, following judgment on
the personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies for the security. Consequently, the practical effect of
the election requirement, when applicable, is that lenders will usually proceed
first against the security rather than bringing a personal action against the
borrower.
Other statutory provisions may limit any deficiency judgment against
the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
sale. The purpose of these statutes is 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 foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided
in specific instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 case under the federal Bankruptcy Code, if a court determines that the value
of a debtor's principal residence is less than the principal balance of the
loan, the court may, as part of the rehabilitation plan, unless the home is the
sole collateral for the mortgage loan, reduce the amount of the secured
indebtedness to the value of the home as it exists at the time of the case,
leaving the lender as a general unsecured
-74-
<PAGE>
creditor for the difference between the amount of outstanding indebtedness and
the adjusted value of the home. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under the mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. Regardless of whether a mortgage loan is
secured by the debtor's principal residence, the rehabilitation plan may provide
for the reinstatement of any payment defaults over a period of up to 5 years. In
addition, the federal Soldiers' and Sailors' Civil Relief Act of 1940 may reduce
the rate of interest payable on any mortgage loan as to which the mortgagor is a
military reservist called to active duty, and may interfere with the lender's
right to foreclose upon the related mortgage or deed of trust. In a Chapter 7,
Chapter 11 or Chapter 13 case under the federal Bankruptcy Code, the lender is
precluded from foreclosing without authorization from the bankruptcy court. If
the debtor's principal residence is not the only security for the mortgage loan,
the lender's lien may be transferred to other collateral and/or be limited in
amount to the value of the lender's interest in the collateral as of the date of
the bankruptcy. The loan term may be extended, the interest rate may be adjusted
to market rates in confirmed Chapter 11 and Chapter 13 plans and the priority of
the loan may be subordinated to bankruptcy court-approved financing. The
bankruptcy court can, in effect, invalidate due-on-sale clauses through
confirmed Chapter 11 and Chapter 13 plans of reorganization. The laws of some
states provide priority to some types of tax liens over the lien of the mortgage
or deed of trust.
Numerous federal and some state consumer protection laws and
environmental laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and the enforcement of Loans. The
consumer protection laws include the federal Truth in Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act, and related statutes and regulations. These
federal laws and state laws impose specified statutory liability upon lenders
who originate or service Loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the Loans.
JUNIOR LIENS; RIGHTS OF SENIOR LIENHOLDERS
The rights of the Trust (and therefore the certificateholders) as
beneficiary under a junior deed of trust or as mortgagee under a junior mortgage
are subordinate to those of the mortgagee or beneficiary under the senior
mortgage or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the junior mortgage loan to be sold upon default of the
mortgagor or trustor, thereby extinguishing the junior mortgagee's or junior
beneficiary's lien unless the lien holders assert their subordinate interest in
a property in foreclosure litigation or satisfy the defaulted senior loan. As
discussed more fully below, in many states a junior mortgagee or beneficiary may
satisfy a defaulted senior loan in full, or may cure the default and bring the
senior loan current, in either event adding the amounts expended to the balance
due on the junior loan.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to
-75-
<PAGE>
apply the proceeds and awards to any indebtedness secured by the mortgage or
deed of trust, in the order as the mortgagee or beneficiary may determine. Thus,
if improvements on the property are damaged or destroyed by fire or other
casualty, or if the property is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust will have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust.
Proceeds in excess of the amount of first mortgage indebtedness will, in most
cases, be applied to the indebtedness of a junior mortgage or trust deed.
The form of mortgage or deed of trust used by most institutional
lenders typically contains a "future advance" clause, which provides, in
essence, that additional amounts advanced to or on behalf of the mortgagor or
trustor by the mortgagee or beneficiary are to be secured by the mortgage or
deed of trust. While this type of clause is valid under the laws of most states,
the priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the mortgagee
or beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially made under the
mortgage or deed of trust, notwithstanding that there may be intervening junior
mortgages or deeds of trust and other liens between the date of recording of the
mortgage or deed of trust and the date of the future advance, and
notwithstanding that the mortgagee or beneficiary had actual knowledge of these
intervening junior mortgages or deeds of trust and other liens at the time of
the advance. Where the mortgagee or beneficiary is not obligated to advance the
additional amounts and has actual knowledge of the intervening junior mortgages
or deeds of trust and other liens, the advance will be subordinate to any
intervening junior mortgages or deeds of trust and other liens. Priority of
advances under the clause rests, in many other states, on state statutes giving
priority to all advances made under the loan agreement to a "credit limit"
amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed
of trust used by most institutional lenders obligates the mortgagor or trustor
to pay when due all taxes and assessments on the property and all encumbrances,
charges and liens on the property which appear prior to the mortgage or deed of
trust, to provide and maintain fire insurance on the property, to maintain and
repair the property and not to commit or permit any waste of the property, and
to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee or beneficiary under the mortgage or
deed of trust. Upon a failure of the mortgagor or trustor to perform any of
these obligations, the mortgagee or beneficiary is given the right under the
mortgage or deed of trust to perform the obligation itself, at its election,
with the mortgagor or trustor agreeing to reimburse the mortgagee or beneficiary
for any sums expended by the mortgagee or beneficiary on behalf of the trustor.
All sums so expended by the mortgagee or beneficiary become part of the
indebtedness secured by the mortgage or deed of trust.
"DUE-ON-SALE" CLAUSES
The Pooling and Servicing Agreement will provide that, when any
mortgaged property underlying a mortgage loan is about to be conveyed by the
mortgagor, the Master Servicer will, to the extent it has knowledge of a
prospective conveyance, exercise its rights to accelerate the maturity
-76-
<PAGE>
of the mortgage loan under the "due-on-sale" clause applicable thereto, if any,
unless it is not exercisable under applicable law or if its exercise would
result in loss of insurance coverage on the mortgage loan or would, in the
Master Servicer's judgment, be reasonably likely to result in litigation by the
mortgagor. In either case, the Master Servicer is authorized to take or enter
into an assumption and modification agreement from or with the person to whom
the mortgaged property has been or is about to be conveyed, pursuant to which
that 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 related primary mortgage
insurance policy and the mortgage interest rate and the payment terms shall
remain unchanged. The Master Servicer will also be authorized, with the prior
approval of any primary mortgage insurer (unless approval is precluded by the
terms of the mortgage loan) to enter into, on behalf of the Trustee, a
substitution of liability agreement with that person, pursuant to which the
original mortgagor is released from liability and that person is substituted as
mortgagor and becomes liable under the mortgage note.
By virtue of the Garn-St Germain Depository Institutions Act of 1982
(the "ACT"), a Servicer or the Master Servicer may generally be permitted to
accelerate any mortgage loan which contains a "due-on-sale" clause upon transfer
of an interest in the property subject to the deed of trust or mortgage. For any
mortgage loan secured by a residence occupied or to be occupied by the borrower,
this ability to accelerate will not apply to some types of transfers, including:
o the granting of a leasehold interest which has a term of three
years or less and which does not contain an option to purchase,
o a transfer to a relative resulting from the death of a borrower,
or a transfer where the spouse or child(ren) becomes an owner of
the property in each case where the transferee(s) will occupy the
property,
o 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,
o 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 the lien or
encumbrance is not created pursuant to a contract for deed),
o a transfer by devise, descent or operation of law on the death of
a joint tenant or tenant by the entirety, and
o other transfers as described in the Act and the regulations
thereunder.
As a result, a lesser number of Loans which contain "due-on-sale"
clauses may extend to full maturity than recent experience on single-family
loans would indicate. The extent of the effect of the Act on the average lives
and delinquency rates of the Loans, however, cannot be predicted. See
"Prepayment, Yield and Maturity Considerations--Prepayment Considerations."
-77-
<PAGE>
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA") and under state law in some states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale or operates a mortgaged property may become
liable in some circumstances for the cleanup costs of remedial action if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Cleanup costs may be substantial. For any particular series of
certificates, it is possible that cleanup costs could become a liability of the
related Trust and reduce the amounts otherwise distributable to the related
certificateholders if cleanup costs are incurred in connection with a mortgaged
property held by that Trust. Moreover, some states by statute impose a lien for
any cleanup costs incurred by the state on the property that is the subject of
cleanup costs (a "SUPERLIEN"). All subsequent liens on that property are
subordinated to the Superlien and, in some states, even prior recorded liens are
subordinated to Superliens. In the latter states, the security interest of the
Trustee in a property that is subject to this type of a Superlien could be
adversely affected.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present on any
mortgaged property prior to the origination of the mortgage loan or prior to
foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, unless
otherwise specified in the prospectus supplement, the qualified lenders will not
have made this type of evaluation prior to the origination of the Loans nor will
the mortgage asset seller or the Depositor have required that this type of
evaluation be made by the originators who have sold the Loans to them. Neither
the applicable Servicer nor the Master Servicer will be required to undertake
any evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure.
Neither the Depositor, the Trustee nor the Master Servicer makes any
representations or warranties or assumes any liability with respect to the
absence or effect of hazardous wastes or hazardous substances on any mortgaged
property or any casualty resulting from the presence or effect of hazardous
wastes or hazardous substances. See "Servicing of the Loans--Collection and
Other Servicing Procedures."
SUBORDINATE FINANCING
Some of the Loans may not restrict the ability of the borrower to use
the mortgaged property as security for one or more additional loans. Where a
borrower encumbers a mortgage property with one or more junior liens, the senior
lender is subjected to additional risk. First, the borrower may have difficulty
servicing and repaying multiple loans. Moreover, if the subordinate financing
permits recourse to the borrower (as is frequently the case) and the senior loan
does not, a borrower may have more incentive to repay sums due on the
subordinate loan. Second, acts of the senior lender that prejudice the junior
lender or impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate payable on
the senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the
-78-
<PAGE>
senior lender and can interfere with or delay the taking of action by the senior
lender. Moreover, the bankruptcy of a junior lender may stay foreclosure or
similar proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("TITLE V"), provides that state usury limitations shall not
apply to some types of residential first loans originated by specific lenders
after March 31, 1980. The Office of Thrift Supervision 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 other types of loan charges.
The Depositor will represent and warrant for the benefit of
certificateholders that the Loans were originated in full compliance with
applicable state laws, including usury laws.
ENFORCEABILITY OF SOME PROVISIONS
Standard forms of note, deed of trust and mortgage 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 some states, there are
or may be specific limitations upon late charges which a lender may collect from
a borrower for delinquent payments. Some 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 Master Servicer or
the Servicers) will be retained by the Master Servicer or the Servicers 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, like the
borrower failing to adequately maintain the property or the borrower executing a
second mortgage or deed of trust affecting the property. In other cases, some
courts have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under the deeds of trust receive notices in addition to the
statutorily-prescribed minimum requirements. For the most part, these cases have
upheld the notice provisions as being reasonable
-79-
<PAGE>
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.
LEGAL ASPECTS OF THE LOANS UNDER CALIFORNIA LAW
Mortgage loans in California are generally secured by deeds of trust.
Provided the deed of trust contains a private power of sale, a lender may
foreclose either non-judicially or judicially. Most lenders choose non-judicial
foreclosure because the process typically may be completed within a much shorter
time frame; however, a lender is barred from obtaining a deficiency judgment
after a non-judicial foreclosure. If the lender opts for judicial foreclosure,
an application for a deficiency judgment must be filed with the court within
three months of the foreclosure sale. A deficiency judgment may not exceed the
difference between the indebtedness and the fair value of the property, as
determined by the court. Unless the lender waives the right to a deficiency
judgment, the borrower has a right to redeem the property following a judicial
foreclosure sale for a period of three months from the date of sale if the
proceeds from the sale were sufficient to satisfy the debt, or for a period of
one year if the proceeds were insufficient to satisfy the debt. Junior
lienholders do not have a right to redeem the property following a judicial
foreclosure sale unless the junior lien was created before July 1, 1983.
California's form of the "one action rule" requires the lender to look first to
the property for satisfaction of the debt if the lender wants to pursue a
deficiency judgment. In general, a lender who takes any action to enforce the
debt other than judicial or non-judicial foreclosure violates the one-action
rule and may be deemed to have waived its security for the indebtedness and, in
some cases, may be prevented from collecting the indebtedness altogether. The
prospectus supplement for each series will specify the percentage of Loans by
initial principal balance that are secured by liens on mortgaged properties
located in California.
CO-OP LOANS
To the extent described in the prospectus supplement, some of the Loans
may have been made in connection with a purchase or refinance of cooperative
apartments. These Co-op Loans are not secured by liens on real estate. The
"owner" of a cooperative apartment does not own the real estate constituting the
apartment but owns shares of stock in a corporation which holds title to the
building in which the apartment is located, and by virtue of owning the stock is
entitled to a proprietary lease to occupy the specific apartment (the "LEASE").
Thus, a Co-op Loan is a personal loan secured by a lien on the shares and an
assignment of the Lease. If the borrower defaults on a Co-op Loan, the lender's
remedies are similar to the remedies which apply to a foreclosure of a mortgage
or deed of trust, in that the lender can foreclose the loan and assume
"ownership" of the apartment.
There are some risks which arise as a result of the cooperative form of
ownership which differentiate Co-op Loans from other types of Loans. For
example, the power of the board of directors of most cooperative corporations to
reject a proposed purchaser of a unit owner's shares (and prevent the sale of an
apartment) for any reason (other than reasons based upon unlawful
discrimination) or for no reason, significantly reduces the universe of
potential purchasers in the event of a foreclosure. Moreover, cooperative
apartment owners run a special risk in buildings where
-80-
<PAGE>
the "sponsor" (i.e., the owner of the unsold shares in the corporation) holds a
significant number of unsold apartments if the sponsor were to go into default
on a loan which is secured by a mortgage on the building. In this event the unit
owners would be forced by special assessment to make the payments on the
delinquent loan or risk losing their apartments in a foreclosure proceeding
brought by the holder of the mortgage on the building. Not only would the value
attributable to the right to occupy a particular apartment be adversely affected
by the special assessment, but the foreclosure of a mortgage on the building in
which the apartment is located could result in a total loss of the shareholder's
equity in the building (and a corresponding loss of the lender's security for
its Co-op Loan).
LEGAL INVESTMENT MATTERS
Unless otherwise specified in the prospectus supplement for a series,
the certificates rated in one of the two highest rating categories by one or
more rating agencies will constitute "mortgage- related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). As a result,
they will be legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including Depository
institutions, life insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation to the same extent as, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
other state entities. Under SMMEA, if a state enacted legislation prior to
October 4, 1991 specifically limiting the legal investment authority of any of
these types of entities to invest in "mortgage-related securities" the
certificates will constitute legal investments for entities subject to the
legislation only to the extent provided therein. SMMEA provides, however, that
in no event will the enactment of this type of legislation affect the validity
of any contractual commitment to purchase, hold or invest in certificates, or
require the sale or other disposition of certificates, so long as the
contractual commitment was made or the certificates were acquired prior to the
enactment of the legislation. Pursuant to SMMEA, a number of states enacted
legislation, on or before the October 3, 1991 cut-off for the enactments,
limiting to varying extents the ability of some entities to invest in "mortgage-
related securities," in most cases by requiring the affected investors to rely
solely upon existing state law, and not SMMEA. Accordingly, the investors
affected by this legislation will be authorized to invest in the Securities only
to the extent provided in this legislation.
SMMEA also amended the legal investment authority of
federally-chartered Depository institutions as follows:
o federal savings and loan associations and federal savings banks
may invest in, sell or otherwise deal in certificates without
limitation as to the percentage of their assets represented
thereby;
o federal credit unions may invest in the certificates; and
o national banks may purchase certificates for their own account
without regard to the limitations generally applicable to
investment securities described in 12 U.S.C. ss. 24
-81-
<PAGE>
(Seventh), subject in each case to those regulations as the
applicable federal authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination
Counsel issued a revised supervisory policy statement (the "1998 POLICY
STATEMENT") applicable to all Depository institutions, setting forth guidelines
for investments in "high-risk mortgage securities." The 1998 Policy Statement
has been adopted by the Federal Reserve Board, the Office of the Comptroller of
the Currency, the FDIC, the National Credit Union Administration (the "NCUA")
and the Office of Thrift Supervision (the "OTS") with an effective date of May
26, 1998. The 1998 Policy Statement rescinds a 1992 policy statement that had
required, prior to purchase, a Depository institution to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and,
if so, that the proposed acquisition would reduce the institution's overall
interest rate risk. The 1998 Policy Statement eliminates former constraints on
investing in some types of "high-risk" mortgage derivative products and
substitutes broader guidelines for evaluating and monitoring investment risk.
The Office of Thrift Supervision (the "OTS") has issued Thrift
Bulletins 73a, entitled "Investing in Complex Securities" ("TB 73a"), which
became effective as of December 18, 2001 and applies to savings associations
regulated by the OTS, and 13a, entitled "Management of Interest Rate Risk,
Investment Securities, and Derivatives Activities" ("TB 13a"), which became
effective as of December 1, 1998, and applies to thrift institutions regulated
by the OTS.
One of the primary purposes of TB 73a is to require savings
associations, prior to taking any investment position, to determine that the
investment position meets applicable regulatory and policy requirements
(including those set forth TB 13a (see below)) and internal guidelines, is
suitable for the institution, and is safe and sound. OTS recommends, with
respect to purchases of specific securities, additional analysis, including,
among others, analysis of repayment terms, legal structure, expected performance
of the issuer and any underlying assets as well as analysis of the effects of
payment priority, with respect to a security which is divided into separate
tranches with unequal payments, and collateral investment parameters, with
respect to a security that is prefunded or involves a revolving period. TB 73a
reiterates OTS's due diligence requirements for investing in all securities and
warns that if a savings association makes an investment that does not meet the
applicable regulatory requirements, the savings association's investment
practices will be subject to criticism, and OTS may require divestiture of such
securities. OTS also recommends, with respect to an investment in any "complex
securities," that savings associations should take into account quality and
suitability, interest rate risk, and classification factors. For the purposes of
each of TB 73a and TB 13a, "complex security" includes among other things any
collateralized mortgage obligation or real estate mortgage investment conduit
security, other than any "plain vanilla" mortgage pass-through security (that
is, securities that are part of a single class of securities in the related pool
that are non-callable and do not have any special features). Accordingly, all
classes of offered certificates would likely be viewed as "complex securities."
With respect to quality and suitability factors, TB 73a warns (i) that a savings
association's sole reliance on outside ratings for material purchases of complex
securities is an unsafe and unsound practice, (ii) that a savings association
should only use ratings and analyses from nationally recognized rating agencies
in conjunction with, and in validation of, its own underwriting processes, and
(iii) that it should not use
-82-
<PAGE>
ratings as a substitute for its own thorough underwriting analyses. With respect
the interest rate risk factor, TB 73a recommends that savings associations
should follow the guidance set forth in TB 13a.
One of the primary purposes of TB 13a is to require thrift
institutions, prior to taking any investment position, to (i) conduct a
pre-purchase portfolio sensitivity analysis for any "significant transaction"
involving securities or financial derivatives, and (ii) conduct a pre-purchase
price sensitivity analysis of any "complex security" or financial derivative.
The OTS recommends that while a thrift institution should conduct its own
in-house pre-acquisition analysis, it may rely on an analysis conducted by an
independent third-party as long as management understands the analysis and its
key assumptions. Further, TB 13a recommends that the use of "complex securities
with high price sensitivity" be limited to transactions and strategies that
lower a thrift institution's portfolio interest rate risk. TB 13a warns that
investment in complex securities by thrift institutions that do not have
adequate risk measurement, monitoring and control systems may be viewed by OTS
examiners as an unsafe and unsound practice.
In addition, the NCUA has issued regulations governing federal credit
union investments which prohibit investment in specified types of securities,
which may include some classes of certificates.
In addition, several states have adopted or are considering regulations
that would prohibit regulated institutions subject to their jurisdiction from
holding mortgage-backed securities like the offered certificates, including
securities previously purchased. You should consult your own legal advisors in
determining whether and to what extent the offered certificates constitute legal
investments for you.
There may be other restrictions on the ability of some investors,
including Depository institutions, either to purchase certificates or to
purchase certificates representing more than a specified percentage of the
investor's assets. Investors should review any applicable or proposed rules,
regulations and guidelines and consult their own legal advisors in determining
whether and to what extent the certificates constitute legal investments for
these investors.
Securities that do not constitute "mortgage-related securities" under
SMMEA will require registration, qualification or an exemption under applicable
state securities laws to meet requirements for legal investments.
You should consult your own legal advisors in determining whether and
to what extent the certificates constitute legal investments for you.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and Section 4975 of the Code impose requirements on employee benefit
plans (and on some other retirement
-83-
<PAGE>
plans and arrangements, including individual retirement accounts and annuities,
Keogh plans and collective investment funds and separate accounts in which
plans, accounts or arrangements are invested) (collectively "PLANS") subject to
ERISA and the Code and on persons who are fiduciaries for these Plans. Among
other things, ERISA requires that the assets of Plans be held in trust and that
the trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of these Plans.
ERISA also imposes specific duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control respecting
the management or disposition of the assets of a Plan is considered to be a
fiduciary of the Plan (subject to specific exceptions not relevant here). Some
employee benefit plans, like governmental plans (as defined in ERISA Section
3(32)) and, if no election has been made under Section 410(d) of the Code,
church plans (as defined in ERISA Section 3(33)), are not subject to ERISA
requirements. Accordingly, assets of these plans may be invested in certificates
without regard to the ERISA considerations described in this prospectus,
however, governmental plans may be subject to the provisions of applicable state
law. Any Plan which is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction rules
contained in Code Section 503.
PUBLICLY-OFFERED SECURITIES
On November 13, 1986, the United States Department of Labor (the "DOL")
issued a final regulation concerning the definition of what constitutes the
assets of a Plan. (29 C.F.R. ss. 2510.3-101.) Under this regulation, the
underlying assets and properties of corporations, partnerships and other
entities in which a Plan acquires an "equity" interest could be deemed for
purposes of ERISA to be assets of the investing Plan in some circumstances. An
equity interest is defined under the regulation as an interest other than an
instrument that is treated as indebtedness under applicable local law that has
no substantial equity features.
However, the regulation provides that, generally, the assets of an
entity in which a Plan invests will not be deemed for purposes of ERISA to be
assets of the Plan if the equity interest acquired by the investing Plan is a
publicly-offered security. A publicly-offered security, as defined in the
regulation, is a security that is widely held (owned by 100 or more investors
independent of the trust and of one another at the initial offering), freely
transferable and registered under the Securities Exchange Act of 1934. No
certificate will be sold to a Plan unless the certificate will be expected to
constitute a "publicly offered security." The related prospectus supplement will
indicate whether the certificates will be expected to constitute
publicly-offered securities for the purpose of this exception.
PROHIBITED TRANSACTION EXEMPTION 83-1
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("PARTIES IN INTEREST" under
ERISA and "DISQUALIFIED PERSONS" under the Code) having specified relationships
to a Plan and imposes additional prohibitions where Parties in Interest are
fiduciaries
-84-
<PAGE>
of the Plan. For example, an investment in the certificates by a Plan to which
the Depositor, the Master Servicer or Trustee is a Party in Interest would
constitute a prohibited transaction unless an exemption is available. In
addition, because the Loans may be deemed Plan assets of each Plan that
purchases certificates, an investment in the certificates by a Plan might be a
prohibited transaction if any of the mortgagors is a Party in Interest to the
Plan unless an exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules specific transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" (as defined below) in the initial issuance of
these certificates. PTE 83-1 permits, subject to specific conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest under those Plans related to the origination, maintenance and
termination of mortgage pools consisting of loans secured by first or second
mortgages or deeds of trust on "single-family residential property" (as defined
below), and the acquisition and holding of mortgage pool pass-through
certificates representing an interest in mortgage pools by Plans.
If the general conditions (discussed below) of PTE 83-1 are satisfied,
investments by a Plan in certificates will be exempt from the prohibitions of
ERISA Sections 406(a) and 407 (relating generally to transactions with Parties
in Interest who are not fiduciaries) if the Plan purchases the certificates at
no more than fair market value, and will be exempt from the prohibitions of
ERISA Sections 406(b)(1) and (2) (relating generally to transactions with
fiduciaries) if, in addition, the purchase is approved by an independent
fiduciary, no sales commission is paid to the pool sponsor, the Plan does not
purchase more than 25% of all certificates, and at least 50% of the certificates
are purchased by persons independent of the pool sponsor or pool trustee.
A "mortgage pool pass-through certificate" for the purpose of PTE 83-1
is defined as a certificate representing a beneficial undivided fractional
interest in a mortgage pool and entitling the holder of the certificate to
pass-through payments of principal and interest from the pooled loans, less any
fees retained by the pool sponsor. Some classes of certificates may, if
specified in the related prospectus supplement, not qualify as mortgage pool
pass-through certificates as so defined, and therefore PTE 83-1 may not be
applicable to these classes of certificates, including:
o classes of certificates entitled to receive payments of interest
and principal on the loans only after payments to other classes
or after the occurrence of specified events;
o classes of certificates that evidence the beneficial ownership in
a Trust divided into mortgage loan groups;
o classes of certificates that evidence beneficial ownership of a
specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or
interest payments; and
o classes of certificates that evidence an interest in a pool
organized as a REMIC.
In addition, PTE 83-1 applies only where the mortgage pool is limited to
single-family residential property. PTE 83-1 defines "single-family residential
property" as non-farm property comprising
-85-
<PAGE>
one to four dwelling units, and condominiums. Therefore, PTE 83-1 may not be
available for classes of certificates representing a beneficial interest in a
mortgage pool which includes: (1) multifamily loans; or (2) loans secured by
shares issued by a cooperative housing association.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (1) the maintenance of a
system of insurance or other protection for the pooled loans and property
securing the loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled loans or the principal balance of the largest
covered pooled mortgage loan; (2) the existence of a pool trustee who is not an
affiliate of the pool sponsor; and (3) a limitation on the amount of the payment
retained by the pool sponsor, together with other funds inuring to its benefit,
to not more than adequate consideration for selling the loans plus reasonable
compensation for services provided by the pool sponsor to the pool.
Some series or classes of certificates may be protected though a
subordination of other classes of certificates, a subordination by shifting of
interests, a Reserve Fund or other form of credit enhancement described in the
related prospectus supplement. In the absence of a ruling that the system of
insurance or other protection for a series or class of certificates satisfies
the first general condition referred to above, there can be no assurance that
these features will be so viewed by the DOL. In addition, subordination or
another form of credit enhancement maintained for a series or class of
certificates will not satisfy the first general condition referred to above
unless it is maintained in an amount not less than the greater of one percent of
the aggregate principal balance of the Loans or the principal balance of the
largest mortgage loan. For the second general condition referred to above, the
Trustee will not be affiliated with the Depositor. There can be no assurance
that the third general condition will be satisfied for the certificates.
One or more exemptions may be available, however, for transactions to
which PTE 83-1 is not applicable, depending in part upon the type of Plan
fiduciary making the decision to acquire a certificate and the circumstances
under which the decision is made, including but not limited to:
o Prohibited Transaction Class Exemption ("PTCE") 96-23, regarding
transactions effected by "in-house asset managers";
o PTCE 95-60, regarding investments by insurance company general
accounts;
o PTCE 91-38, regarding investments by bank collective investment
funds;
o PTCE 90-1, regarding investments by insurance company pooled
separate accounts; and
o PTCE 84-14, regarding transactions effected by "qualified
professional asset managers."
However, even if the conditions specified in one or more of these exemptions are
met, the scope of the relief provided by these exemptions might not cover all of
the transactions involved.
-86-
<PAGE>
UNDERWRITER EXEMPTION
The certificates may be eligible for relief from specified prohibited
transaction and conflict of interest rules of ERISA in reliance on
administrative exemptions granted by the Department of Labor to specified
underwriters (collectively referred to as the "UNDERWRITER EXEMPTION"). The
Underwriter Exemption provides relief which is generally similar to that
provided by PTE 83-1, but is broader in several respects. The related prospectus
supplement will indicate whether the particular underwriter has been granted an
Underwriter Exemption. The Underwriter Exemption provides relief from specified
prohibited transaction and conflict-of-interest rules of ERISA with respect to
the initial purchase, holding and subsequent resale by Plans of pass-through
securities that represent interests in an investment pool for which the
underwriter is the sole underwriter or the co-manager of an underwriting
syndicate and that consist of specified secured receivables, loans and other
obligations that meet the conditions and requirements of the Underwriter
Exemption
The Underwriter Exemption will apply only if specified conditions are
met. Among the conditions that must be satisfied for the Underwriter Exemption
to apply to the acquisition of the certificates by a Plan are the following:
o the acquisition of the certificates by a Plan is on terms,
including the price, that are at least as favorable to the Plan
as they would be in an arm's-length transaction with an unrelated
party;
o the certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the four highest
generic rating categories from Standard & Poor's, a division of
the McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.
or Fitch, Inc.;
o the sum of all payments made to the underwriter in connection
with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates;
the sum of all payments made to and retained by the depositor
pursuant to the sale of the receivables to the trust represents
not more than the fair market value of the receivables; and the
sum of all payments made to and retained by the Master Servicer
or the servicer represents not more than reasonable compensation
for the Master Servicer's or the servicer's services as servicer
under the related agreements and reimbursement of the Master
Servicer's or the servicer's reasonable expenses in connection
with these services;
o the Trustee is a substantial financial institution and is not an
"affiliate," as defined in the Underwriter Exemption, of any
other member of a "restricted group," which consists of the
underwriter, the Trustee, the seller, the Depositor, the Master
Servicer or the servicer, any subservicer, the insurer, any
obligor with respect to loans constituting more than 5% of the
aggregate unamortized principal balance of the assets of the
trust as of the date of initial issuance of the certificates and
any affiliate of these parties;
o the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act;
o the trust satisfies the following requirements:
-87-
<PAGE>
o the corpus of the trust consists solely of assets of the
type which have been included in other investment pools;
o securities in these other investment pools have been rated
in one of the four highest generic rating categories of one
of the rating agencies specified above for at least one year
prior to the Plan's acquisition of the certificates; and
o securities evidencing interests in these other investment
pools have been purchased by investors other than Plans for
at least one year prior to any Plan's acquisition of the
certificates; and
o the pooling and servicing agreement contains restrictions
necessary to ensure that the assets of the trust may not be
reached by creditors of the Depositor in the event of its
bankruptcy or insolvency, the pooling and servicing agreement
prohibits all parties from filing an involuntary bankruptcy or
insolvency petition against the trust and a true sale opinion is
issued in connection with the transfer of the assets to the
trust.
Some transactions are not covered by the Underwriter Exemption or any
other exemption. The Underwriter Exemption does not exempt the acquisition and
holding of securities by Plans sponsored by the Depositor, the seller, the
underwriters, the Trustee, the Master Servicer or the servicer or any "obligor"
(as defined in the exemption) with respect to receivables included in the trust
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the restricted group. Moreover, the exemptive relief from the
self-dealing/conflict-of-interest prohibited transaction rules of ERISA is
available for other Plans only if, among other requirements:
o a Plan's investment in the certificates does not exceed 25% of
all of the certificates outstanding at the time of the
acquisition;
o immediately after the acquisition, no more than 25% of the assets
of a Plan with respect to which the person who has discretionary
authority to render investment advice are invested in securities
representing an interest in a trust containing assets sold or
serviced by the same entity; and
o in the case of the acquisition of certificates in connection with
their initial issuance, at least 50% of such securities are
acquired by persons independent of the restricted group and at
least 50% of the aggregate interest in the related trust is
acquired by persons independent from the restricted group.
The Underwriter Exemption will also apply to transactions in connection
with the servicing, management and operation of the trust, provided that, in
addition to the general requirements described above, (a) these transactions are
carried out in accordance with the terms of a binding pooling and servicing
agreement and (b) the pooling and servicing agreement is provided to, or
described in all material respects int eh prospectus provided to, investing
Plans before the Plans purchase the certificates issued by the trust. All
transactions relating to the servicing, management and operations of the trust
will be carried out in accordance with the pooling and servicing agreement,
which will be described in all material respects in this prospectus and the
prospectus supplement.
-88-
<PAGE>
Each purchaser that is a Plan or that is investing on behalf of or with
plan assets of a Plan in reliance on the Underwriter Exemption will be deemed to
represent that it qualifies as an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Securities Act. In addition, each prospective
purchaser of certificates in reliance on the Underwriter Exemption should
consider the possibility that the rating of a certificate may change during the
period that the certificates are held. If the rating were to decline below BBB-,
the certificate could no longer be transferred to a plan in reliance on the
exemption. If the ratings were to decline below one of the four highest generic
rating categories from Standard & Poor's, a division of the McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc. or Fitch, Inc., each transferee
will be deemed to represent that either (a) it is not purchasing the
certificates with plan assets of a Plan, or (b) the Plan is an insurance company
general account (within the meaning of PTCE 95-60) that meets the conditions set
forth in Sections I and III of PTCE 95-60.
Any Plan proposing to invest in certificates should consult with its
counsel to confirm that the investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Federal income tax consequences of an investment in a certificate
of a series or a class of a series will vary depending on the characteristics of
the certificate. The following is a general discussion of the anticipated
material Federal income tax consequences of the purchase, ownership and
disposition of the certificates offered under this prospectus. The discussion is
based upon the Code, its legislative history, existing and proposed regulations
thereunder, including regulations promulgated under the real estate mortgage
investment conduit ("REMIC") and original issue discount, called "OID"
provisions of the Code, called the "REMIC REGULATIONS" and the "OID
REGULATIONS," published rulings and court decisions, all as in effect and
existing on the date of this prospectus and all of which are subject to change
at any time, possibly on a retroactive basis, and to differing interpretations.
The OID Regulations do not provide guidance on the computation of the accrual of
OID under section 1272(a)(6) of the Code for regular interests in a REMIC.
The following discussion applies only to those persons who are the
original holders of the certificates and who hold certificates as capital
assets, and does not address the tax consequences to taxpayers who are subject
to special rules or aspects of Federal income taxation that may be relevant to a
prospective investor based upon the investor's particular tax situation. For
example, the discussion would not apply to:
o banks,
o insurance companies,
o tax-exempt organizations,
o electing large partnerships,
o dealers in securities or currencies
-89-
<PAGE>
o mutual funds,
o REITs,
o RICs,
o S corporations,
o estates and trusts,
o investors that hold the certificates as part of a hedge, straddle,
integrated or conversion transaction, or
o holders whose "functional currency" is not the United States dollar.
This discussion generally does not address the state, local or foreign tax
consequences of the purchase, ownership and disposition of the certificates.
Investors should consult their tax advisors in determining the Federal, state,
local, foreign or other tax consequences to them of the purchase, ownership and
disposition of the certificates offered hereunder. The following discussion
addresses securities of two general types: (1) certificates representing
interests in a trust, or a portion of a trust, which the Master Servicer will
covenant to elect to have treated as a REMIC under Code Sections 860A through
860G and (2) certificates representing interests in a trust for which an
election to be treated as a REMIC will not be made. The prospectus supplement
for each series of certificates will indicate whether a REMIC election will be
made for the related trust and, if the election is made for the trust, will
designate the related series of certificates as either "regular interests" or
"residual interests" in the REMIC. For purposes of this tax discussion,
references to a "certificateholder" are references to the beneficial owner of a
certificate.
REMIC
CLASSIFICATION OF REMICS
An election to be treated as a REMIC for federal income tax purposes may be
made for a Trust relating to a series of certificates. An election will
generally be made if the related Trust would not qualify as a grantor Trust
under subpart E, Part I of Subchapter J of the Code. Upon issuance of each
series of certificates for which an election to be treated as a REMIC is made,
Mayer, Brown, Rowe & Maw or Thacher Proffitt & Wood, each as counsel to the
Depositor, is of the opinion that, assuming (1) ongoing compliance with all
provisions of the Pooling and Servicing Agreement which include requirements,
among other things, that a REMIC election be made timely in the required form,
the representations described in the Pooling and Servicing Agreement be true,
and there be continued compliance with the applicable provisions of the Code, as
it may be amended from time to time, and the applicable Treasury Regulations
issued under the Code, and (2) the accuracy of information contained in other
related documents, the Trust issuing a series of certificates, under current
Federal income tax law, will qualify as a REMIC (and will not be treated as an
association or publicly traded partnership taxable as a corporation) for Federal
income tax purposes, and the certificates offered thereby will be considered to
be "regular interests" ("REGULAR CERTIFICATES") or "residual interests"
("RESIDUAL CERTIFICATES") in a REMIC. This opinion will be filed prior to
issuance of a series of certificates as an exhibit to a post-effective amendment
or in a Current Report on Form 8-K.
-90-
<PAGE>
QUALIFICATION AS A REMIC
In order for the Trust to qualify as a REMIC, there must be ongoing
compliance on the part of the Trust with requirements contained in the Code.
First, the Trust must fulfill an asset test, which requires that no more than a
de minimis amount of the assets of the Trust, as of the close of the third
calendar month beginning after the date of issuance of the certificates, called
the "STARTUP DAY," 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 is met at any time
when the aggregate adjusted basis of the nonqualified assets is less than 1% of
the aggregate adjusted basis of all the Trust'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 qualified mortgage is any obligation, including any participation or
certificate of beneficial ownership in a qualified mortgage, that is principally
secured by an interest in real property and, generally, that is (1) transferred
to the Trust on the Startup Day, (2) purchased by the Trust within a three-month
period thereafter pursuant to a fixed price contract in effect on the Startup
Day or (3) received by the REMIC within the three-month period in replacement of
an obligation transferred to the REMIC on the Startup Day. Qualified mortgages
also include a regular interest in another REMIC if the interest is transferred
to the Trust on the start-up day in exchange for regular or residual interests
in the Trust. An obligation is "principally secured by an interest in real
property" if (1) the fair market value of the real property security is at least
80% of the principal amount of the related Loan either at origination or as of
the Startup Day (an original loan-to-value ratio of not more than 125% of the
real property security) or (2) substantially all the proceeds of the Loan were
used to acquire, improve or protect an interest in real property that, at the
origination date, was the only security for the Loan. In rendering its opinion
on the classification of the Trust as a REMIC, Mayer, Brown, Rowe & Maw or
Thacher Proffitt & Wood, as applicable, will rely on the representations in the
Pooling and Servicing Agreement and other documents regarding qualification of
the Loans as "qualified mortgages."
Permitted investments include cash flow investments, qualified reserve
assets and foreclosure property. A cash flow investment is generally an
investment of amounts received on qualified mortgages for a temporary period,
not exceeding thirteen months, which investment must earn a return in the nature
of interest. A qualified reserve asset is any intangible property held for
investment that is part of any reserve reasonably required to be maintained to
provide for payments of expenses or to provide security for payments due on
regular or residual interests that otherwise may be delayed or defaulted upon
because of default (including delinquencies) on the qualified mortgages or lower
than expected reinvestment returns. Foreclosure property is real property
acquired in connection with the default or imminent default of a qualified
mortgage and generally held for not more than two years, plus extensions
permitted by the Code.
In addition to the requirements discussed above, the various interests in
the Trust also must meet other requirements. A REMIC meets the interests test if
all of the interests in the REMIC are either regular interests or residual
interests, and there is one, and only one, class of residual interests,
-91-
<PAGE>
and all distributions on the residual interests are made pro rata. A regular
interest is an interest in a REMIC that is issued on the Startup Day with fixed
terms, is designated as a regular interest, 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. The REMIC Regulations provide that an interest in a REMIC may be
treated as a regular interest even if payments on the interest are subordinated
to payments on other interests in the REMIC, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments, lower
than reasonably expected returns on permitted investments, or expenses incurred
by the REMIC. A residual interest is an interest in a REMIC other than a regular
interest that is issued on the Startup Day and that is designated as a residual
interest. The Trust must also adopt reasonable arrangements designed to ensure
that "disqualified organizations" do not hold residual interests and that tax
information is furnished if this restriction is violated.
The following discussion assumes that all requirements for REMIC
qualification will be satisfied by the Trust while there are any Regular
Certificates outstanding. If a Trust for which a REMIC election is made fails to
comply with one or more of the ongoing requirements of the Code for REMIC status
during any taxable year, the Code provides that the Trust will not be treated as
a REMIC for that year and thereafter. In that event, the Trust may be taxable as
a separate corporation, and the related certificates would not be accorded the
status or given the tax treatment described below. The Code provides that if (1)
an entity ceases to be a REMIC, (2) the Secretary of the Treasury determines
that the cessation was inadvertent, (3) no later than a reasonable time after
the discovery of the event resulting in the cessation, steps are taken so that
the entity is once more a REMIC, and (4) the entity, and each person holding an
interest in the entity at any time during a period specified, agrees to make
those adjustments as may be required by the Secretary of the Treasury for that
period, then, notwithstanding a terminating event, the entity will be treated as
continuing to be a REMIC or the cessation will be disregarded, whichever the
Secretary of the Treasury determines to be appropriate. While the Code
authorizes the Treasury Department to issue Treasury Regulations providing
relief in the event of an inadvertent termination of the status as a REMIC, no
Treasury Regulations of this type have been issued. Any relief, moreover, may be
accompanied by sanctions, like the imposition of a corporate tax on all or a
portion of the REMIC's income for the period in which the requirements for REMIC
status are not satisfied.
CHARACTERIZATION OF INVESTMENTS IN CERTIFICATES
In general, (1) subject to the satisfaction of either the applicable
holding period or the bona fide business purpose requirement of Code Section
593(d)(1)(D), certificates owned by a "domestic building and loan association,"
a "mutual savings bank," or "any cooperative bank without capital stock
organized and operated for mutual purposes and without profit" within the
meaning of Code Section 593(a) will be treated as "qualifying real property
loans" within the meaning of Code Section 593(d), in the same proportion that
the assets of the pool underlying the certificates, called the "ASSETS" would be
so treated; (2) certificates held by a domestic building and loan association
will, under Code Section 7701(a)(19)(C)(xi), count toward satisfying the 60%
asset test applicable to
-92-
<PAGE>
those institutions under Code Section 7701(a)(19)(C) in the same proportion that
the Assets would be treated as falling within one of the classes enumerated in
Code Section 7701(a)(19)(C)(i) - (x), including without limitation "loans
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v); and (3) certificates held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code Section
856(c)(5)(B), and interest on the REMIC 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 the Assets would be so treated. Moreover, if 95% or more of the
Assets qualify for any of the foregoing treatments at all times during the
calendar year, the certificates will qualify for the corresponding status in
their entirety for that calendar year. Certificates held by some financial
institutions will constitute an "evidence of indebtedness" within the meaning of
Code Section 582(c)(1).
Certificateholders should be aware that (1) certificates held by a real
estate investment trust will not constitute "government securities" within the
meaning of Code Section 856(c)(5)(A) and (2) certificates held by a regulated
investment company will not constitute "government securities" within the
meaning of Code Section 851(b)(4)(A)(i).
TAXATION OF OWNERS OF REGULAR CERTIFICATES
For Federal income tax purposes, a Regular Certificate will be treated as a
debt instrument issued by the REMIC and not as an ownership interest in the
REMIC or the assets of the REMIC. The amounts includible in the income of a
holder of a Regular certificate (a "REGULAR CERTIFICATEHOLDER") will be
determined under the accrual method.
Original Issue Discount. The Regular Certificates may be issued with OID
within the meaning of Code Section 1273(a). Holders of any class of Regular
Certificates issued with OID will be required to include the OID in gross income
for Federal income tax purposes as it is deemed to accrue, in advance of the
receipt of the cash attributable to that income.
Rules governing OID are set forth generally in Code Sections 1272, 1273 and
1275, and the OID Regulations. Code Section 1272(a)(6) provides special OID
rules that apply to regular interests in a REMIC, like Regular Certificates.
However, as discussed above, no Treasury Regulations have as yet been proposed
or adopted regarding the computation of the accrual of OID under Code Section
1272(a)(6). Further, the application of the OID Regulations to the Regular
Certificates remains unclear in other respects because the OID Regulations
either do not address, or are subject to varying interpretations with regard to,
several relevant issues.
Under the Code, the total amount of OID on a Regular Certificate is the
excess of the "stated redemption price at maturity" of the Regular Certificate
over its "issue price." Except as discussed in the following paragraph, in
general, the issue price of a Regular Certificate offered hereunder will be
determined by the first price at which a substantial amount of the certificates
is sold for money, other than to bond houses or brokers. The stated redemption
price at maturity of a Regular Certificate will be the sum of all payments to be
made on the Regular Certificate other than
-93-
<PAGE>
"qualified stated interest payments." Qualified stated interest is stated
interest that is unconditionally payable at least annually at a single fixed
rate that appropriately takes into account the length of the interval between
payments. Qualified stated interest also includes stated interest on "variable
rate debt instruments" if the interest is unconditionally payable at least
annually. The requirements for qualification of a debt instrument bearing a rate
of interest other than a fixed rate as a "variable rate debt instrument" and for
qualification of stated interest on a variable rate debt instrument as
"qualified stated interest" are complex, and no assurance can be given that all
stated interest on Regular Certificates will constitute qualified stated
interest. For a general discussion of the treatment of variable rate interest,
see "Investment in Certificates Not Representing Interests in a REMIC-- Taxation
of Owners of P&I Certificates--Variable Rate Certificates," below. Generally,
the stated redemption price at maturity of a Regular Certificate will be its
initial certificate balance. Under the OID Regulations, if any portion of the
initial purchase price of a Regular Certificate is allocable to interest that
has accrued prior to the issue date of the Regular Certificates, and if the
pre-issuance accrued interest will be paid on the first payment date within one
year of the issue date, the issue price of the Regular Certificate may be
computed by subtracting from the issue price, as otherwise determined, any
pre-issuance accrued interest. If the issue price is so computed, the actual
payment of any pre-issuance accrued interest will be treated as a return of the
excluded pre-issuance accrued interest, rather than as an amount payable on the
debt instrument.
Under a de minimis rule in the Code, as interpreted in the OID Regulations,
OID on a Regular Certificate will be considered to be zero, and all stated
interest will be treated as qualified stated interest includible under the
accrual method of accounting, if the OID is less than 0.25% of the stated
redemption price at maturity of the Regular Certificates multiplied by the
weighted average life of the Regular Certificates. However, under the OID
Regulations, the holder of a Regular Certificate that has de minimis OID would
be required to include any de minimis OID in income as principal payments are
made in proportion to the ratio that each principal payment bears to the stated
principal amount of the Regular Certificates. For this purpose, the weighted
average life of the Regular Certificates is computed as the sum of the amounts
determined by multiplying (1) the number of complete years (rounding down for
partial years) until each payment included in the stated redemption price at
maturity is expected to be made by (2) a fraction, the numerator of which is the
amount of the payment and the denominator of which is the total amount of
payments included in the stated redemption price at maturity of the Regular
Certificates. The Internal Revenue Service may take the position that this rule
should be applied taking into account the Prepayment Assumption (described
below) and the effect of any anticipated investment income.
For purposes of computing the accrual of OID on the Regular Certificates
issued by a REMIC, Code Section 1272(a)(6) requires that a reasonable assumed
prepayment rate, called the "PREPAYMENT ASSUMPTION", be used for Loans held by a
REMIC, and that adjustments be made in the amount and rate of accrual of the
discount to reflect differences between the actual prepayment rate and the
Prepayment Assumption. Code Section 1272(a)(6) provides that the Prepayment
Assumption is to be determined in the manner prescribed in Treasury Regulations.
As noted above, those Treasury Regulations have not been issued. The Conference
Committee Report discussing Code Section 1272(a)(6) , called the "COMMITTEE
REPORT," indicates that the Treasury Regulations will provide that the
Prepayment Assumption used in determining the amount and rate of accrual of
-94-
<PAGE>
discount on a Regular Certificate must be the same as that used in pricing the
initial offering of the Regular Certificates. The Prepayment Assumption used by
the Master Servicer in reporting OID for each series will be consistent with
this standard and will be disclosed in the related prospectus supplement.
However, neither the Master Servicer nor the Trustee will make any
representation that the Loans will in fact prepay at a rate conforming to the
Prepayment Assumption or at any other rate. Each investor must make its own
decision as to the appropriate Prepayment Assumption to be used in deciding
whether or not to purchase any of the Regular Certificates.
OID is accrued by a Regular Certificateholder by including in its gross
income the sum of the "daily portions" of OID, if any, on its Regular
Certificate for each day during its taxable year on which it held the Regular
Certificates. In general, in the case of an original holder of a Regular
Certificate, the daily portions of OID will be determined based on the excess,
if any, of (1) the sum of (A) the present value, as of the end of the accrual
period, of all of the distributions remaining to be made on the Regular
Certificate in future periods and (B) the distributions made on the Regular
Certificate during the accrual period of amounts included in the stated
redemption price at maturity, over (2) the adjusted issue price of the Regular
Certificate at the beginning of the accrual period. The excess will then be
allocated ratably to each day during the period to determine the daily portion
of OID for that day. Although the OID Regulations allow certificateholders to
use interest accrual periods of any length as long as each Distribution Date
falls on either the first day or final day of an accrual period, a Trust for
which a REMIC election is made will report original issue discount to
certificateholders based on the assumption that each accrual period ends on a
date that corresponds to a Distribution Date and begins on the first day
following the immediately preceding accrual period, or in the case of the first
period, begins on the Closing Date. The present value of the remaining
distributions will be calculated (1) assuming that distributions on the Regular
Certificate will be received in future periods based on the Loans being prepaid
at a rate equal to the Prepayment Assumption, (2) using a discount rate equal to
the original yield to maturity of the Regular Certificate and (3) taking into
account events, including actual prepayments, that have occurred before the
close of the accrual period. The original yield to maturity of the Regular
Certificate will be calculated based on its issue price and the assumption that
distributions on the Regular Certificate will be made in all periods as if the
Loans prepaid at a rate equal to the Prepayment Assumption. The adjusted issue
price of a Regular Certificate at the beginning of any accrual period will equal
the issue price of the certificate, increased by the aggregate amount of the
daily portions on the Regular Certificate that accrued in prior accrual periods,
and reduced by the amount of any distributions made on the Regular Certificate
in prior accrual periods of amounts included in the stated redemption price at
maturity.
A subsequent purchaser of a Regular Certificate that purchases the Regular
Certificate at a cost less than its remaining stated redemption price at
maturity will also be required to include in gross income the daily portions of
any OID on the Regular Certificate. However, if the cost of the Regular
Certificate to the subsequent purchaser is in excess of its "adjusted issue
price," each daily portion will be reduced in proportion to the ratio the excess
bears to the aggregate OID remaining to be accrued on the Regular Certificate.
The adjusted issue price of a Regular Certificate on any given day equals the
issue price, increased by the amount of OID previously includible in the gross
-95-
<PAGE>
income of any holder, and decreased by the amount of any payment previously made
other than a payment of qualified stated interest.
VARIABLE RATE CERTIFICATES. A Regular Certificate may provide for payments
of interest based on a variable interest rate formula, and may provide for
minimum or maximum rates or other adjustments. For a general discussion of the
treatment of variable rate interest, see "Investment in Certificates Not
Representing Interests in a REMIC--Taxation of Owners of P&I Certificates
- --Variable Rate Certificates."
MARKET DISCOUNT. A certificateholder that purchases a Regular Certificate
at a market discount, that is, at a purchase price less than its remaining
stated principal amount, or in the case of a Regular Certificate issued with
OID, less than its "revised issued price," which generally has the same meaning
as "adjusted issue price," as defined above, will recognize market discount
income upon receipt of each principal distribution. See "Investment in
Certificates Not Representing Interests in a REMIC--Taxation of Owners of P&I
Certificates-- If Stripped Bond Rules Do Not Apply" and "--Premium and Market
Discount" below, for a general discussion of market discount. Treasury
regulations implementing the market discount rules have not yet been issued.
Investors should consult their own tax advisors regarding the application of the
market discount rules and the advisability of making any of the elections
provided by the Code relating to the timing of recognition of market discount.
The market discount rules will not be applicable to a Regular Certificate so
long as it is held by its initial purchaser.
PREMIUM. A Regular Certificateholder that purchased its Regular Certificate
at a premium may elect under Code Section 171 to amortize that premium under a
constant yield method over the life of the certificate as an offset to interest
income, rather than as a separate deduction item. It is not clear whether the
Prepayment Assumption would be taken into account in determining the life of the
Regular Certificate for this purpose. However, the Committee Report states that
the same rules that apply to accrual of market discount, which rules will
require use of a Prepayment Assumption in accruing market discount on Regular
Certificates without regard to whether those certificates have original issue
discount, will also apply in amortizing bond premium under Code Section 171. If
made, the election will apply to all debt instruments having amortizable bond
premium that the holder owns or subsequently acquires. See "Constant Yield
Election" below regarding an alternative manner in which the Code Section 171
election may be deemed to be made.
CONSTANT YIELD ELECTION
The OID Regulations permit certificateholders to elect to include all
interest that accrues on a debt instrument by using a constant yield method. For
this purpose, "interest" includes stated interest, acquisition discount, OID, de
minimis OID, market discount, de minimis market discount, and unstated interest,
as adjusted by any amortizable bond premium or acquisition premium. This
election would, in some cases, simplify the calculation of interest income for
certificateholders to whom it is available. However, if the holder makes the
election for a debt instrument with amortizable bond premium or 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
-96-
<PAGE>
constant yield method, respectively, for all debt instruments acquired by the
holder in the same taxable year or thereafter. The election is irrevocable
except with approval of the Internal Revenue Service. Investors should consult
their own tax advisors regarding the advisability of making this election.
EFFECTS OF DEFAULTS AND DELINQUENCIES
Some series of certificates may contain one or more classes of Subordinate
certificates, and if there are defaults or delinquencies on the Loans, amounts
that would otherwise be distributed on the Subordinate certificates may instead
be distributed on the Senior certificates. Holders of Subordinate certificates
nevertheless will be required to report income on these certificates under an
accrual method without giving effect to delays and reductions in distributions
on the Subordinate certificates attributable to defaults and delinquencies on
the Loans, except to the extent that it can be established that those amounts
are uncollectible. As a result, the amount of income reported by a holder of a
Subordinate certificate in any period could significantly exceed the amount of
cash distributed to the holder in that period. The holder will eventually be
allowed a loss, or will be allowed to report a lesser amount of income, to the
extent that the aggregate amount of distributions on the Subordinate certificate
is reduced as a result of defaults and delinquencies on the Loans. However, the
timing and character of losses or reductions in income are uncertain, and,
accordingly, holders of Subordinate certificates should consult their own tax
advisors on this point.
TAXATION OF OWNERS OF RESIDUAL CERTIFICATES
DAILY PORTIONS. A Residual Certificateholder generally will be required to
report its daily portion of the taxable income or, subject to the limitation
described in "--Basis Rules and Distributions" below, the net loss of the REMIC
for each day during a calendar quarter that the Residual Certificateholder owned
the Residual Certificate. For this purpose, the daily portion will be determined
by allocating to each day in the calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for that quarter and then by allocating
the amount so allocated among the Residual Certificateholders in accordance with
their percentage of ownership interests on that day. Any amount included in the
gross income of or allowed as a loss to any Residual Certificateholder by virtue
of the rules described in this paragraph will be treated as ordinary income or
loss. Each Residual Certificateholder should be aware that taxable income on its
Residual Certificate may exceed cash distributions attributable to that income
in any taxable year.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC will reflect a
netting of (1) the income from the Loans and other assets of the REMIC and (2)
the deductions allowed to the REMIC for interest, including OID, on the Regular
Certificates, and any other class of certificates constituting "regular
interests" in the REMIC not offered by this prospectus, and, except as described
below, for servicing, administrative and other expenses. The limitation on
miscellaneous itemized deductions imposed on individuals by Code Section 67 will
not be applied at the pool level to these expenses. See "--Pass-Through of
Miscellaneous Itemized Deductions" below.
-97-
<PAGE>
As a general rule, the taxable income of the REMIC will be determined in
the same manner as if the REMIC were an individual using the accrual method of
accounting, with some modifications. The first modification is that a deduction
will be allowed for accruals of interest, including original issue discount, on
the "regular interests" in the REMIC. If a Regular Certificate is issued at a
price in excess of its aggregate principal amount, the net amount of interest
deductions that are allowed the REMIC in each taxable year for the Regular
Certificate will be reduced by an amount equal to the portion of the excess that
is considered to be amortized or prepaid in that year. Although the matter is
not entirely certain, it is likely that any excess would be amortized under a
constant yield method in a manner analogous to the method for accruing OID
described under "Taxation of Owners of Regular Certificates--Original Issue
Discount" above.
The second modification relates to the accrual of income on a Loan deemed
to have been acquired with market discount or premium. Any market discount will
be includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to that income, under a method similar to the method
described above for accruing OID on the Regular Certificates. If the REMIC
elects under Code Section 171 to amortize any premium on the Loans, the premium
may be amortized under a constant yield method. See "--Taxation of Owners of
Regular Certificates-- Market Discount" and "--Premium" above.
The third modification is that no item of income, gain, loss or deduction
allocable to a prohibited transaction (see "--Prohibited Transactions and other
REMIC--Level Taxes," below) will be taken into account.
The fourth modification is that the REMIC generally may not deduct any item
that would be disallowed in calculating the taxable income of a partnership by
virtue of Code Section 703(a)(2).
The fifth modification is that the amount of the net income from
"foreclosure property", if any, must be reduced by the amount of tax imposed
under Code Section 860G(c) on "foreclosure property."
The REMIC will have an initial aggregate basis in its assets equal to the
aggregate issue price of the "regular interests" and "residual interests" in the
REMIC. The aggregate basis will be allocated among the individual Loans and
other assets of the REMIC in proportion to their respective fair market values.
Accordingly, the Master Servicer will be required to estimate the fair market
value of these interests in order to determine the basis of the REMIC in the
Loans and other property held by the REMIC. Generally for any certificate
offered by this prospectus, its fair market value will be its issue price as
determined in the manner described above under "Taxation of Owners of Regular
Certificates--Original Issue Discount."
BASIS RULES AND DISTRIBUTIONS. Any distribution by a REMIC to a Residual
Certificate- holder will not be included in the gross income of the Residual
Certificateholder to the extent it does not exceed the adjusted basis of the
Residual Certificateholder's interest in a Residual Certificate. The
distribution will reduce the adjusted basis of the interest, but not below zero.
To the extent a distribution exceeds the adjusted basis of the Residual
Certificate, it will be treated as gain from the
-98-
<PAGE>
sale of the Residual Certificate. See "--Sales of Certificates," below. The
adjusted basis of a Residual Certificate is equal to the amount paid for that
Residual Certificate, increased by amounts included in the income of the
Residual Certificateholder (see "--Taxation of Owners of Residual
Certificates--Daily Portions," above) and decreased by distributions and by net
losses taken into account for the interest.
A Residual Certificateholder is not allowed to take into account any net
loss for any calendar quarter to the extent the net loss exceeds the Residual
Certificateholder's adjusted basis in its Residual Certificate as of the close
of the calendar quarter, determined without regard to any net loss. Any loss
allowed will reduce the adjusted basis of the interest, but not below zero. Any
loss disallowed because of this limitation may be carried forward indefinitely
to future calendar quarters and, subject to the same limitation, may be used
only to offset income from the Residual Certificate. The effect of these basis
and distribution rules is that a Residual Certificateholder may not amortize its
basis in a Residual Certificate, but may only recover its basis through
distributions, and through the deduction of any net losses of the REMIC or upon
the sale of its Residual Certificate. See "--Sales of Certificates" below.
EXCESS INCLUSIONS. Any "excess inclusion" for a Residual Certificate is
subject to special tax rules. For a Residual Certificateholder, the excess
inclusion for any calendar quarter is defined as the excess, if any, of the
daily portions of taxable income over the sum of the "daily accruals" for each
day during the quarter that the Residual Certificate was held by the Residual
Certificateholder. The daily accruals are determined by allocating to each day
during a calendar quarter its ratable portion of the product of the "adjusted
issue price" of the Residual Certificate at the beginning of the calendar
quarter and 120 percent of the long-term "applicable Federal rate," generally,
an average of current yields on Treasury securities of comparable maturity, in
effect at the time of issuance of the Residual Certificate. For this purpose,
the adjusted issue price of a Residual Certificate offered by this prospectus,
if any, as of the beginning of any calendar quarter is the issue price of the
Residual Certificate (see "--Taxable Income of the REMIC" above) increased by
the amount of daily portions of income for all prior quarters and decreased, but
not below zero, by any distributions made on the Residual Certificate and any
net losses taken into account on the Residual Certificates before the beginning
of that quarter.
As an exception to the general rules described above, the Treasury
Department has authority to issue regulations that would treat the entire amount
of income accruing on a Residual Certificate as an excess inclusion if the
aggregate Residual Certificates in the REMIC did not have "significant value."
The REMIC Regulations do not provide for this type of an exception.
For Residual Certificateholders, other than thrift institutions described
in Code Section 593, an excess inclusion cannot be offset by losses from other
sources. For Residual Certificateholders that are subject to tax on unrelated
business taxable income, as defined in Code Section 511, an excess inclusion is
treated as unrelated business taxable income. For Residual Certificateholders
that are nonresident alien individuals or foreign corporations generally subject
to United States 30% withholding tax, an excess inclusion will be subject to
this tax and no tax treaty rate reduction or exemption may be claimed for this
tax. See "--Foreign Investors" below.
-99-
<PAGE>
If a thrift institution described in Code Section 593 holds a Residual
Certificate that has "significant value," the thrift institution may offset its
losses against its excess inclusion income. In general, a Residual Certificate
has significant value if (1) the aggregate of the issue prices of the Residual
Certificates in the REMIC is at least equal to 2 percent of the aggregate of the
issue prices of all Regular Certificates and Residual Certificates in the REMIC,
and (2) the anticipated weighted average life of the Residual Certificates is at
least 20 percent of the anticipated weighted average life of the REMIC. However,
a net operating loss of any other member of an affiliated group of which the
thrift institution is a member may not be used to offset an excess inclusion
attributable to the thrift institution. In addition, a thrift institution may
not offset its losses against an excess inclusion attributable to a Residual
Certificate held by any other member of an affiliated group of which the thrift
institution is a member.
In the case of any Residual Certificate held by a real estate investment
trust, the aggregate excess inclusions for the Residual Certificate, reduced,
but not below zero, by the real estate investment trust's taxable income, within
the meaning of Code Section 857(b)(2), excluding any net capital gain, will be
allocated among the shareholders of the trust in proportion to the dividends
received by those shareholders from the trust, and any amount so allocated will
be treated as an excess inclusion for the Residual Certificate as if held
directly by those shareholders.
PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Under temporary Treasury regulations, if the REMIC is considered to be a
"single-class REMIC," a portion of the REMIC's servicing, administrative and
other non-interest expenses will be allocated as a separate item to those
Regular Certificateholders that are "pass-through interest holders." Generally,
a single class REMIC is defined as (1) a REMIC that is substantially similar to
an investment trust under Treasury regulations but for its qualification as a
REMIC, or (2) a REMIC that is substantially similar to an investment trust but
is structured with the principal purpose of avoiding this allocation requirement
imposed by the temporary regulations. A pass-through interest holder would be
required to add its allocable share, if any, of the expenses to its gross income
and to treat the same amount as an item of investment expense. An individual
generally would be allowed a deduction for the expenses only as a miscellaneous
itemized deduction subject to the limitations under Code Section 67, which
allows these deductions only to the extent that in the aggregate the expenses
exceed two percent of the holder's adjusted gross income. In addition, Code
Section 68 provides that the amount of itemized deductions otherwise allowable
for an individual whose adjusted gross income exceeds a specified amount (the
"APPLICABLE AMOUNT") will be reduced by the lesser of (1) 3% of the excess of
the individual's adjusted gross income over the Applicable Amount or (2) 80% of
the amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income recognized by Regular Certificateholders who
are subject to the limitations of either Code Section 67 or Code Section 68 may
be substantial. The REMIC is required to report to each pass-through interest
holder and to the IRS each holder's allocable share, if any, of the REMIC's
non-interest expenses. The term "pass-through interest holder" generally refers
to individuals, entities taxed as individuals and other pass-through entities
including regulated investment companies, but does not include real estate
investment trusts.
-100-
<PAGE>
Certificateholders that are "pass-through interest holders" should consult their
own tax advisors about the impact of these rules on an investment in the Regular
Certificates.
In addition, in a REMIC that is not considered to be a "single-class REMIC"
as well as a REMIC that is considered to be a "single-class REMIC," all or a
portion of the REMIC's servicing, administrative and other non-interest expenses
will be allocated as a separate item to Residual Certificateholders that are
"pass-through interest holders." This type of holder would be required to add
its allocable share, if any, of the expenses to its gross income and to treat
the same amount as an item of investment expense and an individual Residual
Certificateholder would be subject to the same limitations and adjustments as
described above for Regular Certificateholders.
SALES OF CERTIFICATES
If a certificate is sold, the selling certificateholder will recognize gain
or loss equal to the difference between the amount realized on the sale and its
adjusted basis in the certificate. The adjusted basis of a Regular Certificate
generally will equal the cost of the Regular Certificate to the
certificateholder, increased by income reported by the certificateholder on the
Regular Certificate and reduced, but not below zero, by distributions on the
Regular Certificate received by the certificateholder and by any amortized
premium. The adjusted basis of a Residual Certificate will be determined as
described under "Taxation of Owners of Residual Certificates--Basis Rules and
Distributions," above. Except as provided in the following two paragraphs, any
gain or loss will be capital gain or loss, provided the certificate is held as a
capital asset (generally, property held for investment) within the meaning of
Code Section 1221. The Federal income tax rates applicable to capital gains for
taxpayers other than individuals, estates, and trusts are currently the same as
those applicable to ordinary income. However, the maximum ordinary income tax
rate for individuals, estates, and trusts is generally 39.6%, whereas the
maximum long-term capital gains rate for these taxpayers is 20% for capital
assets held for more than 12 months. Capital losses generally may be used by a
corporate taxpayer only to offset capital gains, and by an individual taxpayer
only to the extent of capital gains plus $3,000 of other income.
Gain from the sale of a Regular Certificate that might otherwise be capital
gain will be treated as ordinary income to the extent the gain does not exceed
the excess, if any, of (1) the amount that would have been includible in the
seller's income on the Regular Certificate assuming that income had accrued
thereon at a rate equal to 110% of the applicable Federal rate determined as of
the date of purchase of the Regular Certificate, over (2) the amount of ordinary
income actually includible in the seller's income prior to the sale.
Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a certificate by a bank or thrift institution to which this section applies will
be ordinary income or loss.
Except as provided in Treasury regulations, if the seller of a Residual
Certificate reacquires a Residual Certificate, any other residual interest in a
REMIC or any similar interest in a "taxable mortgage pool", as defined in Code
Section 7701(i), during the period beginning six months before,
-101-
<PAGE>
and ending six months after, the date of the sale, the sale will be subject to
the "wash sale" rules of Code Section 1091. In that event, any loss realized by
the Residual Certificateholder on the sale will not be deductible, but instead
will be added to the Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER REMIC-LEVEL TAXES
A REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means (1) the disposition of a Loan other than pursuant to specified
exceptions, (2) the receipt of investment income from a source other than a Loan
or other permitted investments, (3) the receipt of compensation for services, or
(4) gain from the disposition of an asset purchased with the payments on the
Loans for temporary investment pending distribution on the certificates. It is
not anticipated that a Trust that makes an election to be taxed as a REMIC will
engage in any prohibited transactions. In addition, under the Code, a REMIC
generally will be taxed at a 100% rate on any contribution made to the REMIC
after the Start-Up Date unless the contribution is a cash contribution that (1)
takes place within the three- month period beginning on the closing date, (2) is
made to facilitate a clean-up call or a qualified liquidation, (3) is a payment
in the nature of a guarantee, or (4) constitutes a contribution by the holder of
the Residual Certificates in the REMIC to a qualified reserve fund. The
structure and operation of a Trust that makes an election to be taxed as a REMIC
will be designed to avoid the imposition of the 100% tax on contributions.
To the extent that a REMIC derives specific types of income from
foreclosure property (generally, income relating to dealer activities of the
REMIC), it will be taxed on that income at the highest corporate income tax
rate. It is not anticipated that a Trust that makes an election to be taxed as a
REMIC will receive significant amounts of this income.
TAX ON TRANSFERS OF RESIDUAL CERTIFICATES TO CERTAIN ORGANIZATIONS
If a Residual Certificate is transferred to a "disqualified organization",
as defined below, a tax would be imposed in an amount, determined under the
REMIC Regulations, generally equal to the product of (1) the present value of
the total anticipated excess inclusions for the Residual Certificate for periods
after the transfer, determined by discounting the anticipated excess inclusions
from the end of each remaining calendar quarter in which those excess inclusions
are expected to accrue at the applicable Federal rate based on the date on which
the transfer occurs to the date the disqualified organization acquires the
residual interest, and (2) the highest marginal federal income tax rate
applicable to corporations. This tax would generally be imposed on the
transferor of the Residual Certificate, except that where the transfer is
through an agent for a disqualified organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Certificate would in
no event be liable for the tax on a transfer if the transferee furnished to the
transferor an affidavit stating the transferee's social security number and that
the transferee is not a disqualified organization, and as of the time of the
transfer, the transferor does not have actual knowledge that the affidavit is
false. An entity will not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that residual interests in the entity are not
held by
-102-
<PAGE>
disqualified organizations and that information needed for the application of
the tax described in this prospectus will be made available. Restrictions on the
transfer of the Residual Certificate and other provisions that are intended to
meet these requirements are contained in the Pooling and Servicing Agreement.
Certificateholders should consult their advisors regarding the potential impact
on them of these restrictions.
For these purposes, a "disqualified organization" means (1) the United
States, any State or political subdivision of the United States, any foreign
government, any international organization, or any agency or instrumentality of
the foregoing, but would not include instrumentalities described in Code Section
168(h)(2)(D), (2) any organization, other than a cooperative described in Code
Section 521, which is exempt from tax unless the organization is subject to the
tax imposed by Code Section 511 or (3) any organization described in Code
Section 1381(a)(2)(C).
In addition, if a "pass-through entity", as defined below, includes in
income excess inclusions on a Residual Certificate, and a disqualified
organization is the record holder of an interest in a pass- through entity, then
a tax will be imposed on the pass-through entity equal to the product of (1) the
amount of excess inclusions on the Residual Certificate that are allocable to
the interest in the pass- through entity held by the disqualified organization
and (2) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
the record holder of the interest furnishes to the pass-through entity an
affidavit that the record holder is not a disqualified organization and, during
that period, the pass-through entity does not have actual knowledge that the
affidavit is false. For these purposes, a "pass-through entity" means any
regulated investment company, real estate investment trust, trust, partnership
or other entities described in Code Section 860E(e)(6).
DISREGARD OF SOME TYPES OF TRANSFERS
The REMIC Regulations provide that the transfer of a "non-economic residual
interest" to a United States Person will be disregarded for tax purposes if a
significant purpose of the transfer was to impede the assessment or collection
of tax. A Residual Certificate will constitute a non- economic residual interest
unless, at the time the interest is transferred, (1) the present value of the
expected future distributions on the Residual Certificate equals or exceeds the
product of the present value of the anticipated excess inclusion income and the
highest corporate tax rate for the year in which the transfer occurs and (2) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC in amounts sufficient to satisfy the taxes on excess inclusion
income as they accrue. 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. Under a safe
harbor, a transferor is presumed not to have such knowledge if (1) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and, as a result of the investigation,
the transferor found that the transferee had historically paid its debts as they
came due and found no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, (2) the transferee
represents to the transferor that it understands that, as the holder of the
noneconomic residual interest, the transferee may incur tax
-103-
<PAGE>
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, (3) the transferee represents that it will not cause income
from the noneconomic residual interest to be attributable to a foreign permanent
establishment or fixed base (within the meaning of an applicable income tax
treaty) of the transferee or another U.S. taxpayer and (4) either (i) the amount
received by the transferee be no less on a present value basis than the present
value of the net tax detriment attributable to holding the residual interest
reduced by the present value of the projected tax savings to be derived on the
residual interest or (ii) the transfer is to a domestic taxable corporation with
specified large amounts of gross and net assets and that meets certain other
requirements where agreement is made that all future transfers will be to
taxable domestic corporations in transactions that qualify for the same "safe
harbor" provision. Eligibility for the safe harbor requires, among other things,
that the facts and circumstances known to the transferor at the time of transfer
not indicate to a reasonable person that the taxes with respect to the residual
interest will not be paid, with an unreasonably low cost for the transfer
specifically mentioned as negating eligibility. The regulations providing this
safe harbor generally are applicable to transfers of residual interests on or
after February 4, 2000, but certain provisions only apply to transfers of
residual interests occurring on or after August 19, 2002.
A transfer of a Residual Certificate to a foreign person will be
disregarded if the Residual Certificate has tax avoidance potential. A Residual
Certificate will have tax avoidance potential unless, at the time of the
transfer, the transferor reasonably expects that, for each excess inclusion, the
REMIC will distribute to the transferee Residual Certificateholder an amount
that will equal at least 30 percent of the excess inclusion at or after the time
at which the excess inclusion accrues and not later than the close of the
calendar year following the calendar year of accrual. Under the REMIC
Regulations a safe harbor is provided under which a transferor is treated as
having a reasonable expectation if the 30 percent test would be satisfied were
the mortgages held by a REMIC to prepay at each rate within a range of rates
from 50 percent to 200 percent of the rate assumed under Code Section 1272(a)(6)
on the qualified mortgages, or the rate that would have been assumed had the
mortgages been issued with OID. If a transfer of a residual interest is
disregarded, the transferor would be liable for any Federal income tax imposed
upon taxable income that otherwise would be derived by the transferee from the
REMIC.
A prospective investor in the Class R certificate is urged to consult its
own tax advisor concerning possible compliance with either of such safe harbors.
If a transfer of a residual interest is disregarded, the putative transferor
would continue to be liable for any Federal income tax imposed with respect to
the REMIC taxable income generated on the residual interest.
TERMINATION
A REMIC will terminate shortly following receipt by the REMIC of the final
payment on the Loans or upon a sale of the REMIC's assets following the adoption
by the REMIC of a plan of complete liquidation. The last distribution on a
Regular Certificate will be treated as a payment in
-104-
<PAGE>
retirement of a debt instrument. In the case of a Residual Certificate, if the
last distribution on that certificate is less than the Residual
Certificateholder's adjusted basis in the Residual Certificate, the Residual
Certificateholder should be allowed a loss equal to the amount of the
difference.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and Residual Certificateholders will be treated
as partners. Unless otherwise stated in the related prospectus supplement, the
Residual Certificateholder holding the greatest percentage interest in the
Residual Certificates, will file REMIC federal income tax returns on behalf of
the related REMIC, and will be designated as and will act as the "tax matters
person" on the REMIC.
As the tax matters person, the Master Servicer will, subject to specific
notice requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the Residual Certificateholders in
connection with the administrative and judicial review of items of income,
deduction, gain or loss of the REMIC, as well as the REMIC's classification.
Residual Certificateholders will generally be required to report the REMIC items
consistent with their treatment on the REMIC's tax return and may in some
circumstances be bound by a settlement agreement between the Master Servicer, as
tax matters person, and the Internal Revenue Service concerning any REMIC item.
Any person that holds a Residual Certificate as a nominee for another person may
be required to furnish the REMIC, in a manner to be provided in Treasury
Regulations, with the name and address of that person and other information.
Reporting of interest income, including any OID, on Regular Certificates is
required annually, and may be required more frequently under Treasury
Regulations. This requirement extends to some types of holders of Regular
Certificates who are generally exempt from information reporting on debt
instruments. The REMIC also must comply with rules requiring a Regular
Certificate issued with OID to disclose on its face the amount of OID and the
issue date and requiring this information to be reported to the Internal Revenue
Service.
Because the particular applications of the general method for computing
accrued income are varied and complex and involve factual as well as legal
uncertainties, the extent to which income will be recognized in advance of the
receipt of cash under the OID rules is uncertain. Additional guidance is
required from the Internal Revenue Service or other legal authority before it is
possible to determine definitely the proper methods for accruing income on the
certificates. In the absence of additional guidance from the Internal Revenue
Service or other legal authority, the Master Servicer intends to compute and
report accrued income on the certificates for tax purposes in a manner that it
believes to be consistent with the principles of the Code and the OID
Regulations described above. Because of the uncertainties discussed above, there
can be no assurance that the method adopted by the Master Servicer for reporting
to holders of certificates will coincide with that
-105-
<PAGE>
ultimately adopted in final Treasury Regulations. Accordingly, holders of
certificates should consult their tax advisors regarding the method for
reporting the amounts received or accrued on the certificates. As long as the
only "certificateholder" of record is CEDE & Co., as nominee for DTC,
certificateholders and the IRS will receive tax and other information from DTC
Participants and indirect participants of DTC rather than from the Master
Servicer. (The Master Servicer, however, will respond to requests for necessary
information to enable DTC Participants, indirect participants and other persons
to complete their reports.)
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
certificateholder's purchase price which the REMIC may not have, it appears that
only information pertaining to the appropriate proportionate method of accruing
market discount should be required to be reported.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments of proceeds from
the sale of certificates, may be subject to "backup withholding" under Code
Section 3406 if recipients of these payments fail to furnish to the payor
necessary information, including their taxpayer identification numbers, or
otherwise fail to establish an exemption from backup withholding. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against the recipient's Federal income tax. Furthermore, penalties may be
imposed by the Internal Revenue Service on a recipient of payments that is
required to supply information to the payor but that does not do so in the
proper manner.
FOREIGN INVESTORS
A Regular Certificateholder that is not a "United States Person", as
defined below, and is not subject to Federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a Regular Certificate may be eligible for an exception to United States
Federal income or withholding tax on a distribution on a Regular Certificate,
provided that the certificateholder complies to the extent necessary with
identification requirements, including delivery of a statement, signed by the
certificateholder under penalties of perjury, certifying that the
certificateholder is not a United States Person and providing the name and
address of the certificateholder, and provided that the certificateholder is not
a "10 percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C). The
application of these requirements in the REMIC context is not entirely clear,
and foreign investors seeking to qualify for this exemption should consult their
own tax advisors. While
-106-
<PAGE>
the matter is not free from doubt, the foregoing tax exemption may not apply to
a Regular Certificate held by a Residual Certificateholder, or by a
certificateholder that owns directly or indirectly a 10% or greater interest in,
or is a "controlled foreign corporation" as defined under the Code related to, a
Residual Certificateholder. If the certificateholder does not qualify for
exemption, distributions of interest, including distributions of accrued OID, to
the certificateholder may be subject to a tax rate of 30%, subject to reduction
under any applicable tax treaty. For these purposes, "UNITED STATES PERSON"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision of the United States, or an estate or trust whose
income is subject to United States Federal income taxation regardless of its
source.
Unless otherwise stated in the related prospectus supplement, Residual
Certificateholders that are not United States Persons should assume that
distributions of income on their Residual Certificates will be subject to a 30%
withholding tax, or a lesser rate as may be provided under any applicable tax
treaty. In the case of any income on a Residual Certificate that is an excess
inclusion, however, the rate of withholding will not be subject to reduction
under any applicable tax treaties. (See "--Taxation of Owners of Residual
Certificates--Excess Inclusions" above.)
PURCHASE OF BOTH REGULAR AND RESIDUAL CERTIFICATES
Any certificateholder holding a "regular interest" in the REMIC and persons
related to these certificateholders should not acquire any interest identified
as a "residual interest" in the REMIC and any certificateholders holding a
"residual interest" in the REMIC and persons related to these certificateholders
should not acquire any interest identified as a "regular interest" in the REMIC,
without consulting their tax advisors as to any possible adverse tax
consequences.
TRUSTS WITH NEGATIVELY AMORTIZING ARMS
In the event that a Trust contains Negatively Amortizing ARMs, the
discussion of the federal income tax implications of the Negatively Amortizing
ARMS to a holder of an interest in the Trust, including the treatment of
Deferred Interest, will be contained in the related prospectus supplement.
INVESTMENT IN CERTIFICATES NOT REPRESENTING INTERESTS IN A REMIC
CLASSIFICATION OF TRUST AND CHARACTERIZATION OF INVESTMENT IN CERTIFICATES
For purposes of the following discussion, certificates of a series
evidencing undivided ownership interests in a notional amount of principal of
each Loan in a related Trust together with
-107-
<PAGE>
interest thereon are referred to as "P&I CERTIFICATES." Certificates of a series
evidencing an undivided ownership interest in a portion of the interest payable
on a Notional Amount of the Loans in the related Trust are referred to as "IO
CERTIFICATES."
Upon issuance of each series of certificates, unless a REMIC election is
made for that series, Mayer, Brown, Rowe & Maw and Thacher Proffitt & Wood, each
as counsel to the Depositor, are of the opinion that the related Trust will be
treated as a grantor trust under subpart E, Part I of Subchapter J of the Code
and not as an association taxable as a corporation. The opinion will be filed
prior to issuance of any series of certificates to which a REMIC election is not
made, as an exhibit to a post-effective amendment or in a Current Report on Form
8-K. Moreover, each certificateholder of a series will be treated as the owner
of the undivided interest specified in its certificate in each of the Loans in
the related Trust for each series. Accordingly, in the case of P&I Certificates,
counsel to the Depositor will deliver its opinion that, to the extent that the
Trust holds assets described in the Code sections set forth below, (1) subject
to the satisfaction of either the applicable holding period or the bona fide
business requirement of Code Section 593(d)(1)(D), P&I Certificates owned by a
"domestic building and loan association," a "mutual savings bank," or "any
cooperative bank without capital stock organized and operated for mutual
purposes and without profit" within the meaning of Code Section 593(a) will
represent an interest in "qualifying real property loans" within the meaning of
Code Section 593(d); (2) P&I Certificates owned by a "domestic building and loan
association" will represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v); (3) P&I
Certificates owned by a real estate investment trust will represent "real estate
assets" within the meaning of Code Sections 856(c)(5)(A) and 856(c)(6)(B) and
interest in respect of P&I Certificates will represent "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); and (4) P&I Certificates owned by a
REMIC will represent an interest in "obligation[s] (including any participation
or certificate of beneficial ownership therein) which [are] principally secured
by an interest in real property" within the meaning of Code Section 860G(a)(3).
It is unclear, however, to what extent, if any, an IO Certificate will be
considered to represent these interests. Prospective purchasers should consult
their tax advisors regarding whether an IO Certificate will be characterized as
representing these assets and whether the income from the IO Certificate will be
characterized as derived from these assets.
TAXATION OF OWNERS OF P&I CERTIFICATES
TREATMENT AS STRIPPED BONDS. The rate at which a certificateholder will be
required to recognize income on its certificate may be affected by a separation
of the right to receive a portion of the interest on each Loan in the Trust from
the right to receive a portion of the principal. This type of separation will
occur on each Loan having a Trust issuing IO Certificates. It also will occur if
the amount of the Administration Fee exceeds reasonable compensation so that the
Master Servicer is treated as the owner of a portion of the interest payments on
the Loans. There are no authoritative guidelines for Federal income tax purposes
regarding the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar
-108-
<PAGE>
transactions. However, the Service has issued guidance establishing an elective
"safe harbor" for determining the extent to which amounts that a taxpayer is
entitled to receive under mortgage servicing contracts represent reasonable
compensation. If the safe harbor is potentially applicable in a particular
situation, the mortgage servicer will disclose in the prospectus supplement
relating to each series of certificates whether it will elect to limit its
compensation to an amount that will qualify as reasonable compensation under the
safe harbor. A separation also may occur upon the issuance of a certificate that
represents an interest in principal payments to be made on Loans together with
interest payable on the certificate at a rate in excess of the rate at which
interest is payable on the Loans. These certificateholders may be treated as
having purchased two separate instruments: first, a P&I Certificate representing
their undivided interests in payments of principal on the Loans together with
interest payments at a rate at or below the rate at which interest is payable on
the Loans; and, second, an IO Certificate representing their undivided interests
in the remainder of the payments of interest to be made on the Loans to which
their certificate entitles them.
Each certificateholder will be subject to the "stripped debt" rules of Code
Section 1286. As a result, the market discount rules generally would not be
applicable to the initial certificateholders. However, the Service has recently
provided guidance under which some Loans that are stripped bonds may be treated
as market discount bonds governed by Code Section 1278. This treatment is
available only if the amount of the OID on the stripped bond is determined to be
de minimis (see "--Qualification as a REMIC--Taxation of Owners of Regular
Certificates--Original Issue Discount") or the annual stated rate of interest
payable on the stripped bond is no more than 100 basis points lower than the
annual stated rate of interest payable on the original bond from which it, and
any other stripped bonds or coupons, were stripped. If these requirements are
met, and if the stripped bond has market discount (see "--Qualification as a
REMIC--Taxation of Owners of Regular Certificates--Market Discount"), the
certificateholder may include the market discount as principal is repaid or upon
disposition of the certificate at a gain or may elect to include this income
currently on the basis of either ratable accrual or a constant instant rate
method. If the market discount rules do not apply, each certificateholder in
this type of Trust, whether a cash or accrual method taxpayer, will be required
to report the income, including interest that is added to principal as Deferred
Interest resulting from negative amortization, that is deemed to accrue for each
day on the certificate under a constant yield to maturity method, in accordance
with the OID rules of the Code.
In general, the amount of this income that accrues for each day would equal
the product of the certificateholder's adjusted issue price of the P&I
Certificate at the beginning of an accrual period and the yield of the P&I
Certificate to that holder allocated ratably to each day in the accrual period.
See "--Qualification as a REMIC--Taxation of Owners of Regular
Certificates--Original Issue Discount" above. The yield would be computed as the
rate, assuming monthly compounding, that, if used to discount the
certificateholder's share of future payments on the Loans, would cause the
present value of those future payments to equal the price at which the
certificateholder purchased that certificate. In computing accrued income under
the stripped debt rules, a certificateholder's share of future payments on the
Loans will not include any payments made on any ownership
-109-
<PAGE>
interest in the Loans retained by the Depositor or its affiliates, but will
include the certificateholder's share of any reasonable servicing fees and other
expenses.
There is considerable uncertainty, however, concerning the application of
Code Section 1272(a)(6) and the OID Regulations to instruments like the P&I
Certificates. Among other things, it is unclear whether provisions of the Tax
Reform Act of 1986 (the "1986 ACT") requiring use of a prepayment assumption in
accruing OID would be applicable to the P&I Certificates in the absence of
Treasury Regulations or whether use of a prepayment assumption may be permitted
without reliance on these rules. It also is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments. Certificateholders are
advised to consult their tax advisors concerning whether a prepayment assumption
should be used in reporting OID on P&I Certificates.
In the case of a P&I Certificate acquired at a price approximately equal to
the principal amount of the Loans allocable to the certificate, the use or
non-use of a reasonable prepayment assumption would not cause the income
required to be reported under the stripped debt rules to differ materially from
the income the certificateholder would be required to report under an accrual
method of accounting if the stripped debt rules did not apply. In the case,
however, of a P&I Certificate acquired at a discount from, or premium over, the
principal amount, the use of a reasonable prepayment assumption would increase
or decrease the yield used in calculating accruals of income, and thus
accelerate or decelerate, respectively, the reporting of income.
If no prepayment assumption is used, then when a Loan prepays in full, the
holder of a P&I Certificate acquired at a discount generally will recognize
ordinary income equal to the difference between the portion of the prepaid
principal amount of the Loan that is allocable to that certificate and the
portion of the adjusted basis of that certificate that is allocable to the
certificateholder's interests in the Loan. If a prepayment assumption is used,
it appears that no income or loss should be recognized upon a prepayment unless
prepayments have occurred at a rate different than the assumed prepayment rate.
VARIABLE RATE CERTIFICATES. Although the OID Regulations are subject to a
different interpretation, in the absence of substantial legal authority to the
contrary the Master Servicer intends to treat Loans subject to the stripped debt
rules and bearing a variable rate of interest as subject to the provisions of
the OID Regulations governing variable rate debt instruments. In computing the
accrual or OID, the Master Servicer may be required to use the methods described
in Code Section 1272(a)(6). For the application of Code Section 1272(a)(6) to
the accrual of OID, see generally "--Qualification as a REMIC--Taxation of
Owners of Regular Certificates--Original Issue Discount" above. Under the OID
Regulations, interest payments on a variable rate debt instrument may be
characterized as qualified stated interest includible in income when accrued,
OID includible in income when accrued under the OID rules, or contingent
interest payments generally includible in income in the taxable year in which
the payments become fixed. Although the OID Regulations
-110-
<PAGE>
generally permit a variety of interest rate adjustment mechanisms to produce
"qualified stated interest" (e.g., one or more "qualified floating rates,"
"qualified inverse floating rates," or "objective rates") where each qualified
floating rate or objective rate in effect during an accrual period is set at a
current value of that rate, the use of these formulas may in some cases produce
accelerated or deferred interest which must be accrued under a constant yield
method, which could require accrual in advance of the receipt of a corresponding
payment of cash. Moreover, prospective purchasers of P&I Certificates bearing a
variable rate of interest should be aware that the provisions in the OID
Regulations applicable to variable rate instruments may not apply to the
particular rate adjustment mechanisms for the Loans or Mortgage Certificates. If
variable rate P&I Certificates are not governed by the provisions applicable to
variable rate debt instruments, the OID Regulations provide that the
certificates would be subject to the provisions applicable to instruments having
contingent payments. See "--Taxation of Owners of IO Certificates--Possible
Application of Proposed Contingent Payment Rules" below. The application of
those provisions to instruments like the P&I Certificates is subject to
differing interpretations. Prospective purchasers of variable rate P&I
Certificates are advised to consult their tax advisors concerning the tax
treatment of these certificates.
IF STRIPPED BOND RULES DO NOT APPLY. If the stripped bond rules do not
apply to a P&I Certificate, the certificateholder will be required to report its
pro rata share of the interest income on the Loans in accordance with the
certificateholder's normal method of accounting. However, if the rules relating
to market discount, OID, or premium are applicable, the amount includible in
income on account of a P&I Certificate may differ significantly from the amount
payable thereon from payments of interest on the Loans.
The OID rules will apply to a P&I Certificate to the extent it evidences an
interest in Loans or Mortgage Certificates issued with OID. Under the OID
Regulations a Loan would have OID if the points charged at origination, or other
loan discount, exceeded a specified de minimis amount, generally, the greater of
one-sixth of one percent times the number of full years to final maturity or
one-fourth of one percent times the weighted average maturity. The OID
Regulations also treat some types of variable rate Loans as having OID if the
loans have an initial rate of interest that differs from that determined by the
formula for setting the interest rate during the remainder of the loans or if
the loans use an index that does not vary in a manner approved in the OID
Regulations. For a general discussion of the treatment of variable rate
interest, see "--Taxation of Owners of P&I Certificates--Variable Rate
Certificates" above. Generally, OID would be accrued on the basis of a constant
yield to maturity. However, the application of the original issue discount rules
to the Loans is unclear in all cases. See "--Treatment as Stripped Bonds,"
above.
PREMIUM AND MARKET DISCOUNT. Determination of adjustments to a
certificateholder's income based on premium or market discount on a certificate
requires that the purchase price of the certificate be allocated among the Loans
constituting the Trust. Generally, this allocation will provide a tax basis for
the certificateholder's undivided interest in each Loan and will be made on the
basis of the relative fair market values of the certificateholder's undivided
interest in the Loans.
-111-
<PAGE>
A certificateholder that acquires an interest in a Loan at a premium may
elect under Code Section 171 to amortize the premium under a constant yield to
maturity method over the life of the Loan. Certificateholders should consult
their tax advisors concerning whether a prepayment assumption should be used in
calculating yield and concerning possible alternative methods for amortizing
premium.
An investor also should be aware that the Internal Revenue Service may take
the position that the method described below for accruing income under the
current proposed Treasury Regulations applicable to debt instruments providing
for contingent payments applies to a P&I Certificate purchased at a premium
because all or a portion of its issue price, called the "CONTINGENT PRINCIPAL",
may not be recovered if the related Loans were prepaid. See "--Taxation of
Owners of IO Certificates--Possible Application of Proposed Contingent Payment
Rules" below. The method of accruing income under the contingent payment rules
may be more likely to be applied if the difference between the issue price of
the certificate and the amount of Contingent Principal is substantial.
If the portion of a P&I Certificate's purchase price allocable to a Loan in
the Trust is less than the certificateholder's undivided interest in the Loan's
"revised issue price" (the sum of the issue price and the previously accrued OID
reduced by the sum of all prior payments of the stated redemption price at
maturity), the excess is "market discount." A certificateholder that acquires an
interest in a Loan with market discount generally will be required under Code
Section 1276 to include accrued and previously unrecognized market discount in
income as ordinary income to the extent of payments of the stated redemption
price at maturity received on the Loan at the time that each payment is
received. In addition, on a sale or other disposition of the P&I Certificate, a
certificateholder will be required to include as ordinary income any gain to the
extent of accrued and previously unrecognized market discount. Pending the
issuance of Treasury Regulations, market discount may be treated as accruing
either (1) under a constant yield to maturity method, (2) in proportion to the
OID accruing on a Loan, or (3) in proportion to the stated interest in the
absence of OID. Alternatively, a certificateholder may elect to include accrued
market discount in income currently on all market discount obligations acquired
by the certificateholder during the taxable year in which an election is made
and thereafter. A certificateholder should be aware that Code Section 1277 may
limit the deductibility of interest paid or accrued to purchase or carry a Loan
that is acquired at a market discount unless the election is made to include
accrued market discount in income currently. Certificateholders should consult
their tax advisors as to the application of this rule and the advisability of
making any elections under the market discount rules in their particular
circumstances.
TAXATION OF OWNERS OF IO CERTIFICATES
Because the "stripped debt" rules of Code Section 1286 will apply to the IO
Certificates, income on the IO Certificates must be accrued under the OID
provisions of the Code. The
-112-
<PAGE>
regulations that have been issued to date under Code Section 1286 do not address
the treatment of stripped coupons, and it is uncertain how the section will be
applied to securities like the IO Certificates. The OID Regulations do not
include rules relating specifically to "stripped coupons," although they provide
guidance as to how the OID sections of the Code will generally be applied. The
discussion below assumes that a holder of an IO Certificate will not own any P&I
Certificates. Holders of IO Certificates should consult their tax advisors
concerning the method to be used in reporting income or loss on the IO
Certificates.
Under the stripped coupon rules, it appears that OID will be required to be
accrued for each day on the IO Certificates based on a constant yield to
maturity method. See "--Taxation of Owners of P&I Certificates--Treatment as
Stripped Bonds," above. It is unclear in the absence of Treasury Regulations
whether a reasonable prepayment assumption is required or permitted to be
applied to calculate the yield to maturity under a provision of the 1986 Act.
The accrual of income on the IO Certificates will be significantly slower if a
reasonable prepayment assumption is permitted to be made than if yield is
computed assuming no prepayments.
POSSIBLE APPLICATION OF PROPOSED CONTINGENT PAYMENT RULES. Under the OID
Regulations, debt instruments providing for contingent payments are subject to
different rules than debt instruments providing for non-contingent payments. To
the extent that all or a portion of the issue price, or the Contingent
Principal, of the IO Certificates would not be recovered if the related Loans
were prepaid, the IO Certificates could be considered to be debt instruments
providing for contingent payments within the meaning of the current Treasury
Regulations dealing with debt instruments that provide for contingent payments.
Treasury Regulations concerning the treatment of debt instruments providing
for one or more contingent payments became effective on June 14, 1996, called
the "CONTINGENT PAYMENT REGULATIONS", for debt instruments issued on or after
August 13, 1996. Although the assets may include debt instruments issued before
August 13, 1996, and thus not technically subject to the Contingent Payment
Regulations, the issuer expects to treat any contingent payments on both sets of
instruments in accordance with the Contingent Payment Regulations.
The Contingent Payment Regulations establish a "noncontingent bond method"
for the treatment of debt instruments providing for contingent payments that are
issued for money or other publicly traded property. Under this method, the
holder of a contingent payment debt instrument will generally be required to
accrue interest on the debt instrument on the basis of a projected schedule of
the contingent and noncontingent payments to be made on the debt instrument
prepared by the issuer. These interest accruals will be required to be
calculated on an economic accrual basis applying rules similar to those
applicable to noncontingent debt instruments issued with OID treating none of
the payments on the debt instrument as "qualified stated interest." In
formulating the projected payment schedule, the issuer will be required to take
into account the noncontingent payments provided by the debt instrument, any
readily available forward price quotes for property
-113-
<PAGE>
rights that are substantially similar to the right to any contingent payments on
the debt instrument and any readily available spot price quotes for an option or
combination of options that are substantially similar to the right to any
contingent payments on the debt instrument. If the debt instrument contains
contingent payments for which forward or spot quotes are not readily available,
the payment schedule will be required to result in a reasonable yield for the
debt instrument that reflects any quotable contingent payments and the relative
expected values of any nonquotable contingent payments.
If the amount of a contingent payment varies from its projected amount, the
holder will generally be required to include the variance as a positive or
negative adjustment to income in the year in which the payment is made. Positive
adjustments will be treated as ordinary interest income while negative
adjustments will result in ordinary loss. The amount of the ordinary loss
allowable for the year will be limited to the excess of the total interest
accrued to date on the debt instrument over the total amount of any negative
adjustments included as ordinary loss in previous years.
The Contingent Payment Regulations generally treat any gain on sale of a
contingent payment debt instrument as ordinary interest income. Loss realized on
sale of a contingent payment debt instrument is treated as ordinary loss to the
extent of the excess of the total interest accrued on the debt instrument to the
date of sale over the total amount of any negative adjustments previously
included in income. Any remaining loss is treated as capital loss.
Under these provisions, each holder of an IO Certificate which has
Contingent Principal will generally be required to accrue interest under the
"noncontingent bond method." Although the issuer intends to provide to holders a
projected schedule under the "noncontingent bond method," holders should consult
their own tax advisers regarding the application of the Contingent Payment
Regulations.
ADMINISTRATION FEE, VOLUNTARY ADVANCES AND SUBORDINATED AMOUNT
The income received on a certificate generally includes amounts not paid to
the certificate-holder because they are used to pay the Administration Fee.
Subject to limitations on the deductibility by individual certificateholders of
some categories of expenses under Code Section 67 and the reduction of some
deductible expenses for individual certificateholders under Code Section 68 (see
"--Qualification as a REMIC--Pass-Through of Miscellaneous Itemized Deductions"
above), each certificateholder may deduct its allocable share of the
Administration Fee paid to or retained by the Master Servicer, to the extent the
fee constitutes reasonable compensation for the services rendered by the Master
Servicer, at the times and in the manner as it would have been deducted under
the certificateholder's tax accounting method had it actually received those
amounts and paid them to the Master Servicer. Payments of voluntary servicing
advances and payments in
-114-
<PAGE>
respect of the Subordinated Amount, if any, to certificateholders should be
treated as having the same character as the payments they replace.
SALES OF CERTIFICATES
Except as provided above for accrued market discount under "--Taxation of
Owners of P&I Certificates--If Stripped Bond Rules Do Not Apply," and, in the
case of banks and other financial institutions, except as provided under Code
Section 582(c), any gain or loss, equal to the difference between the amount
realized on the sale and the adjusted basis of the certificate, recognized on
the sale or exchange of a certificate by an investor who holds the certificate
as a capital asset, will be capital gain or loss. The Federal income tax rates
applicable to capital gains for taxpayers other than individuals, estates, and
trusts are currently the same as those applicable to ordinary income. However,
the maximum ordinary income tax rate for individuals, estates, and trusts is
generally 39.6%, whereas the maximum long-term capital gains rate for these
taxpayers is 20% for capital assets held for more than 12 months. Capital losses
generally may be used by a corporate taxpayer only to offset capital gains, and
by an individual taxpayer only to the extent of capital gains plus $3,000 of
other income.
The adjusted basis of a certificate will generally equal its cost,
increased by any income reported by the seller and reduced, but not below zero,
by any previously reported losses and by any distributions on the certificate.
Purchasers of certificates should be aware that, if income must be accrued
on a certificate as if it were a separate instrument, it may not be possible to
determine whether the adjusted tax basis of the certificate will be recovered in
full until all of the Loans in the related Trust have been paid or otherwise
discharged. Conversely, if income must be accrued on each certificateholder's
undivided interest in each Loan in the related Trust, it is likely that a
portion of each certificate-holder's adjusted tax basis will have to be
allocated to each undivided interest. It then should be possible to determine
whether the adjusted tax basis allocable to an undivided interest in a Loan in
the related Trust has been recovered at the time the Loan is paid or discharged.
This approach may result in the earlier recognition of any losses attributable
to a certificateholder's unrecovered adjusted tax basis than if the certificate
were treated as a separate instrument. However, because of the uncertainties
involved and in the absence of substantial legal authority to the contrary, the
Master Servicer does not intend to allocate the adjusted tax basis of a
certificateholder in its certificate to the undivided interest in each Loan
represented by the certificate nor to determine and report whether any allocable
adjusted tax basis has been recovered at the time a Loan in the related Trust is
paid or discharged. Due to the existence of the Subordinated Amount, the effect
of this treatment by the Master Servicer is not expected to be significant on a
P&I certificateholder.
-115-
<PAGE>
REPORTING
On each Distribution Date, the Master Servicer will cause the Trustee to
furnish to each certificateholder a statement setting forth the amount of the
distribution allocable to principal on the Loans and to interest on the Loans at
the related Pass-Through Rate. In addition, the Master Servicer will furnish,
within a reasonable time after the end of each calendar year, to each holder of
a certificate who was a holder at any time during that year, information
regarding the amount of servicing compensation received by the Master Servicer
and sub-servicers, if any, and other customary factual information as the Master
Servicer deems necessary or is required by law to enable holders of certificates
to prepare their tax returns. However, as long as the only "certificateholder"
of record is CEDE & Co., as nominee for DTC, certificateholders and the IRS will
receive tax and other information from DTC Participants and indirect
participants rather than the Master Servicer. (The Master Servicer, however,
will respond to requests for necessary information to enable DTC Participants,
indirect participants and other persons to complete their reports.)
Because the particular applications of the general method for computing
accrued income are varied and complex and involve factual as well as legal
uncertainties, the extent to which income will be recognized in advance of the
receipt of cash under the OID rules is uncertain. Additional guidance is
required from the Internal Revenue Service or other legal authority before it is
possible to determine definitely the proper methods for accruing income on the
certificates. In the absence of additional guidance from the Internal Revenue
Service or other legal authority, the Master Servicer intends to compute and
report accrued income on the certificates for tax purposes in a manner that it
believes to be consistent with the principles of the Code and the OID
Regulations described above. Because of the uncertainties discussed above, there
can be no assurance that the method adopted by the Master Servicer for reporting
to holders of certificates will coincide with that ultimately adopted in final
Treasury Regulations. Accordingly, holders of certificates should consult their
tax advisors regarding the method for reporting the amounts received or accrued
on the certificates. The Trustee intends in reporting information relating to
OID to certificateholders of record, which, in the case of certificates
registered to CEDE & Co., as nominee of DTC, shall be distributed to certificate
owners by DTC Participants and indirect participants of DTC, to provide this
information on an aggregate pool-wide basis. Although there are provisions in
the OID Regulations that suggest that the computation of OID on this basis is
either appropriate or required, it is possible that investors may be required to
compute OID on a Loan by Loan basis taking account of an allocation of their
basis in the certificates among the interests in the various Loans represented
by the certificates according to their respective fair market values. Investors
should be aware that it may not be possible to reconstruct after the fact
sufficient Loan by Loan information should the Internal Revenue Service require
computation on that basis. See "--Sales of Certificates" above.
-116-
<PAGE>
BACKUP WITHHOLDING
In general, the rules described in "--Qualification as a REMIC--Backup
Withholding" above, will also apply to certificates.
FOREIGN INVESTORS
In general, the discussion on Regular Certificates in "--Qualification as a
REMIC--Foreign Investors" above, applies to certificates.
STATE TAX CONSIDERATIONS
In addition to the Federal income tax consequences described in "Federal
Income Tax Consequences" above, potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not describe any aspect of
the income tax laws of any state. Therefore, potential investors should consult
their own tax advisors about the various tax consequences of investments in the
certificates.
PLAN OF DISTRIBUTION
The Depositor may sell the certificates in any of three ways:
o through underwriters or dealers;
o directly to a limited number of purchasers or to a single purchaser;
or
o through agents.
The prospectus supplement will set forth the terms of the offering of each
series of certificates including:
o the name or names of any underwriters, dealers or agents;
o the purchase price of the certificates and the proceeds to the
Depositor from the sale;
o any underwriting discounts and other items constituting underwriters'
compensation; and
o any discounts and commissions allowed or paid to dealers.
-117-
<PAGE>
Any initial public offering prices and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
If so specified in the prospectus supplement, the Depositor or any of its
affiliates may purchase or retain some or all of one or more classes of
certificates of the series. The purchaser may thereafter from time to time offer
and sell, pursuant to this prospectus, some or all of the certificates so
purchased directly, through one or more underwriters to be designated at the
time of the offering of the certificates or through broker-dealers acting as
agent and/or principal. The offering may be restricted in the manner specified
in the related prospectus supplement. The transactions may be effected at market
prices prevailing at the time of sale, at negotiated prices or at fixed prices.
In addition, the Depositor or an affiliate of the Depositor may pledge
certificates retained or purchased by the Depositor in connection with
borrowings or use them in repurchase transactions.
If any certificates of any series are sold through underwriters, the
related prospectus supplement will describe the nature of the obligation of the
underwriters to purchase the certificates. The certificates may be offered to
the public either through underwriting syndicates represented by one or more
managing underwriters or directly by one or more underwriting firms acting
alone. The underwriter or underwriters for a particular underwritten offering of
certificates will be named in the prospectus supplement relating to that
offering, and, if an underwriting syndicate is used, the managing underwriter or
underwriters will be set forth on the cover of the related prospectus
supplement. Unless otherwise described in a prospectus supplement, the
obligation of the underwriters to purchase any certificates of the related
series will be subject to various conditions precedent, and the underwriters
will be obligated to purchase all of the certificates if any are purchased.
Underwriters and agents who participate in the distribution of a series of
certificates may be entitled under agreements which may be entered into by the
Depositor to indemnification by the Depositor against specific liabilities,
including liabilities under the Securities Act, as amended, or to contribution
for payments which the underwriters or agents may be required to make under the
terms of the agreements.
The prospectus supplement for any series of certificates offered other than
through underwriters will contain information regarding the nature of the
offering and any agreements to be entered into between the Depositor and dealers
for the certificates of that series.
Affiliates of the Depositor, including ABN AMRO Incorporated ("AAI"), may
act as agents or underwriters in connection with the sale of a series of
certificates. AAI is a separately incorporated, wholly-owned indirect non-bank
subsidiary of ABN AMRO Bank N.V. AAI is not a bank. Securities sold, offered or
recommended by AAI are not deposits, are not insured by the
-118-
<PAGE>
Federal Deposit Insurance Corporation, are not guaranteed by, and are not
otherwise obligations of, any bank or thrift affiliate of AAI and involve
investment risks, including the possible loss of principal.
Any affiliate of the Depositor acting as agent or underwriter in connection
with the sale of a series of certificates will be named, and its affiliation
with the Depositor described, in the related prospectus supplement. For
underwritten offerings, any of these affiliates not named in the prospectus
supplement will not be parties to the related underwriting agreement, will not
be purchasing the related certificates from the Depositor and will have no
direct or indirect participation in the underwriting of the certificates,
although the affiliates may participate in the distribution of the certificates
under circumstances entitling it to a dealer's commission. An affiliate of the
Depositor may act as a placement agent for certificates not offered through
underwriters. If an affiliate does act as placement agent on behalf of the
Depositor in the sale of certificates, it will receive a selling commission
which will be disclosed in the related prospectus supplement. To the extent
permitted by law, affiliates of the Depositor, including AAI, may purchase
certificates acting as principal.
The Depositor anticipates that the certificates will be sold to
institutional and retail investors. Purchasers of certificates, including
dealers, may, depending on the facts and circumstances of the purchases, be
deemed to be "underwriters" within the meaning of the Securities Act in
connection with re-offers and sales by them of certificates. Certificateholders
should consult with their legal advisors in this regard prior to any re-offer or
sale.
There is currently no secondary market for the certificates. The Depositor
does not intend to make a secondary market for the certificates. There can be no
assurance that a secondary market for the certificates will develop or, if it
does develop, that it will continue. Unless otherwise stated in the prospectus
supplement, the certificates will not be listed on any securities exchange.
LEGAL MATTERS
The legality of the certificates of each series and the federal income tax
consequences will be passed upon for the Depositor by Mayer, Brown, Rowe & Maw,
Chicago, Illinois or Thacher Proffitt & Wood, New York, New York. Matters
relating to corporate law will be passed upon for the Depositor by Kirk P.
Flores, Esq., in-house counsel to the Depositor.
-119-
<PAGE>
RATING
Any class of certificates of a series offered by this prospectus and the
related prospectus supplement will be:
o rated by at least one nationally recognized statistical rating agency
or organization that initially rates the series at the request of the
depositor and
o is identified in the related prospectus supplement in one of the
rating agency's four highest rating categories which are referred to
as investment grade.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions of payments required pursuant
to the Pooling and Servicing Agreement pursuant to which the certificates are
issued on the Underlying Loans. These ratings address the structural, legal and
issuer tax-related aspects associated with the certificates, the nature of the
Underlying Loans and the credit quality of the guarantor, if any. Ratings on
mortgage pass- through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which
prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
Each rating should be evaluated independently of similar ratings on different
securities.
WHERE YOU CAN FIND MORE INFORMATION
ABN AMRO MORTGAGE CORPORATION
We will file reports and other information with the SEC about the Trust
issuing your certificates. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C..
Please call the SEC at 1-800-SEC-0330 for further information on their public
reference rooms.
The SEC allows us to incorporate by reference the information we file with
them about the Trust issuing your certificates. This means that we can disclose
important information to you by
-120-
<PAGE>
referring you to these documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC about the Trust issuing your certificates will automatically update and
supersede this information. You may request a copy of our filings at no cost by
writing or telephoning at the following address:
ABN AMRO Mortgage Corporation
135 South LaSalle Street, Suite 925
Chicago, Illinois 60603
Attention: Maria Fregosi--Director--ABN AMRO Mortgage Operations
Telephone: 312-904-2000
In addition, we will provide you with reports annually and monthly on each
Distribution Date containing information about the Trust and your certificates.
ADDITIONAL INFORMATION RELATING TO THE MORTGAGE CERTIFICATES
Copies of the most recent prospectus for certificates issued by FNMA and
FNMA's annual report and other quarterly financial statements as well as other
financial information may be obtained from FNMA by writing or calling its MBS
Helpline at 3900 Wisconsin Avenue, N.W., Area 2H-3S, Washington, D.C. 20016,
telephone 1-800-BEST-MBS or 202-752-6547. Neither the Depositor nor any of the
underwriters which might be designated to offer the certificates participated in
the preparation of any of these documents, and has not conducted any independent
inquiry to verify the accuracy or completeness of the information described in
FNMA's prospectus, annual report or other reports or statements.
Copies of the most recent Offering Circular for certificates issued by
FHLMC as well as FHLMC's most recent Information Statement and Information
Statement Supplement can be obtained by writing or calling the Investor Inquiry
Department of FHLMC at 8200 Jones Branch Drive, McLean, Virginia 22102
(telephone 1-800-336-FMPC). Neither the Depositor nor any of the underwriters
which might be designated to offer the certificates participated in the
preparation of any of these documents and has not conducted any independent
inquiry to verify the accuracy or completeness of the information contained in
FHLMC's Offering Circular, Information Statement or Information Statement
Supplement.
-121-
<PAGE>
Index to Prospectus Definitions
-------------------------------
1986 Act.....................................................................110
1998 Policy Statement.........................................................82
AAI..........................................................................118
Accretion Directed.............................................................5
Accrual........................................................................5
Accrual Period.................................................................8
Act...........................................................................77
Administration Fee............................................................33
Applicable Amount............................................................100
ARMs..........................................................................15
Assets........................................................................92
Available Distribution Amount.................................................41
Back-Up Master Servicer.......................................................52
Balloon Loan..................................................................15
BIF...........................................................................13
Buydown Loan..................................................................15
CERCLA........................................................................78
Certificate Account............................................................7
Closing Date..................................................................57
Co-op Loans...................................................................14
Code...........................................................................3
Committee Report..............................................................94
Contingent Payment Regulations...............................................113
Contingent Principal.........................................................112
Custodial Account for P&I.....................................................42
Custodians....................................................................53
Cut-off Date...................................................................3
Deferred Interest.............................................................17
Definitive certificates.......................................................67
Depositor......................................................................1
Determination Date.............................................................9
Disqualified Persons..........................................................84
Distribution Date..............................................................4
DOL...........................................................................84
Due Date.......................................................................9
Eligible Investments...........................................................7
ERISA.........................................................................83
Excess Liquidation Proceeds...................................................42
FDIC..........................................................................13
FHA...........................................................................21
FHA Loans.....................................................................21
FHLMC.........................................................................12
FHLMC Act.....................................................................22
Fixed-Rate Loans..............................................................15
FNMA..........................................................................13
Forward Purchase Agreement....................................................57
Fractional Undivided Interest..................................................2
GNMA..........................................................................20
Gross Margin..................................................................16
Guide.........................................................................18
Housing Act...................................................................20
HUD...........................................................................12
Index.........................................................................16
Interest Only..................................................................5
Interest Remittance Amount....................................................35
IO certificates..............................................................108
Lease.........................................................................80
Loans..........................................................................1
Master Servicer................................................................1
Mortgage Assets................................................................1
Mortgage Certificates..........................................................1
NCUA..........................................................................82
-122-
<PAGE>
Negatively Amortizing ARMs....................................................17
Net Margin....................................................................33
Non-Accelerated................................................................6
OID...........................................................................89
OID Regulations...............................................................89
OTS...........................................................................82
P&I Certificates.............................................................108
Parties in Interest...........................................................84
Pass-Through Rate.............................................................33
Payment Caps..................................................................17
Percentage Interest............................................................2
Plans.........................................................................84
Pooling and Servicing Agreement................................................1
Pre-Funding Account...........................................................12
Prepayment.....................................................................5
Prepayment Assumption.........................................................94
Prepayment Interest Shortfall.................................................35
Prepayment Period.............................................................42
Principal Only.................................................................5
Principal Prepayments..........................................................9
Private.......................................................................24
PTCE..........................................................................86
PTE 83-1......................................................................85
PUDs..........................................................................14
Realized Loss.................................................................48
Record Date....................................................................7
Regular Certificateholder.....................................................93
Regular certificates..........................................................90
REMIC.........................................................................89
REMIC Regulations.............................................................89
Remittance Rate............................................................4, 33
Reserve Fund..................................................................31
Residual.......................................................................6
Residual certificates.........................................................90
Residual Holder................................................................2
SAIF..........................................................................13
Senior.........................................................................4
Sequential Pay.................................................................5
Shifting Interest Credit Enhancement..........................................28
SMMEA.........................................................................81
Specified Reserve Fund Balance................................................31
Startup Day...................................................................91
Stripped.......................................................................5
Subordinate....................................................................4
Subordinated Amount............................................................5
Superlien.....................................................................78
Surplus........................................................................6
Title V.......................................................................79
Trust..........................................................................1
Trustee........................................................................1
Unanticipated Recovery........................................................48
Underlying Loans...............................................................1
Underwriter Exemption.........................................................87
United States person.........................................................107
VA............................................................................21
-123-
<PAGE>
ABN AMRO MORTGAGE CORPORATION
$352,904,666
MULTI-CLASS MORTGAGE
PASS-THROUGH CERTIFICATES,
SERIES 2003-13
[GRAPHIC OMITTED]
----------------
PROSPECTUS SUPPLEMENT
----------------
UNDERWRITERS
CREDIT SUISSE FIRST BOSTON
ABN AMRO FINANCIAL SERVICES, INC.
DECEMBER 23, 2003
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the offered certificates in any state where the offer is
not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the offered certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the offered
certificates will deliver a prospectus supplement and prospectus until March
23, 2004.
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----