PROSPECTUS SUPPLEMENT DATED MARCH 26, 2001 (TO PROSPECTUS DATED MARCH 26, 2001)
$254,126,000 (APPROXIMATE)
NEW SOUTH HOME EQUITY TRUST 2001-1
ASSET-BACKED CERTIFICATES, SERIES 2001-1
SELLER AND MASTER SERVICER
FINANCIAL ASSET SECURITIES CORPORATION
DEPOSITOR
CONSIDER CAREFULLY Only the three classes of certificates identified below are being offered by this prospectus
THE RISK FACTORS supplement and the accompanying prospectus.
BEGINNING ON PAGE
S-9 IN THIS
PROSPECTUS THE OFFERED CERTIFICATES
SUPPLEMENT AND ON
PAGE 4 IN THE o Represent ownership interests in a trust consisting primarily of closed-end, fixed-rate loans
PROSPECTUS. secured primarily by first or second mortgages or deeds of trust on residential one- to four-
The certificates family properties and security interests in manufactured homes. The loans will be segregated
represent into two groups, one consisting of loans with principal balances that conform to Fannie Mae
obligations of the and Freddie Mac guidelines and one consisting of loans with principal balances that may or
trust only and do may not conform to Fannie Mae and Freddie Mac guidelines.
not represent an
interest in or o The Class A-1 Certificates and the Class A-2 Certificates will accrue interest at the applicable
obligation of fixed rate set forth below, subject to certain limitations described in this prospectus
Financial Asset supplement.
Securities
Corporation, New o The Class S-1 Certificates will accrue interest for 24 months on its notional amount at a fixed
South Federal rate described below, subject to certain limitations described in this prospectus supplement.
Savings Bank or
any of their
affiliates. This CREDIT ENHANCEMENT
prospectus
supplement may be o Policy - Ambac Assurance Corporation will issue a certificate guaranty insurance policy which
used to offer and will guarantee certain payments on the offered certificates.
sell the certificates
only if accompanied
by the prospectus.
o Overcollateralization and Excess Interest as described in this prospectus supplement under
"Description of the Certificates--Overcollateralization Provisions."
o Crosscollateralization as described in this prospectus supplement under "Description of the
Certificates--Allocation of Available Funds"
- -----------------------
ORIGINAL
CERTIFICATE PASS UNDERWRITING PROCEEDS TO THE
CLASS PRINCIPAL BALANCE THROUGH RATE(1)(4) PRICE TO PUBLIC(2) DISCOUNT DEPOSITOR(2)(3)
----- ----------------- ------------------ ------------------ -------- ---------------
Class A-1............ $ 231,101,000 6.179% 100.00% 0.25% 99.75%
Class A-2............ $ 23,025,000 6.491% 100.00% 0.25% 99.75%
Class S-1............ $ 23,110,000(5) 5.490% (6) (6) (6)
- --------------------
(1) Subject to limitation as described herein.
(2) Plus accrued interest from March 1, 2001.
(3) Before deducting expenses estimated to be $475,000.
(4) Subject to increase as described herein.
(5) Original Notional Amount.
(6) The Class S-1 Certificates will be offered solely by Greenwich Capital
Markets, Inc. in negotiated transactions at varying prices determined at
the time of sale. See "Method of Distribution" in this prospectus
supplement.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES 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.
Delivery of the Offered Certificates will be made in book-entry form through the
facilities of The Depository Trust Company, and upon request through the
facilities of Clearstream Banking Luxembourg and the Euroclear System on or
about March 29, 2001.
GREENWICH CAPITAL MARKETS, INC.
FIRST UNION SECURITIES, INC.
UBS WARBURG LLC
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
SUMMARY OF TERMS........................................................................................................S-3
RISK FACTORS............................................................................................................S-9
DESCRIPTION OF THE LOANS...............................................................................................S-16
NEW SOUTH FEDERAL SAVINGS BANK.........................................................................................S-30
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS..........................................................................S-35
THE POOLING AGREEMENT..................................................................................................S-42
DESCRIPTION OF THE CERTIFICATES........................................................................................S-48
THE CERTIFICATE INSURER................................................................................................S-59
THE CERTIFICATE INSURANCE POLICY.......................................................................................S-61
USE OF PROCEEDS........................................................................................................S-62
FEDERAL INCOME TAX CONSEQUENCES........................................................................................S-62
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS..............................................................................S-64
LEGAL INVESTMENT CONSIDERATIONS........................................................................................S-64
EXPERTS................................................................................................................S-65
METHOD OF DISTRIBUTION.................................................................................................S-65
LEGAL MATTERS..........................................................................................................S-66
RATINGS................................................................................................................S-66
INDEX OF DEFINED TERMS.................................................................................................S-68
ANNEX I.................................................................................................................I-1
S-2
SUMMARY OF TERMS
O 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 ALL OF THE TERMS OF THE OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
O THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION TO AID YOUR UNDERSTANDING AND IS QUALIFIED
BY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES AND
OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. SOME OF THE INFORMATION CONSISTS OF FORWARD-LOOKING STATEMENTS
RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER FINANCIAL
ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED
RESULTS. THOSE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE
WITH GOVERNMENTAL REGULATIONS, AND VARIOUS OTHER MATTERS, ALL OF WHICH ARE
BEYOND OUR CONTROL. ACCORDINGLY, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
OFFERED CERTIFICATES
On the Closing Date, New South Home Equity Trust 2001-1 will issue six classes
of certificates, three of which are being offered by this prospectus supplement
and the accompanying prospectus. The assets of the trust that will support the
certificates will consist primarily of a pool of closed-end, fixed- rate loans
secured primarily by first or second mortgages or deeds of trust on residential
one- to four-family properties and by security interests in manufactured homes
having the characteristics described in this prospectus supplement. The Class
A-1 Certificates, the Class A-2 Certificates and the Class S-1 Certificates are
the only classes of Offered Certificates. The Class A-1 Certificates and the
Class S-1 Certificates (collectively, the "Group I Certificates") will represent
interests primarily in a group of fixed-rate loans ("Loan Group I") having
principal balances that conform to Fannie Mae and Freddie Mac guidelines and
have the characteristics described in this prospectus supplement. The Class A-2
Certificates (the "Group II Certificates") will represent interests primarily in
a group of fixed-rate loans ("Loan Group II") having principal balances that may
or may not conform to Fannie Mae and Freddie Mac guidelines and have the
characteristics described in this prospectus supplement.
The Offered Certificates will be book-entry securities clearing through The
Depository Trust Company (in the United States) or upon request through
Clearstream Banking Luxembourg and the Euroclear System (in Europe) in minimum
denominations of $50,000.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES-- GENERAL," "--BOOK-ENTRY
CERTIFICATES" AND "DESCRIPTION OF THE LOANS" IN THIS PROSPECTUS SUPPLEMENT.
OTHER CERTIFICATES
The trust will issue three additional classes of certificates. These
certificates will be designated as the Class C-1 Certificates, the Class C-2
Certificates and the Class R Certificates and are not being offered to the
public by this prospectus supplement and the prospectus.
Each class of Class C Certificates will have a Certificate Principal Balance as
of any date of determination equal to the excess, if any, of (i) the sum of the
principal balances of the loans in the related loan group and, in the case of
the Class C-1 Certificates, the amount on deposit in the related pre- funding
account over (ii) the Certificate Principal Balance of the related Class A
Certificates. The Class C Certificates will be entitled to interest calculated
as provided in the pooling agreement. The Class C Certificates will be delivered
to the Seller or its designee as partial consideration for the sale of the
loans.
The Class R Certificates will not have an initial principal balance and are the
class of certificates representing the non-economic residual interests in the
trust. The Class R Certificates will be delivered to the Seller or its designee
as partial consideration for the sale of the loans.
CUT-OFF DATE
The close of business on February 28, 2001.
CLOSING DATE
On or about March 29, 2001.
S-3
SUBSEQUENT CUT-OFF DATE
For loans to be purchased by the trust after the Closing Date, the later of the
close of business on the last business day of the month prior to the month in
which such purchase will take place and the origination date of such loan.
THE DEPOSITOR
Financial Asset Securities Corporation, a Delaware corporation and a wholly
owned subsidiary of Greenwich Capital Markets, Inc. WE REFER YOU TO "THE
DEPOSITOR" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
SELLER AND MASTER SERVICER
New South Federal Savings Bank, a federally chartered savings bank. WE REFER YOU
TO "NEW SOUTH FEDERAL SAVINGS BANK" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
TRUSTEE
The Bank of New York, a New York banking corporation. WE REFER YOU TO "THE
POOLING AGREEMENT--THE TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL
INFORMATION.
CERTIFICATE INSURER
Ambac Assurance Corporation. WE REFER YOU TO "THE CERTIFICATE INSURER" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
DESIGNATIONS
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o OFFERED CERTIFICATES
Class A Certificates and Class S-1 Certificates.
o CLASS A CERTIFICATES
Class A-1 Certificates and Class A-2 Certificates.
o GROUP I CERTIFICATES
Class A-1 Certificates and Class S-1 Certificates. Except under the
circumstances described under "Description of the Certificates--Allocation
of Available Funds", the Group I Certificates receive their distributions
from Loan Group I. The Group I Certificates are sometimes collectively
referred to as Certificate Group I.
o GROUP II CERTIFICATES
Class A-2 Certificates. Except under the circumstances described under
"Description of the Certificates--Allocation of Available Funds", the Group
II Certificates receive their distributions from Loan Group II. The Group
II Certificates are sometimes collectively referred to as Certificate Group
II.
o CLASS C CERTIFICATES
The Class C-1 Certificates and the Class C-2 Certificates.
o RESIDUAL CERTIFICATES
Class R Certificates.
LOANS
On the Closing Date the trust will acquire a pool of fixed-rate, closed-end
loans secured by first or second priority liens and having original terms to
maturity of not greater than 30 years. The loans will be divided into two loan
groups, Loan Group I and Loan Group II (each, a "Loan Group").
Loan Group I will consist of fixed-rate loans with principal balances that
conform to Fannie Mae and Freddie Mac guidelines included in the group as of the
Closing Date (the "Initial Group I Loans") and any subsequent fixed-rate loans
with principal balances that conform to Fannie Mae and Freddie Mac guidelines
that will be included in the group on or before June 19, 2001 (the "Subsequent
Group I Loans"; together with the Initial Group I Loans, the "Group I Loans").
Loan Group II will consist of fixed-rate loans with principal balances that may
or may not conform to Fannie Mae and Freddie Mac guidelines included in the
group as of the Closing Date (the "Group II Loans"). The Initial Group I Loans
and the Group II Loans are sometimes referred to together as the "Closing Date
Loans."
Loans representing approximately 88.54% and approximately 97.29% of the
principal balance of the Closing Date Loans in Loan Group I and Loan Group II ,
respectively, as of the Cut-off Date (the
S-4
"Mortgage Loans") will be secured by mortgages or deeds of trust on residential
real properties ("Mortgaged Properties"). Loans representing approximately
11.46% and approximately 2.71% of the principal balance of the Closing Date
Loans in Loan Group I and Loan Group II, respectively, as of the Cut-off Date
(the "Manufactured Home Loans", and together with the Mortgage Loans, the
"Loans") will be secured by security interests in manufactured homes that are
not real estate (the "Manufactured Homes" and together with the Mortgaged
Properties, the "Properties").
The statistical information in this prospectus supplement reflects the
characteristics of the Closing Date Loans as of the Cut-off Date for those
loans. After the date of this prospectus supplement and prior to the Closing
Date, some loans may be added to the pool and some loans may be removed from the
pool, as described under "Description of the Loans" in this prospectus
supplement. The Depositor believes that the information set forth in this
prospectus supplement is representative of the characteristics of the pool as it
will be constituted at the Closing Date, although certain characteristics of the
Loans may vary.
The Closing Date Loans in Loan Group I have the following characteristics(1):
Loans with Prepayment Penalties: 47.74%
Range of Remaining Term 24 months to
to Stated Maturities: 360 months
Weighted Average Remaining
Term to Stated Maturity: 245 months
Range of Original Principal
Balances: $6,293 to $275,000
Average Original Principal $55,607
Balance:
Range of Outstanding Principal
Balances: $4,737 to $274,643
Average Outstanding Principal
Balance: $54,481
Current Range of Loan Rates: 6.125% to 16.750%
Current Weighted Average Loan
Rate: 10.484%
Geographic Concentration (top
three states):
Alabama 30.72%
Louisiana 15.62%
Mississippi 14.54%
(1) All figures are approximate. Percentages and weighted averages are based on
principal balances of the Closing Date Loans in Loan Group I as of their Cut-off
Date.
The Closing Date Loans in Loan Group II have the following characteristics(1):
Loans with Prepayment Penalties: 30.76%
Range of Remaining Term 55 months to
to Stated Maturities: 360 months
Weighted Average Remaining
Term to Stated Maturity: 239 months
Range of Original Principal
Balances: $10,000 to $750,000
Average Original Principal $73,288
Balance:
Range of Outstanding Principal
Balances: $289 to $658,417
Average Outstanding Principal
Balance: $71,286
Current Range of Loan Rates: 6.750% to 17.000%
Current Weighted Average Loan
Rate: 10.718%
Geographic Concentration (top
three states):
Alabama 29.88%
Louisiana 11.04%
Tennessee 9.85%
(1) All figures are approximate. Percentages and weighted averages are based on
principal balances of the Closing Date Loans in Loan Group II as of their
Cut-off Date.
DISTRIBUTION DATES
The Trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in April 2001 to the holder of record of the
certificates as of the last business day of the month immediately preceding the
month in which the distribution occurs. If the 25th day of a month is not a
business day, then the distribution will be made on the next business day.
PAYMENTS ON THE CERTIFICATES
INTEREST PAYMENTS
The pass-through rate for the Class A-1 Certificates will be 6.179% per annum
and the pass-through rate for the Class A-2 Certificates will be 6.491% per
annum, in each case subject to the limitations
S-5
described under "Description of the Certificates--Pass-Through Rates" in this
prospectus supplement. However, if the option to terminate the trust is not
exercised on the earliest permitted date as described below under "--Optional
Termination", the pass-through rate for the Class A-1 Certificates will then
increase to 6.679% per annum and the pass- through rate for the Class A-2
Certificates will then increase to 6.991% per annum, in each case subject to the
limitations described under "Description of the Certificates--Pass-Through
Rates" in this prospectus supplement.
The pass-through rate for the Class S-1 Certificates will be 5.490% per annum
for the April 2001 Distribution Date through the March 2003 Distribution Date.
After the March 2003 Distribution Date, the pass-through rate for the Class S-1
Certificates will be 0.000% per annum, and such class will cease to accrue
interest.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PASS-THROUGH RATES" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
INTEREST DISTRIBUTIONS
Interest payable on each class of Offered Certificates accrues during an accrual
period. The accrual period for the Offered Certificates for any Distribution
Date is the calendar month preceding the month in which such Distribution Date
occurs. Interest will be calculated for the Offered Certificates on the basis of
a 360-day year consisting of twelve 30-day months.
The Class A Certificates will accrue interest on their Certificate Principal
Balance outstanding immediately prior to each Distribution Date. The Class S-1
Certificates will accrue interest on their Notional Amount outstanding
immediately prior to each Distribution Date.
The "Notional Amount" of the Class S-1 Certificates immediately prior to any
Distribution Date will be equal to the lesser of (i) $23,110,000 and (ii) the
sum of the aggregate principal balance of the Loans in Loan Group I (prior to
giving effect to scheduled payments of principal received during the related due
period and unscheduled collections of principal received during the related due
period) and any amount remaining in the pre-funding account relating to Loan
Group I.
The Class C Certificates will accrue interest as provided in the pooling
agreement. The Residual Certificates will not accrue interest.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
PRINCIPAL DISTRIBUTIONS
Principal will be distributed to holders of the Class A Certificates on each
Distribution Date, but only in the amounts and to the extent described under
"Description of the Certificates--Allocation of Available Funds" in this
prospectus supplement.
PAYMENT PRIORITIES
Group I Certificates
In general, funds available on any Distribution Date for distribution from
payments and other amounts received or advanced on the Loans (other than
prepayment penalties) in Loan Group I will be distributed in the following
order:
FIRST, concurrently, to pay interest on the Class A-1 Certificates and the Class
S-1 Certificates, on a PRO RATA basis based on their respective entitlements;
and
SECOND, to pay principal on the Class A-1 Certificates, but only in the amounts
and to the extent described under "Description of the Certificates--Allocation
of Available Funds" in this prospectus supplement.
Group II Certificates
In general, funds available on any Distribution Date for distribution from
payments and other amounts received or advanced on the Loans (other than
prepayment penalties) in Loan Group II will be distributed in the following
order:
FIRST, to pay interest on the Class A-2 Certificates;
and
SECOND, to pay principal on the Class A-2 Certificates, but only in the amounts
and to the extent described under "Description of the Certificates--Allocation
of Available Funds" in this prospectus supplement.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF AVAILABLE FUNDS"
IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
Crosscollateralization
In certain limited circumstances, payments on the Loans in one Loan Group may be
used to make certain distributions to the holders of Offered
S-6
Certificates relating to the other Loan Group. WE REFER YOU TO "DESCRIPTION OF
THE CERTIFICATES-- ALLOCATION OF AVAILABLE FUNDS" IN THIS PROSPECTUS SUPPLEMENT
FOR ADDITIONAL INFORMATION.
ADVANCES
The Master Servicer will make cash advances in respect of interest (but not
principal) on delinquent Loans to the extent it reasonably believes that the
cash advances are recoverable from future payments on the Loans. Advances are
intended to maintain a regular flow of scheduled interest payments on the
certificates and are not intended to guarantee or insure against losses. WE
REFER YOU TO "THE POOLING AGREEMENT--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT AND
"DESCRIPTION OF THE SECURITIES--ADVANCES" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
PRE-FUNDING ACCOUNT
On or before June 19, 2001, the Depositor may sell and the trust will be
obligated to purchase Subsequent Loans for inclusion in Loan Group I.
On the Closing Date, the Depositor will deposit with the Trustee approximately
$25,000,000, which will be held by the Trustee in a separate pre-funding account
(the "Group I Pre-Funding Account").
The amount on deposit in the Group I Pre-Funding Account will be reduced by the
amount used to purchase Subsequent Group I Loans for inclusion in Loan Group I
during the period from the Closing Date up to and including June 19, 2001. Any
amounts remaining in the Group I Pre-Funding Account after June 19, 2001 will be
distributed on the next distribution date to the holders of the Class A-1
Certificates in the same priority as would be applicable in the case of payments
of principal on the Group I Loans. WE REFER YOU TO "DESCRIPTION OF THE
LOANS--CONVEYANCE OF SUBSEQUENT GROUP I LOANS AND THE GROUP I PRE-FUNDING
ACCOUNT" AND "DESCRIPTION OF THE CERTIFICATES--MANDATORY PREPAYMENTS ON CLASS
A-1 CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
INTEREST COVERAGE ACCOUNT
On the Closing Date, the Depositor will pay to the Trustee for deposit in an
interest coverage account related to Loan Group I, an amount as required by the
Certificate Insurer which will be applied by the Trustee to cover shortfalls in
the amount of interest generated by the Group I Loans attributable to the
pre-funding feature. WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--INTEREST
COVERAGE ACCOUNT" IN THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
OPTIONAL TERMINATION
The Master Servicer, or the Certificate Insurer if the Master Servicer fails to
exercise such option, may purchase all of the Loans in both Loan Groups and any
Properties then owned by the trust and retire the certificates when the current
aggregate principal balance of the Loans and Properties then owned by the trust
is equal to or less than 10% of the sum of the aggregate principal balance as of
the Cut-off Date of the Closing Date Loans in both Loan Groups and the balance
on deposit in the Group I Pre-Funding Account on the Closing Date. WE REFER YOU
TO "THE POOLING AGREEMENT --TERMINATION" AND "DESCRIPTION OF THE
CERTIFICATES--PASS-THROUGH RATES" IN THIS PROSPECTUS SUPPLEMENT AND "THE
AGREEMENTS--TERMINATION; OPTIONAL TERMINATION" IN THE PROSPECTUS FOR ADDITIONAL
INFORMATION.
CREDIT ENHANCEMENT
1. THE POLICY
The policy issued by the Certificate Insurer will guarantee the ultimate payment
of principal and the timely payment of interest on the Class A Certificates and
the timely payment of interest on the Class S-1 Certificates to the extent
described in this prospectus supplement. If the Certificate Insurer were unable
to pay under the policy, the Offered Certificates could be subject to losses. WE
REFER YOU TO "THE CERTIFICATE INSURANCE POLICY" AND "THE CERTIFICATE INSURER" IN
THIS PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
2. EXCESS INTEREST AND OVERCOLLATERALIZATION
The Loans bear interest each month that in the aggregate is expected to exceed
the amount needed to pay monthly interest on the Offered Certificates and to pay
certain fees and expenses of the trust. On the Closing Date, the sum of the
aggregate principal balance of the Initial Group I Loans as of the Cut-off Date
plus the amount on deposit in the Group I Pre- Funding Account will not exceed
the aggregate certificate principal balance of the Class A-1 Certificates by any
significant amount, and the aggregate principal balance of the Group II Loans as
of the Cut-off Date will not exceed the aggregate certificate principal balance
of the Class A-2 Certificates by any significant amount. However, as a result of
the application of excess interest in reduction of the certificate principal
balances of the Class A Certificates, the aggregate principal balance of the
Loans in each Loan Group is expected to
S-7
exceed the aggregate principal balance of the related class of Class A
Certificates by an amount that is expected to increase over time until it
reaches the required level of overcollateralization for such Loan Group. The
required level of overcollateralization for Loan Group I will initially be an
amount equal to 4.00% of the sum of the aggregate principal balance of the
Initial Group I Loans as of the Cut-off Date plus the amount on deposit in the
Group I Pre- Funding Account on the Closing Date. The required level of
overcollateralization for Loan Group II will initially be an amount equal to
4.00% of the aggregate principal balance of the Group II Loans as of the Cut-off
Date. However, the required level of overcollateralization for each Loan Group
for the first Distribution Date will be $0. The required level of
overcollateralization for either Loan Group may increase or decrease over time.
WE CANNOT ASSURE YOU THAT SUFFICIENT INTEREST WILL BE GENERATED BY THE LOANS TO
CREATE OR MAINTAIN THE REQUIRED LEVELS OF OVERCOLLATERALIZATION. WE REFER YOU TO
"DESCRIPTION OF THE CERTIFICATES-- OVERCOLLATERALIZATION PROVISIONS" IN THIS
PROSPECTUS SUPPLEMENT FOR ADDITIONAL INFORMATION.
RATINGS
It is a condition of the issuance of the Offered Certificates that they be
assigned the following ratings by Standard & Poor's Ratings Services ("S&P") and
Moody's Investors Service, Inc. ("Moody's"):
Class S&P Moody's
- ----- --- -------
A-1 AAA Aaa
A-2 AAA Aaa
S-1 AAA Aaa
A security rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by either of the rating
agencies. WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "RATING"
IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
TAX STATUS
One or more elections will be made to treat designated portions of the trust
(exclusive of the Group I Pre-Funding Account and the interest coverage account,
as described more fully herein) as real estate mortgage investment conduits for
federal income tax purposes. WE REFER YOU TO "FEDERAL INCOME TAX CONSEQUENCES"
IN THIS PROSPECTUS SUPPLEMENT AND "CERTAIN MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS" IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
It is expected that the Offered Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended so
long as certain conditions are met. A fiduciary of an employee benefit plan must
determine that the purchase of a certificate is consistent with its fiduciary
duties under applicable law and does not result in a nonexempt prohibited
transaction under applicable law. WE REFER YOU TO "CONSIDERATIONS FOR BENEFIT
PLAN INVESTORS" IN THIS PROSPECTUS SUPPLEMENT AND "ERISA CONSIDERATIONS" IN THE
PROSPECTUS FOR ADDITIONAL INFORMATION.
LEGAL INVESTMENT
The Offered Certificates will not be "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984. WE REFER YOU TO "LEGAL
INVESTMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND "LEGAL INVESTMENT"
IN THE PROSPECTUS FOR ADDITIONAL INFORMATION.
S-8
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
NATURE OF THE LOANS
The Seller's underwriting standards that were applicable to the
underwriting or re-underwriting of the Loans are intended to assess the
creditworthiness of the borrower and the value of the Property and to evaluate
the adequacy of such Property as collateral for the related Loan. In comparison
to first lien mortgage loans that conform to the underwriting guidelines of
Fannie Mae or Freddie Mac, the Loans have generally been underwritten or
re-underwritten with more lenient underwriting criteria. For example, the Loans
may have been made to borrowers having imperfect credit histories, ranging from
minor delinquencies to bankruptcies, or to borrowers with higher ratios of
monthly payments to income or higher ratios of total monthly credit payments to
income. Accordingly, the Loans will likely experience higher, and possibly
substantially higher, rates of delinquencies, defaults and losses than the rates
experienced by loans underwritten according to Fannie Mae or Freddie Mac
underwriting guidelines.
Furthermore, changes in the values of the Properties may have a greater
effect on the delinquency, foreclosure, bankruptcy and loss experience of the
Loans than on mortgage loans originated according to Fannie Mae or Freddie Mac
underwriting guidelines. No assurance can be given that the values of the
Properties have remained or will remain at the levels in effect on the dates of
origination of the related Loans.
In addition, manufactured housing generally depreciates in value.
Moreover, downturns in economic conditions have sharply depressed manufactured
housing prices on a historical basis. Consequently, the market value of a
Manufactured Home could be, or could become, less than the principal balance of
the related Loan. If a borrower defaults on its Manufactured Home Contract and
the Master Servicer is unable to recover the entire unpaid principal balance of
the related Loan through foreclosure of the related Manufactured Home (and any
land securing a land-and-home contract), the trust will suffer a loss.
UNPREDICTABILITY OF PREPAYMENTS AND EFFECT ON YIELDS
Borrowers may prepay their Loans in whole or in part at any time. We
cannot predict the rate at which borrowers will repay their Loans. A prepayment
of a Loan generally will result in a prepayment on the related Class A
Certificates.
o If you purchase Class A Certificates at a discount and principal is
repaid slower than you anticipate, then your yield may be lower than
you anticipate.
o If you purchase Class A Certificates at a premium and principal is
repaid faster than you anticipate, then your yield may be lower than
you anticipate.
o The yield to maturity of the Class S-1 Certificates will become
extremely sensitive to the rate of principal prepayment on the Loans,
if prior to February 1, 2003 the aggregate principal balance of the
Group I Loans is reduced to or below $23,110,000. INVESTORS IN THE
CLASS S-1 CERTIFICATES SHOULD FULLY CONSIDER THE RISK THAT AN EXTREMELY
RAPID RATE OF PRINCIPAL PREPAYMENT ON THE GROUP I LOANS COULD RESULT IN
THE FAILURE OF SUCH INVESTORS TO RECOVER THEIR INITIAL INVESTMENTS.
o The rate of prepayments on the Loans will be sensitive to prevailing
interest rates. Generally, if prevailing interest rates decline
significantly below the interest rates on the Loans, the Loans are more
likely to prepay than if prevailing rates remain above the interest
rates on the Loans. Conversely, if prevailing interest rates rise
significantly, prepayments on the Loans may decrease.
o Approximately 47.74% of the Initial Group I Loans and approximately
30.76% of the Group II Loans (in each case by aggregate principal
balance of the related Closing Date Loans as of the Cut-off Date)
require the borrower to pay a prepayment penalty in certain instances
if the borrower prepays the Loan during a stated period, which may be
from one year to five years after the Loan was originated. A prepayment
penalty may or may not discourage a borrower from prepaying the Loan
during the applicable period.
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o The Seller may be required to purchase Loans from the trust in the
event certain breaches of representations and warranties occur and have
not been cured. In addition, the Master Servicer has the option to
purchase Loans that become 90 days or more delinquent, subject to
certain limitations and conditions described in this prospectus
supplement. These purchases will have the same effect on the holders of
the Offered Certificates as a prepayment of those Loans. Moreover,
under certain circumstances, the Master Servicer has the option to sell
Loans 90 days or more delinquent to third parties at prices less than
their outstanding principal balances in accordance with the servicing
standard in the pooling agreement and as further described in this
prospectus supplement. These sales will have the same effect on the
holders of the Offered Certificates as a liquidation of those Loans.
o The Master Servicer, or if the Master Servicer does not exercise such
option, the Certificate Insurer, may purchase all of the Loans when the
aggregate principal balance of the Loans is equal to or less than 10%
of the sum of the aggregate principal balance of the Closing Date Loans
in both Loan Groups as of the Cut- off Date and the amount on deposit
in the Group I Pre-Funding Account on the Closing Date.
o As a result of (i) the absorption of realized losses on the Loans by
any available excess interest or overcollateralization as described in
this prospectus supplement and (ii) the availability of the policy,
liquidations of defaulted Loans, whether or not realized losses are
incurred upon such liquidations, will result in an earlier return of
the principal of the Class A Certificates and influence the yield on
the Offered Certificates in a manner similar to the manner in which
principal prepayments on the Loans will influence the yield on the
Offered Certificates.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the Class A
Certificates at any time that the overcollateralization provided by the
related Loan Group is below the required level. An earlier return of
principal to the holders of the Class A Certificates as a result of the
overcollateralization provisions will influence the yield on the Class
A Certificates in a manner similar to the manner in which principal
prepayments on the related Loans will influence the yield on the Class
A Certificates.
SEE "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING
OF PREPAYMENTS ON THE LOANS.
CONFLICTS OF INTEREST BETWEEN THE MASTER SERVICER AND THE TRUST
The Master Servicer will initially, directly or indirectly, own all or
a portion of the Class C Certificates and the Residual Certificates. The timing
of Loan foreclosures and sales of the related Properties may affect the weighted
average lives and yields of the Offered Certificates.Investors should consider
that the timing of such foreclosures or sales may not be in the best interests
of all certificateholders and that no formal policies or guidelines have been
established to resolve or minimize such a conflict of interest.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT FOR THE OFFERED CERTIFICATES
The credit enhancement features described in this prospectus supplement
are intended to enhance the likelihood that holders of the Class A Certificates
will receive regular payments of interest and the ultimate payment of principal
and that the holders of the Class S-1 Certificates will receive regular payments
of interest. If delinquencies or defaults occur on the Loans, neither the Master
Servicer nor any other entity will advance interest on delinquent or defaulted
Loans if such advances are not likely to be recovered. The Master Servicer will
not advance principal on any Loans.
IF THE PROTECTION TO BE PROVIDED BY ANY EXCESS INTEREST OR
OVERCOLLATERALIZATION THAT MAY BECOME AVAILABLE WERE TO PROVE INSUFFICIENT AND
THE CERTIFICATE INSURER WERE UNABLE TO MEET ITS OBLIGATIONS UNDER THE POLICY,
THEN YOU COULD EXPERIENCE A LOSS OF SOME OF YOUR INVESTMENT.
None of the Depositor, the Master Servicer, the Trustee, the Seller or
any of their respective affiliates or any other person will have any obligation
to replace or supplement any credit enhancement, or to take any other action to
maintain the ratings of the Offered Certificates.
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INTEREST GENERATED BY THE LOANS MAY BE INSUFFICIENT TO CREATE OR MAINTAIN
OVERCOLLATERALIZATION
The Loans in each Loan Group are expected to generate more interest
than is needed to pay interest owed on the related classes of Offered
Certificates and to pay certain fees and expenses of the trust. Any remaining
interest generated by the Loans will then be used to absorb losses that occur on
the Loans. After these financial obligations of the trust are covered, the
available excess interest generated by the Loans will be used to create and
maintain overcollateralization below the related classes of Offered Certificates
and, under certain circumstances, below the unrelated classes of Offered
Certificates. Overcollateralization will be created when such available excess
interest is applied as distribution of principal on the Class A Certificates
entitled to such distribution, in reduction of the Certificate Principal
Balances of such Class A Certificates. WE CANNOT ASSURE YOU, HOWEVER, THAT
ENOUGH EXCESS INTEREST WILL BE GENERATED TO CREATE OR MAINTAIN
OVERCOLLATERALIZATION AT THE LEVEL REQUIRED TO BE PROVIDED BY EITHER LOAN GROUP.
The factors described below, as well as the factors described in the
next Risk Factor, will affect the amount of excess interest that the Loans will
generate:
o Every time a Loan is prepaid in full, excess interest may be reduced
because such Loan will no longer be outstanding and generating interest
or, in the case of a partial prepayment, will be generating less
interest.
o Every time a Loan is liquidated or written off, excess interest may be
reduced because such Loan will no longer be outstanding and generating
interest.
o If the rates of delinquencies, defaults or losses on the Loans turn out
to be higher than expected, excess interest will be reduced by the
amount necessary to compensate for any shortfalls in cash available to
make required distributions on the Offered Certificates.
o If prepayments, defaults and liquidations occur more rapidly on the
Loans with relatively higher interest rates than on the Loans with
relatively lower interest rates, the amount of excess interest
generated by the Loans will be less than would otherwise be the case.
o If the Master Servicer does not terminate the trust at the earliest
possible date that such optional termination could occur as described
under "The Pooling Agreement--Termination" in this prospectus
supplement, then the pass-through rates on the Class A Certificates
will, subject to the limitation described in the next Risk Factor
below, increase. Any such increase would decrease the amount of excess
interest that could become available for other purposes.
THE PASS-THROUGH RATES ON THE CLASS A CERTIFICATES ARE SUBJECT TO LIMITATION
The Class A Certificates accrue interest at fixed pass-through rates,
but each such pass-through rate is subject to a limit. The limit on the
pass-through rates on the Class A Certificates is based on the weighted average
of the interest rates on the related Loans, net of certain fees and expenses of
the trust and, in the case of the Class A- 1 Certificates, net of the amount of
interest distributable on the Class S-1 Certificates. All of the Loans have
interest rates that are fixed.
A variety of factors, in addition to those described in the previous
Risk Factor, could limit the pass-through rate and adversely affect the yield to
maturity on the Class A Certificates. Some of these factors are described below.
o If prepayments, defaults and liquidations occur more rapidly on the
Loans with relatively higher interest rates than on the Loans with
relatively lower interest rates, the pass-through rate on the related
class of Class A Certificates is more likely to be limited.
o The required payment by the trust to the Certificate Insurer of
premiums on the policy will result in the limit on the pass-through
rates on the Class A Certificates being lower than would be the case if
the trust did not have such obligation.
o The limit on the pass-through rate on the Class A-1 Certificates will
be affected by the amount of interest payable on the Class S-1
Certificates. As the aggregate principal balance of the Group I Loans
is reduced by payments of principal (including prepayments and the
proceeds of liquidations of defaulted Group I Loans), the percentage of
the total amount of interest generated by the Group I Loans that is
used to pay
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interest on the Class S-1 Certificates will increase. Scheduled and
unscheduled collections of principal on the Group I Loans occurring
during the first 24 due periods will lower the pass-through rate
ceiling applicable to the Class A-1 Certificates. As a result, a rapid
rate of prepayments on or liquidations of the Group I Loans before the
end of the first 24 due periods would increase the likelihood that such
ceiling will limit the pass-through rate on the Class A-1 Certificates.
o The interest rates on the Loans will not adjust. Consequently, if the
pass-through rate on either class of Class A Certificates becomes
subject to the applicable limit, such limit may reduce the amount of
interest accruing on such class of Class A Certificates for an
indefinite period.
IF THE PASS-THROUGH RATE ON EITHER CLASS OF THE CLASS A CERTIFICATES IS
LIMITED FOR ANY DISTRIBUTION DATE, THE RESULTING SHORTFALLS WILL NOT BE
RECOVERABLE BY THE HOLDERS OF SUCH CLASS OF CLASS A CERTIFICATES ON SUCH
DISTRIBUTION DATE OR ON ANY FUTURE DISTRIBUTION DATES. MOREOVER, THE POLICY WILL
NOT COVER ANY SUCH SHORTFALLS.
If the pass-through rate on either class of the Class A Certificates is
limited for any Distribution Date, the value of such class of Class A
Certificates may be temporarily or permanently reduced.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS
When a Loan is prepaid, the borrower is charged interest on the amount
prepaid only up to the date on which the prepayment is made, rather than for an
entire month. This may result in a shortfall in interest collections available
for payment on the next Distribution Date. The Master Servicer is required to
cover a portion of the shortfall in interest collections that are attributable
to prepayments, but only up to the amount of the Master Servicer's servicing fee
for the related calendar month.
In addition, certain shortfalls in interest collections may arise from
the application of the Soldiers' and Sailors' Civil Relief Act of 1940 (the
"Relief Act"). No portion of interest shortfalls arising from the application of
the Relief Act will be covered by the Master Servicer.
On any Distribution Date, any prepayment interest shortfalls to the
extent not covered by compensating interest paid by the Master Servicer, and any
interest shortfalls resulting from the application of the Relief Act, will be
allocated first, to the interest distribution amount with respect to the Class C
Certificates, and thereafter, in the case of any interest shortfalls resulting
from the application of the Relief Act, to the Monthly Interest Distributable
Amounts with respect to the related class or classes of Offered Certificates on
a PRO RATA basis based on the respective amounts of interest accrued on such
certificates for such Distribution Date. THE HOLDERS OF THE OFFERED CERTIFICATES
WILL NOT BE ENTITLED TO REIMBURSEMENT FOR INTEREST SHORTFALLS RESULTING FROM THE
APPLICATION OF THE RELIEF ACT. IF SUCH SHORTFALLS ARE ALLOCATED TO THE OFFERED
CERTIFICATES, THE AMOUNT OF INTEREST PAID ON SUCH CERTIFICATES WILL BE REDUCED,
ADVERSELY AFFECTING THE YIELD ON YOUR INVESTMENT.
The policy will not cover any shortfalls resulting from the application
of the Relief Act.
THE RATINGS OF THE OFFERED CERTIFICATES ARE BASED PRIMARILY ON THE CLAIMS-PAYING
ABILITY OF THE CERTIFICATE INSURER AND COULD BE REDUCED OR WITHDRAWN
The ratings on the Offered Certificates depend primarily on the claims
paying ability of the Certificate Insurer. Therefore, a reduction of the rating
assigned to the claims paying ability of the Certificate Insurer may have a
corresponding reduction on the ratings assigned to the Offered Certificates. In
general, the ratings address credit risk and do not address the likelihood of
prepayments.
Each rating agency rating the Offered Certificates may change or
withdraw its initial ratings at any time in the future if, in its judgment,
circumstances warrant a change. None of the Depositor, the Master Servicer, the
Trustee, the Seller or any of their respective affiliates or any other person
will have any obligation to replace or supplement any credit enhancement, or to
take any other action to maintain the ratings of the Offered Certificates.
If a Rating Agency reduces or withdraws its rating on one or more
classes of the Offered Certificates, the liquidity and market value of the
affected certificates is likely to be reduced.
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DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
LOAN BALANCE
Substantial delays could be encountered in connection with the
liquidation of delinquent Loans. Further, reimbursement of advances made on a
Loan, liquidation expenses such as legal fees, real estate taxes, hazard
insurance and maintenance and preservation expenses may reduce the portion of
liquidation proceeds payable to you. If a Property fails to provide adequate
security for the related Loan, you will incur a loss on your investment if the
Certificate Insurer fails to perform its obligations under the policy and the
other credit enhancements are insufficient to cover the loss.
BALLOON LOANS RISK
Balloon loans pose a risk because a borrower must make a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the
Certificate Insurer fails to perform its obligations under the policy and the
forms of other credit enhancement are insufficient to cover the loss.
Approximately 18.68% of the Initial Group I Loans and approximately 10.92% of
the Group II Loans (in each case by aggregate principal balance of the related
Closing Date Loans as of the Cut-off Date) are balloon loans.
SECOND LIEN LOANS RISK
Approximately 7.66% of the Initial Group I Loans and approximately
26.58% of the Group II Loans (in each case by aggregate principal balance of the
related Closing Date Loans as of the Cut-off Date) are secured by second liens
on the related Property. The proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such Loans only to the extent that the claims of the related senior liens have
been satisfied in full, including any related foreclosure costs. In
circumstances when it has been determined to be uneconomical to foreclose on the
Property, the Master Servicer may write off the entire balance of such Loan as a
bad debt. The foregoing considerations will be particularly applicable to Loans
secured by second liens that have high loan-to-value ratios because it is
comparatively more likely that the Master Servicer would determine foreclosure
to be uneconomical in the case of such Loans. The rate of default of second lien
loans may be greater than that of loans secured by first liens on comparable
properties. See "Certain Legal Aspects of the Loans--Junior Mortgages; Rights of
Senior Mortgagees" in the prospectus.
DELINQUENT LOANS RISK
As of the Cut-off Date, approximately 1.48% of the Initial Group I
Loans and approximately 1.85% of the Group II Loans (in each case by aggregate
principal balance of the related Closing Date Loans as of the Cut-off Date) had
not made the monthly payment due thereon in January 2001. However, investors in
the Offered Certificates should realize that approximately 7.88% of the Initial
Group I Loans and approximately 2.34% of the Group II Loans (in each case by
aggregate principal balance of the related Closing Date Loans as of the Cut-off
Date) have a first payment date occurring on or after February 1, 2001 and,
therefore, such Loans could not as of the Cut-off Date have been delinquent with
respect to their January 2001 monthly payment.
HIGH LOAN-TO-VALUE RATIOS RISK
Loans with higher loan-to-value ratios may present a greater risk of
loss than loans with loan-to-value ratios of 80.00% or below. Approximately
46.39% of the Initial Group I Loans and approximately 42.30% of the Group II
Loans (in each case by aggregate principal balance of the related Closing Date
Loans as of the Cut-off Date) had loan-to-value ratios at origination in excess
of 80.00%, but no more than 100.00%. With limited exceptions, no Loan will be
covered by a primary mortgage insurance policy or any comparable credit
insurance policy. Additionally, the Seller's determination of the value of a
Property used in the calculation of the loan-to-value ratios of the Loans may
differ from the appraised value of such Property or the actual value of such
Property at origination, or at any date subsequent thereto. See "Description of
the Loans--General" herein.
References in this prospectus supplement to the loan-to-value ratios of
the Loans, in the case of second lien Loans, unless indicated otherwise,
generally refer to the quotient of (x) the sum of the principal balance of the
applicable second lien Loan and the principal balance of any mortgage loan or
manufactured home loan indebtedness secured by any senior lien on the related
Property divided by (y) the value (as determined as described herein, and which
may not be the actual value) of such related Property.
S-13
GEOGRAPHIC CONCENTRATION RISK
The chart presented under "Summary of Terms--Loans" lists the states
with the highest concentrations of Loans.
Listed below are some of the factors which could lead to a
disproportionate impact on the Loans based on the geographic locations of the
related Properties:
o Economic conditions in states with high concentrations of Loans may
affect the ability of borrowers to repay their Loans on time, even if
such conditions do not affect real property values.
o Declines in the residential real estate markets in the states with high
concentrations of Loans may reduce the values of Properties located in
those states, which would result in an increase in loan-to-value
ratios.
o Any increase in the market value of Properties located in the states
with high concentrations of Loans would reduce loan-to-value ratios and
could, therefore, make alternative sources of financing available to
borrowers at lower interest rates, which could result in an increased
rate of prepayment of the Loans.
o Some regions of the United States may be more susceptible than others
to natural disasters, deteriorating economic conditions or other
factors that could negatively affect the performance of the Loans.
Natural disasters (including those that result in certain types of
uninsurable hazards, such as earthquakes, floods, mudslides, hurricanes
and others for which there may or may not be insurance) or varying
economic or other conditions affecting different regions of the United
States from time to time may contribute to differing rates of
prepayment, defaults and losses being experienced on the Loans from one
geographic area to another.
THERE MAY BE VARIATIONS IN THE SUBSEQUENT LOANS IN LOAN GROUP I FROM THE INITIAL
LOANS IN LOAN GROUP I
Each Subsequent Group I Loan generally will satisfy the eligibility
criteria described in this prospectus supplement at the time of its sale to the
trust. Following any purchase of Subsequent Group I Loans by the trust, the
statistical characteristics of the Loans in Loan Group I will be altered. This
is because, although the statistical characteristics of the Subsequent Group I
Loans will be required to fall within the parameters detailed in the eligibility
criteria, such statistical characteristics may vary somewhat from the
statistical characteristics of the Initial Group I Loans presented in this
prospectus supplement.
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the Group I Pre-Funding
Account have not been fully applied to the purchase of Subsequent Group I Loans
for inclusion in Loan Group I on or before June 19, 2001, the holders of the
Class A-1 Certificates will receive, on the Distribution Date immediately
following June 19, 2001, any amount remaining in the Group I Pre-Funding Account
after giving effect to any purchases of Subsequent Group I Loans. Although no
assurance can be given, the Depositor intends that the principal amount of
Subsequent Group I Loans sold to the trust will require the application of
substantially all amounts on deposit in the Group I Pre-Funding Account and that
there will be no material principal payment to the holders of the Class A-1
Certificates resulting from the pre-funding feature of Loan Group I on such
Distribution Date.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE LOANS
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure, and require licensing (or exemption from
licensing) of the Seller. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Loans.
The Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the Loans;
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o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and
o the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the trust to damages and
administrative enforcement. In particular, the Seller's failure to comply with
certain requirements of the Federal Truth-in-Lending Act, as implemented by
Regulation Z, could subject the trust (and other assignees of the Loans) to
monetary penalties, and result in the obligors' rescinding the Loans against
either the trust or subsequent holders of the Loans. See "Certain Legal Aspects
of the Loans--Anti-Deficiency Legislation and Other Limitations on Lenders" in
the prospectus.
The Seller will represent that as of the Closing Date, each Loan is in
compliance with applicable federal and state laws and regulations. In addition,
the Seller will represent that none of the Loans are subject to the Home
Ownership and Equity Protection Act of 1994. In the event of a breach of either
such representation, the Seller will be obligated to cure such breach or
repurchase or replace the affected loan in the manner and to the extent
described under "The Pooling Agreement--Assignment of the Loans" in this
prospectus supplement.
THE CERTIFICATES ARE INTERESTS IN THE TRUST ONLY
The certificates will not represent an interest in or obligation of the
Depositor, the Master Servicer, the Seller, the Trustee or any of their
respective affiliates. Neither the Offered Certificates nor the underlying Loans
will be guaranteed or insured by any governmental agency or instrumentality, or
by the Depositor, the Master Servicer, the Seller, the Trustee, or any of their
respective affiliates. The Offered Certificates are covered by the policy, as
and to the extent described under "The Certificate Insurance Policy" in this
prospectus supplement. Proceeds of the assets included in the trust and payments
under the policy will be the sole source of payments on the Offered
Certificates, and there will be no recourse to the Depositor, the Master
Servicer, the Seller, the Trustee or any other entity (other than the
Certificate Insurer to the extent of its obligations under the policy) in the
event that such proceeds are insufficient or otherwise unavailable to make all
payments provided for under the Offered Certificates.
LACK OF LIQUIDITY
Greenwich Capital Markets, Inc., First Union Securities, Inc. and UBS
Warburg LLC (the "Underwriters") intend to make a secondary market in the
classes of Offered Certificates actually purchased by them, but they 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. Consequently, you may not be
able to sell your Offered Certificates readily or at prices that will enable you
to realize your desired yield. The market values of the Offered Certificates are
likely to fluctuate; these fluctuations may be significant and could result in
significant losses to you.
The secondary markets for asset-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities 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.
SUITABILITY OF THE OFFERED CERTIFICATES AS INVESTMENTS
The Offered Certificates are not suitable investments for any investor
that requires a regular or predictable schedule of monthly payments or payment
on any specific date. The Offered Certificates are complex investments that
should be considered only by institutional investors who, either alone or with
their financial, tax and legal advisors, are familiar with complex asset
securitization structures and have the expertise to analyze the prepayment,
reinvestment, default and market risk, tax consequences and other attributes of
an investment in the Offered Certificates and the interaction of these risks.
S-15
DESCRIPTION OF THE LOANS
The information set forth in the following paragraphs has been provided
by the Seller. Neither of the Depositor nor any other affiliate of the Seller,
nor the Underwriters, the Trustee, the Certificate Insurer or any of their
respective affiliates have made or will make any representation as to the
accuracy or completeness of such information.
The statistical information presented in this prospectus supplement
relates to the Closing Date Loans in each Loan Group as of the Cut-off Date for
those Loans. As used herein, "Closing Date Loans" with respect to a Loan Group
refers to the Loans anticipated to be included in such Loan Group on the Closing
Date, which in the case of Loan Group I will be the Initial Group I Loans, and
which in the case of Loan Group II will be all of the Group II Loans. Prior to
the issuance of the Offered Certificates, Loans may be removed from one or both
Loan Groups as a result of incomplete documentation or otherwise if the
Depositor deems such removal necessary or desirable, and may be prepaid at any
time. A limited number of other Loans may be included in each Loan Group prior
to the issuance of the Offered Certificates unless including such Loans would
materially alter the characteristics of the Initial Loans in such Loan Group as
described herein. The Depositor believes that the information set forth herein
with respect to the Closing Date Loans in each Loan Group will be representative
of the characteristics of such Loan Group as it will be constituted at the time
the Offered Certificates are issued, although the range of loan rates and
maturities and certain other characteristics of the Closing Date Loans in a Loan
Group may vary.
Unless otherwise noted, all statistical percentages set forth in this
prospectus supplement are measured as a percentage of the aggregate principal
balance as of the Cut-off Date of the Closing Date Loans in the related Loan
Group (each, a "Cut-off Date Principal Balance") and in the case of Loan Group
I, therefore, does not include the Subsequent Group I Loans. Subsequent Group I
Loans will be selected using generally the same criteria used to select the
Initial Group I Loans, and generally the same representations and warranties
will be made with respect to Subsequent Group I Loans. The "Principal Balance"
of a Loan as of any date is equal to the principal balance of such Loan at its
origination, less the sum of scheduled and unscheduled payments in respect of
principal made on such Loan. The "Pool Balance" as of any date is equal to the
aggregate of the Principal Balances of the Loans in both Loan Groups.
GENERAL
New South Home Equity Trust 2001-1 (the "Trust") will consist of a pool
of residential loans (the "Loans" or the "Pool") which will in turn consist of a
group of fixed-rate, first lien and second lien, fully-amortizing and balloon
loans with principal balances that conform to Fannie Mae and Freddie Mac
guidelines (the "Group I Loans") and a group of fixed-rate, first lien and
second lien, fully-amortizing and balloon loans with principal balances that may
or may not conform to Fannie Mae and Freddie Mac guidelines (the "Group II
Loans"). The Group I Loans will include the Initial Group I Loans and the
Subsequent Group I Loans. The Group II Loans will consist only of the Closing
Date Loans in Loan Group II. The Initial Group I Loans have original terms to
maturity ranging from 4 years to 30 years and a Cut-off Date Principal Balance
of approximately $206,101,272. The Group II Loans have original terms to
maturity ranging from 5 years to 30 years and a Cut-off Date Principal Balance
of approximately $23,025,499. Subsequent to the Closing Date, Loan Group I will
also include, to the extent available, approximately $25,000,000 in Subsequent
Group I Loans. No subsequent loans will be acquired by the Trust with any
pre-funded amounts for inclusion in Loan Group II.
The Loans consist of mortgage loans (the "Mortgage Loans") and
manufactured home loans (the "Manufactured Home Loans"). The Mortgage Loans,
representing approximately 88.54% of the Initial Group I Loans and approximately
97.29% of the Group II Loans (in each case by aggregate principal balance of the
related Closing Date Loans as of the Cut-off Date), are evidenced by mortgage
notes (each, a "Mortgage Note"), secured by first or second mortgages or deeds
of trust (the "Mortgages") on one- to four-family residential properties
consisting of attached or detached one- to four-family dwelling units and
individual condominium units (each, a "Mortgaged Property"). The Manufactured
Home Loans, representing approximately 11.46% of the Initial Group I Loans and
approximately 2.71% of the Group II Loans (in each case by aggregate principal
balance of the related Closing Date Loans as of the Cut-off Date), are evidenced
by first or second manufactured housing contracts (each, a "Manufactured Home
Contract" and together with the Mortgage Notes, the "Debt Instruments") on
manufactured homes (each, a "Manufactured Home" and together with the Mortgaged
Properties, the "Properties") that are not real estate. The Initial Group I
Loans consist of approximately 3,783 Loans, of which approximately 92.34% are
secured by first Mortgages or Manufactured Home Contracts, as applicable and
approximately 7.66% are secured by second Mortgages or Manufactured Home
Contracts, as applicable. The Group II Loans consist of
S-16
approximately 323 Loans, of which approximately 73.42% are secured by first
Mortgages or Manufactured Home Contracts, as applicable and approximately 26.58%
are secured by second Mortgages or Manufactured Home Contracts, as applicable.
The Depositor will purchase the Loans from the Seller pursuant to the
Loan Purchase Agreement (the "Loan Purchase Agreement") dated as of March 26,
2001 between the Seller and the Depositor. Pursuant to the Pooling and Servicing
Agreement, dated as of March 1, 2001 (the "Pooling Agreement"), among the
Depositor, the Master Servicer and the Trustee, the Depositor will cause the
Loans to be assigned to the Trustee for the benefit of the certificateholders.
See "The Pooling and Servicing Agreement" herein.
Subsequent Group I Loans are intended to be purchased by the Trust from
the Depositor from time to time on or before June 19, 2001 from funds on deposit
in the Group I Pre-Funding Account. The Pooling Agreement will provide that each
Subsequent Group I Loan must conform to certain specified characteristics and,
following the conveyance of the Subsequent Group I Loans, Loan Group I must
conform to certain specified characteristics, as described below under
"--Conveyance of Subsequent Group I Loans and the Group I Pre-Funding Account."
The Loans were selected by the Seller from the loans in the Seller's
portfolio using a selection process believed by the Seller not to be adverse to
the certificateholders or to the Certificate Insurer. Each of the Loans was
underwritten in accordance with the underwriting standards as described under
"New South Federal Savings Bank--Underwriting Standards" in this prospectus
supplement.
Each Loan will accrue interest at the fixed rate calculated as
specified under the terms of the related Mortgage Note or Manufactured Home
Contract (each such rate, a "Loan Rate").
As used herein, the "CLTV" at origination of any Loan refers to the
quotient calculated by dividing (x) the sum of (i) the principal balance of such
Loan as of the date of the origination of such Loan and (ii) if such Loan is a
second lien Loan, the principal balance of the applicable senior lien mortgage
loan or manufactured home loan by (y) the Value of the related Property at
origination. The "Value" of a Mortgaged Property means the lesser of the
appraised value of such Mortgaged Property or, if applicable, the purchase price
of such Mortgaged Property. The "Value" of a Manufactured Home means the stated
cash sale price of such Manufactured Home, including sales and other taxes,
plus, to the extent financed, filing and recording fees imposed by law, premiums
for related insurance and prepaid finance charges.
INITIAL GROUP I LOANS STATISTICS
The following statistical information, unless otherwise specified, is
based upon percentages of the Principal Balances of the Initial Group I Loans as
of the Cut-off Date.
As of the Cut-off Date, the average unpaid principal balance of the
Initial Group I Loans was approximately $54,481. As of the Cut-off Date, the
weighted average Loan Rate of the Initial Group I Loans was approximately
10.484% per annum. As of the Cut-off Date, the weighted average CLTV at
origination of the Initial Group I Loans was approximately 79.42%. The weighted
average remaining term to maturity of the Initial Group I Loans was
approximately 245 months as of the Cut-off Date, and the latest scheduled
maturity of any Initial Group I Loan is March 2031; however the actual date on
which any Initial Group I Loan is paid in full may be earlier than the stated
maturity date due to unscheduled payments of principal.
As of the Cut-off Date, all of the Initial Group I Loans were secured
by Mortgaged Properties or Manufactured Homes. Based on information supplied by
the borrowers in connection with their loan applications at origination,
Properties securing approximately 87.50% of the Initial Group I Loans will be
owner occupied primary residences.
Approximately 47.74% of the Initial Group I Loans provide for penalties
upon full prepayment during the first one, two, three, four or five years after
origination thereof. Each of the Initial Group I Loans is subject to a
due-on-sale clause. See "Certain Legal Aspects of the Loans" in the Prospectus.
Except with respect to approximately 18.68% of the Initial Group I
Loans, the scheduled monthly payment on each Initial Group I Loan includes
interest plus an amount that will amortize the outstanding principal balance of
the Initial Group I Loan over its remaining term.
S-17
The Initial Group I Loans are expected to have the following
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
CUT-OFF DATE PRINCIPAL BALANCES OF THE INITIAL GROUP I LOANS (1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
--------------------- -------- ---------------- ----------------
4,736.53 - 50,000.00........ 2,147 $ 68,003,779.05 33.00%
50,000.01 - 100,000.00........ 1,252 84,081,898.85 40.80
100,000.01 - 150,000.00........ 271 32,883,155.80 15.95
150,000.01 - 200,000.00........ 82 14,012,028.40 6.80
200,000.01 - 250,000.00........ 26 5,810,831.81 2.82
250,000.01 - 274,643.38........ 5 1,309,578.43 0.64
----- --------------- ------
TOTAL......................... 3,783 $206,101,272.34 100.00%
===== =============== ======
(1) THE AVERAGE CUT-OFF DATE PRINCIPAL BALANCE OF THE INITIAL GROUP I LOANS WAS
APPROXIMATELY $54,481.
CREDIT BUREAU RISK SCORES FOR THE INITIAL GROUP I LOANS(1)(2)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT BUREAU RISK SCORE OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------------ -------- ---------------- ----------------
N/A................................. 152 $ 9,341,384.51 4.53%
401 - 450........................ 5 319,330.57 0.15
451 - 500........................ 57 2,877,937.23 1.40
501 - 550........................ 451 24,535,267.24 11.90
551 - 600........................ 770 46,273,303.85 22.45
601 - 650........................ 968 52,644,762.44 25.54
651 - 700........................ 792 41,540,494.01 20.16
701 - 750........................ 414 20,852,779.11 10.12
751 - 800........................ 172 7,611,478.87 3.69
801 - 820........................ 2 104,534.51 0.05
----- --------------- ------
TOTAL............................ 3,783 $206,101,272.34 100.00%
===== =============== ======
- --------------------
(1) THE WEIGHTED AVERAGE CREDIT BUREAU RISK SCORE OF THE INITIAL GROUP I
LOANS WAS APPROXIMATELY 626.
(2) DETERMINED FOR EACH INITIAL GROUP I LOAN AS DESCRIBED UNDER "NEW SOUTH
FEDERAL SAVINGS BANK--UNDERWRITING STANDARDS" IN THIS PROSPECTUS
SUPPLEMENT.
S-18
ORIGINAL TERMS TO MATURITY OF THE INITIAL GROUP I LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
---------------------- -------- ---------------- ----------------
48 - 72...................... 25 $ 436,940.98 0.21%
73 - 108...................... 24 441,985.26 0.21
109 - 144...................... 181 4,785,267.48 2.32
145 - 180...................... 1,914 95,119,016.39 46.15
181 - 216...................... 1 45,341.06 0.02
217 - 252...................... 459 22,272,186.19 10.81
289 - 324...................... 78 2,816,736.07 1.37
325 - 360...................... 1,101 80,183,798.91 38.91
----- ------------- -------
TOTAL........................ 3,783 $206,101,272.34 100.00%
===== ============== ======
- --------------------
(1) THE WEIGHTED AVERAGE ORIGINAL TERM TO MATURITY OF THE INITIAL GROUP I LOANS
WAS APPROXIMATELY 256 MONTHS.
REMAINING TERMS TO MATURITY OF THE INITIAL GROUP I LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM (MONTHS) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
----------------------- -------- ---------------- ----------------
24 - 36...................... 2 $ 39,852.78 0.02%
37 - 72...................... 41 745,114.32 0.36
73 - 108...................... 80 2,050,246.34 0.99
109 - 144...................... 162 5,110,521.61 2.48
145 - 180...................... 1,867 93,223,350.68 45.23
181 - 216...................... 7 440,313.84 0.21
217 - 252...................... 450 21,865,847.21 10.61
253 - 288...................... 79 3,149,888.30 1.53
289 - 324...................... 15 1,171,554.31 0.57
325 - 360...................... 1,080 78,304,582.95 37.99
----- --------------- ------
TOTAL........................ 3,783 $206,101,272.34 100.00%
===== =============== ======
- --------------------
(1) THE WEIGHTED AVERAGE REMAINING TERM TO MATURITY OF THE INITIAL GROUP I LOANS
WAS APPROXIMATELY 245 MONTHS.
S-19
PROPERTY TYPES OF THE INITIAL GROUP I LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------------- -------- ---------------- ----------------
Single Family....................... 3,096 $176,760,238.09 85.76%
Manufactured Housing................ 582 23,617,173.67 11.46
Other............................... 41 2,746,418.23 1.33
Mobile Home......................... 38 1,816,091.60 0.88
Two- to Four-Family................. 12 648,251.26 0.31
Condominium......................... 10 275,259.46 0.13
Apartment........................... 4 237,840.03 0.12
----- --------------- ------
Total......................... 3,783 $206,101,272.34 100.00%
===== =============== ======
OCCUPANCY STATUS OF THE INITIAL GROUP I LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT OFF DATE THE CUT OFF DATE
---------------- -------- ---------------- ----------------
Primary............................. 3,354 $180,335,145.35 87.50%
Second Home......................... 265 17,512,068.08 8.50
Investor............................ 123 5,440,195.46 2.64
Unknown............................. 41 2,813,863.45 1.37
----- --------------- ------
Total.......................... 3,783 $206,101,272.34 100.00%
===== =============== ======
- --------------------
(1) Occupancy as represented by the borrower at the time of origination.
PURPOSE OF THE INITIAL GROUP I LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------- -------- ---------------- ----------------
Refinance........................... 2,638 $138,460,485.44 67.18%
Purchase............................ 1,112 64,504,726.69 31.30
Other............................... 33 3,136,060.21 1.52
----- --------------- ------
Total.......................... 3,783 $206,101,272.34 100.00%
===== =============== ======
S-20
ORIGINAL CLTVS OF THE INITIAL GROUP I LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL CLTV(%) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
---------------- -------- ---------------- ----------------
11.90 - 20.00.................. 14 $ 285,960.38 0.14%
20.01 - 30.00.................. 39 903,974.84 0.44
30.01 - 40.00.................. 66 1,919,818.09 0.93
40.01 - 50.00.................. 119 4,697,438.97 2.28
50.01 - 60.00.................. 196 8,553,540.83 4.15
60.01 - 70.00.................. 363 18,380,723.89 8.92
70.01 - 80.00.................. 1,267 75,747,214.63 36.75
80.01 - 90.00.................. 1,182 70,084,345.61 34.00
90.01 - 100.00.................. 537 25,528,255.10 12.39
----- --------------- ------
TOTAL...................... 3,783 $206,101,272.34 100.00%
===== =============== ======
- ------------------
(1) THE WEIGHTED AVERAGE CLTV AT ORIGINATION OF THE INITIAL GROUP I LOANS AS OF
THE CUT-OFF DATE WAS APPROXIMATELY 79.42%.
S-21
GEOGRAPHIC DISTRIBUTION OF THE PROPERTIES RELATING TO THE INITIAL GROUP I LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT OFF DATE THE CUT OFF DATE
-------- -------- ---------------- ----------------
ALABAMA............................. 1,222 $ 63,309,102.14 30.72%
ARIZONA............................. 11 670,519.95 0.33
ARKANSAS............................ 175 10,126,134.87 4.91
CALIFORNIA.......................... 17 733,594.29 0.36
COLORADO............................ 8 389,305.11 0.19
CONNECTICUT......................... 2 149,788.43 0.07
FLORIDA............................. 239 13,650,143.83 6.62
GEORGIA............................. 218 12,757,041.06 6.19
ILLINOIS............................ 14 739,585.36 0.36
INDIANA............................. 8 391,148.94 0.19
KENTUCKY............................ 23 1,647,108.04 0.80
LOUISIANA........................... 653 32,193,319.19 15.62
MARYLAND............................ 4 237,330.37 0.12
MASSACHUSETTS....................... 2 229,468.94 0.11
MICHIGAN............................ 1 21,847.70 0.01
MISSISSIPPI......................... 613 29,972,688.59 14.54
MISSOURI............................ 1 18,820.63 0.01
NEVADA.............................. 9 915,607.17 0.44
NEW JERSEY.......................... 1 114,600.23 0.06
NEW MEXICO.......................... 2 89,517.09 0.04
NEW YORK............................ 12 615,727.85 0.30
NORTH CAROLINA...................... 33 2,481,124.29 1.20
OHIO................................ 26 1,571,766.62 0.76
OKLAHOMA............................ 9 434,000.70 0.21
OREGON.............................. 1 34,767.12 0.02
SOUTH CAROLINA...................... 32 2,102,920.33 1.02
TENNESSEE........................... 336 22,004,638.42 10.68
TEXAS............................... 57 4,882,928.27 2.37
UTAH................................ 2 87,153.86 0.04
VIRGINIA............................ 46 3,014,802.66 1.46
WASHINGTON.......................... 3 344,530.67 0.17
WISCONSIN........................... 3 170,239.62 0.08
----- --------------- ------
TOTAL............................... 3,783 $206,101,272.34 100.00%
===== =============== ======
- -------------------
(1) THE GREATEST ZIP CODE GEOGRAPHIC CONCENTRATION OF THE INITIAL GROUP I LOANS
WAS APPROXIMATELY 1.07% IN THE 71360 ZIP CODE.
S-22
DOCUMENTATION LEVEL OF THE INITIAL GROUP I LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN RATE(%) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------------ -------- ---------------- ----------------
Limited Documentation............... 2,884 $160,202,186.46 77.73%
Full Documentation.................. 775 39,647,423.09 19.24
No Income/No Asset.................. 119 5,708,889.02 2.77
Stated Income Documentation......... 2 330,110.00 0.16
Other............................... 3 212,663.77 0.10
----- --------------- ------
Total............................. 3,783 $206,101,272.34 100.00%
===== =============== ======
- --------------------
(1) For a description of each Documentation Level, see "New South Federal
Savings Bank--Underwriting Standards" herein.
LOAN RATES OF THE INITIAL GROUP I LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN RATE(%) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------------ -------- ---------------- ----------------
6.125 - 7.000................. 62 $ 3,900,251.99 1.89%
7.001 - 8.000................. 250 14,585,457.10 7.08
8.001 - 9.000................. 276 17,549,268.11 8.51
9.001 - 10.000................. 618 37,343,610.69 18.12
10.001 - 11.000................. 1,014 60,820,818.09 29.51
11.001 - 12.000................. 873 45,587,660.36 22.12
12.001 - 13.000................. 467 19,252,252.12 9.34
13.001 - 14.000................. 141 4,949,468.92 2.40
14.001 - 15.000................. 60 1,597,847.29 0.78
15.001 - 16.000................. 19 405,831.19 0.20
16.001 - 16.750................. 3 108,806.48 0.05
----- --------------- ------
Total..................... 3,783 $206,101,272.34 100.00%
===== =============== ======
- ------------------
(1) The weighted average Loan Rate of the Initial Group I Loans as of the
Cut-off Date was approximately 10.484% per annum.
CONVEYANCE OF SUBSEQUENT GROUP I LOANS AND THE GROUP I PRE-FUNDING ACCOUNT
Under and to the extent provided in the Pooling Agreement, the Trust will
be obligated to purchase from the Depositor during the Group I Funding Period,
subject to the availability thereof, Subsequent Group I Loans secured by
Mortgages on Mortgaged Properties or security interests in Manufactured Homes.
Each Subsequent Group I Loan shall have been underwritten in accordance with the
criteria set forth under "New South Federal Savings Bank--Underwriting
Standards" herein. The Subsequent Group I Loans will be transferred to the Trust
pursuant to subsequent transfer instruments (the "Subsequent Transfer
Instruments") between the Depositor and the Trust. In connection with the
purchase of Subsequent Group I Loans on such dates of transfer (the "Subsequent
Transfer Dates"), the Trust will be required to pay to the Depositor from
amounts on deposit in the Group I Pre-Funding Account a cash purchase price of
100% of the principal balance thereof. The Depositor will designate the later of
(i) the origination date of such Subsequent Group I Loan and (ii) the close of
business on the last business day of the month prior to the month in which the
related Subsequent Transfer Date occurs as the "Subsequent Cut-off Date" with
respect to the Subsequent Group I Loans. The amount paid from the Group I
Pre-Funding Account on
S-23
each Subsequent Transfer Date will not include accrued interest on the related
Subsequent Group I Loans. Following each Subsequent Transfer Date, the aggregate
principal balance of the Group I Loans will increase by an amount equal to the
aggregate principal balance of the related Subsequent Group I Loans so purchased
and the amount in the Group I Pre-Funding Account will decrease accordingly.
An account (the "Group I Pre-Funding Account") will be established by the
Trustee and funded on the Closing Date by the Depositor with approximately
$25,000,000 (the "Original Group I Pre-Funded Amount"), subject to a permitted
variance equal to the aggregate principal balance of any of the Closing Date
Group I Loans which are added or removed from the Trust within the permitted
variance as described herein under "Description of the Loans," to provide the
Trust with sufficient funds to purchase Subsequent Group I Loans. The Original
Group I Pre-Funded Amount will be reduced during the Funding Period by the
amount used to purchase Subsequent Group I Loans for Loan Group I in accordance
with the Pooling Agreement. During the period (the "Group I Funding Period")
from the Closing Date until the earliest of (i) the date on which the amount on
deposit in the Group I Pre-Funding Account is reduced to zero or (ii) June 19,
2001, such amount will be maintained in the Group I Pre-Funding Account to the
extent not used by the Trust to acquire Subsequent Group I Loans.
Any conveyance of Subsequent Group I Loans on a Subsequent Transfer Date is
subject to certain conditions including, but not limited to: (a) each such Loan
must satisfy the representations and warranties specified in the related
Subsequent Transfer Instrument and the Loan Purchase Agreement; (b) the
Depositor will not select such Loans in a manner that it believes to be adverse
to the interests of the certificateholders; (c) the Depositor will deliver
certain opinions of counsel with respect to the validity of the conveyance of
such Loans; (d) the Certificate Insurer must consent to such conveyance; and (e)
as of the applicable Subsequent Transfer Date, each such Subsequent Group I Loan
will satisfy the following criteria: (i) such Loan may not be 30 or more days
delinquent as of the related Subsequent Cut-off Date; (ii) the original term to
stated maturity of such Loan will not be less than 100 months and will not
exceed 360 months as of the related Subsequent Cut-off Date; (iii) such Loan may
not provide for negative amortization; (iv) such Loan will not have a CLTV at
origination greater than 100%; (v) such Loan shall have a fixed Loan Rate that
is not less than 6.125% or greater than 17.000%; (vi) such Loan shall have been
serviced by the Seller since origination or the date of purchase by the Seller;
(vii) such Loan must have a first payment date occurring in or before August
2001; (viii) such Loan must have an original principal balance which conforms to
Fannie Mae and Freddie Mac guidelines and (ix) such Loan shall have been
underwritten in accordance with the criteria set forth under "New South Federal
Savings Bank--Underwriting Standards" herein.
In addition, following the purchase of any Subsequent Group I Loans by the
Trust, the Group I Loans (including the Subsequent Group I Loans) will as of the
Subsequent Cut-off Date: (i) have a weighted average original term to stated
maturity of not more than 360 months; (ii) have a weighted average Loan Rate of
not less than 10.250% and not more than 12.000%; (iii) have a weighted average
CLTV at origination of the Mortgage Loans in Loan Group I of not more than
80.00% and of the Manufactured Home Loans in Loan Group I of not more than
89.00%; (iv) have no Loan with a principal balance in excess of $275,000; (v)
have a weighted average term since origination not in excess of 60 months; (vi)
have no more than 12.00% Manufactured Home Loans by aggregate principal balance
of the Group I Loans as of the Subsequent Cut-off Date; (vii) have no more than
8.00% second lien Loans by aggregate principal balance of the Group I Loans as
of the Subsequent Cut-off Date; (ix) have no more than 70.00%, by aggregate
principal balance of the Group I Loans as of the Subsequent Cut-off Date, with a
refinance loan purpose; (x) have no more than 34.00% of the related Properties,
by aggregate principal balance of the Group I Loans as of the Subsequent Cut-off
Date, in any single state and (xi) have a weighted average Credit Score at
origination of not less than 620. In the sole discretion of the Certificate
Insurer, Subsequent Group I Loans with characteristics varying from those set
forth above may be purchased by the Trust; provided, however that the addition
of such Loans will not materially affect the aggregate characteristics of the
Group I Loans.
GROUP II LOANS STATISTICS
The following statistical information, unless otherwise specified, is based
upon percentages of the Principal Balances of the Group II Loans as of the
Cut-off Date. No subsequent loans will be acquired by the Trust with any
pre-funded amounts for inclusion in Loan Group II.
As of the Cut-off Date, the average unpaid principal balance of the Group
II Loans was approximately $71,286. As of the Cut-off Date, the weighted average
Loan Rate of the Group II Loans was approximately 10.718% per annum. As of the
Cut-off Date, the weighted average CLTV at origination of the Group II Loans was
approximately 79.34%. The weighted average remaining term to maturity of the
Group II Loans was approximately
S-24
239 months as of the Cut-off Date and the latest scheduled maturity of any Group
II Loan is February 2031; however the actual date on which any Group II Loan is
paid in full may be earlier than the stated maturity date due to unscheduled
payments of principal.
As of the Cut-off Date, all of the Group II Loans were secured by Mortgaged
Properties or Manufactured Homes. Based on information supplied by the borrowers
in connection with their loan applications at origination, Properties securing
approximately 64.70% of the Group II Loans will be owner occupied primary
residences.
Approximately 30.76% of the Group II Loans provide for penalties upon full
prepayment during the first one, two, three, four or five years after
origination thereof. Each of the Group II Loans is subject to a due-on-sale
clause.
See "Certain Legal Aspects of the Loans" in the Prospectus.
Except for approximately 10.92% of the Group II Loans, the scheduled
monthly payment on each Group II Loan includes interest plus an amount that will
amortize the outstanding principal balance of the Group II Loan over its
remaining term.
Approximately 17.08% of the Group II Loans were "Section 32" Loans at
origination. With respect to these Loans, the Seller will represent that all
applicable state and federal laws were complied with.
The Group II Loans are expected to have the following characteristics as of
the Cut-off Date (the sum in any column may not equal the total indicated due to
rounding):
CUT-OFF DATE PRINCIPAL BALANCES OF THE GROUP II LOANS (1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE OF LOANS THE CUT OFF DATE THE CUT OFF DATE
----------------- -------- ---------------- ----------------
289.29 - 50,000.00........ 190 $ 5,849,209.06 25.40%
50,000.01 - 100,000.00........ 86 5,753,098.04 24.99
100,000.01 - 150,000.00........ 16 1,916,076.93 8.32
150,000.01 - 200,000.00........ 6 1,007,756.56 4.38
200,000.01 - 250,000.00........ 1 247,031.41 1.07
250,000.01 - 300,000.00........ 8 2,272,917.69 9.87
300,000.01 - 350,000.00........ 10 3,227,392.65 14.02
350,000.01 - 400,000.00........ 1 371,226.57 1.61
400,000.01 - 450,000.00........ 3 1,225,592.13 5.32
450,000.01 - 500,000.00........ 1 496,781.93 2.16
650,000.01 - 658,416.51........ 1 658,416.51 2.86
--- -------------- ------
TOTAL......................... 323 $23,025,499.48 100.00%
=== ============== ======
- -------------
(1) THE AVERAGE CUT-OFF DATE PRINCIPAL BALANCE OF THE GROUP II LOANS WAS
APPROXIMATELY $71,286.
S-25
CREDIT BUREAU RISK SCORES FOR THE GROUP II LOANS(1)(2)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT BUREAU RISK SCORE OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------------ -------- ---------------- ----------------
N/A................................. 13 $ 1,702,026.78 7.39%
451 - 500......................... 7 584,930.09 2.54
501 - 550......................... 24 2,270,612.27 9.86
551 - 600......................... 34 2,486,679.23 10.80
601 - 650......................... 63 5,645,026.81 24.52
651 - 700......................... 109 5,559,799.19 24.15
701 - 750......................... 65 4,008,436.06 17.41
751 - 767......................... 8 767,989.05 3.34
--- -------------- ------
TOTAL............................... 323 $23,025,499.48 100.00%
=== ============== ======
- --------------------
(1) THE WEIGHTED AVERAGE CREDIT BUREAU RISK SCORE OF THE GROUP II LOANS WAS
APPROXIMATELY 640.
(2) DETERMINED FOR EACH GROUP II LOAN AS DESCRIBED UNDER "NEW SOUTH FEDERAL
SAVINGS BANK--UNDERWRITING STANDARDS" IN THIS PROSPECTUS SUPPLEMENT.
ORIGINAL TERMS TO MATURITY OF THE GROUP II LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
---------------------- -------- ---------------- ----------------
60 - 72...................... 2 $ 50,294.05 0.22%
109 - 144...................... 5 108,771.79 0.47
145 - 180...................... 214 12,240,140.82 53.16
217 - 252...................... 27 1,644,053.22 7.14
289 - 324...................... 3 201,432.77 0.87
325 - 360...................... 72 8,780,806.83 38.14
--- -------------- ------
TOTAL........................ 323 $23,025,499.48 100.00%
=== ============== ======
- --------------------
(1) THE WEIGHTED AVERAGE ORIGINAL TERM TO MATURITY OF THE GROUP II LOANS WAS
APPROXIMATELY 253 MONTHS.
S-26
REMAINING TERMS TO MATURITY OF THE GROUP II LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM (MONTHS) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
----------------------- -------- ---------------- ----------------
55 - 72...................... 2 $ 50,294.05 0.22%
73 - 108...................... 2 49,974.17 0.22
109 - 144...................... 4 164,118.49 0.71
145 - 180...................... 214 12,195,510.23 52.97
217 - 252...................... 26 1,583,362.94 6.88
253 - 288...................... 2 81,191.39 0.35
289 - 324...................... 1 120,241.38 0.52
325 - 360...................... 72 8,780,806.83 38.14
--- -------------- ------
TOTAL........................ 323 $23,025,499.48 100.00%
=== ============== ======
- --------------------
(1) THE WEIGHTED AVERAGE REMAINING TERM TO MATURITY OF THE GROUP II LOANS WAS
APPROXIMATELY 239 MONTHS.
PROPERTY TYPES OF THE GROUP II LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------------- -------- ---------------- ----------------
Single Family....................... 288 $21,519,433.81 93.46%
Manufactured Housing................ 14 624,298.95 2.71
Condominium......................... 10 322,261.78 1.40
Other............................... 4 246,114.96 1.07
Two- to Four-Family................. 4 187,813.48 0.82
Mobile Home......................... 3 125,576.50 0.55
--- -------------- ------
Total......................... 323 $23,025,499.48 100.00%
=== ============== ======
OCCUPANCY STATUS OF THE GROUP II LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT OFF DATE THE CUT OFF DATE
---------------- -------- ---------------- ----------------
Primary............................. 171 $14,896,464.22 64.70%
Second Home......................... 145 7,857,154.16 34.12
Investor............................ 7 271,881.10 1.18
--- -------------- ------
Total.......................... 323 $23,025,499.48 100.00%
=== ============== ======
- --------------------
(1) Occupancy as represented by the borrower at the time of origination.
S-27
PURPOSE OF THE GROUP II LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PURPOSE OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------- -------- ---------------- ----------------
Refinance........................... 279 $18,932,195.42 82.22%
Purchase............................ 38 3,720,520.99 16.16
Other............................... 3 273,453.66 1.19
Unknown............................. 3 99,329.41 0.43
--- -------------- ------
Total.......................... 323 $23,025,499.48 100.00%
=== ============== ======
ORIGINAL CLTVS OF THE GROUP II LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL CLTV(%) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
---------------- -------- ---------------- ----------------
16.50 - 20.00.................. 1 $ 19,426.20 0.08%
20.01 - 30.00.................. 5 116,732.70 0.51
30.01 - 40.00.................. 5 130,389.75 0.57
40.01 - 50.00.................. 8 523,791.32 2.27
50.01 - 60.00.................. 6 1,355,106.26 5.89
60.01 - 70.00.................. 27 2,475,402.81 10.75
70.01 - 80.00.................. 89 8,664,072.12 37.63
80.01 - 90.00.................. 76 5,653,597.13 24.55
90.01 - 100.00.................. 106 4,086,981.19 17.75
--- -------------- ------
TOTAL...................... 323 $23,025,499.48 100.00%
=== ============== ======
- ------------------
(1) THE WEIGHTED AVERAGE CLTV AT ORIGINATION OF THE GROUP II LOANS AS OF THE
CUT-OFF DATE WAS APPROXIMATELY 79.34%.
S-28
GEOGRAPHIC DISTRIBUTION OF THE PROPERTIES RELATING TO THE GROUP II LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION OF LOANS THE CUT OFF DATE THE CUT OFF DATE
-------- -------- ---------------- ----------------
ALABAMA............................. 60 $ 6,879,748.51 29.88%
ARIZONA............................. 4 187,620.95 0.81
ARKANSAS............................ 8 693,839.13 3.01
CALIFORNIA.......................... 49 2,142,257.05 9.30
COLORADO............................ 6 143,602.11 0.62
FLORIDA............................. 21 1,157,728.43 5.03
GEORGIA............................. 15 1,295,389.55 5.63
ILLINOIS............................ 7 232,114.40 1.01
INDIANA............................. 4 362,493.66 1.57
KENTUCKY............................ 3 195,341.45 0.85
LOUISIANA........................... 41 2,540,994.24 11.04
MARYLAND............................ 2 84,504.11 0.37
MASSACHUSETTS....................... 1 13,519.38 0.06
MICHIGAN............................ 1 48,048.81 0.21
MISSISSIPPI......................... 22 1,464,764.93 6.36
MISSOURI............................ 1 32,759.09 0.14
NEBRASKA............................ 1 53,563.27 0.23
NEVADA.............................. 7 400,089.36 1.74
NEW JERSEY.......................... 2 192,311.99 0.84
NEW MEXICO.......................... 3 41,439.06 0.18
NEW YORK............................ 5 148,956.14 0.65
NORTH CAROLINA...................... 8 418,755.76 1.82
OHIO................................ 1 33,589.68 0.15
OKLAHOMA............................ 1 12,206.45 0.05
OREGON.............................. 5 165,819.82 0.72
SOUTH CAROLINA...................... 2 87,752.63 0.38
TENNESSEE........................... 18 2,267,679.01 9.85
TEXAS............................... 8 520,923.79 2.26
UTAH................................ 6 725,341.16 3.15
VIRGINIA............................ 3 246,959.89 1.07
WASHINGTON.......................... 5 167,092.51 0.73
WISCONSIN........................... 2 59,145.09 0.26
WYOMING............................. 1 9,148.07 0.04
--- -------------- ------
TOTAL............................... 323 $23,025,499.48 100.00%
=== ============== ======
- -------------------
(1) THE GREATEST ZIP CODE GEOGRAPHIC CONCENTRATION OF THE GROUP II LOANS WAS
APPROXIMATELY 2.86% IN THE 30328 ZIP CODE.
S-29
DOCUMENTATION LEVEL OF THE GROUP II LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------------------- -------- ---------------- ----------------
Limited Documentation............... 160 $13,994,349.60 60.78%
No Income/No Asset.................. 131 5,231,377.78 22.72
Full Documentation.................. 31 3,512,494.61 15.25
Stated Income Documentation......... 1 287,277.49 1.25
--- -------------- ------
Total............................. 323 $23,025,499.48 100.00%
=== ============== ======
- --------------------
(1) For a description of each Documentation Level, see "New South Federal
Savings Bank--Underwriting Standards" herein.
LOAN RATES OF THE GROUP II LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN RATE(%) OF LOANS THE CUT OFF DATE THE CUT OFF DATE
------------ -------- ---------------- ----------------
6.750 - 7.000................. 3 $ 852,435.42 3.70%
7.001 - 8.000................. 10 1,489,939.78 6.47
8.001 - 9.000................. 21 2,370,760.91 10.30
9.001 - 10.000................. 39 3,438,746.75 14.93
10.001 - 11.000................. 56 5,537,110.77 24.05
11.001 - 12.000................. 65 4,198,941.81 18.24
12.001 - 13.000................. 71 2,485,435.22 10.79
13.001 - 14.000................. 47 2,121,142.21 9.21
14.001 - 15.000................. 8 363,947.59 1.58
15.001 - 16.000................. 2 120,656.93 0.52
16.001 - 17.000................. 1 46,382.09 0.20
--- -------------- ------
Total..................... 323 $23,025,499.48 100.00%
=== ============== ======
- ------------------
(1) The weighted average Loan Rate of the Group II Loans as of the Cut-off Date
was approximately 10.718% per annum.
NEW SOUTH FEDERAL SAVINGS BANK
GENERAL
New South Federal Savings Bank ("New South") is the Seller and Master
Servicer under the Pooling Agreement. New South is a federally chartered savings
bank with its principal place of business in Birmingham, Alabama, and is a
wholly owned subsidiary of New South Bancshares, Inc., a Delaware corporation.
As of December 31, 2000, New South had total assets of approximately
$1,221,110,000, net loans of approximately $969,683,000, deposits of
approximately $890,425,000 and capital of approximately $98,345,000. At December
31, 2000, New South's regulatory capital measures, determined under the
regulatory reporting requirement of the Office of Thrift Supervision, were as
follows: core capital 8.05% and total risk based capital 11.04%.
S-30
The Seller will sell and assign each Loan to the Depositor in
consideration for the net proceeds from the sale of the Offered Certificates,
and for the Class C Certificates and Class R Certificates, which will initially
be retained by the Seller.
The Offered Certificates will not represent an interest in or
obligation of, nor are the Loans guaranteed by, the Seller or any of its
affiliates.
The Master Servicer may utilize one or more subservicers (each, a
"Subservicer") in the performance of the administrative and servicing
obligations of the Master Servicer under the Pooling Agreement, but no such
subservicing arrangement will discharge the Master Servicer from its obligations
under the Pooling Agreement.
The Trustee may remove the Master Servicer, and the Master Servicer may
resign, only in accordance with the terms of the Pooling Agreement. In addition,
the Master Servicer may also be removed by the Certificate Insurer if certain
delinquency and loan loss triggers specified in the Certificate Insurance
Agreement have been met. No removal or resignation will become effective until
the Trustee or a successor servicer has assumed the Master Servicer's
responsibilities and obligations in accordance therewith. Any collections
received by the Master Servicer after its removal or resignation will be
endorsed by it to the Trustee and remitted directly to the Trustee.
UNDERWRITING STANDARDS
The following is a brief description of New South's underwriting
guidelines (the "Guidelines") as they are currently in effect. The Guidelines
are revised continuously based on opportunities and prevailing conditions in the
nonconforming credit residential mortgage market, as well as in the expected
market for securities backed by such loans. New South has informed the Depositor
that it believes that the Guidelines are consistent with standards generally
used by lenders in the business of making loans based on non-conforming credits.
Loans originated by correspondent originators generally will have been
originated in accordance with New South's Guidelines.
In certain cases, the Guidelines may not be followed where New South
believes it appropriate as a result of the existence of other compensating
factors.
The underwriting process is intended to assess both the prospective
borrower's ability to repay and the adequacy of the real property as collateral
for the loan granted. New South's Guidelines permit the origination and purchase
of loans with multi-tiered credit characteristics tailored to individual credit
profiles. In general, New South's Guidelines require an analysis of the equity
in the collateral, the payment history and debt-to-income ratio of the borrower,
the property type, and the characteristics of the underlying first mortgage, if
any. A lower maximum CLTV at origination is required for lower gradations of
credit quality.
New South's Guidelines permit the origination or purchase of fixed or
adjustable rate loans that either fully amortize over a period generally not to
exceed 30 years or, in the case of a balloon loan, generally amortize based on a
30-year or less amortization schedule with a due date and a "balloon" payment at
the end of a term that can be no greater than 15 years.
The homes pledged to secure loans may be either owner occupied (which
includes second homes) or non-owner occupied investor properties which, in
either case, are single-family residences (which may be detached, part of a
two-or four-family dwelling, manufactured homes, condominium units or units in a
planned unit development). Commercial properties or agricultural land are not
generally accepted as collateral; however, they may be added as additional
security.
New South's Guidelines generally require that the CLTV at origination
of a Loan generally not exceed 95%. A second lien loan in an amount of $50,000
or less may have a CLTV at origination of up to 95%, and a second lien loan in
an amount of $25,000 or less may have a CLTV at origination of up to 100%. New
South's Guidelines do not permit the origination or purchase of loans where the
senior mortgagee may share in any appreciation in the value of the related
Mortgaged Property.
In most cases, the value of each property proposed as security for a
loan is determined by a full appraisal. A limited appraisal, conducted on a
drive-by basis, is sometimes utilized for loans with a CLTV at origination that
is
S-31
50% or less. Appraisals are performed by professional appraisers who have been
approved by New South or who are employed by an appraisal service company
approved by New South. New South evaluates appraisers based on established
criteria and appraisal requirements, and maintains a current approved appraiser
list.
New South's Guidelines provide for the origination of loans under three
programs: (a) a full documentation program, (b) a limited documentation program
and (c) a stated income program. The full documentation program requires certain
personal financial information from the applicant, including total monthly
obligations and current employment information in addition to recent employment
history. New South or its designee generally verifies this information, for
salaried applicants, based upon certified, written confirmation from employers
or a combination of two of the following: the most recent pay stub, the most
recent W-2 tax form, or telephone confirmation from the employer. Self-employed
applicants are required to provide personal and business financial statements
and signed copies of complete federal income tax returns (including schedules)
filed for the most recent two years. The applicant's total monthly obligations
(including principal and interest on each mortgage, other loans, charge accounts
and all other monthly indebtedness) generally should not exceed 45% of the
applicant's gross monthly income as represented by the borrower and verified by
New South as indicated above, in the absence of countervailing considerations
such as relatively high income, significant disposable income, or a relatively
low CLTV at origination. The limited documentation program is one in which
verifications of income and mortgage histories fall outside conforming
requirements but serves as acceptable documentation for the loan request. This
includes faxed verification of employment, copies of current paystubs and
previous W-2 tax forms, faxed copies of the verification of mortgage or 12
consecutive canceled checks to lienholders, versus certified copies of W-2 tax
forms, paystubs, an original verification of employment, a residential mortgage
report showing a 12 month history, or an original verification of mortgage. For
self-employed borrowers, income verification may be accomplished based upon
average monthly deposit amounts using 12 months consecutive bank statements. The
limited documentation program refers to verifications, not closing documents, as
all loans are closed on standard FNMA documents with insured closing protection
by title insurance. New South offers a stated income documentation program for
self-employed applicants with unverifiable income in which no proof of income is
required, but the applicant's standard of living, reflecting substantial
financial resources, and good credit record are indicative of their ability to
pay. Under this program, two years' history of self employment plus proof of
current self- employed status is required.
A credit report by an independent, nationally recognized credit
reporting agency reflecting the applicant's complete credit history is required.
Verification is required to be obtained of the senior loan balance, if any, the
payment status of the senior loans and whether local taxes, interest, insurance
and assessments are included in the applicant's monthly payment. All taxes and
assessments not included in the payment are required to be verified as current.
A poor credit history may not disqualify an applicant if, in New
South's judgment, there are offsetting factors, such as the applicant's ability
to pay and a relatively low CLTV at origination.
In connection with purchase-money loans, New South's Guidelines require
an acceptable source of down payment funds and verification of the source of the
down payment funds.
New South's Guidelines generally require title insurance coverage
issued by an approved American Land Title Association ("ALTA") or California
Land Title Association ("CLTA") title insurance company on each Loan it
originates or purchases. The applicant is required to secure property insurance
in an amount equal to the lesser of (a) an amount sufficient to cover the new
loan and any prior loan and (b) the cost of rebuilding the subject property
(which generally does not include land value).
Approximately 11.46% of the Initial Group I Loans and approximately
2.71% of the Group II Loans (in each case by aggregate principal balance of the
related Closing Date Loans as of the Cut-off Date), are secured by Manufactured
Homes and were originated by the Manufactured Housing Division of New South. The
Manufactured Housing Division originates loans predominantly on an indirect
basis through a network of approved dealers, although approximately 20% of its
loans are originated on a direct basis. The underwriting guidelines used by the
Manufactured Housing Division require borrowers to make a minimum down payment
of 5% of the purchase price of the home. The maximum loan amount is generally
95% of the purchase price plus closing costs. A minimum Credit Score (using the
lower of two repositories) of 625 is generally required. The credit score
("Credit Score") of a borrower is a numerical representation of a borrower's
credit risk or credit worthiness based on a methodology developed by Fair Isaac
and Company and generally ranges from a low of 200 to a high of 800. The
S-32
weighted average Credit Score for Closing Date Loans secured by Manufactured
Homes is approximately 702 with respect to Loan Group I and approximately 697
with respect to Loan Group II, in each case, as of the Cut-off Date.
Borrowers also must typically provide verification that they have been employed
at their current position for at least one year or in a like field for at least
two years and that their total debt-to-income ratio does not exceed 41%.
Approximately 2.77% of the Initial Group I Loans and approximately
22.72% of the Group II Loans, in each case by aggregate Principal Balance of the
related Closing Date Loans as of the Cut-off Date, were originated by or through
Avondale Funding.com, inc. ("Avondale"), a subsidiary of New South. Avondale
originated first mortgages, closed end second mortgages, and home equity lines
of credit through a distribution of correspondent and broker channels. Using an
automated decision process that reviewed the customer's credit risk score and
other credit attributes and that required no verification of income or assets,
Avondale was able to quickly render a risk based priced credit decision through
the Internet. Avondale approved first mortgage loans up to a CLTV at origination
of 80% and second mortgages up to a CLTV at origination of 100%. Approximately
50% of the first mortgages originated by or through Avondale were purchase
transactions and the remainder were either rate/term refinances or cash out
refinances. The minimum Credit Score required of borrowers for (i) first
mortgages was 620 and (ii) closed end second mortgages was 600. The weighted
average Credit Score for the Closing Date Loans originated by or through
Avondale was approximately 699 with respect to Loan Group I and approximately
691 with respect to Loan Group II, in each case as of the Cut-off Date. These
Loans were not underwritten in accordance with the Guidelines and are
categorized as "No Income/No Asset" in the tables entitled Documentation Level
of the Initial Group I Loans and Documentation Level of the Group II Loans in
this prospectus supplement under "Description of the Loans--Initial Group I
Loans Statistics" and "--Group II Loans Statistics," respectively.
Approximately 1.62% of the Initial Group I Loans and approximately
4.07% of the Group II Loans, in each case by aggregate Principal Balance of the
related Closing Date Loans as of the Cut-off Date, were purchased by the Seller
from Republic Bank of Florida. Such Loans were originated and underwritten by
Republic Bank of Florida pursuant to standards that are similar to those of New
South.
DELINQUENCY AND LOSS EXPERIENCE
The following tables set forth the delinquency and loss experience of
New South's servicing portfolio of fixed rate and adjustable rate loans as of
the dates indicated below. New South's portfolio of loans may differ
significantly from the Loans included in the Trust in such characteristics as
type and credit quality, interest rates, principal balances, geographic
distribution, loan-to-value ratios and other relevant characteristics. There can
be no assurance that the delinquency and loss experience on the Loans (many of
which have been originated or acquired by New South during the past twelve
months) will be consistent with the historical information provided below. The
rates of delinquencies and losses on the Loans may be higher than the historical
information presented below.
S-33
DELINQUENCY EXPERIENCE ON NEW SOUTH'S
SERVICING PORTFOLIO OF LOANS
(DOLLARS IN THOUSANDS)
AT DECEMBER 31, 1998 AT DECEMBER 31, 1999
-------------------- --------------------
PERCENT PERCENT PERCENT PERCENT
NO. DOLLAR BY NO. BY DOLLAR NO. DOLLAR BY NO. BY DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------ -------- ------
Total Portfolio(1)........ 10,834 $498,201 100.00% 100.00% 12,273 $614,316 100.00% 100.00%
------ ------- ------- ------- ------ -------- ------- -------
Period of Delinquency:
30-59 days............. 62 $ 3,133 0.60% 0.63% 150 $ 7,137 1.22% 1.16%
60-89 days............. 23 1,360 0.22 0.27 33 1,548 0.27 0.25
90 days or more........ 55 2,492 0.53 0.50 90 4,182 0.73 0.68
---- --------- ---- ---- --- --------- ---- ----
Total Delinquent Loans.... 140 $ 6,985 1.35% 1.40% 273 $ 12,867 2.22% 2.09%
Loans in foreclosure...... 65 2,784 0.63 0.56 79 4,461 0.64 0.73
---- --------- ---- ---- --- --------- ---- ----
Total.................. 205 $ 9,769 1.98% 1.96% 352 $ 17,328 2.87% 2.82%
=== ========= ==== ==== === ========= ==== ====
AT DECEMBER 31, 2000
--------------------
PERCENT PERCENT
NO. DOLLAR BY NO. BY DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT
Total Portfolio(1).......... 13,232 $671,696 100.00% 100.00%
------ ------- ------- -------
Period of Delinquency:
30-59 days............... 152 $ 8,046 1.15% 1.20%
60-89 days............... 59 3,015 0.45 0.45
90 days or more.......... 148 7,934 1.12 1.18
--- -------- ---- ----
Total Delinquent Loans...... 359 $ 18,995 2.71% 2.83%
Loans in foreclosure........ 129 7,639 0.97 1.14
--- -------- ---- ----
Total.................... 488 $ 26,634 3.69% 3.97%
=== ======= ==== ====
(1) The information presented represents only New South's one-to
four-family residential mortgage loan portfolios that consisted
primarily of performing loans at the time New South began servicing
such loans.
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ----------------- -----------------
NO. DOLLAR NO. DOLLAR NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------
Real Estate Owned........... 42 $2,313 82 $5,098 114 $7,190
S-34
LOAN LOSS EXPERIENCE ON NEW SOUTH'S
SERVICING PORTFOLIO OF LOANS
(DOLLARS IN THOUSANDS)
AT DECEMBER 31, 1998 AT DECEMBER 31, 1999 AT DECEMBER 31, 2000
-------------------- -------------------- --------------------
Total Portfolio(1)(2)............ $498,201 $614,316 $671,696
Gross Losses(3)............. $501 $909 $1,187
Recoveries(4)............... $210 $340 $517
Net Losses(5)............... $291 $569 $670
Annualized Loan Losses........... 0.06% 0.09% 0.10%
- -------------
(1) The information presented represents only New South's one-to
four-family residential mortgage loan portfolios that consisted
primarily of performing loans at the time New South began servicing
such loans.
(2) Aggregate principal balance of the loans outstanding on the last day of
the period.
(3) Actual losses incurred on liquidated properties for each respective
period. Losses are calculated after repayment of all principal and
foreclosure costs.
(4) Recoveries from liquidation proceeds and deficiency judgments.
(5) Gross losses minus recoveries.
The above delinquency and foreclosure experience statistics are calculated on
the basis of the total home equity loan portfolio (which includes both loans
that are generally similar to the Loans, as well as loans originated to more
stringent underwriting standards) serviced by New South as of the dates
indicated, all of which loans were originated or acquired by New South. Such
statistics are not cumulative. Because the total amount of loans serviced by New
South has increased over these periods as a result of new originations, the
delinquency and foreclosure percentages shown above are lower than they might be
if such loans had been outstanding for a longer period of time. Because the
Trust consists of a fixed pool of Loans, the actual delinquency and foreclosure
percentages with respect to the Loans may be higher, and could be significantly
higher, than the delinquency and foreclosure percentages indicated above.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
GENERAL
The yield to maturity of the Offered Certificates will be sensitive to
defaults on the Loans in the related Loan Group. If a purchaser of an Offered
Certificate calculates its anticipated yield based on an assumed rate of default
and amount of losses that is lower than the default rate and amount of losses
actually incurred, its actual yield to maturity may be lower than that so
calculated. In general, the earlier a loss occurs, the greater the effect on an
investor's yield to maturity. There can be no assurance as to the delinquency,
foreclosure or loss experience with respect to the Loans. Because the Loans were
underwritten in accordance with standards less stringent than those generally
acceptable to Fannie Mae and Freddie Mac with regard to a mortgagor's credit
standing and repayment ability, the risk of delinquencies with respect to, and
losses on, the Loans will be greater than that of loans underwritten in
accordance with Fannie Mae and Freddie Mac underwriting standards.
The rate of principal payments, the aggregate amount of distributions and the
yields to maturity of the Offered Certificates will be related to the rate and
timing of payments of principal on the Loans in the related Loan Group.
The rate of principal payments on the Loans will in turn be affected by the
amortization schedules of the Loans and by the rate of principal prepayments
(including for this purpose prepayments resulting from refinancing, liquidations
of the Loans due to defaults, casualties or condemnations and repurchases by the
Seller or Master Servicer). Certain of the Loans have prepayment penalties; the
rate of principal payments on such Loans may or may not be less than the rate of
principal payments for loans which do not have prepayment penalties. The Loans
are subject to the "due- on-sale" provisions included therein which generally
provide that the Loan is due upon the sale of the related Property.
Prepayments, liquidations and purchases of the Loans in a Loan Group
(including any optional purchase) will result in distributions on the Class A
Certificates of principal amounts which would otherwise be distributed over
S-35
the remaining terms of the Loans. Since the rate of payment of principal on the
Loans will depend on future events and a variety of other factors, no assurance
can be given as to such rate or the rate of principal prepayments. The extent to
which the yield to maturity of the Offered Certificates may vary from the
anticipated yield will depend, in the case of each class of Class A
Certificates, upon the degree to which such class of Certificates is purchased
at a discount or premium, and in the case of each class of the Offered
Certificates, upon the degree to which the amount or timing of payments thereon
is sensitive to prepayments, liquidations and purchases of the Loans in the
related Loan Group. An investor should consider the risk that, in the case of
any Class A Certificate purchased at a discount, a slower than anticipated rate
of principal payments (including prepayments) on the Loans in the related Loan
Group could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Class A Certificate purchased at a
premium, a faster than anticipated rate of principal payments on the Loans in
the related Loan Group could result in an actual yield to such investor that is
lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of loans may
vary significantly over time and may be influenced by a variety of economic,
geographic, social and other factors, including changes in borrowers' housing
needs, job transfers, unemployment, mortgagors' net equity in the properties and
servicing decisions. In general, if prevailing interest rates were to fall
significantly below the Loan Rates on the Loans, the Loans could be subject to
higher prepayment rates than if prevailing interest rates were to remain at or
above the Loan Rates on the Loans. Conversely, if prevailing interest rates were
to rise significantly, the rate of prepayments on the Loans would generally be
expected to decrease. The Loans may be subject to a greater rate of principal
prepayments in a low interest rate environment. No assurances can be given as to
the rate of prepayments on the Loans in stable or changing interest rate
environments.
Approximately 47.74% of the Initial Group I Loans and approximately 30.76% of
the Group II Loans (in each case by aggregate Principal Balance of the related
Closing Date Loans) provide for payment by the borrower of a prepayment penalty
in limited circumstances on certain prepayments. The Seller will be entitled to
all prepayment penalties received on the Loans, and such amounts will not be
available for distribution on the Certificates. Under certain circumstances, as
set forth in the Pooling Agreement, the Master Servicer may waive the payment of
any otherwise applicable prepayment penalty. Investors should conduct their own
analysis of the effect, if any, that the prepayment penalties, and decisions by
the Master Servicer with respect to the waiver thereof, may have on the
prepayment performance of the Loans. The Depositor makes no representations as
to the effect that the prepayment penalties, and decisions by the Master
Servicer with respect to the waiver thereof, may have on the prepayment
performance of the Loans.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal prepayments is consistent with such investor's expectation. In
general, the earlier a principal prepayment on the Loans occurs, the greater the
effect of such principal prepayment on an investor's yield to maturity. The
effect on an investor's yield 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 Offered Certificates may not be offset
by a subsequent like decrease (or increase) in the rate of principal
prepayments.
The weighted average life of a Class A Certificate is the average amount of
time that will elapse from the Closing Date until each dollar of principal is
scheduled to be repaid to the investors in such Certificate. Because it is
expected that there will be prepayments and defaults on the Loans, the actual
weighted average life of the Class A Certificates is expected to vary
substantially from the weighted average remaining terms to stated maturity of
the Loans as set forth herein under "Description of the Loans."
Prepayments of loans are commonly measured relative to a prepayment standard
or model. The model used with respect to the Loans (the "Prepayment Assumption")
assumes:
(i) In the case of the Mortgage Loans, 125% of the related Vector. In the
case of the Mortgage Loans, the related "Vector" means a constant prepayment
rate ("CPR") of 4.00% per annum of the then unpaid principal balance of such
Mortgage Loans in the first month of the life of such Mortgage Loans and an
additional approximately 1.455% (precisely 16/11%) per annum in each month
thereafter until the 12th month, and then beginning in the 12th month and in
each month thereafter during the life of such Mortgage Loans, a CPR of 20.00%
per annum.
S-36
(ii) In the case of the Manufactured Home Loans, 200% of the related Vector.
In the case of the Manufactured Home Loans, the related "Vector" means a CPR
of 3.70% per annum of the then unpaid principal balance of such Manufactured
Home Loans in the first month of the life of such Manufactured Home Loans and
an additional 0.10% per annum in each month thereafter until the 24th month,
and then beginning in the 24th month and in each month thereafter during the
life of such Manufactured Home Loans, a CPR of 6.00% per annum.
CPR is a prepayment assumption that represents a constant assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of loans for the life of such loans. The model does not purport to be
either an historical description of the prepayment experience of any pool of
loans or a prediction of the anticipated rate of prepayment of any loans,
including the Loans to be included in the Trust. Each of the Prepayment
Scenarios in the table below assumes the respective percentages of the Vectors
indicated for such scenario.
The table entitled "Percent of Original Certificate Principal Balance
Outstanding" was prepared on the basis of the assumptions in the following
paragraph and the tables set forth below. There are certain differences between
the loan characteristics included in such assumptions and the characteristics of
the actual Loans. Any such discrepancy may have an effect upon the percentages
of Initial Certificate Principal Balances outstanding and weighted average lives
of the Class A Certificates set forth in the table. In addition, since the
actual Loans in the Trust will have characteristics that differ from those
assumed in preparing the tables set forth below, the distributions of principal
of the Class A Certificates may be made earlier or later than indicated in the
table.
The percentages, weighted average lives and pre-tax yields in the table
entitled "Percent of Original Certificate Principal Balance Outstanding" were
determined assuming that (the "Structuring Assumptions"): (i) the Loans have the
characteristics set forth in the table below, (ii) the closing date for the
Offered Certificates occurs on
March 29,
2001 and the Offered Certificates were sold to investors on such date, (iii)
distributions on the Certificates are made on the 25th day of each month
regardless of the day on which the Distribution Date actually occurs, commencing
in April 2001, in accordance with the allocation of Available Funds set forth
below under "Description of the Certificates--Allocation of Available Funds",
(iv) the prepayment rates are those indicated in the table below for the related
Prepayment Scenario, (v) prepayments include thirty days' interest thereon, (vi)
the Seller is not required to substitute or repurchase any or all of the Loans
pursuant to the Pooling Agreement and no optional termination occurs, except
with respect to the entries identified by the row captioned "Weighted Average
Life (years) to Optional Termination" in the table, (vii) each
Overcollateralization Target Amount is set initially as specified herein and
decreases after the Stepdown Date as set forth in the Pooling Agreement, (viii)
scheduled payments for all Loans are due and are received on the first day of
each month commencing in March 2001, the principal portion of such payments
being computed prior to giving effect to prepayments received in such month and
there are no losses or delinquencies with respect to the Loans, (ix) all Loans
prepay at the same rate and all such payments are treated as prepayments in full
of individual Loans, with no shortfalls in collection of interest, (x) such
prepayments are received on the first day of each month commencing in the month
of the Closing Date, (xi) the Pass-Through Rates for the Offered Certificates
are as set forth herein, (xii) the Servicing Fee Rate is equal to 0.50% per
annum and the Trustee Fee Rate is equal to 0.01% per annum, (xiii) the Group I
Funding Period ends immediately after the first Distribution Date and (xiv) a
sufficient amount is withdrawn from the Interest Coverage Account and included
in Available Funds on the first two Distribution Dates. Nothing contained in the
foregoing assumptions should be construed as a representation that the Loans
will not experience delinquencies or losses.
PREPAYMENT SCENARIOS(1)
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V SCENARIO VI SCENARIO VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
Mortgage Loans 0% 50% 100% 125% 150% 175% 200%
Manufactured Home Loans 0% 80% 160% 200% 240% 280% 320%
- --------------------------------------
(1) Percentage of the related Vector.
S-37
ASSUMED LOAN CHARACTERISTICS
ORIGINAL ORIGINAL REMAINING
AMORTIZATION TERM TO TERM TO
PRINCIPAL LOAN TERM TO MATURITY MATURITY
DESCRIPTION BALANCE ($) RATE (%) MATURITY (MONTHS) (MONTHS) (MONTHS)
----------- ----------- -------- ----------------- -------- --------
Initial Group I Mortgage Loans:
$ 4,246,910.01 11.07927 113 113 105
$48,817,644.46 10.99891 180 180 171
$18,230,433.26 10.85516 240 240 233
$51,830,513.02 10.89194 360 360 353
$ 237,890.51 10.02763 360 120 97
$38,261,183.78 10.82768 360 180 172
$ 2,942,455.06 13.94343 180 180 166
$ 2,766,433.96 9.77044 360 360 345
$ 33,657.19 7.12500 120 120 38
$ 3,123,557.93 7.62521 180 180 147
$ 148,492.68 9.79315 240 240 210
$ 8,510,891.98 8.60425 360 360 333
$ 3,334,034.83 8.67537 360 360 331
Subsequent Group I Mortgage Loans:
$ 520,302.98 11.07927 113 113 112
$ 5,980,810.95 10.99891 180 180 179
$ 2,233,470.63 10.85516 240 240 239
$ 6,349,927.44 10.89194 360 360 359
$ 29,144.75 10.02763 360 120 119
$ 4,687,504.07 10.82768 360 180 179
$ 360,489.89 13.94343 180 180 179
$ 338,924.97 9.77044 360 360 359
$ 4,123.45 7.12500 120 120 119
$ 382,677.40 7.62521 180 180 179
$ 18,192.33 9.79315 240 240 239
$ 1,042,697.50 8.60425 360 360 359
$ 408,463.63 8.67537 360 360 359
Initial Group I Manufactured Home Loans:
$ 830,737.74 10.11516 108 108 91
$ 2,289,173.43 9.43947 178 178 161
$ 6,755,337.38 8.88713 263 263 246
$13,741,925.12 8.14257 360 360 341
S-38
ORIGINAL ORIGINAL REMAINING
AMORTIZATION TERM TO TERM TO
PRINCIPAL LOAN TERM TO MATURITY MATURITY
DESCRIPTION BALANCE ($) RATE (%) MATURITY (MONTHS) (MONTHS) (MONTHS)
----------- ----------- -------- ----------------- -------- --------
Subsequent Group I Manufactured Home Loans:
$ 92,977.43 10.11516 108 108 107
$ 256,207.77 9.43947 178 178 177
$ 756,067.63 8.88713 263 263 262
$1,538,017.16 8.14257 360 360 359
ORIGINAL ORIGINAL REMAINING
AMORTIZATION TERM TO TERM TO
PRINCIPAL LOAN TERM TO MATURITY MATURITY
DESCRIPTION BALANCE ($) RATE (%) MATURITY (MONTHS) (MONTHS) (MONTHS)
----------- ----------- -------- ----------------- -------- --------
Group II Mortgage Loans:
$ 159,065.84 9.76938 101 101 92
$ 3,729,581.32 10.97354 180 180 173
$ 1,618,903.66 11.06712 244 244 235
$ 6,260,197.75 10.43858 360 360 349
$ 2,513,878.52 10.71619 360 180 172
$ 4,571,494.10 12.97937 180 180 161
$ 659,883.68 10.17179 360 360 347
$ 1,392,785.03 7.21506 180 180 146
$ 557,531.67 8.83941 360 360 345
$ 937,878.96 8.29709 360 360 330
Group II Manufactured Home Loans:
$ 32,401.85 7.25000 180 180 161
$ 226,582.33 9.04481 261 261 243
$ 365,314.77 8.23466 360 360 341
Based on the foregoing assumptions, the following tables set forth the
percentages of the Original Certificate Principal Balance of each class of Class
A Certificates that would be outstanding after each of the dates shown, at the
various indicated Prepayment Scenarios and the corresponding weighted average
lives.
S-39
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS A-1
PREPAYMENT SCENARIO
-------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
Distribution Date
- -----------------
Initial Percentage 100% 100% 100% 100% 100% 100% 100%
March 2002.......... 96 87 79 75 70 66 62
March 2003.......... 93 76 61 54 47 41 36
March 2004.......... 91 67 48 40 34 27 22
March 2005.......... 88 59 38 30 24 19 14
March 2006.......... 86 52 30 23 17 13 9
March 2007.......... 83 45 24 17 12 9 6
March 2008.......... 80 39 19 13 9 6 4
March 2009.......... 77 34 15 10 6 4 2
March 2010.......... 73 30 12 7 5 3 2
March 2011.......... 70 26 9 6 3 2 1
March 2012.......... 66 22 7 4 2 1 1
March 2013.......... 61 19 6 3 2 1 0
March 2014.......... 56 16 4 2 1 0 0
March 2015.......... 51 13 3 2 1 0 0
March 2016.......... 33 9 2 1 0 0 0
March 2017.......... 32 7 2 1 0 0 0
March 2018.......... 30 6 1 0 0 0 0
March 2019.......... 27 5 1 0 0 0 0
March 2020.......... 25 4 0 0 0 0 0
March 2021.......... 23 4 0 0 0 0 0
March 2022.......... 21 3 0 0 0 0 0
March 2023.......... 19 2 0 0 0 0 0
March 2024.......... 17 2 0 0 0 0 0
March 2025.......... 15 1 0 0 0 0 0
March 2026.......... 13 1 0 0 0 0 0
March 2027.......... 10 1 0 0 0 0 0
March 2028.......... 7 0 0 0 0 0 0
March 2029.......... 4 0 0 0 0 0 0
March 2030.......... 1 0 0 0 0 0 0
March 2031.......... 0 0 0 0 0 0 0
Weighted Average Life
(years) to maturity
(1)................. 13.99 6.83 4.14 3.39 2.84 2.42 2.09
Weighted Average Life
(years) to Optional
Termination(1)(2)... 13.85 6.39 3.83 3.10 2.58 2.19 1.89
- -------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates 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 aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Assumes an optional purchase of the Loans on the earliest possible
Distribution Date on which it is permitted.
S-40
PERCENT OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING*
CLASS A-2
PREPAYMENT SCENARIO
-------------------
Scenario I Scenario II Scenario III Scenario IV Scenario V Scenario VI Scenario VII
---------- ----------- ------------ ----------- ---------- ----------- ------------
Distribution Date
- -----------------
Initial Percentage 100% 100% 100% 100% 100% 100% 100%
March 2002.......... 95 85 76 71 67 62 57
March 2003.......... 92 74 58 51 44 38 32
March 2004.......... 90 65 45 37 30 24 18
March 2005.......... 87 56 35 27 21 16 12
March 2006.......... 84 49 27 20 14 10 7
March 2007.......... 81 42 21 15 10 7 4
March 2008.......... 77 36 16 11 7 4 2
March 2009.......... 73 31 13 8 5 2 1
March 2010.......... 69 27 10 6 3 1 1
March 2011.......... 64 22 7 4 2 1 0
March 2012.......... 59 19 5 3 1 0 0
March 2013.......... 52 15 4 2 1 0 0
March 2014.......... 46 12 3 1 0 0 0
March 2015.......... 42 10 2 1 0 0 0
March 2016.......... 31 7 1 0 0 0 0
March 2017.......... 30 6 1 0 0 0 0
March 2018.......... 28 5 0 0 0 0 0
March 2019.......... 26 4 0 0 0 0 0
March 2020.......... 24 3 0 0 0 0 0
March 2021.......... 22 3 0 0 0 0 0
March 2022.......... 20 2 0 0 0 0 0
March 2023.......... 18 2 0 0 0 0 0
March 2024.......... 16 1 0 0 0 0 0
March 2025.......... 14 1 0 0 0 0 0
March 2026.......... 12 1 0 0 0 0 0
March 2027.......... 9 0 0 0 0 0 0
March 2028.......... 6 0 0 0 0 0 0
March 2029.......... 3 0 0 0 0 0 0
March 2030.......... 0 0 0 0 0 0 0
March 2031.......... 0 0 0 0 0 0 0
Weighted Average Life
(years) to maturity
(1)................. 13.22 6.29 3.75 3.05 2.54 2.14 1.83
Weighted Average Life
(years) to Optional
Termination(1)(2)... 13.10 5.96 3.56 2.88 2.38 2.01 1.71
- -------------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of any class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the principal
amount on each Distribution Date on such Class of Certificates 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 aggregate amount of the assumed net reductions in
principal amount on such class of Certificates.
(2) Assumes an optional purchase of the Loans on the earliest possible
Distribution Date on which it is permitted.
S-41
SPECIAL YIELD CONSIDERATIONS RELATING TO THE CLASS S-1 CERTIFICATES
Investors should note that the Class S-1 Certificates are entitled to
distributions only through the Distribution Date in March 2003. In addition, if,
at any time on or prior to February 1, 2003, the aggregate Principal Balance of
the Group I Loans is reduced to or below $23,110,000, the yield to investors in
the Class S-1 Certificates will become extremely sensitive to the rate and
timing of principal payments on the Group I Loans (including prepayments,
defaults and liquidations), which rate may fluctuate significantly over time.
Further, if the Optional Termination Date occurs prior to the Distribution Date
in March 2003 and the Master Servicer or the Certificate Insurer effects an
optional termination, then the Class S-1 Certificates will receive no further
distributions. Investors in the Class S-1 Certificates should consider the risk
that an extremely rapid rate of prepayments on the Group I Loans could result in
the failure of such investors to fully recover their investments.
Based on the Structuring Assumptions, and further assuming prepayments
at a CPR of approximately 78.2% and an assumed purchase price of $2,377,095, the
pre-tax yield to maturity of the Class S-1 Certificates would be approximately
0%. If the actual prepayment rate on the Group I Loans were to exceed such rate,
then assuming the Group I Loans behave in conformity with all other Structuring
Assumptions, initial investors in the Class S-1 Certificates would not fully
recover their initial investment. Timing of changes in the rate of prepayments
may significantly affect the actual yield to investors, even if the average rate
of principal prepayments is consistent with the expectations of investors.
Investors must make their own decisions as to the appropriate prepayment
assumption to be used in deciding whether to purchase any Class S-1
Certificates.
The 0% pre-tax yield described above was calculated by determining the
monthly discount rates which, when applied to the assumed stream of cash flow to
be paid on the Class S-1 Certificates, would cause the discounted present value
of such assumed stream of cash flow to the Closing Date to equal the assumed
purchase price (which includes accrued interest), and converting such monthly
rate to a corporate bond equivalent rate. Such calculations do not take into
account the interest rates at which funds received by holders of the Class S-1
Certificates may be reinvested and consequently does not purport to reflect the
return on any investment in the Class S-1 Certificates when such reinvestment
rates are considered.
THE POOLING AGREEMENT
GENERAL
The Certificates will be issued on the Closing Date pursuant to the
Pooling Agreement. The Trust created under the Pooling Agreement will consist of
(i) all of the Depositor's right, title and interest in the Loans, the related
Mortgage Notes or Manufactured Home Contracts, Mortgages and other related
documents, (ii) all payments on or collections in respect of the Loans (other
than any prepayment penalties) received after the Cut-off Date together with any
proceeds thereof, (iii) any Properties acquired on behalf of certificateholders
by foreclosure, by deed in lieu of foreclosure or by repossession, and any
revenues received thereon, (iv) the rights of the Trustee under all insurance
policies required to be maintained pursuant to the Pooling Agreement and (v) the
rights of the Depositor under the Loan Purchase Agreement.
ASSIGNMENT OF THE LOANS
On the Closing Date, the Depositor will transfer to the Trust all of
its right, title and interest in and to each Loan, the related Mortgage Note or
Manufactured Home Contract and other related documents (collectively, the
"Related Documents"), including all payments on or collections in respect of
each such Loan (other than any prepayment penalties) received after the Cut-off
Date. The Trustee, concurrently with such transfer, will deliver the
Certificates to the Depositor. Each Loan transferred to the Trust will be
identified on a schedule (the "Loan Schedule") delivered to the Trustee pursuant
to the Pooling Agreement. Such schedule will include information such as the
Principal Balance of each Loan as of the Cut-off Date, its Loan Rate as well as
other information.
The Pooling Agreement will require that, within the time period
specified therein, the Depositor will deliver or cause to be delivered to the
Trustee (or a custodian, as the Trustee's agent for such purpose) the Mortgage
Notes or Manufactured Home Contracts endorsed to the Trustee on behalf of the
certificateholders and the Related
S-42
Documents (such documents, the "Trustee's Loan File"). In lieu of delivery of
original Mortgages, Mortgage Notes or Manufactured Home Contracts, if such
original is not available or lost, the Depositor may deliver or cause to be
delivered true and correct copies thereof, or, with respect to a lost Mortgage
Note, a lost note affidavit executed by the Seller. The assignments of mortgage
are required to be recorded by the Seller in the appropriate offices for real
property records unless an opinion of counsel is rendered that recordation is
not necessary to protect the assignee of the Loans secured by the Properties in
such jurisdiction.
Pursuant to the Pooling Agreement, the Depositor will sell, transfer,
assign, set over and otherwise convey without recourse to the Trust in trust for
the benefit of the certificateholders and the Certificate Insurer all right,
title and interest in and to each Loan. Each such transfer will convey all
right, title and interest in and to each Loan including (a) principal and
interest payments received after the Cut-off Date and (b) principal prepayments
in full and curtailments (i.e., partial prepayments) and other principal
collections received after the Cut-off Date, but excluding prepayment penalties
which will be retained by the Seller.
In connection with such transfer and assignment, the Seller will
deliver to the Trustee on the Closing Date certain loan documents (collectively,
with respect to each Loan, the "Trustee's Loan File") with respect to each Loan.
If the Trustee or the Certificate Insurer during the process of
reviewing the Trustee's Loan Files finds any document constituting a part of a
Trustee's Loan File which is not executed, has not been received or is unrelated
to the Loans, or that any Loan does not conform to its requirements or to the
description thereof as set forth in the Loan Schedule, the Trustee or the
Certificate Insurer, as applicable, is required to promptly so notify the
Trustee, the Master Servicer, the Seller and the Certificate Insurer. The Seller
agrees to use reasonable efforts to cause to be remedied a material defect in a
document constituting part of a Trustee's Loan File of which it is so notified
by the Trustee or the Certificate Insurer. If, however, within 90 days after the
Trustee's or the Certificate Insurer's notice to it respecting such defect the
Seller has not caused to be remedied the defect and the defect materially and
adversely affects the value of the Loan or the interest of the
certificateholders or the Certificate Insurer in such Loan, the Seller will be
required to either (i) substitute in lieu of such Loan a Qualified Substitute
Loan and, if the then unpaid principal balance of such Qualified Substitute Loan
is less than the principal balance of such Loan as of the date of such
substitution plus accrued and unpaid interest on such amount, deliver to the
Master Servicer as part of the related monthly remittance remitted by the Master
Servicer the amount of any such shortfall plus any unreimbursed Servicing
Advances (as defined herein) made by the Master Servicer with respect to such
defective Loan (the "Substitution Adjustment") or (ii) purchase such Loan at a
price (the "Purchase Price") equal to the unpaid principal balance of such Loan
as of the date of purchase, plus the greater of (x) all accrued and unpaid
interest on the unpaid principal balance of such Loan to the scheduled payment
date for such Loan in the related Due Period or (y) 30 days' interest on such
balance, computed at such Loan's interest rate, plus the amount of any
unreimbursed Servicing Advances made by the Master Servicer with respect to such
defective Loan, which Purchase Price is required to be deposited in the
Collection Account after deducting therefrom any amounts received in respect of
such repurchased Loan or Loans and being held in the Collection Account for
future distribution to the extent such amounts have not yet been applied to
principal or interest on such Loan or Loans.
A "Qualified Substitute Loan" is any Loan or Loans which (i) relates or
relate to a detached one-family residence or to the same type of residential
dwelling as the deleted Loan and in each case has or have the same or a better
lien priority as the deleted Loan with a borrower having the same or better
traditionally ranked credit status and is an owner-occupied Property or has the
same occupancy status as the Property securing the deleted Loan, (ii) matures or
mature no later than (and not more than one year earlier than) the deleted Loan,
(iii) has or have, at the time of substitution, a CLTV or CLTVs at origination
no higher than the CLTV at origination of the deleted Loan, (iv) has or have an
unpaid principal balance or principal balances (after application of all
payments received on or prior to the date of substitution) (which will be the
unpaid principal balance or principal balances thereof) not substantially less
and not more than the unpaid principal balance of the deleted Loan as of such
date, (v) has or have a Loan Rate not less than that of the deleted Loan, (vi)
satisfies or satisfy the criteria set forth from time to time in the definition
of "qualified replacement mortgage" in Section 860G(a)(4) of the Code (or any
successor statute thereto), (vii) has or have an applicable borrower or
borrowers with the same or better traditionally ranked credit status as the
borrower or borrowers under the deleted Loan for which it is to be substituted
and (viii) complies or comply as of the date of substitution with each
representation and warranty set forth in the Pooling Agreement.
S-43
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller will represent, among other things, with respect to each
Loan, as of the Closing Date, the following: (i) the information set forth in
the Loan Schedule with respect to each Loan is materially complete, true and
correct as of the Cut-off Date; (ii) immediately prior to the sale of the Loans
to the Depositor, the Seller had good and marketable title to each Loan subject
to no prior lien (other than the related senior lien in the case of any second
lien Loan) or interest of any nature; (iii) immediately upon the transfer and
assignment by the Depositor to the Trustee, the Trust will hold good and
marketable title to, and be the sole owner of, each Loan (other than the right
to any prepayment penalties), subject to no liens (other than the related senior
lien in the case of any second lien Loan), charges, mortgages, encumbrances or
rights of others; (iv) as of the Cut-off Date, less than 2% of the Closing Date
Loans are 30 or more days delinquent; and no Closing Date Loan is more than 59
days delinquent; (v) the Group I Loans are not subject to the requirements of
the Home Ownership and Equity Protection Act of 1994 or any comparable state
law; (vi) no proceeds from any Group I Loan were used to purchase single premium
credit insurance policies as part of the origination of, or as a condition to
closing, such Loan; (vii) the Master Servicer will accurately and fully report
its borrower credit files to each of the credit repositories in a timely manner
and (viii) no Group I Loan has a prepayment penalty term longer than five years
after its date of origination. Upon discovery of a breach of any such
representation and warranty which materially and adversely affects the value of
the Loan or the interests of the certificateholders in the related Loan and
Related Documents (which shall be deemed to have occurred in the case of a
breach of any of the representations and warranties set forth in clauses (v)
through (viii) above with respect to a Group I Loan), the Seller will have a
period of 90 days after discovery or notice of the breach to effect a cure. If
the breach cannot be cured within the 90-day period, the Seller will be
obligated to (i) substitute for such deleted Loan a Qualified Substitute Loan or
(ii) repurchase such deleted Loan from the Trust. The same procedure and
limitations that are set forth above for the substitution or repurchase of
deleted Loans as a result of deficient documentation relating thereto will apply
to the substitution or purchase of a deleted Loan as a result of a breach of a
representation or warranty in the Loan Purchase Agreement that materially and
adversely affects the interests of the certificateholders.
Pursuant to the Pooling Agreement, upon the discovery by any of the
certificateholders, the Master Servicer, the Seller, the Certificate Insurer or
the Trustee that any of the representations and warranties of the Seller have
been breached in any material respect as of the Closing Date, with the result
that the value of the Loan or the interests of the certificateholders in the
related Loan or the interests of the Certificate Insurer were materially and
adversely affected (notwithstanding that such representation and warranty was
made to the Seller's best knowledge), the party discovering such breach is
required to give prompt written notice to the others of such breach.
Within 90 days of the earlier to occur of the Seller's discovery or its
receipt of written notice of any such breach, the Seller will be required to:
(i) promptly cure such breach in all material respects; (ii) remove the
applicable Loan and substitute one or more Qualified Substitute Loans and, if
the unpaid principal balance of such Qualified Substitute Loans as of the date
of such substitution is less than the unpaid principal balance, plus accrued and
unpaid interest thereon of the replaced Loans as of the date of substitution,
deposit the Substitution Adjustment in the Collection Account; or (iii) purchase
such Loan at the Purchase Price and deposit such Purchase Price into the
Distribution Account after deducting any amounts received in respect of such
repurchased Loan or Loans and being held in the Distribution Account for future
distribution to the extent such amounts have not yet been applied to principal
or interest on such Loan; provided, however, that any substitution of one or
more Qualified Substitute Loans pursuant to the preceding clause (ii) must be
effected not later than two years after the Closing Date. The obligation of the
Seller to cure such breach or to substitute or purchase any Loan, and certain
indemnification obligations set forth in the Pooling Agreement, will constitute
the sole remedy respecting a material breach of any such representation or
warranty to the certificateholders, the Trustee and the Certificate Insurer.
PAYMENTS ON LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION ACCOUNT
The Master Servicer shall establish and maintain or cause to be
maintained one or more separate trust accounts (each, a "Collection Account")
for the benefit of the certificateholders and the Certificate Insurer. Each
Collection Account will be an Eligible Account (as defined in the Pooling
Agreement). Upon receipt by the Master Servicer of amounts in respect of the
Loans (excluding amounts representing the Servicing Fee or other servicing
compensation, reimbursement for Advances and Servicing Advances, prepayment
penalty amounts to be paid to the Seller and insurance proceeds to be applied to
the restoration or repair of a Property or similar items), the Master
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Servicer will deposit such amounts in the Collection Account. Amounts so
deposited may be invested in Permitted Investments (as described in the Pooling
Agreement) maturing no later than the date on which the amount on deposit
therein is required to be deposited in the Distribution Account. The Trustee
will establish an account (the "Distribution Account") into which will be
deposited amounts withdrawn from the Collection Account for distribution to
certificateholders on a Distribution Date and payment of certain fees and
expenses of the Trust. The Distribution Account will be an Eligible Account.
Amounts on deposit therein may be invested in Permitted Investments maturing on
or before the business day prior to the related Distribution Date unless such
Permitted Investments are invested in investments managed or advised by the
Trustee or an affiliate thereof, in which case such Permitted Investments may
mature on the related Distribution Date.
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which are rated P-1
by Moody's and A-1 by S&P (or comparable ratings if Moody's and S&P are not the
Rating Agencies) at the time any amounts are held on deposit therein, (ii) an
account or accounts the deposits in which are fully insured by the Federal
Deposit Insurance Corporation (to the limits established by such corporation),
the uninsured deposits in which account are otherwise secured such that, as
evidenced by an opinion of counsel delivered to the Trustee and the Rating
Agencies, in form and substance satisfactory to the Rating Agencies, the
certificateholders will have a claim with respect to the funds in such account
or a perfected first priority security interest against such collateral (which
shall be limited to Permitted Investments) securing such funds that is superior
to claims of any other depositors or creditors of the depository institution
with which such account is maintained, (iii) a trust account or accounts
maintained with the trust department of a federal or state chartered depository
institution, national banking association or trust company acting in its
fiduciary capacity or (iv) otherwise acceptable to the Certificate Insurer and
to each Rating Agency without reduction or withdrawal of their then current
ratings of the Certificates as evidenced by a letter from each Rating Agency to
the Trustee and the Certificate Insurer. Permitted Investments are specified in
the Pooling Agreement and are limited to investments which meet the criteria of
the Rating Agencies from time to time as being consistent with their then
current ratings of the Certificates and which are acceptable to the Certificate
Insurer.
ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each Distribution Date
its own funds, or funds in the Collection Account that are not included in the
Group I Available Funds or the Group II Available Funds for such Distribution
Date, in an amount equal to interest (net of Servicing Fees) on the Principal
Balance of each Loan as of the beginning of the related Due Period, to the
extent not received on such Loan by the related Determination Date, plus certain
amounts representing assumed interest payments not covered by any current net
income on the Properties acquired by foreclosure or deed in lieu of foreclosure
(any such advance, an "Advance"). The "Determination Date" with respect to any
Distribution Date will be the 18th day of the calendar month in which such
Distribution Date occurs or, if such 18th day is not a business day, the
business day immediately preceding such 18th day.
Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, insurance
proceeds, condemnation proceeds and liquidation proceeds. The purpose of making
such Advances is to maintain a regular cash flow to the certificateholders,
rather than to guarantee or insure against losses. The Master Servicer will not
be required, however, to make any Advances with respect to reductions in the
amount of the monthly payments on the Loans due to bankruptcy proceedings or the
application of the Relief Act. Subject to the recoverability standard above, the
Master Servicer's obligation to make Advances as to any Loan will continue until
the Loan is paid in full or until the recovery of all Liquidation Proceeds
thereon.
All Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds, condemnation proceeds and liquidation proceeds
from the Loan as to which such unreimbursed Advance was made unless such amounts
are deemed to be nonrecoverable by the Master Servicer from the proceeds of the
related Loan, in which event reimbursement will be made to the Master Servicer
from general funds in the Collection Account. The Master Servicer may recover
from amounts in the Collection Account the amount of any Advance that remains
unreimbursed to the Master Servicer from the related liquidation proceeds after
the final liquidation of the related Loan, and such reimbursement amount will
not be available for remittance to the Trustee for distribution on the
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Certificates. In the event the Master Servicer fails in its obligation to make
any required Advance, the Trustee, in its capacity as successor Master Servicer,
will be obligated to make any such Advance, to the extent required in the
Pooling Agreement.
In the course of performing its servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses (including reasonable attorneys' fees and disbursements) incurred in
the performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration, inspection and protection of the
Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, (iii) the management and liquidation of Properties acquired in
satisfaction of the related mortgage and (iv) certain insurance premiums and
certain ongoing expenses associated with the Pool and incurred by the Master
Servicer in connection with its responsibilities under the Pooling Agreement.
Each such expenditure will constitute a "Servicing Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Loan, including liquidation proceeds,
condemnation proceeds, released mortgaged property proceeds, insurance proceeds
and such other amounts as may be collected by the Master Servicer from the
related borrower or otherwise relating to the Loan in respect of which such
unreimbursed amounts are owed, unless such amounts are deemed to be
nonrecoverable by the Master Servicer from the proceeds of the related Loan, in
which event reimbursement will be made to the Master Servicer from general funds
in the Collection Account.
The Pooling Agreement provides that the Trustee, on behalf of the Trust
and with the consent of the Master Servicer, may enter into a facility with any
person which provides that such person (an "Advancing Person") may fund Advances
and/or Servicing Advances, although no such facility shall reduce or otherwise
affect the Master Servicer's obligation to fund such Advances and/or Servicing
Advances. Any Advances and/or Servicing Advances made by an Advancing Person
will be reimbursed to the Advancing Person in the same manner as reimbursements
would be made to the Master Servicer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its servicing activities (the "Servicing Fee") for the Certificates will be
at the "Servicing Fee Rate" of 0.50% per annum for each Due Period on the
Principal Balance of each Loan. As additional servicing compensation, the Master
Servicer is entitled to retain all service-related fees, assumption fees,
modification fees, extension fees, late payment charges, non- sufficient fund
fees and other ancillary fees (but not prepayment penalties which shall be
payable to the Seller), to the extent collected from mortgagors, together with
any interest or other income earned on funds held in the Collection Account and
any Servicing Accounts.
The Master Servicer is obligated to deposit into the Collection Account
the amount of any Prepayment Interest Shortfall (payments made by the Master
Servicer in satisfaction of such obligation, "Compensating Interest") but only
in an amount up to its aggregate Servicing Fee for the related Distribution
Date. With respect to any Distribution Date and each Loan as to which a
principal prepayment was applied during the related Due Period, the "Prepayment
Interest Shortfall" is an amount equal to the interest at the applicable Loan
Rate (net of the Servicing Fee) on the amount of such principal prepayment for
the number of days from the date on which the principal prepayment is applied
until the Due Date for such Loan that occurs in such Due Period.
THE TRUSTEE
The Bank of New York, a New York banking corporation organized and
existing under the laws of the State of New York, will be named Trustee pursuant
to the Pooling Agreement. The Trustee will make available a monthly statement to
certificateholders containing information regarding the Certificates.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling Agreement will be equal to certain investment
earnings on the amounts on deposit in the Distribution Account and a fee (the
"Trustee Fee") equal to accrued interest at the "Trustee Fee Rate" of 0.01% per
annum on the Principal Balance of the Loans. The Pooling Agreement will provide
that the Trustee and any director, officer, employee or
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agent of the Trustee will be indemnified by the Trust and will be held harmless
against any loss, liability or expense (not including expenses, disbursements
and advances incurred or made by the Trustee, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trustee's performance in accordance with the provisions of the Pooling
Agreement) incurred by the Trustee arising out of or in connection with the
acceptance or administration of its obligations and duties under the Pooling
Agreement, other than any loss, liability or expense (i) that constitutes
certain specific liabilities of the Trustee under the Pooling Agreement relating
to REMIC administration or (ii) incurred by reason of willful misfeasance, bad
faith or negligence in the performance of the Trustee's duties under the Pooling
Agreement or by reason of reckless disregard of the Trustee's obligations and
duties under the Pooling Agreement. The Pooling Agreement will provide that the
Trustee may withdraw amounts owing to it under the Pooling Agreement prior to
distributions to certificateholders.
VOTING RIGHTS
At all times 98% of all voting rights will be allocated among the
holders of the Class A Certificates and the Class C Certificates in proportion
to the then outstanding Certificate Principal Balances of their respective
Certificates. At all times 1% of all voting rights will be allocated to the
holders of the Class S-1 Certificates and 1% of all voting rights will be
allocated to the holders of the Class R Certificates. The voting rights
allocated to any class of Certificates shall be allocated among all holders of
the Certificates of such class in proportion to the outstanding percentage
interests of such holders in such class. With respect to any date of
determination, if no Insurer Default (as defined herein) exists and is
continuing, all of the voting rights allocated to the holders of the Offered
Certificates shall be vested in the Certificate Insurer.
AMENDMENT
The Pooling Agreement may be amended under the circumstances set forth
under "The Pooling Agreement--Amendment" in the Prospectus; provided, however,
that unless an Insurer Default exists and is continuing, the consent of the
Certificate Insurer shall be required (if any Offered Certificates are
outstanding); provided, further, that if an Insurer Default exists and is
continuing, the consent of the Certificate Insurer shall be required for any
amendment that would affect the Certificate Insurer's right to reimbursement.
TERMINATION
The Master Servicer, or if the Master Servicer does not exercise such
option, the Certificate Insurer, will have the right to repurchase all of the
Loans and REO Properties in both Loan Groups and thereby effect the early
retirement of the Certificates, on any Distribution Date on which the aggregate
Principal Balance of such Loans and REO Properties in both Loan Groups is equal
to or less than 10% of the sum of the aggregate Principal Balance of the Closing
Date Loans in both Loan Groups as of the Cut-off Date plus the amounts deposited
in the Group I Pre- Funding Account on the Closing Date. The first Distribution
Date on which such option could be exercised is referred to herein as the
"Optional Termination Date." In the event that the option is exercised, the
repurchase will be made at a price (the "Termination Price") generally equal to
the greater of par or the fair market value of the Loans and REO Properties in
both Loan Groups, in each case plus accrued interest for each Loan at the
related Loan Rate to but not including the first day of the month in which such
repurchase price is paid plus the amount of any unreimbursed Advances and
Servicing Advances made by the Master Servicer plus any amounts due to the
Certificate Insurer under the Insurance Agreement. Proceeds from such repurchase
will be included in Available Funds and will be distributed to the holders of
the Certificates in accordance with the Pooling Agreement. Any such repurchase
of the Loans and REO Properties will result in the early retirement of the
Certificates. See "The Pooling Agreement--Termination; Retirement of
Certificates" in the Prospectus.
MASTER SERVICER ALTERNATIVES TO FORECLOSURE
The Master Servicer may foreclose on any delinquent Loan or, subject to
certain limitations set forth in the Pooling Agreement, work out an agreement
with the borrower, which may involve waiving or modifying any term of the Loan.
The Master Servicer may also sell any Loan that is at least 90 days delinquent.
If the Master Servicer sells any such Loan for less than its outstanding
Principal Balance in accordance with the servicing standard set forth in the
Pooling Agreement plus (without duplication) all prior Advances and Servicing
Advances thereon, or
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extends the payment period or accepts a lesser amount than stated in the
mortgage note or manufactured home contract in satisfaction of the mortgage note
or manufactured home contract, your yield may be reduced.
OPTIONAL PURCHASE OF DEFAULTED LOANS
As to any Loan which is delinquent in payment by 90 days or more, the
Master Servicer may, at its option, purchase such Loan from the Trust at the
Purchase Price for such Loan; provided, however, that the Master Servicer must
first purchase the Loan that, as of the time of such purchase, has been
delinquent for the greatest period before purchasing Loans that have been
delinquent lesser periods.
EVENTS OF DEFAULT
In addition to those Events of Default described under "The Pooling
Agreement--Events of Default" in the Prospectus, upon the occurrence of certain
loss and delinquency triggers with respect to the Loans or upon the occurrence
of certain other defaults set forth in the Pooling Agreement, the Master
Servicer may be removed as Master Servicer in accordance with the terms of the
Pooling Agreement and the Insurance Agreement.
CERTAIN MATTERS REGARDING THE CERTIFICATE INSURER
Pursuant to the terms of the Pooling Agreement, unless there exists an
Insurer Default, the Certificate Insurer will be entitled to exercise, among
others, the following rights of the holders of the Offered Certificates, without
the consent of such holders, and the holders of the Offered Certificates may
exercise such rights only with the prior written consent of the Certificate
Insurer: (i) the right to direct the Trustee to terminate the rights and
obligations of the Master Servicer upon the occurrence of an Event of Default or
upon the occurrence of certain loss and delinquency triggers with respect to the
Loans; (ii) the right to consent or to direct any waivers of defaults by the
Master Servicer; (iii) the right to remove the Trustee pursuant to the Pooling
Agreement; and (iv) the right to institute proceedings against the Master
Servicer in the event of default by the Master Servicer and refusal of the
Trustee to institute such proceedings. In addition, unless an Insurer Default
exists, the Certificate Insurer will have the right to direct all matters
relating to any proceeding seeking the avoidance as a preferential transfer
under applicable bankruptcy, insolvency, receivership or similar law of any
distribution made with respect to the Offered Certificates, and, unless an
Insurer Default exists, the Certificate Insurer's consent will be required prior
to, among other things, (i) the removal of the Trustee, (ii) the appointment of
any successor Trustee or Master Servicer or (iii) any amendment to the Pooling
Agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling Agreement. Set
forth below are summaries of the specific terms and provisions pursuant to which
the Offered Certificates will be issued. The following summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Pooling Agreement. When particular
provisions or terms used in the Pooling Agreement are referred to, the actual
provisions (including definitions of terms) are incorporated by reference.
New South Home Equity Trust 2001-1 will issue (i) the Class A-1
Certificates and the Class A-2 Certificates (together, the "Class A
Certificates"), (ii) the Class S-1 Certificates, (iii) the Class C-1
Certificates and the Class C-2 Certificates (together, the "Class C
Certificates") and (iv) the Class R Certificates (the "Residual Certificates").
The Class A Certificates, the Class S-1 Certificates, the Class C Certificates
and the Residual Certificates are collectively referred to herein as the
"Certificates." Only the Class A Certificates and the Class S-1 Certificates are
offered hereby (the "Offered Certificates").
The Offered Certificates will be covered by an irrevocable and
unconditional certificate guaranty insurance policy (the "Policy") issued by
Ambac Assurance Corporation (the "Certificate Insurer") for the benefit of the
holders of the Offered Certificates, pursuant to which the Certificate Insurer
will guarantee payments to such certificateholders as described herein.
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The Class A Certificates will have the respective Original Certificate
Principal Balances specified on the cover hereof, subject to a permitted
variance of plus or minus ten percent. The Class S-1 Certificates will not have
a Certificate Principal Balance, but will bear interest on their Notional Amount
outstanding from time to time. The initial Notional Amount of the Class S-1
Certificates is specified on the cover hereof, subject to a permitted variance
of plus or minus ten percent. Each related class of Class C Certificates will
have a Certificate Principal Balance equal to the excess, if any, of (i) the sum
of (A) the aggregate Principal Balance of the related Loans and (B) in the case
of the Class C-1 Certificates, the amount on deposit in the Group I Pre-Funding
Account over (ii) the Certificate Principal Balance of the related Class A
Certificates. The Class C Certificates will be entitled to interest as provided
in the Pooling Agreement. The Class R Certificates will not have Original
Certificate Principal Balances and will not bear interest, but will be entitled
to other amounts, payable in the priorities described under "- Allocation of
Available Funds" below.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $50,000 and integral multiples of $1.00 in excess thereof. The Class S-1
Certificates will be issued in fully registered, certificated form in minimum
Notional Amounts of $50,000 and integral multiples of $1.00 in excess thereof.
The assumed final maturity date (each, an "Assumed Final Distribution Date") for
the Class A-1 Certificates, the Class A-2 Certificates and the Class S-1
Certificates is the Distribution Date in July 2031, April 2031 and March 2003,
respectively.
Distributions on the Offered Certificates will be made by the Trustee
on the 25th day of each month, or if such day is not a business day, on the
first business day thereafter, commencing in April 2001 (each, a "Distribution
Date"), to the persons in whose names such Certificates are registered at the
close of business on the Record Date.
The "Record Date" is the last business day of the month immediately preceding
the month in which the related Distribution Date occurs.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (for so long
as they are registered in the name of the applicable depository or its nominee,
the "Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Book-Entry Certificates ("Certificate Owners") will hold such
Certificates through The Depository Trust Company ("DTC") in the United States,
or upon request through Clearstream Banking Luxembourg, formerly known as
Cedelbank SA ("Clearstream"), or the Euroclear System ("Euroclear") (in Europe)
if they are participants of such systems, or indirectly through organizations
which are participants in such systems. The Book-Entry Certificates will be
issued in one or more certificates which equal the aggregate Certificate
Principal Balance of such Certificates and will initially be registered in the
name of Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Clearstream's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Clearstream and The Chase Manhattan Bank will act as depositary
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $50,000.
Except as described below, no Certificate Owner acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
certificateholder of the Offered Certificates will be Cede & Co., as nominee of
DTC. Certificate Owners will not be certificateholders as that term is used in
the Pooling Agreement.
Certificate Owners are only permitted to exercise their rights indirectly
through DTC and participants of DTC ("DTC Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
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Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates. DTC
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates representing their respective interests in the
Book-Entry Certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not DTC
Participants may transfer ownership of Book-Entry Certificates only through DTC
Participants and indirect participants by instructing such DTC Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective DTC
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Book-Entry Certificates will be executed through DTC
and the accounts of the respective DTC Participants at DTC will be debited and
credited. Similarly, the DTC Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant (as
defined below) or Euroclear Participant (as defined below) to a DTC Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Federal Income Tax
Consequences--REMICS--Backup Withholding With Respect to REMIC Certificates" and
"--Foreign Investors in REMIC Certificates" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream Participants and Euroclear Participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its DTC Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the Rules, as in effect from time to time.
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Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois, "IML," the
Luxembourg Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("Clearstream
Participants") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial relationships.
Clearstream has established an electronic bridge with the Euroclear Operator (as
defined below) in Brussels to facilitate settlement of trades between systems.
Clearstream currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 29 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Euroclear Bank S.A./N.V. (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede & Co. DTC will be responsible for
crediting the amount of such payments to the accounts of the applicable DTC
Participants in accordance with DTC's normal procedures. Each DTC Participant
will be responsible for disbursing such payments to the Certificate Owners of
the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co. Distributions with
respect to Certificates held through Clearstream or Euroclear will be credited
to the cash accounts of
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Clearstream Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Federal Income Tax
Consequences--REMICS--Backup Withholding With Respect to REMIC Certificates" and
"--Foreign Investors in REMIC Certificates" in the Prospectus. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a Certificate
Owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to Certificate Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Certificate Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Clearstream or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a certificateholder under the
Pooling Agreement on behalf of a Clearstream Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related DTC
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor advises the Trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of a
Master Servicer Event of Termination (as defined in the Pooling Agreement),
Certificate Owners having percentage interests aggregating not less than 51% of
the Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Certificate
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
certificateholders under the Pooling Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each Class of Offered Certificates will be
made on each Distribution Date from Group I Available Funds or Group II
Available Funds, as applicable. With respect to any Distribution Date and
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Loan Group I and Loan Group II, respectively, the "Group I Available Funds" and
the "Group II Available Funds," respectively, will be equal to the sum of the
following amounts with respect to the related Loans, net of amounts reimbursable
therefrom to the Master Servicer: (i) the aggregate amount of monthly payments
on the Loans received during the related Due Period, after deduction of the
Trustee Fee and the Servicing Fee for such Distribution Date and any accrued and
unpaid Trustee Fees and Servicing Fees in respect of any prior Distribution
Dates, (ii) certain unscheduled payments in respect of the Loans, including
prepayments, insurance proceeds, Net Liquidation Proceeds and proceeds from
repurchases of and substitutions for such Loans occurring during the related Due
Period (but not including prepayment penalties), (iii) payments from the Master
Servicer in connection with Advances and Prepayment Interest Shortfalls for such
Distribution Date and (iv) in the case of Loan Group I, amounts transferred from
the Interest Coverage Account and, after the end of the Group I Funding Period,
any excess amounts transferred from the Group I Pre-Funding Account. The Seller
will be entitled to all prepayment penalties received on the Loans and such
amounts will not be available for distribution to the holders of the Offered
Certificates.
I. On each Distribution Date the Trustee shall withdraw from the
Distribution Account the Group I Available Funds, and make the following
disbursements and transfers in the order of priority described below and in each
case to the extent of Group I Available Funds remaining:
(i) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for the premium payable in respect of the
Group I Certificates;
(ii) CONCURRENTLY, to the holders of the Class A-1 Certificates and the
Class S-1 Certificates, the related Interest Distributable Amount for each such
class for such Distribution Date, on a PRO RATA basis based on the entitlement
of each such class pursuant to this clause (ii);
(iii) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws made on
the Policy in respect of the Group I Certificates and any other amounts owing to
the Certificate Insurer under the Insurance Agreement and relating to the Group
I Loans or to the Class A-1 Certificates or the Class S-1 Certificates;
(iv) to the Certificate Insurer, an amount equal to the excess, if any,
of (x) the amount required to be distributed pursuant to clause II(i) and clause
II(iii) below for such Distribution Date over (y) the amount actually
distributed pursuant to such clauses from Group II Available Funds;
(v) to the holders of the Class A-1 Certificates, an amount equal to
the Group I Basic Principal Distribution Amount;
(vi) if the Overcollateralized Amount with respect to Loan Group I is
less than zero, to the holders of the Class A-1 Certificates, an amount equal to
the Group I Extra Principal Distribution Amount, until the Overcollateralized
Amount with respect to Loan Group I has been increased to zero;
(vii) to the holders of the Class A-2 Certificates, an amount equal to
the excess, if any, of (x) the amount required to be distributed pursuant to
clause II(ii) below for such Distribution Date over (y) the amount actually
distributed pursuant to such clause from Group II Available Funds;
(viii) to the holders of the Class A-2 Certificates, an amount equal to
the excess, if any, of (x) the amount required to be distributed pursuant to
clause II(v) and clause II(vi) below for such Distribution Date over (y) the
amount actually distributed pursuant to such clauses from Group II Available
Funds;
(ix) to the holders of the Class A-1 Certificates, an amount equal to
the Group I Extra Principal Distribution Amount remaining, until the related
Overcollateralized Amount is equal to the related Overcollateralization Target
Amount; and
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(x) to the holders of the Class A-2 Certificates, an amount equal to
the excess, if any, of (x) the amount required to be distributed pursuant to
clause II(ix) below for such Distribution Date over (y) the amount actually
distributed pursuant to such clause from Group II Available Funds.
II. On each Distribution Date the Trustee shall withdraw from the
Distribution Account the Group II Available Funds, and make the following
disbursements and transfers in the order of priority described below and in each
case to the extent of Group II Available Funds remaining:
(i) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for the premium payable in respect of the
Group II Certificates;
(ii) to the holders of the Class A-2 Certificates, the related Interest
Distributable Amount for such Distribution Date;
(iii) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws made on
the Policy in respect of the Class A-2 Certificates and any other amounts owing
to the Certificate Insurer under the Insurance Agreement and relating to the
Group II Loans or to the Class A-2 Certificates;
(iv) to the Certificate Insurer, an amount equal to the excess, if any,
of (x) the amount required to be distributed pursuant to clause I(i) and clause
I(iii) above for such Distribution Date over (y) the amount actually distributed
pursuant to such clauses from Group I Available Funds;
(v) to the holders of the Class A-2 Certificates, an amount equal to
the Group II Basic Principal Distribution Amount;
(vi) if the Overcollateralized Amount with respect to Loan Group II is
less than zero, to the holders of the Class A-2 Certificates, an amount equal to
the Group II Extra Principal Distribution Amount, until the Overcollateralized
Amount with respect to Loan Group II has been increased to zero;
(vii) CONCURRENTLY, to the holders of the Class A-1 Certificates and
the Class S-1 Certificates, an amount equal to the excess, if any, of (x) the
amount required to be distributed pursuant to clause I(ii) above for such
Distribution Date over (y) the amount actually distributed pursuant to such
clause from Group I Available Funds, on a PRO RATA basis based on the
entitlement of each such class pursuant to this clause (vii);
(viii) to the holders of the Class A-1 Certificates, an amount equal to
the excess, if any, of (x) the amount required to be distributed pursuant to
clause I(v) and clause I(vi) above for such Distribution Date over (y) the
amount actually distributed pursuant to such clauses from Group I Available
Funds;
(ix) to the holders of the Class A-2 Certificates, an amount equal to
the Group II Extra Principal Distribution Amount remaining, until the related
Overcollateralized Amount is equal to the related Overcollateralization Target
Amount; and
(x) to the holders of the Class A-1 Certificates, an amount equal to
the excess, if any, of (x) the amount required to be distributed pursuant to
clause I(ix) above for such Distribution Date over (y) the amount actually
distributed pursuant to such clause from Group I Available Funds.
III. On each Distribution Date, any remaining Group I Available Funds
and Group II Available Funds, after giving effect to the distributions in
clauses I and II above, will be distributed in the following order of priority:
(i) to the holders of the Class C-1 Certificates and the Class C-2
Certificates, in each case, as provided in the Pooling Agreement; and
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(ii) to the holders of the Residual Certificates as provided in the
Pooling Agreement.
On each Distribution Date, following the distribution of the Group I
Available Funds and the Group II Available Funds as described above, the Trustee
shall withdraw from the Distribution Account the amount of any Insured Payment
received by it for such Distribution Date as described under "The Certificate
Insurance Policy" in this prospectus supplement and shall distribute to the
holders of each class of the Offered Certificates, (A) as interest, any portion
of such Insured Payment made in respect of an Insured Amount of interest for
such class and (B) as principal, in reduction of the Certificate Principal
Balance of the Class A Certificates, any portion of such Insured Payment made in
respect of an Insured Amount of principal. Any Insured Payment of principal will
be allocated between the classes of Class A Certificates as follows:
o if the Overcollateralized Amount (calculated for this purpose
after taking into account all distributions of Group I
Available Funds and Group II Available Funds) for both
Certificate Groups is less than zero, to the holders of the
Class A-1 Certificates and the Class A-2 Certificates on a PRO
RATA basis based on the amount by which the related
Overcollateralized Amount for each group (as so calculated) is
less than zero, or
o if the Overcollateralized Amount (calculated for this purpose
after taking into account all distributions of Group I
Available Funds and Group II Available Funds) for only one
Certificate Group is less than zero, to the holders of only
the related class of Class A Certificates.
DEFINITIONS
Many of the defined terms listed below may apply to both Loan
Groups/Certificate Groups and are sometimes used in this prospectus supplement
to refer to a particular Loan Group/Certificate Group by the use of the words
"Group I" and "Group II."
The "Accrual Period" for the Offered Certificates for any Distribution
Date will be the calendar month preceding the month of such Distribution Date
based on a 360-day year consisting of twelve 30-day months.
The "Basic Principal Distribution Amount" means with respect to each
Certificate Group and any Distribution Date the excess, if any, of (i) the
related Principal Remittance Amount for such Distribution Date over (ii) the
related Overcollateralization Release Amount, if any, for such Distribution
Date.
The "Certificate Principal Balance" of any Class A Certificate
immediately prior to any Distribution Date will be equal to the Certificate
Principal Balance thereof on the Closing Date (the "Initial Certificate
Principal Balance") reduced by the sum of all amounts actually distributed in
respect of principal of such Certificate on all prior Distribution Dates. The
"Certificate Principal Balance" of the related class of Class C Certificates as
of any date of determination is equal to excess, if any, of (i) the sum for such
date of determination of (A) the aggregate Principal Balance of the related
Loans and (B) in the case of the Class C-1 Certificates, the amount on deposit
in the Group I Pre-Funding Account over (ii) the Certificate Principal Balance
of the related Class A Certificates.
A Loan is "Delinquent" if any monthly payment due on a Due Date is not
made by the close of business on the next scheduled Due Date for such Loan. A
Loan is "30 days Delinquent" if such monthly payment has not been received by
the close of business on the corresponding day of the month immediately
succeeding the month in which such monthly payment was due or, if there was no
such corresponding day (E.G., as when a 30-day month follows a 31-day month in
which a payment was due on the 31st day of such month), then on the last day of
such immediately succeeding month; and similarly for "60 days Delinquent" and
"90 days Delinquent," etc.
A "Due Period" with respect to any Distribution Date is the immediately
preceding calendar month.
The "Extra Principal Distribution Amount" with respect to a Certificate
Group and any Distribution Date, is the lesser of (x) the related General Excess
Available Amount for such Distribution Date and (y) the related
Overcollateralization Deficiency Amount for such Distribution Date.
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The "General Excess Available Amount" means with respect to a
Certificate Group and each Distribution Date, the amount, if any, by which the
Group I Available Funds or Group II Available Funds, as applicable, for such
Distribution Date exceeds the aggregate amount distributed on such Distribution
Date pursuant to subclauses (i) through (v) for such Certificate Group as set
forth under "--Allocation of Available Funds" above.
"Insurance Proceeds" means the proceeds of any title policy, hazard
policy or other insurance policy covering a Loan, to the extent such proceeds
are not to be applied to the restoration of the related Property or released to
the borrower in accordance with the procedures that the Master Servicer would
follow in servicing loans held for its own account, subject to the terms and
conditions of the related Mortgage Note and Mortgage or Manufactured Home
Contract, as applicable.
The "Interest Distributable Amount" for any Distribution Date and each
class of Offered Certificates equals the sum of (i) the related Monthly Interest
Distributable Amount for such class for such Distribution Date and (ii) the
related Unpaid Interest Shortfall Amount for such class for such Distribution
Date.
An "Insurer Default" will occur in the event the Certificate Insurer
fails to make a payment under the Policy or if certain events of bankruptcy or
insolvency occur with respect to the Certificate Insurer.
The "Monthly Interest Distributable Amount" for any Distribution Date
and each class of Offered Certificates equals the amount of interest accrued
during the related Accrual Period at the related Pass-Through Rate on the
Certificate Principal Balance or Notional Amount of such class immediately prior
to such Distribution Date reduced by any related shortfalls resulting from the
application of the Relief Act (allocated PRO RATA between the Offered
Certificates in the related Certificate Group based upon the Monthly Interest
Distributable Amount of such class for such Distribution Date irrespective of
any Prepayment Interest Shortfalls or shortfalls resulting from the application
of the Relief Act for such Distribution Date).
The "Notional Amount" of the Class S-1 Certificate immediately prior to
any Distribution Date will be equal to the lesser of (i) $23,110,000 and (ii)
the sum of the aggregate principal balance of the Loans in Loan Group I (prior
to giving effect to scheduled payments of principal received during the related
Due Period and unscheduled collections of principal received during the related
Due Period) and any amount remaining in the Group I Pre- Funding Account.
An "Overcollateralization Deficiency Amount" with respect to any
Distribution Date and each Certificate Group equals the amount, if any, by which
the related Overcollateralization Target Amount exceeds the related
Overcollateralized Amount on such Distribution Date (after giving effect to
distributions in respect of the Basic Principal Distribution Amount on such
Distribution Date).
The "Overcollateralization Deficit" with respect to any Distribution
Date is equal to the excess, if any, of (a) the aggregate Certificate Principal
Balance of the Class A Certificates over (b) the sum of the aggregate principal
balances of the Loans in both Loan Groups then outstanding and the amount in the
Group I Pre-Funding Account, calculated after taking into account all
distributions on the related Distribution Date of Group I Available Funds and
Group II Available Funds.
"Overcollateralization Release Amount" means, with respect to each
Certificate Group and any Distribution Date, the lesser of (x) the related
Principal Remittance Amount for such Distribution Date and (y) the excess, if
any, of (i) the related Overcollateralized Amount for such Distribution Date
(assuming that 100% of the related Principal Remittance Amount is applied as a
principal payment on such Distribution Date) over (ii) the related
Overcollateralization Target Amount for such Distribution Date.
The "Overcollateralization Target Amount" means with respect to each
Certificate Group and any Distribution Date a specified level of
overcollateralization determined in accordance with the Pooling Agreement.
The "Overcollateralized Amount" for each Certificate Group and any
Distribution Date is the amount equal to (i) the aggregate Principal Balance of
the related Loan Group (after giving effect to scheduled payments of principal
received during the related Due Period and unscheduled collections of principal
received during the related
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Due Period) plus, in the case of the Group I Certificates, the amount of any
funds on deposit in the Group I Pre- Funding Account minus (ii) the aggregate
Certificate Principal Balance of the related Class A Certificates as of such
Distribution Date after giving effect to distributions of the Group I Basic
Principal Distribution Amount and the Group II Basic Principal Distribution
Amount to be made on such Distribution Date. If the amount in clause (ii) of
this definition is greater than the amount in clause (i) of this definition, the
Overcollateralized Amount will be a negative number less than zero.
The "Principal Remittance Amount" means with respect to each Loan Group
and any Distribution Date, the sum of (i) each scheduled payment of principal
(including any pay-aheads) collected on the Loans by the Master Servicer during
the related Due Period, (ii) the principal portion of all partial and full
principal prepayments of the Loans applied by the Master Servicer during such
Due Period, (iii) the principal portion of all related Net Liquidation Proceeds
and Insurance Proceeds received during such Due Period, (iv) that portion of the
Purchase Price, representing principal of any repurchased Loan, deposited to the
Collection Account during such Due Period, (v) the principal portion of any
related Substitution Adjustments deposited in the Collection Account during such
Due Period, (vi) in the case of Loan Group I, on the Distribution Date in June
2001, any amount remaining on deposit in the Group I Pre-Funding Account and
(vii) on the Distribution Date on which the Trust is to be terminated in
accordance with the Pooling Agreement, that portion of the Termination Price, in
respect of principal.
"Realized Loss" means, with respect to any defaulted Loan that is
finally liquidated (a "Liquidated Loan"), the amount of loss realized equal to
the portion of the Principal Balance remaining unpaid after application of all
liquidation proceeds net of amounts reimbursable to the Master Servicer for
related Advances, Servicing Advances and Servicing Fees (such amount, the "Net
Liquidation Proceeds") in respect of such Loan.
The "Stepdown Date" with respect to either Certificate Group means the
later to occur of (x) the Distribution Date in March 2004 and (y) the first
Distribution Date on which the aggregate Principal Balance of the related Loans
has been reduced to 50% or less of the aggregate Principal Balance of the
related Closing Date Loans as of the Cut-off Date plus, in the case of the Group
I Certificates, the Group I Pre-Funded Amount as of the Closing Date.
The "Unpaid Interest Shortfall Amount" means (i) for each class of
Offered Certificates and the first Distribution Date, zero, and (ii) with
respect to each class of Offered Certificates and any Distribution Date after
the first Distribution Date, the amount, if any, by which (a) the sum of (1) the
Monthly Interest Distributable Amount for such class for the immediately
preceding Distribution Date and (2) the outstanding Unpaid Interest Shortfall
Amount, if any, for such class for such preceding Distribution Date exceeds (b)
the aggregate amount distributed on such class in respect of interest pursuant
to clause (a) of this definition on such preceding Distribution Date, plus
interest on the amount of interest due but not paid on the Certificates of such
class on such preceding Distribution Date, to the extent permitted by law, at
the Pass-Through Rate for such class for the related Accrual Period.
PASS-THROUGH RATES
The "Pass-Through Rate" on any Distribution Date with respect to:
(i) the Class A-1 Certificates, (a) on or prior to the Optional
Termination Date, the lesser of (x) 6.179% per annum and (y)
the related Net WAC Rate and (b) after the Optional
Termination Date, the lesser of (x) 6.679% per annum and (y)
the related Net WAC Rate;
(ii) the Class A-2 Certificates, (a) on or prior to the Optional
Termination Date, the lesser of (x) 6.491% per annum and (y)
the related Net WAC Rate and (b) after the Optional
Termination Date, the lesser of (x) 6.991% per annum and (y)
the related Net WAC Rate;
(iii) the Class S-1 Certificates will be 5.490% per annum for the
April 2001 Distribution Date through the March 2003
Distribution Date. After the March 2003 Distribution Date, the
Pass-Through Rate for the Class S-1 Certificates will be
0.000% per annum, and will therefore then cease to accrue
interest.
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The "Net WAC Rate" for the Class A-1 Certificates and any Distribution
Date shall be a per annum rate equal to the excess of (A) the weighted average
of the Loan Rates of the Group I Loans (weighted on the Principal Balances
thereof prior to giving effect to scheduled payments of principal received
during the related Due Period, or any unscheduled collections of principal
received during the related Due Period) over (B) the sum of (i) the Servicing
Fee Rate, (ii) the Trustee Fee Rate, (iii) the percentage equivalent of a
fraction, the numerator of which is (x) twelve times the amount of the premium
payable to the Certificate Insurer with respect to the Class A-1 Certificates
and the Class S-1 Certificates on such Distribution Date, and the denominator of
which is (y) the sum of the outstanding Principal Balance of the Group I Loans
(prior to giving effect to scheduled payments of principal received during the
related Due Period, or any unscheduled collections of principal received during
the related Due Period) and any amount remaining in the Group I Pre-Funding
Account (exclusive of any investment income thereon) and (iv) the percentage
equivalent of a fraction, the numerator of which is (x) twelve times the amount
of the Monthly Interest Distributable Amount distributable on the Class S-1
Certificates on such Distribution Date (calculated for this purpose without
regard to any Relief Act Interest Shortfalls allocated to the Class S-1
Certificates on such Distribution Date), and the denominator of which is (y) the
sum of the outstanding Principal Balance of the Group I Loans (prior to giving
effect to scheduled payments of principal received during the related Due
Period, or any unscheduled collections of principal received during the related
Due Period) and any amount remaining in the Group I Pre-Funding Account
(exclusive of any investment income thereon). Notwithstanding the foregoing, if
the Class A-1 Certificates remain outstanding at any time that there are no
Loans in Loan Group I remaining, the Net WAC Rate for the Class A-1 Certificates
will be calculated as provided in the Pooling Agreement.
The "Net WAC Rate" for the Class A-2 Certificates and any Distribution
Date shall be a per annum rate equal to the excess of (A) the weighted average
of the Loan Rates of the Group II Loans (weighted on the Principal Balances
thereof prior to giving effect to scheduled payments of principal received
during the related Due Period, or any unscheduled collections of principal
received during the related Due Period) over (B) the sum of (i) the Servicing
Fee Rate, (ii) the Trustee Fee Rate, and (iii) the percentage equivalent of a
fraction, the numerator of which is (x) twelve times the amount of the premium
payable to the Certificate Insurer with respect to the Class A-2 Certificates on
such Distribution Date, and the denominator of which is (y) the outstanding
Principal Balance of the Group II Loans (prior to giving effect to scheduled
payments of principal received during the related Due Period, or any unscheduled
collections of principal received during the related Due Period).
Notwithstanding the foregoing, if the Class A-2 Certificates remain outstanding
at any time that there are no Loans in Loan Group II remaining, the Net WAC Rate
for the Class A-2 Certificates will be calculated as provided in the Pooling
Agreement.
MANDATORY PREPAYMENTS ON CLASS A-1 CERTIFICATES
The Class A-1 Certificates will be prepaid on the Distribution Date
immediately following the end of the Group I Funding Period to the extent of any
amounts remaining on deposit in the Group I Pre-Funding Account, on such
Distribution Date. Although no assurance can be given, it is anticipated by the
Depositor that the principal amount of Subsequent Group I Loans sold to the
Trust will require the application of substantially all of the Original Group I
Pre-Funded Amount and that there will be no material amount of principal prepaid
to the holders of the Class A-1 Certificates from the Group I Pre-Funding
Account. It is unlikely, however, that the Depositor will be able to deliver
Subsequent Group I Loans with an aggregate principal balance identical to the
related Original Group I Pre-Funded Amount. Accordingly, a small amount of
principal is likely to be prepaid on the Class A-1 Certificates on the
Distribution Date immediately following the end of the Group I Funding Period.
INTEREST COVERAGE ACCOUNT
The Depositor will establish for the benefit of the holders of the
Certificates a trust account (the "Interest Coverage Account"). On the Closing
Date, the Depositor will deposit in such account a cash amount as specified in
the Pooling Agreement. On each Distribution Date during the Group I Funding
Period and on the two Distribution Dates immediately following, funds on deposit
in the Interest Coverage Account will be applied by the Trustee to cover a
portion of the shortfalls in the amount of interest generated by the assets of
the Trust attributable to the pre-funding feature in Loan Group I. Such
shortfall will exist during the Group I Funding Period because the interest
accruing on the aggregate principal balance of the Group I Loans during such
period will be less than the amount of interest which would have accrued on such
Loans if the Subsequent Group I Loans were included in the Trust as of the
Closing Date. On the second Distribution Date following the termination of the
Group I Funding
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Period (after the distribution on the Certificates to be made on such
Distribution Date), funds on deposit in the Interest Coverage Account will be
released by the Trustee to the Master Servicer or its designee.
OVERCOLLATERALIZATION
The weighted average net Loan Rate for the Loans in each Loan Group is
generally expected to be higher than the weighted average of the Pass-Through
Rates on the Class A Certificates and the Class S-1 Certificates. As a result,
interest collections on the Loans in each Loan Group are expected to be
generated in excess of the amount of interest payable to the holders of the
Offered Certificates related to such Loan Group and the fees and expenses
payable by the Trust. Such excess interest generated by the Loans in each Loan
Group will be applied initially to absorb Realized Losses on the related Loans
and to make principal distributions on the related Class A Certificates.
This acceleration feature creates overcollateralization (i.e., the excess of the
aggregate Principal Balance of the Loans in the related Loan Group and, in the
case of the Group I Certificates, any amounts on deposit in the Group I
Pre-Funding Account over the aggregate Certificate Principal Balance of the
related Class A Certificates) for such Certificate Group. Once the required
level of overcollateralization is reached, and subject to the provisions
described in the next paragraph, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization for the
related Certificate Group.
The Principal Balance of the Closing Date Group I Loans as of the
Cut-off Date plus the Original Group I Pre-Funded Amount will approximately
equal the initial aggregate Certificate Principal Balance of the Class A-1
Certificates. The Principal Balance of the Closing Date Group II Loans as of the
Cut-off Date will approximately equal the initial aggregate Certificate
Principal Balance of the Class A-2 Certificates.
The Pooling Agreement provides that, subject to certain floors, caps
and triggers, the required level of overcollateralization provided by a Loan
Group may increase or decrease over time. The Certificate Insurer may, in its
sole discretion, waive any required increase in the required level of
overcollateralization or consent to a decrease in the level of
overcollateralization otherwise required under the terms of the Pooling
Agreement. Any decrease in the required level of overcollateralization provided
by a Loan Group will have the effect of reducing the amortization of the Class A
Certificates related to such Loan Group.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will provide or make available
to each holder of a Certificate, the Certificate Insurer and the Rating Agencies
a statement (based on information received from the Master Servicer) setting
forth, among other things, the information set forth in the Prospectus under
"Description of the Securities--Reports to Securityholders." The Trustee will
make the statement (and, at its option, any additional files containing the same
information in an alternative format) available each month via the Trustee's
internet website. The Trustee's internet website shall initially be located at
"www.bankofny.com". Parties that are unable to use the website are entitled to
have a paper copy mailed to them via first class mail by calling the customer
service desk and indicating such. The Trustee shall have the right to change the
way statements are distributed in order to make such distribution more
convenient and/or more accessible to the above parties and the Trustee shall
provide timely and adequate notification to all above parties regarding any such
changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their tax
returns. Such statements will not have been examined and reported upon by an
independent public accountant.
THE CERTIFICATE INSURER
The following information has been provided by the Certificate Insurer
for inclusion in this prospectus supplement. No representation is made by the
Depositor, the Trustee, the Seller, the Master Servicer, the Underwriters or any
of their affiliates as to the accuracy or completeness of this information.
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The Certificate Insurer is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. The
Certificate Insurer primarily insures newly-issued municipal and structured
finance obligations. The Certificate Insurer is a wholly owned subsidiary of
Ambac Financial Group, Inc. (formerly, AMBAC Inc.), a 100% publicly-held
company. Moody's, S&P and Fitch have each assigned a triple-A financial strength
rating to the Certificate Insurer.
The consolidated financial statements of the Certificate Insurer and
subsidiaries as of December 31, 2000 and December 31, 1999 and for each of the
years in the three-year period ended December 31, 2000 prepared in accordance
with accounting principles generally accepted in the United States of America,
included in the Current Report on Form 8-K of Ambac Financial Group, Inc., which
was filed with the Securities and Exchange Commission (the "Commission") on
March 19, 2001; Commission File Number 1-10777, are incorporated by reference
into this prospectus supplement and are deemed to constitute a part of this
prospectus supplement. Any statement contained in a document incorporated by
reference shall be modified or superseded for the purposes of this prospectus
supplement to the extent that a statement contained by reference in this
prospectus supplement also modified or supersedes that statement. Any statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this prospectus supplement.
All financial statements of the Certificate Insurer and subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this prospectus supplement and prior to the termination of the
offering of the Offered Certificates shall be deemed to be incorporated by
reference into this prospectus supplement and to be a part hereof from the
respective dates of filing the financial statements.
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1999 and December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
AMBAC ASSURANCE CORPORATION
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER 31,
1999 2000
---- ----
Unearned premiums............................................... $1,442 $1,556
Other liabilities............................................... 524 581
----- -----
Total liabilities............................................... 1,966 2,137
===== =====
Stockholder's equity:
Common stock............................................... 82 82
Additional paid-in capital................................. 752 760
Accumulated other comprehensive income (loss).............. (92) 82
Retained earnings.......................................... 1,674 2,002
----- -----
Total stockholder's equity...................................... 2,416 2,926
----- -----
Total liabilities and stockholder's equity...................... $4,382 $5,063
====== ======
For additional financial information concerning the Certificate
Insurer, see the audited financial statements of the Certificate Insurer
incorporated by reference in this prospectus supplement. Copies of the financial
statements of the Certificate Insurer incorporated herein by reference as stated
above and copies of the Certificate Insurer's annual statement for the year
ended December 31, 2000, prepared in accordance with statutory accounting
standards are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer's administrative offices and its telephone
number are One State Street Plaza, 19th Floor, New York, New York 10004 and
(212) 668-0340.
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The Certificate Insurer makes no representation regarding the Offered
Certificates or the advisability of investing in the Offered Certificates and
makes no representation regarding, nor has it participated in the preparation
of, this prospectus supplement other than the information supplied by the
Certificate Insurer and presented under the headings "The Certificate Insurer"
and "The Certificate Insurance Policy" in this prospectus supplement and in the
financial statements incorporated herein by reference as stated above.
THE CERTIFICATE INSURANCE POLICY
The following information has been provided by the Certificate Insurer
for inclusion in this prospectus supplement. No representation is made by the
Depositor, the Trustee, the Seller, the Master Servicer, the Underwriters or any
of their affiliates as to the accuracy or completeness of this information.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Policy, agrees unconditionally and irrevocably
to pay to the Trustee for the benefit of the applicable owners of the Offered
Certificates, that portion of Insured Amounts which shall become Due for Payment
but shall be unpaid by reason of Nonpayment.
The Certificate Insurer will make such payments to the Trustee from its
own funds on the later of (a) the business day following actual receipt of the
Notice to the Certificate Insurer of Nonpayment or (b) the business day on which
the Insured Amounts are Due for Payment. The Certificate Insurer shall be
subrogated to all the rights of the holders of the Offered Certificates to
payment on the Offered Certificates to the extent of the payments so made under
the Policy. Once payments of the Insured Amounts have been made to the Trustee,
the Certificate Insurer shall have no further obligation in respect of such
Insured Amounts. Payment of Insured Amounts shall be made only at the time set
forth in the Policy and no accelerated payment of Insured Amounts shall be made,
except in the sole discretion of the Certificate Insurer.
The Policy does not cover shortfalls, if any, attributable to the
liability of the trust, any REMIC or the Trustee for withholding taxes, if any,
including interest and penalties related to that liability. The Policy does not
cover, and Insured Payments will not include, any shortfalls due to the
application of the Relief Act.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the business day following receipt on a business day by the
Certificate Insurer of a final non-appealable copy of the order requiring the
return of a preference payment, and other documentation as is reasonably
required by the Certificate Insurer. This documentation shall be in a form
satisfactory to the Certificate Insurer, provided that if the documents are
received after 12:00 noon New York City time on that business day, they will be
deemed to be received on the following business day.
Insured Payments due under the Policy unless otherwise stated in the
Policy will be disbursed by the Certificate Insurer to the Trustee on behalf of
the owners of the Offered Certificates by wire transfer of immediately available
funds in the amount of the Insured Payment.
Any notice under the Policy may be made at the address listed below for
the Certificate Insurer or such other address as the Certificate Insurer shall
specify in writing to the Trustee.
The notice address of the Certificate Insurer is One State Street
Plaza, New York, New York 10004, Attention: General Counsel, or such other
address as the Certificate Insurer shall specify to the Trustee in writing.
The Policy is being issued under and pursuant to, and shall be construed under,
the laws of the State of New York, without giving effect to the conflict of laws
principles thereof.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY
FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The Policy is not cancelable for any reason. The premium on the Policy
is not refundable for any reason.
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As used in the Policy, the following terms shall have the following
meanings:
"Deficiency Amount" shall mean, for any Distribution Date, the excess,
if any, of (i) Required Distributions over (ii) the amount of Group I Available
Funds and Group II Available Funds that are available, in accordance with the
priorities described under "Description of the Offered Certificates--Allocation
of Available Funds" in this prospectus supplement, to make such Required
Distributions.
"Due for Payment" shall mean with respect to an Insured Amount, the
Distribution Date on which Insured Amounts are due or, with respect to an
Insured Payment which is a Preference Amount, the business day on which the
documentation required by the Certificate Insurer referred to above has been
received by the Certificate Insurer.
"Insured Amounts" shall mean, for any Distribution Date, any Deficiency
Amount for such Distribution Date.
"Insured Payments" shall mean, the aggregate amount actually paid by
the Certificate Insurer to the Trustee in respect of (i) Insured Amounts for a
Distribution Date and (ii) Preference Amounts for a given business day.
"Nonpayment" shall mean, with respect to any Distribution Date, a
Deficiency Amount owing in respect of such Distribution Date.
"Notice" means the notice sent in writing by telecopy, in the form
acceptable to the Certificate Insurer, the original of which is subsequently
delivered by registered or certified mail, from the Trustee specifying the
Insured Amount which shall be due and owing on the applicable Distribution Date.
"Preference Amount" means any payment of principal or interest on an
Offered Certificate which has become Due for Payment and which is made to an
owner of an Offered Certificate by or on behalf of the Trustee which has been
deemed a preferential transfer and was previously recovered from its owner
pursuant to the United States Bankruptcy Code in accordance with a final,
nonappealable order of a court of competent jurisdiction.
"Required Distributions" shall mean, with respect to the Offered
Certificates, (i) for any Distribution Date prior to the Distribution Date in
July 2031, the sum of (A) the Interest Distributable Amount on such Certificates
for the related Accrual Period and (B) any Overcollateralization Deficit
following all distributions of Group I Available Funds and Group II Available
Funds on such Distribution Date and (ii) for the Distribution Date in July 2031,
the sum of (A) the Interest Distributable Amount on such Certificates for the
related Accrual Period and (B) the aggregate Certificate Principal Balance of
the Class A Certificates to the extent unpaid following all distributions of
Group I Available Funds and Group II Available Funds on such Distribution Date.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates to the purchase of the Loans transferred to the Trust.
FEDERAL INCOME TAX CONSEQUENCES
Multiple elections will be made to treat designated portions of the
Trust (exclusive of the Group I Pre- Funding Account and the Interest Coverage
Account) as a real estate mortgage investment conduit (a "REMIC") for federal
income tax purposes. Upon the issuance of the Offered Certificates, Thacher
Proffitt & Wood, counsel to the Depositor, will deliver its opinion generally to
the effect that, assuming compliance with all provisions of the Pooling
Agreement, for federal income tax purposes, each REMIC elected by the Trust will
qualify as a REMIC under Sections 860A through 860G of the Internal Revenue Code
of 1986 (the "Code").
For federal income tax purposes, (i) the Residual Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the Trust and (ii) the Class A Certificates,
the Class S-1 Certificates and the Class C Certificates will represent the
"regular interests" in, and
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which generally will be treated as debt instruments of, a REMIC. See "Certain
Material Federal Income Tax Considerations--General" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates
will not, and the Class S-1 Certificates will, be treated as having been issued
with original issue discount. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount, premium and market
discount, if any, for federal income tax purposes will be based on the
assumption that subsequent to the date of any determination the Loans will
prepay at the Prepayment Assumption. No representation is made that the Loans
will prepay at such rate or at any other rate. See "Certain Material Federal
Income Tax Considerations--Taxation of Debt Securities" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Offered Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
prepayable securities such as the Offered Certificates. Because of the
uncertainty concerning the application of Section 1272(a)(6) of the Code to such
Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Offered Certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other method not yet set forth in
regulations. Prospective purchasers of the Offered Certificates are advised to
consult their tax advisors concerning the tax treatment of such Certificates.
If the method of computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to any
certificateholders, in particular, the holders of the Class S-1 Certificates,
the amount of original issue discount allocable to such period would be zero,
and such certificateholders will be permitted to offset such amounts only
against the respective future income, if any, from such certificate. Although
uncertain, a certificateholder may be permitted to deduct a loss to the extent
that his or her respective remaining basis in such certificate exceeds the
maximum amount of future payments to which such certificateholders is entitled,
assuming no further prepayments of the loans. Although the matter is not free
from doubt, any such loss might be treated as a capital loss.
In certain circumstances the OID Regulations permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, the holder of an Offered Certificate
may be able to select a method for recognizing original issue discount that
differs from that used by the Trust in preparing reports to the
certificateholders and the IRS.
Certain of the Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a Certificate
will be treated as holding such Certificate with amortizable bond premium will
depend on such certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
certificateholder. Holders of such Certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Certain Material Federal Income Tax Considerations--Taxation of
Debt Securities" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the Trust would
be so treated. In addition, interest on the Offered Certificates will be treated
as "interest on obligations secured by mortgages on real property" under Section
856(c)(3)(B) of the Code, generally to the extent that the Offered Certificates
are treated as "real estate assets" under Section 856(c)(4)(A) of the Code. The
Offered Certificates will also be treated as "qualified mortgages" under Section
860G(a)(3) of the Code. See "Certain Material Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans" in
the Prospectus.
The holders of the Class A Certificates will be required to include in
income interest on such Certificates in accordance with the accrual method of
accounting.
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It is not anticipated that any REMIC elected by the Trust will engage
in any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on any REMIC elected by the Trust, such tax will be borne (i) by
the Trustee, if the Trustee has breached its obligations with respect to REMIC
compliance under the Pooling Agreement, (ii) by the Master Servicer, if the
Master Servicer has breached its obligations with respect to REMIC compliance
under the Pooling Agreement and (iii) otherwise by the Trust, with a resulting
reduction in amounts otherwise distributable to the holders of the related
Offered Certificates.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Material Federal Income
Tax Considerations" in the Prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates by or on behalf
of, or with Plan assets of, a Plan may qualify for exemptive relief under the
Underwriters' Exemption, as currently in effect and as described under "ERISA
Considerations" in the Prospectus. The Underwriters' Exemption relevant to the
Offered Certificates was granted by the Department of Labor on September 6, 1990
as Prohibited Transaction Exemption, or PTE 90-59 at 55 F.R. 36724, and amended
on July 21, 1997 as PTE 97-34 at 62 F.R. 39021 and further amended on November
13, 2000 by PTE 2000-58 at 65 F.R. 67765. However, the Underwriters' Exemption
contains a number of conditions which must be met for the exemption to apply,
including the requirements that the Offered Certificates be rated at least
"BBB-" (or its equivalent) by Moody's or S&P at the time of the Plan's purchase
and that the investing Plan must be an "accredited investor" as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act. A
fiduciary of a Plan contemplating purchasing an Offered Certificate must make
its own determination that the conditions set forth in the Underwriters'
Exemption will be satisfied with respect to the those Certificates.
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Offered Certificates on behalf of or with Plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Offered Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. See "Considerations for
Benefit Plan Investors" in the prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the Depositor or the related Underwriter that an investment
in the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA").
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to
S-64
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent any class of Offered Certificates
constitutes a legal investment or is subject to investment, capital or other
restrictions.
See "Legal Investment" in the Prospectus.
EXPERTS
The consolidated financial statements of the Certificate Insurer, Ambac
Assurance Corporation and subsidiaries, as of December 31, 2000 and 1999 and for
each of the years in the three-year period ended December 31, 2000, are
incorporated by reference in this Prospectus Supplement and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, and upon the authority of said firm as experts in accounting and
auditing.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated March 26, 2001 (the "Underwriting Agreement"), between the
Underwriters named below and the Depositor, the Depositor has agreed to sell to
the Underwriters, and the Underwriters have agreed to purchase from the
Depositor, the principal amount of the Class A Certificates set forth opposite
their respective names.
ORIGINAL CERTIFICATE PRINCIPAL ORIGINAL CERTIFICATE PRINCIPAL
BALANCE OF THE CLASS A-1 BALANCE OF THE CLASS A-2
UNDERWRITERS CERTIFICATES CERTIFICATES
------------ ------------ ------------
Greenwich Capital Markets, Inc. ............... $167,548,000 $16,693,000
First Union Securities, Inc.................... $ 51,998,000 $ 5,181,000
UBS Warburg LLC................................ $ 11,555,000 $ 1,151,000
Distribution of the Class S-1 Certificates will be made solely by
Greenwich Capital Markets, Inc. from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the sale of the Class S-1 Certificates to Greenwich Capital
Markets, Inc. pursuant to the Underwriting Agreement are expected to be
approximately $2,283,600 plus accrued interest from March 1, 2001, before
deducting a portion of the total expenses payable by the Depositor estimated to
be approximately $475,000. In connection with the purchase and sale of the Class
S-1 Certificates, Greenwich Capital Markets, Inc. may be deemed to have received
compensation from the Depositor in the form of underwriting discounts and
commissions.
The Offered Certificates to be purchased by the Underwriters are
referred to as the "Underwritten Certificates."
The Depositor has been advised by the Underwriters that they propose
initially to offer the Underwritten Certificates of each class to the public in
Europe and the United States at the offering price set forth herein and to
certain dealers at such price less a selling concession, not in excess of the
percentage set forth in the table below of the Certificate Principal Balance of
the related class of Underwritten Certificates. The Underwriters may allow and
such dealers may reallow a reallowance discount, not in excess of the percentage
set forth in the table below of the Certificate Principal Balance of the related
class of Underwritten Certificates, to certain other dealers. After the initial
public offering, the public offering price, such concessions and such discounts
may be changed.
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CLASS OF CERTIFICATES SELLING CONCESSION REALLOWANCE DISCOUNT
--------------------- ------------------ --------------------
Class A-1...................... 0.15% 0.10%
Class A-2...................... 0.15% 0.10%
Until the distribution of the Underwritten Certificates is completed,
rules of the SEC may limit the ability of the Underwriters and certain selling
group members to bid for and purchase the Underwritten Certificates. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Underwritten Certificates (other
than the Class S-1 Certificates). Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Underwritten
Certificates (other than the Class S-1 Certificates).
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the prices of the Underwritten
Certificates (other than the Class S-1 Certificates). In addition, neither the
Depositor nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Depositor has been advised by each Underwriter that it intends to
make a market in the Underwritten Certificates but no Underwriter has any
obligation to do so. There can be no assurance that a secondary market for the
Underwritten Certificates will develop or, if it does develop, that it will
continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Act.
The Depositor is an affiliate of Greenwich Capital Markets, Inc.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Depositor and the Underwriters by Thacher Proffitt & Wood,
New York, New York. Certain legal matters relating to the Certificate Insurer
and the Policy will be passed upon for the Certificate Insurer by Thacher
Proffitt & Wood.
RATINGS
It is a condition to the issuance of the Offered Certificates that each
class of Offered Certificates be rated "AAA" by Standard & Poor's Ratings
Services ("S&P") and "Aaa" by Moody's Investors Service, Inc. ("Moody's" and,
together with S&P, the "Rating Agencies").
A securities rating addresses the likelihood of the receipt by a
certificateholder of distributions on the Loans. The rating takes into
consideration the characteristics of the Loans and the structural, legal and tax
aspects associated with the certificates. The ratings on the Offered
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Loans or the possibility that a holder of an
Offered Certificate might realize a lower than anticipated yield.
The ratings assigned to the Offered Certificates will depend primarily
upon the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below
S-66
the ratings initially assigned to the Offered Certificates may result in a
reduction of one or more of the ratings assigned to the Offered Certificates.
The Depositor has not engaged any rating agency other than the Rating
Agencies to provide ratings on the Offered Certificates. 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. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Offered Certificates by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to provide
any additional support or credit enhancement with respect to such Offered
Certificates.
S-67
INDEX OF DEFINED TERMS
Page
----
Accrual Period.................................................................................................S-55
Advance........................................................................................................S-45
Advancing Person...............................................................................................S-46
ALTA...........................................................................................................S-32
Assumed Final Distribution Date................................................................................S-49
Avondale.......................................................................................................S-33
Basic Principal Distribution Amount............................................................................S-55
Book-Entry Certificates........................................................................................S-49
Certificate Insurer............................................................................................S-48
Certificate Owners.............................................................................................S-49
Certificate Principal Balance..................................................................................S-55
Certificates...................................................................................................S-48
Class A Certificates...........................................................................................S-48
Class C Certificates...........................................................................................S-48
Clearstream....................................................................................................S-49
Clearstream Participants.......................................................................................S-51
Closing Date Loans..............................................................................................S-4
CLTA...........................................................................................................S-32
CLTV...........................................................................................................S-17
Code...........................................................................................................S-62
Collection Account.............................................................................................S-44
Commission.....................................................................................................S-60
Compensating Interest..........................................................................................S-46
Cooperative....................................................................................................S-51
CPR............................................................................................................S-36
Credit Score...................................................................................................S-32
Cut-off Date Principal Balance.................................................................................S-16
Debt Instruments...............................................................................................S-16
Deficiency Amount..............................................................................................S-62
Definitive Certificate.........................................................................................S-49
Delinquent.....................................................................................................S-55
Determination Date.............................................................................................S-45
Distribution Account...........................................................................................S-45
Distribution Date..............................................................................................S-49
DTC............................................................................................................S-49
DTC Participants...............................................................................................S-49
Due for Payment................................................................................................S-62
Due Period.....................................................................................................S-55
Eligible Account...............................................................................................S-45
Euroclear......................................................................................................S-49
Euroclear Operator.............................................................................................S-51
Euroclear Participants.........................................................................................S-51
European Depositaries..........................................................................................S-49
Extra Principal Distribution Amount............................................................................S-55
Financial Intermediary.........................................................................................S-49
General Excess Available Amount................................................................................S-56
Global Securities...............................................................................................S-1
Group I........................................................................................................S-55
Group I Available Funds........................................................................................S-53
Group I Certificates............................................................................................S-3
Group I Funding Period.........................................................................................S-24
Group I Loans.............................................................................................S-4, S-16
Group I Pre-Funding Account...............................................................................S-7, S-24
Group II.......................................................................................................S-55
Group II Available Funds.......................................................................................S-53
Group II Certificates...........................................................................................S-3
Group II Loans............................................................................................S-4, S-16
Guidelines.....................................................................................................S-31
IML............................................................................................................S-51
Initial Certificate Principal Balance..........................................................................S-55
Initial Group I Loans...........................................................................................S-4
Insurance Proceeds.............................................................................................S-56
Insured Amounts................................................................................................S-62
Insured Payments...............................................................................................S-62
Insurer Default................................................................................................S-56
Interest Coverage Account......................................................................................S-58
Interest Distributable Amount..................................................................................S-56
IRS............................................................................................................S-63
Liquidated Loan................................................................................................S-57
Loan Group......................................................................................................S-4
Loan Group I....................................................................................................S-3
Loan Group II...................................................................................................S-3
Loan Purchase Agreement........................................................................................S-17
Loan Rate......................................................................................................S-17
Loan Schedule..................................................................................................S-42
Loans.....................................................................................................S-5, S-16
Manufactured Home..............................................................................................S-16
Manufactured Home Contract.....................................................................................S-16
Manufactured Home Loans...................................................................................S-5, S-16
Manufactured Homes..............................................................................................S-5
Monthly Interest Distributable Amount..........................................................................S-56
Moody's...................................................................................................S-8, S-66
Mortgage Loans............................................................................................S-5, S-16
Mortgage Note..................................................................................................S-16
Mortgaged Properties............................................................................................S-5
Mortgaged Property.............................................................................................S-16
Mortgages......................................................................................................S-16
Net Liquidation Proceeds.......................................................................................S-57
Net WAC Rate...................................................................................................S-58
New South......................................................................................................S-30
Nonpayment.....................................................................................................S-62
Notice.........................................................................................................S-62
Notional Amount...........................................................................................S-6, S-56
Offered Certificates...........................................................................................S-48
OID Regulations................................................................................................S-63
Optional Termination Date......................................................................................S-47
Original Group I Pre-Funded Amount.............................................................................S-24
S-68
Overcollateralization Deficiency Amount........................................................................S-56
Overcollateralization Deficit..................................................................................S-56
Overcollateralization Release Amount...........................................................................S-56
Overcollateralization Target Amount............................................................................S-56
Overcollateralized Amount......................................................................................S-56
Pass-Through Rate..............................................................................................S-57
Plan...........................................................................................................S-64
Policy.........................................................................................................S-48
Pool...........................................................................................................S-16
Pool Balance...................................................................................................S-16
Pooling Agreement..............................................................................................S-17
Preference Amount..............................................................................................S-62
Prepayment Assumption..........................................................................................S-36
Prepayment Interest Shortfall..................................................................................S-46
Principal Balance..............................................................................................S-16
Principal Remittance Amount....................................................................................S-57
Properties................................................................................................S-5, S-16
Purchase Price.................................................................................................S-43
Qualified Substitute Loan......................................................................................S-43
Rating Agencies................................................................................................S-66
Realized Loss..................................................................................................S-57
Record Date....................................................................................................S-49
Related Documents..............................................................................................S-42
Relevant Depositary............................................................................................S-49
Relief Act.....................................................................................................S-12
REMIC..........................................................................................................S-62
Required Distributions.........................................................................................S-62
Residual Certificates..........................................................................................S-48
Rules..........................................................................................................S-50
S&P.......................................................................................................S-8, S-66
Servicing Advance..............................................................................................S-46
Servicing Fee..................................................................................................S-46
Servicing Fee Rate.............................................................................................S-46
SMMEA..........................................................................................................S-64
Stepdown Date..................................................................................................S-57
Structuring Assumptions........................................................................................S-37
Subsequent Cut-off Date........................................................................................S-23
Subsequent Group I Loans........................................................................................S-4
Subsequent Transfer Dates......................................................................................S-23
Subsequent Transfer Instruments................................................................................S-23
Subservicer....................................................................................................S-31
Substitution Adjustment........................................................................................S-43
Termination Price..............................................................................................S-47
Terms and Conditions...........................................................................................S-51
Trust..........................................................................................................S-16
Trustee Fee....................................................................................................S-46
Trustee Fee Rate...............................................................................................S-46
Trustee's Loan File............................................................................................S-43
U.S. Person.....................................................................................................S-4
Underwriters...................................................................................................S-15
Underwriting Agreement.........................................................................................S-65
Underwritten Certificates......................................................................................S-65
Unpaid Interest Shortfall Amount...............................................................................S-57
Value..........................................................................................................S-17
Vector...................................................................................................S-36, S-37
S-69
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will
be offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC and upon request through Clearstream or Euroclear.
The Global Securities will be tradable as home market instruments in both the
European and U.S. domestic markets. Initial settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and
DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
I-1
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER.
When Global Securities are to be transferred from the account of a DTC
Participant to the account of a Clearstream Participant or a Euroclear
Participant, the purchaser will send instructions to Clearstream or Euroclear
through a Clearstream Participant or Euroclear Participant at least one business
day prior to settlement. Clearstream or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Clearstream Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Clearstream or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
I-2
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants for delivery to Clearstream
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 or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner who is an individual or corporation holding the
Global Securities on its own behalf through Clearstream or Euroclear (or through
DTC if the holder has an address outside the U.S.) will be subject to the 30%
U.S. withholding tax that generally applies to payments of interest (including
original issue discount) on registered debt issued by U.S. Persons, unless (i)
each clearing system, bank or other institution that holds customers' securities
in the ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner or a foreign partnership or trust and the U.S.
entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W- 8BEN (Certificate
of Foreign Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form W-8BEN may be filed by the Certificate Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of
a Global Security 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-8BEN and Form W-8ECI are generally
effective until the third succeeding calendar year from the date such form is
signed. However, a Form W-8BEN or Form W- 8ECI with a taxpayer identification
number will remain effective until a change in circumstances makes any
information on such form incorrect, provided that the withholding agent reports
at least annually to the beneficial owner of Form 1042-S.
I-3
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise) or (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
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
I-4
PROSPECTUS
Asset Backed Securities
(Issuable in Series)
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servcicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
The Securities
Financial Asset Securities Corp., as depositor, will sell the securities, which
may be in the form of asset backed certificates or asset backed notes. Each
issue of securities will have its own series designation and will evidence
either:
o the ownership of certain trust assets or
o debt obligations secured by certain trust assets.
Each series of securities will consist of one or more classes. Each
class of securities will represent the entitlement to a specified portion of
future interest payments and a specified portion of future principal payments on
the assets in the related trust. In each case, the specified portion may equal
from 100% to 0%. A series may include one or more classes of securities that are
senior in right of payment to one or more other classes. One or more classes of
securities may be entitled to receive distributions of principal, interest or
both prior to one or more other classes or before or after certain specified
events have occurred. The related prospectus supplement will specify each of
these features.
THE TRUST AND ITS ASSETS
As specified in the related prospectus supplement, the assets of a trust will
include primarily the following:
o closed-end and/or revolving home equity loans secured by
senior or junior liens on one- to four-family residential
properties;
o home improvement installment sales contracts and installment
loan agreements that are either unsecured or secured generally
by junior liens on one- to four-family residential properties
or by purchase money security interests in the related home
improvements;
o manufactured housing conditional sales contracts and
installment loan agreements, or beneficial interests therein;
and/or
o private asset backed securities.
Each trust may be subject to early termination in certain circumstances.
MARKET FOR THE SECURITIES
No market will exist for the securities of any series before they are issued. In
addition, even after the securities of a series have been issued and sold, there
can be no assurance that a resale market will develop.
OFFERS OF THE SECURITIES
Offers of the securities may be made through one or more different methods,
including through underwriters. All certificates will be distributed by, or sold
through underwriters managed by, Greenwich Capital Markets, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION 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.
March 26, 2001
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT.......................................................................3
RISK FACTORS......................................................................................................4
THE TRUST FUND...................................................................................................11
USE OF PROCEEDS..................................................................................................17
THE DEPOSITOR....................................................................................................17
LOAN PROGRAM.....................................................................................................18
DESCRIPTION OF THE SECURITIES....................................................................................21
CREDIT ENHANCEMENT...............................................................................................30
YIELD AND PREPAYMENT CONSIDERATIONS..............................................................................35
THE AGREEMENTS...................................................................................................38
CERTAIN LEGAL ASPECTS OF THE LOANS...............................................................................50
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS...............................................................66
STATE TAX CONSIDERATIONS.........................................................................................88
ERISA CONSIDERATIONS.............................................................................................88
LEGAL INVESTMENT.................................................................................................92
METHOD OF DISTRIBUTION...........................................................................................93
LEGAL MATTERS....................................................................................................94
FINANCIAL INFORMATION............................................................................................94
AVAILABLE INFORMATION............................................................................................94
RATING...........................................................................................................94
INDEX OF DEFINED TERMS...........................................................................................96
2
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of
which may not apply to a particular series; and
o the accompanying prospectus supplement for a particular
series, which describes the specific terms of the securities
of that series. If the prospectus supplement contains
information about a particular series that differs from the
information contained in this prospectus, you should rely on
the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement. The information in this prospectus is
accurate only as of the date of this prospectus.
Beginning with the section titled "The Trust Fund", certain capitalized terms
are used in this prospectus to assist you in understanding the terms of the
securities. The capitalized terms used in this prospectus are defined on the
pages indicated under the caption "Index of Defined Terms" beginning on page 117
in this prospectus.
------------------------------------
If you require additional information, the mailing address of our principal
executive offices is Financial Asset Securities Corp., 600 Steamboat Road,
Greenwich, Connecticut 06830 and the telephone number is (203) 625-2756. For
other means of acquiring additional information about us or a series of
securities, see "The Trust Fund 3/4 Incorporation of Certain Information by
Reference" beginning on page 20 of this prospectus.
------------------------------------
3
RISK FACTORS
You should carefully consider the following information, since it
identifies certain significant sources of risk associated with an investment in
these securities.
Limited Liquidity.......................... No market will exist for the securities of any series before they are
issued. In addition, there can be no assurance that a resale market
will develop following the issuance and sale of any series of the
securities. Even if a resale market does develop, it might not provide
investors with liquidity of investment or continue for the life of the
securities.
Limited Assets............................. Unless the applicable prospectus supplement provides otherwise, the
securities of each series will be payable solely from the assets of
the related trust, including any applicable credit enhancement, and
will not have any claims against the assets of any other trust.
Moreover, at the times specified in the related prospectus supplement,
certain assets of the trust and/or the related security account may be
released to the depositor, master servicer, any servicer, credit
enhancement provider or other person, if:
o all payments then due on the related securities have been made;
o adequate provision for future payments on certain classes of the
securities has been made; and
o any other payments specified in the related prospectus supplement
have been made.
Once released, such assets will no longer be available to make
payments to securityholders.
There will be no recourse against the depositor or the master servicer
if any required distribution on the securities is not made.
The securities will not represent an interest in the depositor, the
master servicer, any servicer or any of their respective affiliates,
nor will the securities represent an obligation of any of them. The
only obligations of the depositor with respect to the related trust or
the securities would arise from the representations and warranties
that the depositor may make concerning the related assets. The
depositor does not have significant assets and is unlikely to have
significant assets in the future. If the depositor should be required
to repurchase a loan from a trust because of the breach of a
representation or warranty, the depositor's sole source of funds for
the repurchase would be:
o funds obtained from enforcing any similar obligation of the
seller or originator of the loan, or
o funds from a reserve account or similar credit enhancement
established to pay for loan repurchases.
In addition, the master servicer may be obligated to make certain
advances if loans are delinquent, but only to the extent it deems the
4
advances to be recoverable from amounts it expects to receive on those
loans.
Credit Enhancement......................... Credit enhancement is intended to reduce the effect of delinquent
payments or loan losses on those classes of securities that have the
benefit of the credit enhancement. Nevertheless, the amount of any
credit enhancement is subject to the limits described in the related
prospectus supplement. Moreover, the amount of credit enhancement may
decline or be depleted under certain circumstances before the
securities are paid in full. As a result, securityholders may suffer
losses. In addition, credit enhancement may not cover all potential
sources of risk of loss, such as fraud or negligence by a loan
originator or other parties.
Prepayment and Yield Considerations........ The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying loans in the trust
or, if the trust is comprised of underlying securities, on the
loans backing the underlying securities;
o how payments of principal are allocated among the classes of
securities of that series as specified in the related prospectus
supplement;
o if any party has an option to terminate the related trust early,
the effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the
related trust; and
o repurchases of assets in the related trust as a result of
material breaches of representations and warranties made by the
depositor or master servicer.
The rate of prepayment of the loans included in or underlying the
assets in each trust may affect the yield to maturity of the
securities.
Interest payable on the securities on any given distribution date will
include all interest accrued during the related interest accrual
period. The interest accrual period for the securities of each series
will be specified in the applicable prospectus supplement. If the
interest accrual period ends two or more days before the related
distribution date, your effective yield will be less than it would be
if the interest accrual period ended the day before the distribution
date. As a result, your effective yield at par would be less than the
indicated coupon rate.
Balloon Payments........................... Certain of the underlying loans may not be fully amortizing and may
require a substantial principal payment (i.e., a "balloon" payment) at
their stated maturity. Loans of this type involve a greater degree of
risk than fully amortizing loans since the related borrower must
generally be able to refinance the loan or sell the related property
prior to the loan's maturity date. The borrower's ability to do so
will depend on such
5
factors as the level of available mortgage rates at the time of sale
or refinancing, the relative strength of the local housing market, the
borrower's equity in the property, the borrower's general financial
condition and tax laws.
Nature of Mortgages........................ The following factors, among others, could adversely affect property
values in such a way that the outstanding balance of the related
loans, together with any senior financing on the same properties,
would equal or exceed those values:
o an overall decline in the residential real estate markets where
the properties are located,
o failure of borrowers to maintain their properties adequately,
and
o natural disasters that are not necessarily covered by hazard
insurance, such as earthquakes and floods.
If a home equity loan is in a junior lien position, a decline in
property values could extinguish the value of the junior
mortgageholder in the property before having any effect on the
interest of the senior mortgageholder. If property values decline,
actual rates of delinquencies, foreclosures and losses on the
underlying loans could be higher than those currently experienced by
the mortgage lending industry in general. Manufactured Homes are less
likely to experience appreciation in value and more likely to
experience depreciation in value over time than other types of housing
properties.
Even if you assume that the properties provide adequate security for
the loans, substantial delays could occur before defaulted loans are
liquidated and the proceeds forwarded to investors. Property
foreclosure actions are regulated by state statutes and rules and are
subject to many of the delays and expenses that characterize other
types of lawsuits if defenses or counterclaims are made. As a result,
foreclosure actions can sometimes take several years to complete.
Moreover, some states prohibit a mortgage lender from obtaining a
judgment against the borrower for amounts not covered by property
proceeds if the property is sold outside of a judicial proceeding. As
a result, if a borrower defaults, these restrictions may impede the
servicer's ability to dispose of the borrower's property and obtain
sufficient proceeds to repay the loan in full. In addition, the
servicer is entitled to deduct from liquidation proceeds all the
expenses it reasonably incurs in trying to recover on the defaulted
loan, including payment to the holders of any senior mortgages, legal
fees and costs, real estate taxes, and property preservation and
maintenance expenses.
In general, the expenses of liquidating defaulted loans do not vary
directly with the unpaid amount. So, assuming that a servicer would
take the same steps to recover a defaulted loan with a small unpaid
balance as it would a loan with a large unpaid balance, the net amount
realized after paying liquidation expenses would be a smaller
percentage of the balance of the small loan than of the large loan.
Since the mortgages or deeds of trust securing home equity loans
typically will be in a junior
6
lien position, the proceeds from any liquidation will be applied first
to the claims of the related senior mortgageholders, including
foreclosure costs. In addition, a junior mortgage lender may only
foreclose subject to any related senior mortgage. As a result, the
junior mortgage lender generally must either pay the related senior
mortgage lender in full at or before the foreclosure sale or agree to
make the regular payments on the senior mortgage. Since the trust will
not have any source of funds to satisfy any senior mortgages or to
continue making payments on them, the trust's ability as a practical
matter to foreclose on any junior mortgage will be quite limited.
State laws generally regulate interest rates and other loan charges,
require certain disclosures, and often require licensing of loan
originators and servicers. In addition, most states have other laws
and public policies for the protection of consumers that prohibit
unfair and deceptive practices in the origination, servicing and
collection of loans. Depending on the provisions of the particular law
or policy and the specific facts and circumstances involved,
violations may limit the ability of the servicer to collect interest
or principal on the loans. Also, the borrower may be entitled to a
refund of amounts previously paid and the servicer may be subject to
damage claims and administrative sanctions.
Nonperfection of Security Interests
in Manufactured Homes May
Result in Losses........................... Any conditional sales contracts and installment loan agreements with
respect to manufactured homes (each, a "MANUFACTURED HOME CONTRACT")
included in a trust fund will be secured by a security interest in a
manufactured home. Perfection of security interests in manufactured
homes and enforcement of rights to realize upon the value of the
manufactured homes as collateral for the Manufactured Home Contracts
are subject to a number of federal and state laws, including the
Uniform Commercial Code as adopted in each state and each state's
certificate of title statutes. The steps necessary to perfect the
security interest in a manufactured home will vary from state to
state. In the event the master servicer fails, due to clerical errors
or otherwise, to take the appropriate steps to perfect such a security
interest, the trustee may not have a first priority security interest
in the manufactured home securing a Manufactured Home Contract.
Additionally, courts in many states have held that manufactured homes
may, under certain circumstances, become subject to real estate title
and recording laws. Furthermore, due to the expense and administrative
inconvenience involved, it is unlikely that the master servicer will
undertake the steps necessary to perfect the security interests in any
manufactured homes. As a result, a security interest in a manufactured
home could be rendered subordinate to the interests of other parties
claiming an interest in the home under applicable state real estate
law. The failure to properly perfect a valid, first priority security
interest in a manufactured home securing a Manufactured Home Contract
could lead to losses that, to the extent not covered by credit
support, may adversely affect the yield to maturity of the related
securities.
7
Environmental Risks........................ Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and
safety. In certain circumstances, these laws and regulations impose
obligations on owners or operators of residential properties such as
those that secure the loans. Failure to comply with these laws and
regulations can result in fines and penalties that could be assessed
against the trust as owner of the related property.
In some states, a lien on the property due to contamination has
priority over the lien of an existing mortgage. Further, a mortgage
lender may be held liable as an "owner" or "operator" for costs
associated with the release of petroleum from an underground storage
tank under certain circumstances. If the trust is considered the owner
or operator of a property, it will suffer losses as a result of any
liability imposed for environmental hazards on the property.
Certain Other Legal Considerations
Regarding the Loans........................ The loans may also be subject to federal laws relating to the
origination and underwriting. These laws
o require certain disclosures to the borrowers regarding the terms
of the loans;
o prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the consumer
credit protection act, in the extension of credit;
o regulate the use and reporting of information related to the
borrower's credit experience; and
o require additional application disclosures, limit changes that
may be made to the loan documents without the borrower's consent
and restrict a lender's ability to declare a default or to
suspend or reduce a borrower's credit limit to certain
enumerated events.
Certain loans are also subject to federal laws which impose additional
disclosure requirements on creditors with respect to non-purchase
money mortgage loans with high interest rates or high up-front fees
and charges. These laws can impose specific statutory liabilities upon
creditors that fail to comply and may affect the enforceability of the
related loans. In addition, any assignee of the creditor (including
the trust) would generally be subject to all claims and defenses that
the borrower could assert against the creditor, including the right to
rescind the loan.
Certain loans relating to home improvement contracts are subject to
federal laws that protect the borrower from defective or incomplete
work by a contractor. These laws permit the borrower to withhold
payment if the work does not meet the quality and durability standards
agreed to between the borrower and the contractor. These laws have the
effect of subjecting any assignee of the creditor (including the
trust) to all claims
8
and defenses which the borrower in a sale transaction could assert
against the seller of defective goods.
If certain provisions of these federal laws are violated, the master
servicer may be unable to collect all or part of the principal or
interest on the loans. The trust also could be subject to damages and
administrative enforcement.
Ratings of the Securities.................. Any class of securities is issued under this prospectus and the
accompanying prospectus supplement will be rated in one of the four
highest rating categories of a nationally recognized rating agency. A
rating is based on the adequacy of the value of the trust assets and
any credit enhancement for that class and reflects the rating agency's
assessment of how likely it is that holders of the class of securities
will receive the payments to which they are entitled. A rating does
not constitute an assessment of how likely it is that principal
prepayments on the underlying loans will be made, the degree to which
the rate of prepayments might differ from that originally anticipated
or the likelihood of early, optional termination of the securities.
You must not view a rating as a recommendation to purchase, hold or
sell securities because it does not address the market price or
suitability of the securities for any particular investor.
There is no assurance that any rating will remain in effect for any
given period of time or that the rating agency will not lower or
withdraw it entirely in the future. The rating agency could lower or
withdraw its rating due to:
o any decrease in the adequacy of the value of the trust assets or
any related credit enhancement;
o an adverse change in the financial or other condition of a
credit enhancement provider; or
o a change in the rating of the credit enhancement provider's
long-term debt.
Book-Entry Registration.................... LIMIT ON LIQUIDITY OF SECURITIES. Securities issued in book-entry form
may have only limited liquidity in the resale market, since investors
may be unwilling to purchase securities for which they cannot obtain
physical instruments.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Transactions in book-entry
securities can be effected only through The Depository Trust Company
("DTC"), its participating organizations, its indirect participants
and certain banks. As a result, your ability to transfer or pledge
securities issued in book-entry form may be limited.
DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt
of distributions on book-entry securities since the distributions will
be forwarded by the trustee to DTC for DTC to credit the accounts of
its participants. In turn, these participants will thereafter credit
the
9
distributions to your account either directly or indirectly through
indirect participants.
Pre-Funding Accounts....................... The related prospectus supplement may provide that the depositor
deposit a specified amount in a pre-funding account on the date the
securities are issued. In this case, the deposited funds may only be
used to acquire the additional assets for the trust during a set
period after the initial issuance of the securities. Any amounts
remaining in the account at the end of the period will be distributed
as a prepayment of principal to the holders of the related securities.
Lower Credit Quality Trust Fund
Assets..................................... Certain of the trust assets may have been made to lower credit quality
borrowers who fall into one of two categories:
o customers with moderate income, limited assets and other income
characteristics that cause difficulty in borrowing from banks
and other traditional lenders; and
o customers with a history of irregular employment, previous
bankruptcy filings, repossession of property, charged-off loans
or garnishment of wages.
The average interest rate charged on loans made to these types of
borrowers is generally higher than that charged by lenders that
typically impose more stringent credit requirements. There is a
greater likelihood of late payments on loans made to these types of
borrowers than on loans to borrowers with a higher credit quality.
Payments from borrowers with a lower credit quality are more likely to
be sensitive to changes in the economic climate in the areas in which
they reside.
Delinquent Trust Fund Assets............... No more than 20% (by principal balance) of the trust assets for any
particular series of securities will be contractually delinquent as of
the related cut-off date.
Other Considerations....................... There is no assurance that the value of the trust assets for any
series of securities at any time will equal or exceed the principal
amount of the outstanding securities of the series. If trust assets
have to be sold because of an event of default or otherwise, providers
of services to the trust (including the trustee, the master servicer
and the credit enhancer, if any) generally will be entitled to receive
the proceeds of the sale to the extent of their unpaid fees and other
amounts due them before any proceeds are paid to investors. As a
result, the proceeds of such a sale may be insufficient to pay the
full amount of interest and principal of the related securities.
10
THE TRUST FUND
The Certificates of each Series will represent interests in the assets
of the related Trust Fund, and the Notes of each Series will be secured by the
pledge of the assets of the related Trust Fund. The Trust Fund for each Series
will be held by the Trustee for the benefit of the related Securityholders. Each
Trust Fund will consist of certain assets (the "TRUST FUND ASSETS") consisting
of a pool (each, a "POOL") comprised of Loans or Private Asset Backed
Securities, in each case as specified in the related Prospectus Supplement,
together with payments in respect of such Trust Fund Assets and certain other
accounts, obligations or agreements, in each case as specified in the related
Prospectus Supplement.1 The Pool will be created on the first day of the month
of the issuance of the related Series of Securities or such other date specified
in the Prospectus Supplement (the "CUT-OFF DATE"). The Securities will be
entitled to payment from the assets of the related Trust Fund or Funds or other
assets pledged for the benefit of the Securityholders as specified in the
related Prospectus Supplement and will not be entitled to payments in respect of
the assets of any other trust fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either
directly or through affiliates, from originators or sellers which may be
affiliates of the Depositor (the "SELLERS"), and conveyed by the Depositor to
the related Trust Fund. Loans acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Loan Program-Underwriting Standards" or as otherwise described in a related
Prospectus Supplement. See "Loan Program-Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named in
the related Prospectus Supplement will service the Trust Fund Assets, either
directly or through other servicing institutions ("SUB-SERVICERS"), pursuant to
a Pooling and Servicing Agreement among the Depositor, the Master Servicer and
the Trustee with respect to a Series of Certificates, or a servicing agreement
(each, a "SERVICING AGREEMENT") between the Trustee and the Servicer with
respect to a Series of Notes, and will receive a fee for such services. See
"Loan Program" and "The Pooling and Servicing Agreement". With respect to Loans
serviced by the Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Loans.
As used herein, "AGREEMENT" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the laws
of the state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "TRUST AGREEMENT") between the Depositor and the trustee of
such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding of the related Trust Fund Assets and other assets
contemplated herein and in the related Prospectus Supplement and the proceeds
thereof, issuing Securities and making payments and distributions thereon and
certain related activities. No Trust Fund is expected to have any source of
capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Depositor with respect to a Series of Securities will be
to obtain certain representations and warranties from the Sellers and to assign
- --------
1 Whenever the terms "Pool", "Certificates" and "Notes" are used
in this Prospectus, such terms will be deemed to apply, unless
the context indicates otherwise, to one specific Pool and the
Certificates representing certain undivided interests in, or
Asset Backed Notes secured by the assets of, a single trust
fund (the "Trust Fund") consisting primarily of the Loans in
such Pool. Similarly, the term "Pass-Through Rate" will refer
to the Pass-Through Rate borne by the Certificates or Notes of
one specific Series and the term "Trust Fund" will refer to
one specific Trust Fund.
11
to the Trustee for such Series of Securities the Depositor's rights with respect
to such representations and warranties. See "The Agreements-Assignment of Trust
Fund Assets". The obligations of the Master Servicer with respect to the Loans
will consist principally of its contractual servicing obligations under the
related Agreement (including its obligation to enforce the obligations of the
Sub-Servicers or Sellers, or both, as more fully described herein under "Loan
Program-Representations by Sellers; Repurchases or Substitutions" and "The
Agreements-Assignment of the Trust Fund Assets" and "Sub-Servicing of Loans")
and its obligation, if any, to make certain cash advances in the event of
delinquencies in payments on or with respect to the Loans in the amounts
described herein under "Description of the Securities-Advances". The obligations
of the Master Servicer to make advances may be subject to limitations, to the
extent provided herein and in the related Prospectus Supplement.
As specified in the related Prospectus Supplement, the Trust fund
Assets for a Series of Securities may consist of (i) closed-end and/or revolving
home equity loans (the "HOME EQUITY LOANS") secured by senior or junior liens on
one- to four-family residential properties, (ii) have improvement installment
sales contracts and installment loan agreements (the "HOME IMPROVEMENT
CONTRACTS") that are either unsecured or secured primarily by junior liens on
one- to four-family residential properties, or by purchase money security
interests in the home improvements financed thereby (the "HOME IMPROVEMENTS"),
(iii) manufactured housing conditional sales contracts and installment loan
agreements, or beneficial interests therein and/or (iv) Private Asset Backed
Securities (as defined herein).
The following is a brief description of the assets expected to be
included in the Trust Funds. If specific information respecting the Trust Fund
Assets is not known at the time the related Series of Securities initially is
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and specific information will be set forth
in a report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Securities (the "DETAILED
DESCRIPTION"). A copy of the Agreement with respect to each Series of Securities
will be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Trust Fund Assets relating to such Series will be
attached to the Agreement delivered to the Trustee upon delivery of the
Securities.
THE LOANS
GENERAL. The real property which secures repayment of the Loans is
referred to as "Properties". Unless otherwise specified in the related
Prospectus Supplement, the Loans will be secured by mortgages or deeds of trust
or other similar security instruments creating a lien on a Property, which may
be subordinated to one or more senior liens on the related Properties, each as
described in the related Prospectus Supplement. As more fully described in the
related Prospectus Supplement, the Loans may be "conventional" loans or loans
that are insured or guaranteed by a governmental agency such as the FHA or VA.
The proceeds of the Closed-End Loans may have been applied to the purchase of
the related Property.
The Properties relating to Loans will consist primarily of detached or
semi-detached one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit developments, and
certain other dwelling units ("SINGLE FAMILY PROPERTIES"), conditional sales
contracts and installment loan agreements with respect to new or used
Manufactured Homes, or Small Mixed-Used Properties (as defined herein) which
consist of structures of not more than three stories which include one- to
four-family residential dwelling units and space used for retail, professional
or other commercial uses. Such Properties may include vacation and second homes,
investment properties and leasehold interests. The Properties may be located in
any one of the fifty states, the District of Columbia, Guam, Puerto Rico or any
other territory of the United States.
The payment terms of the Loans to be included in a Trust Fund will be
described in the related Prospectus Supplement and may include any of the
following features (or combination thereof) or other features, all as described
above or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate,
a rate adjustable from time to time in relation to an index
(which will be specified in the related Prospectus
Supplement), a rate that is fixed for a period of time or
under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed
rate. Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum
12
rates or a combination of such limitations. Accrued interest
may be deferred and added to the principal of a loan for such
periods and under such circumstances as may be specified in
the related Prospectus Supplement. Loans may provide for the
payment of interest at a rate lower than the specified
interest rate borne by such Mortgage (the "LOAN RATE") for a
period of time or for the life of the Loan, and the amount of
any difference may be contributed from funds supplied by the
Seller of the Property or another source.
(b) Principal may be payable on a level debt
service basis to fully amortize the loan over its term, may be
calculated on the basis of an assumed amortization schedule
that is significantly longer than the original term to
maturity or on an interest rate that is different from the
interest rate on the Loan or may not be amortized during all
or a portion of the original term. Payment of all or a
substantial portion of the principal may be due on maturity
("balloon payment"). Principal may include interest that has
been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and
interest may be fixed for the life of the loan, may increase
over a specified period of time or may change from period to
period. Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject
to a prepayment fee, which may be fixed for the life of the
loan or may decline over time, and may be prohibited for the
life of the loan or for certain periods ("lockout periods").
Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a
prepayment fee in connection with any such subsequent
prepayment. Other loans may permit prepayments without payment
of a fee unless the prepayment occurs during specified time
periods. The loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire loan in
connection with the sale or certain transfers of the related
Property. Other loans may be assumable by persons meeting the
then applicable underwriting standards of the Seller.
As more fully described in the related Prospectus Supplement, interest
on each Revolving Credit Line Loan, excluding introduction rates offered from
time to time during promotional periods, is computed and payable monthly on the
average daily outstanding principal balance of such Loan. Principal amounts on a
Revolving Credit Line Loan may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid under each Revolving
Credit Line Loan from time to time, but may be subject to a minimum periodic
payment. Except to the extent provided in the related Prospectus Supplement, the
Trust Fund will not include any amounts borrowed under a Revolving Credit Line
Loan after the Cut-off Date. The full amount of a Closed-End Loan is advanced at
the inception of the loan and generally is repayable in equal (or substantially
equal) installments of an amount to fully amortize such loan at its stated
maturity. Except to the extent provided in the related Prospectus Supplement,
the original terms to stated maturity of Closed-End Loan will not exceed 360
months. Under certain circumstances, under either a Revolving Credit Line Loan
or a Closed-End Loan, a borrower may choose an interest only payment option and
is obligated to pay only the amount of interest which accrues on the loan during
the billing cycle. An interest only payment option may be available for a
specified period before the borrower must begin paying at least the minimum
monthly payment of a specified percentage of the average outstanding balance of
the loan.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans is secured by Single Family
Property that is owner-occupied will be either (i) the making of a
representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
The Loans may include fixed-rate, closed-end mortgage loans having
terms to maturity of up to 30 years and secured by first-lien mortgages
originated on Properties containing one to four residential units and no more
than three income producing non-residential units ("Small Mixed-Use
Properties"). At least 50% of the units contained in a Small
13
Mixed-Use Property will consist of residential units. Income from such
non-residential units will not exceed 40% of the adjusted gross income of the
related borrower. The maximum Loan-to-Value Ratio on Small Mixed-Use Properties
will not exceed 65%. Small Mixed-Use Properties may be owner occupied or
investor properties and the loan purpose may be a refinancing or a purchase.
HOME IMPROVEMENT CONTRACTS. The Trust Fund Assets for a Series may
consist, in whole or part, of Home Improvement Contracts originated by a home
improvement contractor, a thrift or a commercial mortgage banker in the ordinary
course of business. As specified in the related Prospectus Supplement, the Home
Improvement Contracts will either be unsecured or secured by the Mortgages
primarily on Single Family Properties which are generally subordinate to other
mortgages on the same Property, or secured by purchase money security interest
in the Home Improvements financed thereby. Except as otherwise specified in the
related Prospectus Supplement, the Home Improvement Contracts will be fully
amortizing and may have fixed interest rates or adjustable interest rates and
may provide for other payment characteristics as described below and in the
related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, the
Home Improvements securing the Home Improvement Contracts will include, but are
not limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
MANUFACTURED HOME CONTRACTS. The Trust Fund Assets for a Series may
consist, in whole or part, of a pool of contracts (a "MANUFACTURED HOME CONTRACT
POOL") evidencing interest in manufactured housing installment or conditional
sales contracts and installment loan agreements (the "Manufactured Home
Contracts") originated by a manufactured housing dealer in the ordinary course
of business and purchased by the Depositor. The Manufactured Home Contracts may
be conventional manufactured housing contracts or contracts insured by the FHA
or partially guaranteed by the VA. Each Manufactured Home Contract will be
secured by a Manufactured Home, as defined below.
Unless otherwise specified in the related Prospectus Supplement, the
Manufactured Home Contracts will be fully amortizing and will bear interest at a
fixed annual percentage rate or at a contract rate which steps up on a
particular date or dates.
The Manufactured Home Contracts will consist of manufactured housing
conditional sales contracts and installment loan agreements each secured by a
Manufactured Home. The Manufactured Homes securing the Contracts will consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "MANUFACTURED HOME" as "a structure, transportable in one or
more sections, which in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
The Depositor will cause the Manufactured Home Contracts constituting
each Manufactured Home Contract Pool to be assigned to the Trustee named in the
related Prospectus Supplement for the benefit of the related Securityholder. The
Master Servicer specified in the related Prospectus Supplement will service the
Manufactured Home Contracts, either by itself or through subservicers, pursuant
to the Agreement. The Master Servicer will remain liable for its servicing
obligations under the Agreement. The Manufactured Home Contract documents, if so
specified in the related Prospectus Supplement, may be held for the benefit of
the Trustee by a Custodian, appointed pursuant to a Custodial Agreement (the
"Custodial Agreement") among the Depositor, the Trustee and the Custodian.
The related Prospectus Supplement (or, if such information is not
available in advance of the date of such Prospectus Supplement, a Current Report
on Form 8-K to be filed with the Commission) will specify, for the Manufactured
Home Contracts contained in the related Manufactured Home Contract Pool, among
other things: (a) the dates of origination of the Manufactured Home Contracts;
(b) the weighted average APR on the Manufactured Home
14
Contracts; (c) the range of outstanding principal balances as of the Cut-off
Date; (d) the average outstanding principal balance of the Manufactured Home
Contracts as of the Cut-off Date; (e) the weighted average term to maturity as
of the Cut-off Date; and (f) the range of original maturities of the
Manufactured Home Contracts.
Unless otherwise specified in the related Prospectus Supplement, for
purposes of calculating the Loan-to-Value Ratio of a Manufactured Home Contract
relating to a new Manufactured Home, the Value is no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "MANUFACTURER'S INVOICE PRICE"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit, and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified in the related Prospectus Supplement, with
respect to a used Manufactured Home, the Value is the least of the sale price,
the appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
ADDITIONAL INFORMATION. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Loans contained in the
related Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Loan (e.g., one- to four-family
houses, individual units in condominium apartment buildings, vacation and second
homes, new or used Manufactured Homes or other real property), (iii) the
original terms to maturity of the Loans, (iv) the largest principal balance and
the smallest principal balance of any of the Loans, (v) the earliest origination
date and latest maturity date of any of the Loans, (vi) the Loan-to-Value Ratios
or Combined Loan-to-Value Ratios, as applicable, of the Loans, (vii) the Loan
Rates or annual percentage rates ("APR") or range of Loan Rates or APR's borne
by the Loans, and (viii) the geographical location of the Loans on a
state-by-state basis. If specific information respecting the Loans is not known
to the Depositor at the time the related Securities are initially offered, more
general information of the nature described above will be provided in the
related Prospectus Supplement, and specific information will be set forth in the
Detailed Description.
Except as otherwise specified in the related Prospectus Supplement, the
"COMBINED LOAN-TO-VALUE Ratio" of a Loan at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of the Loan (or, in the case of a Revolving Credit Line Loan, the maximum amount
thereof available) and (b) the outstanding principal balance at the date of
origination of the Loan of any senior mortgage loan(s) or, in the case of any
open-ended senior mortgage loan, the maximum available line of credit with
respect to such mortgage loan, regardless of any lesser amount actually
outstanding at the date of origination of the Loan, to (ii) the Collateral Value
of the related Property. Except as otherwise specified in the related Prospectus
Supplement, the "COLLATERAL VALUE" of the Property, other than with respect to
certain Loans the proceeds of which were used to refinance an existing mortgage
loan (each, a "REFINANCE LOAN"), is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
Loan and (b) the sales price for such Property. In the case of Refinance Loans,
the "Collateral Value" of the related Property is the appraised value thereof
determined in an appraisal obtained at the time of refinancing.
PRIVATE ASSET BACKED SECURITIES
GENERAL. Private Asset Backed Securities may consist of (a)
pass-through certificates or participation certificates evidencing an undivided
interest in a pool of home equity or home improvement loans, or (b)
collateralized mortgage obligations secured by home equity or home improvement
loans. Private Asset Backed Securities may include stripped asset backed
securities representing an undivided interest in all or a part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions) or in some specified portion
of the principal and interest distributions (but not all of such distributions)
on certain home equity or home improvement loans. Private Asset Backed
Securities will have been issued pursuant to a pooling and servicing agreement,
an indenture or similar agreement (a "PABS AGREEMENT"). The seller/servicer of
the underlying Loans will have entered into the PABS Agreement with the trustee
under such PABS Agreement (the "PABS TRUSTEE"). The PABS Trustee or its agent,
or a custodian, will possess the loans underlying such Private Asset Backed
Security. Loans underlying
15
a Private Asset Backed Security will be serviced by a servicer (the "PABS
SERVICER") directly or by one or more subservicers who may be subject to the
supervision of the PABS Servicer. Except as otherwise specified in the related
Prospectus Supplement, the PABS Servicer will be a FNMA or FHLMC approved
servicer and, if FHA Loans underlie the Private Asset Backed Securities,
approved by HUD as an FHA mortgagee.
The issuer of the Private Asset Backed Securities (the "PABS ISSUER")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts.
The PABS Issuer shall not be an affiliate of the Depositor. The obligations of
the PABS Issuer will generally be limited to certain representations and
warranties with respect to the assets conveyed by it to the related trust.
Except as otherwise specified in the related Prospectus Supplement, the PABS
Issuer will not have guaranteed any of the assets conveyed to the related trust
or any of the Private Asset Backed Securities issued under the PABS Agreement.
Additionally, although the loans underlying the Private Asset Backed Securities
may be guaranteed by an agency or instrumentality of the United States, the
Private Asset Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Asset Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Asset Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Asset Backed
Securities by the PABS Trustee or the PABS Servicer. The PABS Issuer or the PABS
Servicer may have the right to repurchase assets underlying the Private Asset
Backed Securities after a certain date or under other circumstances as specified
in the related Prospectus Supplement.
UNDERLYING LOANS. The home equity or home improvement loans underlying
the Private Asset Backed Securities may consist of fixed rate, level payment,
fully amortizing loans or graduated payment loans, buydown loans, adjustable
rate loans, or loans having balloon or other special payment features. Such
loans may be secured by single family property, multifamily property,
manufactured homes or by an assignment of the proprietary lease or occupancy
agreement relating to a specific dwelling within a cooperative and the related
shares issued by such cooperative. Except as otherwise specified in the related
Prospectus Supplement, the underlying loans will have the following
characterizations: (i) no loan will have had a Loan-to-Value Ratio at
origination in excess of 95%, (ii) each single family loan secured by a
mortgaged property that had a Loan-to-Value ratio in excess of 80% at
origination will be covered by a primary mortgage insurance policy, (iii) each
loan will have had an original term to stated maturity of not less than 5 years
and not more than 40 years, (iv) no loan that was more than 89 days delinquent
as to the payment of principal or interest will have been eligible for inclusion
in the assets under the related PABS Agreement, (v) each loan (other than a
cooperative loan) will be required to be covered by a standard hazard insurance
policy (which may be a blanket policy), and (vi) each loan (other than a
cooperative loan or a contract secured by a manufactured home) will be covered
by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE ASSET BACKED SECURITIES. Credit
support in the form of reserve funds, subordination of other private
certificates issued under the PABS Agreement, letters of credit, surety bonds,
insurance policies or other types of credit support may be provided with respect
to the loans underlying the Private Asset Backed Securities themselves.
RATING OF PRIVATE ASSET BACKED SECURITIES. The PABS upon their issuance
will have been assigned a rating in one of the four highest rating categories by
at least one nationally recognized statistical rating agency.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Asset Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private Asset Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of the
loans which comprise the underlying assets for the Private Asset Backed
Securities including (A) the payment features of such loans, (B) the approximate
aggregate principal balance, if known, of underlying loans insured or guaranteed
by a governmental entity, (C) the servicing fee or range of servicing fees with
respect to the loans, and (D) the minimum and maximum stated maturities of the
underlying loans at origination, (iii) the maximum original term-to-stated
maturity of the Private Asset Backed Securities, (iv) the weighted average
term-to-stated maturity of the Private Asset Backed Securities, (v) the
pass-through or certificate rate of the Private Asset Backed Securities, (vi)
the weighted average pass-through or
16
certificate rate of the Private Asset Backed Securities, (vii) the PABS Issuer,
the PABS Servicer (if other than the PABS Issuer) and the PABS Trustee for such
Private Asset Backed Securities, (viii) certain characteristics of credit
support, if any, such as reserve funds, insurance policies, surety bonds,
letters of credit or guaranties relating to the loans underlying the Private
Asset Backed Securities or to such Private Asset Backed Securities themselves,
(ix) the term on which the underlying loans for such Private Asset Backed
Securities may, or are required to, be purchased prior to their stated maturity
or the stated maturity of the Private Asset Backed Securities, (x) the terms on
which loans may be substituted for those originally underlying the Private Asset
Backed Securities and (xi) to the extent provided in a periodic report to the
Trustee in its capacity as holder of the PABS, certain information regarding the
status of the credit support, if any, relating to the PABS.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by Financial Asset Securities Corp. ("FASCO") with
respect to a Trust Fund pursuant to Section 13(a), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, prior to the termination of the offering of
Certificates evidencing interests therein. Upon request by any person to whom
this Prospectus is delivered in connection with the offering of one or more
classes of Certificates, FASCO will provide or cause to be provided without
charge a copy of any such documents and/or reports incorporated herein by
reference, in each case to the extent such documents or reports relate to such
classes of Certificates, other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents). Requests
to FASCO should be directed in writing to: Paul D. Stevelman, Financial Asset
Securities Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, telephone
number (203) 625-2700. FASCO has determined that its financial statements are
not material to the offering of any Certificates.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
(the "SEC") at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects to sell
Securities in Series from time to time, but the timing and amount of offerings
of Securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the Depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
Financial Asset Securities Corp., the Depositor, is a Delaware
corporation organized on August 2, 1995 for the limited purpose of acquiring,
owning and transferring Trust Fund Assets and selling interests therein or bonds
secured thereby. It is an indirect limited purpose finance subsidiary of
National Westminster Bank Plc and an affiliate of Greenwich Capital Markets,
Inc., a registered securities broker-dealer. The Depositor maintains its
principal office at 600 Steamboat Road, Greenwich, Connecticut 06830. Its
telephone number is (203) 625-2700.
Neither the Depositor nor any of the Depositor's affiliates will insure
or guarantee distributions on the Securities of any Series.
17
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
UNDERWRITING STANDARDS
Each Seller will represent and warrant that all Loans originated and/or
sold by it to the Depositor or one of its affiliates will have been underwritten
in accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination for similar types of loans. As to any
Loan insured by the FHA or partially guaranteed by the VA, the Seller will
represent that it has complied with underwriting policies of the FHA or the VA,
as the case may be.
Underwriting standards are applied by or on behalf of a lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the Property as collateral. In general, a prospective borrower
applying for a Loan is required to fill out a detailed application designed to
provide to the underwriting officer pertinent credit information, including the
principal balance and payment history with respect to any senior mortgage, if
any, which, unless otherwise specified in the related Prospectus Supplement, the
borrower's income will be verified by the Seller. As part of the description of
the borrower's financial condition, the borrower generally is required to
provide a current list of assets and liabilities and a statement of income and
expenses, as well as an authorization to apply for a credit report which
summarizes the borrower's credit history with local merchants and lenders and
any record of bankruptcy. In most cases, an employment verification is obtained
from an independent source (typically the borrower's employer) which
verification reports the length of employment with that organization, the
current salary, and whether it is expected that the borrower will continue such
employment in the future. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral,
an appraisal will generally be made of each property considered for financing,
except in the case of new Manufactured Homes, as described under "The Trust
Fund". The appraiser is generally required to inspect the property, issue a
report on its condition and, if applicable, verify that construction, if new,
has been completed. The appraisal is based on the market value of comparable
homes, the estimated rental income (if considered applicable by the appraiser)
and the cost of replacing the home. The value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance.
With respect to a Manufactured Home Contract made in connection with
the obligor's purchase of a Manufactured Home, the "appraised value" is the
amount determined by a professional appraiser. The appraiser must personally
inspect the Manufactured Home and prepare a report which includes market data
based on recent sales of comparable Manufactured Homes and, when deemed
applicable, a replacement cost analysis based on the current cost of a similar
Manufactured Home. Unless otherwise specified in the related Prospectus
Supplement, the Manufactured Home Contract Loan-to-Value Ratio is equal to the
original principal amount of the Manufactured Home Contract divided by the
lesser of the "appraised value" or the sales price for the Manufactured Home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the property (such as property taxes and hazard insurance) and (ii)
to meet monthly housing expenses and other financial obligations and monthly
living expenses. The underwriting standards applied by Sellers, particularly
with respect to the level of loan documentation and the mortgagor's income and
credit history, may be varied in appropriate cases where factors such as low
Combined Loan-to-Value Ratios or other favorable credit exist.
Manufactured Home Contracts will comply with the underwriting policies
of the Seller of the Manufactured Home Contracts described in the related
Prospectus Supplement. Except as described in the related Prospectus
18
Supplement, these policies will be consistent with those utilized by mortgage
lenders or manufactured home lenders generally during the period of origination.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans of
the type contained in the related Pool in accordance with accepted practices and
prudent guidelines, and must maintain satisfactory facilities to originate and
service those loans. Unless otherwise specified in the related Prospectus
Supplement, each Seller will be a seller/servicer approved by either FNMA or
FHLMC.
REPRESENTATIONS BY SELLERS; REPURCHASES OR SUBSTITUTIONS
Each Seller will have made representations and warranties in respect of
the Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus Supplement,
such representations and warranties include, among other things: (i) that title
insurance (or in the case of Properties located in areas where such policies are
generally not available, an attorney's certificate of title) and any required
hazard insurance policy (or certificate of title as applicable) remained in
effect on the date of purchase of the Loan from the Seller by or on behalf of
the Depositor; (ii) that the Seller had good title to each such Loan and such
Loan was subject to no offsets, defenses, counterclaims or rights of rescission
except to the extent that any buydown agreement described herein may forgive
certain indebtedness of a borrower; (iii) that each Loan constituted a valid
lien on the Property (subject only to permissible liens disclosed, if
applicable, title insurance exceptions, if applicable, and certain other
exceptions described in the Agreement) and that the Property was free from
damage and was in acceptable condition; (iv) that there were no delinquent tax
or assessment liens against the Property; (v) that no required payment on a Loan
was more than thirty days' delinquent; and (vi) that each Loan was made in
compliance with, and is enforceable under, all applicable local, state and
federal laws and regulations in all material respects.
If so specified in the related Prospectus Supplement, the
representations and warranties of a Seller in respect of a Loan will be made not
as of the Cut-off Date but as of the date on which such Seller sold the Loan to
the Depositor or one of its affiliates. Under such circumstances, a substantial
period of time may have elapsed between such date and the date of initial
issuance of the Series of Securities evidencing an interest in such Loan. Since
the representations and warranties of a Seller do not address events that may
occur following the sale of a Loan by such Seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a Loan occurs after the date of
sale of such Loan by such Seller to the Depositor or its affiliates.
However, the Depositor will not include any Loan in the Trust Fund for any
Series of Securities if anything has come to the Depositor's attention that
would cause it to believe that the representationes and warranties of a Seller
will not be accurate and complete in all material respects in respect of such
Loan as of the date of initial issuance of the related Series of Securities. If
the Master Servicer is also a Seller of Loans with respect to a particular
Series, such representations will be in addition to the representations and
warranties made by the Master Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the
Seller, will promptly notify the relevant Seller of any breach of any
representation or warranty made by it in respect of a Loan which materially and
adversely affects the interests of the Securityholders in such Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days following notice from the Master Servicer or the
Trustee, as the case may be, then such Seller will be obligated either (i) to
repurchase such Loan from the Trust Fund at a price (the "PURCHASE PRICE") equal
to 100% of the unpaid principal balance thereof as of the date of the repurchase
plus accrued interest thereon to the first day of the month following the month
of repurchase at the Loan Rate (less any Advances or amount payable as related
servicing compensation if the Seller is the Master Servicer) or (ii) to
substitute for such Loan a replacement loan that satisfies certain requirements
set forth in the Agreement. If a REMIC election is to be made with respect to a
Trust Fund, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or a holder of the related residual certificate generally will
be obligated to pay any prohibited transaction tax which may arise in connection
with any such repurchase or substitution and the Trustee must have received a
satisfactory opinion of counsel that such repurchase or substitution will not
cause the Trust Fund to lose its status as a REMIC or otherwise subject the
Trust Fund to a prohibited transaction tax. The Master Servicer may be entitled
to reimbursement for any
19
such payment from the assets of the related Trust Fund or from any holder of the
related residual certificate. See "Description of the Securities-General".
Except in those cases in which the Master Servicer is the Seller, the Master
Servicer will be required under the applicable Agreement to enforce this
obligation for the benefit of the Trustee and the holders of the Securities,
following the practices it would employ in its good faith business judgment were
it the owner of such Loan. This repurchase or substitution obligation will
constitute the sole remedy available to holders of Securities or the Trustee for
a breach of representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master
Servicer is the Seller) will be obligated to purchase or substitute a Loan if a
Seller defaults on its obligation to do so, and no assurance can be given that
Sellers will carry out their respective repurchase or substitution obligations
with respect to Loans. However, to the extent that a breach of a representation
and warranty of a Seller may also constitute a breach of a representation made
by the Master Servicer, the Master Servicer may have a repurchase or
substitution obligation as described below under "The Agreements-Assignment of
Trust Fund Assets".
REPRESENTATIONS REGARDING MANUFACTURED HOME CONTRACTS. With respect to
Manufactured Home Contracts included in a Manufactured Home Contract Pool, the
Seller or such other party, as specified in the related Prospectus Supplement,
will make or cause to be made representations and warranties as to the types and
geographic distribution of such Manufactured Home Contracts and as to the
accuracy in all material respects of certain information furnished to the
Trustee in respect of each such Manufactured Home Contract. Upon a breach of any
representation or warranty that materially and adversely affects the interests
of the Securityholders in a Manufactured Home Contract, the Seller or such other
party, as appropriate, will be obligated either to cure the breach in all
material respects or to purchase the Manufactured Home Contract or, if so
specified in the related Prospectus Supplement, to substitute another
Manufactured Home Contract as described below. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders or the
Trustee for a breach of representation or warranty by the Seller or such other
party.
If so specified in the related Prospectus Supplement, the Seller will
make certain representations and warranties, except to the extent that another
party specified in the Prospectus Supplement makes any such representation or
warranty, to the Trustee with respect to the enforceability of coverage under
any applicable insurance policy or hazard insurance policy. Upon a breach of the
insurability representation that materially and adversely affects the interests
of the Securityholders in a contract, the Seller or such other party, as
appropriate, will be obligated to either cure the breach in all material
respects or, unless otherwise specified in the related Prospectus Supplement, to
purchase such Manufactured Home Contract at a price equal to, except as
otherwise specified in the related Prospectus Supplement, the principal balance
thereof as of the date of purchase plus accrued interest at the related interest
rate to the first day of the month following the month of the purchase. The
Seller, if required by the rating agency or agencies rating the Securities, will
procure a surety bond, guaranty, letter of credit or other instrument acceptable
to such rating agency to support this purchase obligation. The purchase
obligation constitutes the sole remedy available to the Securityholders or the
Trustee for a breach of the Seller's insurability representation.
Unless otherwise provided in the related Prospectus Supplement, if the
Seller discovers or receives notice of any breach of its representations and
warranties relating to a Manufactured Home Contract within two years or such
other period as may be specified in the related Prospectus Supplement of the
date of the initial issuance of the Securities, the Seller may remove such
Manufactured Home Contracts from the Trust Fund ("Deleted Manufactured Home
Contract"), rather than repurchase the Manufactured Home Contract as provided
above, and substitute in its place another Manufactured Home Contract
("Substitute Manufactured Home Contract"). Any Substitute Manufactured Home
Contract, on the date of substitution, will (i) have an outstanding principal
balance, after deduction of all scheduled payments due in the month of
substitution, not in excess of the outstanding principal balance of the Deleted
Manufactured Home Contract (the amount of any shortfall to be distributed to the
Securityholders in the month of substitution), (ii) have an APR not less than
(and not more than 1% greater than) the APR of the Deleted Manufactured Home
Contract, (iii) have a remaining term to maturity no greater than (and not more
than one year less than) that of the Deleted Manufactured Home Contract and (iv)
comply with all the representations and warranties set forth in the Agreement as
of the date of substitution. This repurchase or substitution obligation
constitutes the sole remedy available to the Securityholders or the Trustee for
any such breach.
20
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to a pooling and
servicing agreement (a "Pooling and Servicing Agreement") or a Trust Agreement
among the Depositor, the Servicer, if the Series relates to Loans, and the
Trustee. A form of Pooling and Servicing Agreement and Trust Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part. Each Series of Notes will be issued pursuant to an indenture (the
"INDENTURE") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "TRUSTEE") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
Each Agreement, dated as of the related Cut-off Date, will be among the
Depositor, the Master Servicer and the Trustee for the benefit of the holders of
the Securities of such Series. The provisions of each Agreement will vary
depending upon the nature of the Securities to be issued thereunder and the
nature of the related Trust Fund. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Securities will describe any provision of the Agreement relating to
such Series that mainly differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Securities and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of record of a Security of such Series addressed to Financial Asset Securities
Corp., 600 Steamboat Road, Greenwich, Connecticut 06830, Attention: Asset Backed
Finance Group.
GENERAL
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each Series will be issued in book-entry or fully registered
form, in the authorized denominations specified in the related Prospectus
Supplement, will evidence specified beneficial ownership interests in the
related Trust Fund created pursuant to each Agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Notes of each Series will be issued in book-entry or
fully registered form, in the authorized denominations specified in the related
Prospectus Supplement, will be secured by the pledge of the assets of the
related Trust Fund and will not be entitled to payments in respect of the assets
included in any other Trust Fund established by the Depositor. The Securities
will not represent obligations of the Depositor or any affiliate of the
Depositor. Certain of the Loans may be guaranteed or insured as set forth in the
related Prospectus Supplement. Each Trust Fund will consist of, to the extent
provided in the Agreement, (i) the Trust Fund Assets, as from time to time are
subject to the related Agreement (exclusive of any amounts specified in the
related Prospectus Supplement ("RETAINED INTEREST")), including all payments of
interest and principal received with respect to the Loans after the Cut-off Date
(to the extent not applied in computing the Cut-off Date Principal Balance);
(ii) such assets as from time to time are required to be deposited in the
related Security Account, as described below under "The Agreements-Payments on
Loans; Deposits to Security Account"; (iii) property which secured a Loan and
which is acquired on behalf of the Securityholders by foreclosure or deed in
lieu of foreclosure and (iv) any insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related Agreement. If so
specified in the related Prospectus Supplement, a Trust Fund may also include
one or more of the following: reinvestment income on payments received on the
Trust Fund Assets, a Reserve Account, a mortgage pool insurance policy, a
Special Hazard Insurance Policy, a Bankruptcy Bond, one or more letters of
credit, a surety bond, guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Trust Fund Assets in the related Trust Fund. A Series of
Securities may include one or more classes that are senior in right to payment
to one or more other classes of Securities of such Series. One or more classes
of Securities of a Series may be entitled to receive distributions of principal,
interest or any combination thereof. Distributions on one or more classes of a
Series of Securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Trust Fund Assets in the
related Trust Fund or on a different basis, in each case as specified in the
related Prospectus Supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the related Prospectus
Supplement.
21
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities will be made by the Trustee on each
Distribution Date (i.e., monthly or at such other intervals and on the dates as
are specified in the Prospectus Supplement) in proportion to the percentages
specified in the related Prospectus Supplement. Distributions will be made to
the persons in whose names the Securities are registered at the close of
business on the dates specified in the related Prospectus Supplement (each, a
"RECORD DATE"). Distributions will be made in the manner specified in the
Prospectus Supplement to the persons entitled thereto at the address appearing
in the register maintained for holders of Securities (the "SECURITY REGISTER");
provided, however, that the final distribution in retirement of the Securities
will be made only upon presentation and surrender of the Securities at the
office or agency of the Trustee or other person specified in the notice to
Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of other interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of ERISA or the
Code may result in prohibited transactions within the meaning of ERISA and the
Code. See "ERISA Considerations". Unless otherwise specified in the related
Prospectus Supplement, the transfer of Securities of such a class will not be
registered unless the transferee (i) represents that it is not, and is not
purchasing on behalf of, any such plan, account or arrangement or (ii) provides
an opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Securities of such a class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
Trustee, the Master Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust
Fund or designated portions thereof as a "real estate mortgage investment
conduit" or "REMIC" as defined in the Code. The related Prospectus Supplement
will specify whether a REMIC election is to be made. Alternatively, the
Agreement for a Series may provide that a REMIC election may be made at the
discretion of the Depositor or the Master Servicer and may only be made if
certain conditions are satisfied. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any material
federal income tax consequences to Securityholders not otherwise described
herein, will be set forth in the related Prospectus Supplement. If such an
election is made with respect to a Series, one of the classes will be designated
as evidencing the sole class of "residual interests" in the related REMIC, as
defined in the Code. All other classes of Securities in such a Series will
constitute "regular interests" in the related REMIC, as defined in the Code.
As to each Series with respect to which a REMIC election is to be made, the
Master Servicer or a holder of the related residual certificate will be
obligated to take all actions required in order to comply with applicable laws
and regulations and will be obligated to pay any prohibited transaction taxes.
The Master Servicer, to the extent set forth in the related Prospectus
Supplement, will be entitled to reimbursement for any such payment from the
assets of the Trust Fund or from any holder of the related residual certificate.
DISTRIBUTIONS ON SECURITIES
GENERAL. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement" herein. Set forth below are descriptions of various methods that
may be used to determine the amount of distributions on the Securities of a
particular Series. The Prospectus Supplement for each Series of Securities will
describe the method to be used in determining the amount of distributions on the
Securities of such Series.
Distributions allocable to principal and interest on the Securities
will be made by the Trustee out of, and only to the extent of, funds in the
related Security Account, including any funds transferred from any Reserve
Account (a
22
"RESERVE ACCOUNT"). As between Securities of different classes and as between
distributions of principal (and, if applicable, between distributions of
Principal Prepayments, as defined below, and scheduled payments of principal)
and interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the distributions to any class of Securities
will be made pro rata to all Securityholders of that class.
AVAILABLE FUNDS. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "AVAILABLE FUNDS" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including Principal Prepayments, if any,
and prepayment penalties, if so provided in the related
Prospectus Supplement) and interest on the Loans in the
related Trust Fund (including Liquidation Proceeds and
Insurance Proceeds and amounts drawn under letters of credit
or other credit enhancement instruments as permitted
thereunder and as specified in the related Agreement) received
by the Master Servicer after the Cut-off Date and on or prior
to the day of the month of the related Distribution Date
specified in the related Prospectus Supplement (the
"Determination Date") except
(a) all payments which were due on or before
the Cut-off Date;
(b) all Liquidation Proceeds and all
Insurance Proceeds, all Principal Prepayments and all other
proceeds of any Loan purchased by the Depositor, Master
Servicer, any Sub-Servicer or any Seller pursuant to the
Agreement that were received after the prepayment period
specified in the related Prospectus Supplement and all related
payments of interest representing interest for any period
after the interest accrual period;
(c) all scheduled payments of principal and
interest due on a date or dates subsequent to the Due Period
relating to such Distribution Date;
(d) amounts received on particular Loans as
late payments of principal or interest or other amounts
required to be paid by borrowers, but only to the extent of
any unreimbursed advance in respect thereof made by the Master
Servicer (including the related Sub-Servicers, Support
Servicers or the Trustee);
(e) amounts representing reimbursement, to
the extent permitted by the Agreement and as described under
"Advances" below, for advances made by the Master Servicer,
Sub-Servicers (as defined below), Support Servicers or the
Trustee that were deposited into the Security Account, and
amounts representing reimbursement for certain other losses
and expenses incurred by the Master Servicer or the Depositor
and described below;
(f) that portion of each collection of
interest on a particular Loan in such Trust Fund which
represents servicing compensation payable to the Master
Servicer or Retained Interest which is to be retained from
such collection or is permitted to be retained from related
Insurance Proceeds, Liquidation Proceeds or proceeds of Loans
purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer,
Sub Servicer, Support Servicer or Trustee as described under
"-Advances" below and deposited by it in the Security Account;
(iii) if applicable, amounts withdrawn from a Reserve Account;
(iv) if applicable, amounts provided under a letter of credit,
insurance policy, surety bond or other third-party guaranties;
and
(v) if applicable, the amount of prepayment interest
shortfall.
23
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Security Principal
Balance (or, in the case of Securities (i) entitled only to distributions
allocable to interest, the aggregate notional principal balance or (ii) which,
under certain circumstances, allow for the accrual of interest otherwise
scheduled for payment to remain unpaid until the occurrence of certain events
specified in the related Prospectus Supplement) of each class of Securities
entitled to interest from the date, at the Pass-Through Rate (which may be a
fixed rate or rate adjustable as specified in such Prospectus Supplement) and
for the periods specified in such Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Securities entitled to interest (other than a class of Securities that
provides for interest that accrues, but is not currently payable, referred to
hereafter as "ACCRUAL SECURITIES") will be distributable on the Distribution
Dates specified in the related Prospectus Supplement until the aggregate
Security Principal Balance of the Securities of such class has been distributed
in full or, in the case of Securities entitled only to distributions allocable
to interest, until the aggregate notional principal balance of such Securities
is reduced to zero or for the period of time designated in the related
Prospectus Supplement. The original Security Principal Balance of each Security
will equal the aggregate distributions allocable to principal to which such
Security is entitled. Unless otherwise specified in the related Prospectus
Supplement, distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
notional principal balance of such Security. The notional principal balance of a
Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Security were to accrue through the day immediately preceding
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Security Principal
Balance of such class of Securities on that Distribution Date. Distributions of
interest on any class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Security Principal
Balance of such class of Accrual Securities, will increase on each Distribution
Date by the amount of interest that accrued on such class of Accrual Securities
during the preceding interest accrual period but that was not required to be
distributed to such class on such Distribution Date. Any such class of Accrual
Securities will thereafter accrue interest on its outstanding Security Principal
Balance as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. The related Prospectus Supplement will
specify the method by which the amount of principal to be distributed on the
Securities on each Distribution Date will be calculated and the manner in which
such amount will be allocated among the classes of Securities entitled to
distributions of principal. The aggregate Security Principal Balance of any
class of Securities entitled to distributions of principal generally will be the
aggregate original Security Principal Balance of such class of Securities
specified in such Prospectus Supplement, reduced by all distributions reported
to the holders of such Securities as allocable to principal and, (i) in the case
of Accrual Securities, increased by all interest accrued but not then
distributable on such Accrual Securities and (ii) in the case of adjustable rate
Securities, subject to the effect of negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more
classes of Securities will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments ("PRINCIPAL
PREPAYMENTS") in the percentages and under the circumstances or for the periods
specified in such Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Securityholders will have the effect of
accelerating the amortization of such Securities while increasing the interests
evidenced by other Securities in the Trust Fund. Increasing the interests of the
other Securities relative to that of certain Securities allocated by the
principal prepayments is intended to preserve the availability of the
subordination provided by such other Securities. See "Credit
Enhancement-Subordination".
24
UNSCHEDULED DISTRIBUTIONS. The Securities will be subject to receipt of
distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such unscheduled
distributions on the day and in the amount specified in the related Prospectus
Supplement if, due to substantial payments of principal (including Principal
Prepayments) on the Trust Fund Assets, the Trustee or the Master Servicer
determines that the funds available or anticipated to be available from the
Security Account and, if applicable, any Reserve Account, may be insufficient to
make required distributions on the Securities on such Distribution Date. Unless
otherwise specified in the related Prospectus Supplement, the amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal on
the Securities on the next Distribution Date.
Unless otherwise specified in the related Prospectus Supplement, the unscheduled
distributions will include interest at the applicable Pass-Through Rate (if any)
on the amount of the unscheduled distribution allocable to principal for the
period and to the date specified in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Securities would have been made on the next Distribution Date, and with respect
to Securities of the same class, unscheduled distributions of principal will be
made on the same basis as such distributions would have been made on the next
Distribution Date on a pro rata basis. Notice of any unscheduled distribution
will be given by the Trustee prior to the date of such distribution.
ADVANCES
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or Support Servicers or funds
held in the Security Account for future distributions to the holders of such
Securities), an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date and were not
advanced by any Sub-Servicer, subject to the Master Servicer's determination
that such advances will be recoverable out of late payments by borrowers,
Liquidation Proceeds, Insurance Proceeds or otherwise. In addition, to the
extent provided in the related Prospectus Supplement, a cash account may be
established to provide for Advances to be made in the event of certain Trust
Fund Assets payment defaults or collection shortfalls.
In making Advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If Advances are
made by the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Security
Account on such Distribution Date would be less than the amount required to be
available for distributions to Securityholders on such date. Any Master Servicer
funds advanced will be reimbursable to the Master Servicer out of recoveries on
the specific Loans with respect to which such Advances were made (e.g., late
payments made by the related borrower, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Loan purchased by a Sub-Servicer or a
Seller under the circumstances described hereinabove). Advances by the Master
Servicer (and any advances by a Sub-Servicer or a Support Servicer) also will be
reimbursable to the Master Servicer (or Sub-Servicer or a Support Servicer) from
cash otherwise distributable to Securityholders (including the holders of Senior
Securities) to the extent that the Master Servicer determines that any such
Advances previously made are not ultimately recoverable as described above. To
the extent provided in the related Prospectus Supplement, the Master Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. Funds so
advanced are reimbursable to the Master Servicer to the extent permitted by the
Agreement. The obligations of the Master Servicer to make advances may be
supported by a cash advance reserve fund, a surety bond or other arrangement, in
each case as described in such Prospectus Supplement.
The Master Servicer or Sub-Servicer may enter into an agreement (a
"SUPPORT AGREEMENT") with a support servicer (each, a "SUPPORT SERVICER")
pursuant to which the Support Servicer agrees to provide funds on behalf of the
Master Servicer or Sub-Servicer in connection with the obligation of the Master
Servicer or Sub-Servicer, as the case may be, to make Advances. The Support
Agreement will be delivered to the Trustee and the Trustee will be authorized
25
to accept a substitute Support Agreement in exchange for an original Support
Agreement, provided that such substitution of the Support Agreement will not
adversely affect the rating or ratings then in effect on the Securities.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer, a Sub-Servicer or a Support Servicer fails to make a
required Advance, the Trustee will be obligated to make such Advance in its
capacity as successor servicer. If the Trustee makes such an Advance, it will be
entitled to be reimbursed for such Advance to the same extent and degree as the
Master Servicer, a Sub-Servicer or a Support Servicer is entitled to be
reimbursed for Advances. See "Description of the Securities-Distributions on
Securities" herein.
COMPENSATING INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to remit to the Trustee, with respect to each Loan in
the related Trust Fund as to which a principal prepayment in full or a principal
payment which is in excess of the scheduled monthly payment and is not intended
to cure a delinquency was received during any Due Period, an amount, from and to
the extent of amounts otherwise payable to the Master Servicer as servicing
compensation, equal to the excess, if any, of (a) 30 days' interest on the
principal balance of the related Loan at the Loan Rate net of the per annum rate
at which the Master Servicer's servicing fee accrues, over (b) the amount of
interest actually received on such Loan during such Due Period, net of the
Master Servicer's servicing fee.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date,
the Master Servicer or the Trustee will furnish to each Securityholder of record
of the related Series a statement setting forth, to the extent applicable to
such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and any applicable prepayment penalties included
therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and
(b) withdrawn from the Reserve Fund, if any, that is included
in the amounts distributed to the Senior Securityholders;
(v) the outstanding principal balance or notional principal
balance of such class after giving effect to the distribution
of principal on such Distribution Date;
(vi) the percentage of principal payments on the Loans
(excluding prepayments), if any, which such class will be
entitled to receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if
any, which such class will be entitled to receive on the
following Distribution Date;
(viii) the related amount of the servicing compensation
retained or withdrawn from the Security 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 similar charges
and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 31 to 60
days, (2) 61 to 90 days and (3) 91 or more days and (B) in
foreclosure and delinquent (1) 31 to 60 days, (2) 61 to 90
days and (3) 91 or more days, as of the close of business on
the last day of the calendar month preceding such Distribution
Date;
26
(x) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure;
(xi) if a class is entitled only to a specified portion of
payments of interest on the Loans in the related Pool, the
Pass-Through Rate, if adjusted from the date of the last
statement, of the Loans expected to be applicable to the next
distribution to such class;
(xii) if applicable, the amount remaining in any Reserve
Account at the close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the
immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool
policies or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Securityholders for any Series of Securities may include additional or other
information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "BOOK-ENTRY SECURITIES"). Persons acquiring beneficial
ownership interests in the Securities ("SECURITY OWNERS") will hold their
Securities through the Depository Trust Company ("DTC") in the United States, or
Cedel Bank ("CEDEL") or the Euroclear System ("EUROCLEAR") (in Europe) if they
are participants ("PARTICIPANTS") of such systems, or indirectly through
organizations which are Participants in such systems. The Book-Entry Securities
will be issued in one or more certificates which equal the aggregate principal
balance of the Securities and will initially be registered in the name of Cede &
Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in CEDEL's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "RELEVANT DEPOSITARY" and collectively the
"EUROPEAN DEPOSITARIES"). Except as described below, no Security Owner will be
entitled to receive a physical certificate representing such Security (a
"DEFINITIVE SECURITY"). Unless and until Definitive Securities are issued, it is
anticipated that the only "Securityholders" of the Securities will be Cede & Co.
("CEDE"), as nominee of DTC. Security Owners are only permitted to exercise
their rights indirectly through Participants and DTC.
The Security Owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains the
Security Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Security will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Security Owner's
Financial Intermediary is not a Participant and on the records of CEDEL or
Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and Participants. While
the Securities are outstanding (except under the circumstances described
below),
27
under the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined herein) or Euroclear Participant (as defined herein) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
PARTICIPANTS") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
28
Euroclear was created in 1968 to hold securities for its participants
("EUROCLEAR PARTICIPANTS") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "COOPERATIVE"). All operations are conducted by
Morgan, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is
a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Under a book-entry format, beneficial owners of the Book-Entry
Securities may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Securities held through CEDEL or Euroclear will be credited to the cash accounts
of CEDEL Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Certain Material
Federal Income Tax Considerations-Tax Treatment of Foreign Investors" and "-Tax
Consequences to Holders of the Notes-Backup Withholding" herein. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Securities to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Securities, may be limited due to the lack of physical
certificates for such Book-Entry Securities. In addition, issuance of the
Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Securities are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Securityholder under the Agreement on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Securities which conflict with actions taken with respect to other Securities.
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Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
None of the Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the Trust Fund Assets in the
related Trust Fund. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related Prospectus Supplement,
the subordination of one or more classes of the Securities of such Series, the
establishment of one or more Reserve Accounts, the use of a cross-support
feature, use of a mortgage pool insurance policy, FHA Insurance, VA Guarantee,
bankruptcy bond, special hazard insurance policy, surety bond, letter of credit,
guaranteed investment contract or another method of credit enhancement described
in the related Prospectus Supplement, or any combination of the foregoing.
Unless otherwise specified in the related Prospectus Supplement, credit
enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the Securities and
interest thereon. If losses occur which exceed the amount covered be credit
enhancement or which are not covered by the credit enhancement, Securityholders
will bear their allocable share of deficiencies.
SUBORDINATION
Protection afforded to holders of one or more classes of Securities of
a Series by means of the subordination feature may be accomplished by the
preferential right of holders of one or more other classes of such Series (the
"Senior Securities") to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise would
have been payable to holders of Subordinated Securities under the circumstances
and to the extent specified in the related Prospectus Supplement. Protection may
also be afforded to the holders of Senior Securities of a Series by: (i)
reducing the ownership interest of the related Subordinated Securities; (ii) a
combination of the immediately preceding sentence and clause (i) above; or (iii)
as otherwise described in the related Prospectus Supplement. Delays in receipt
of scheduled payments on the Loans and losses on defaulted Loans may be borne
first by the various classes of Subordinated Securities and thereafter by the
various classes of Senior Securities, in each case under the circumstances and
subject to the limitations specified in such related Prospectus Supplement. The
aggregate distributions in respect of delinquent payments on the Loans over the
lives of the Securities or at any time, the aggregate losses in respect of
defaulted Loans which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the distributions otherwise distributable to the
Subordinated Securityholders that will be distributable to Senior
Securityholders on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement, holders
of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee or distributed to holders of Senior Securities. Such deposits may be
made on each Distribution Date, for specified periods or until the balance in
the Reserve Account
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has reached a specified amount and, following payments from the Reserve Account
to holders of Senior Securities or otherwise, thereafter to the extent necessary
to restore the balance in the Reserve Account to required levels, in each case
as specified in the related Prospectus Supplement. Amounts on deposit in the
Reserve Account may be released to the holders of certain classes of Securities
at the times and under the circumstances specified in such Prospectus
Supplement.
Various classes of Senior Securities and Subordinated Securities may
themselves be subordinate in their right to receive certain distributions to
other classes of Senior and Subordinated Securities, respectively, through a
cross support mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Securities, payments to holders of Senior
Securities on account of delinquencies or losses and payments to any Reserve
Account will be allocated as specified in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
A separate special hazard insurance policy (each, a "SPECIAL HAZARD
INSURANCE POLICY") may be obtained for the Pool and issued by the insurer (the
"SPECIAL HAZARD INSURER") named in the related Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to limitations described below,
protect holders of the related Securities from (i) loss by reason of damage to
Properties caused by certain hazards (including earthquakes and, to a limited
extent, tidal waves and related water damage or as otherwise specified in the
related Prospectus Supplement) not insured against under the standard form of
hazard insurance policy for the respective states in which the Properties are
located or under a flood insurance policy if the Property is located in a
federally designated flood area, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "The Agreements-Hazard Insurance". Each Special Hazard Insurance Policy will
not cover losses occasioned by fraud or conversion by the Trustee or Master
Servicer, war, insurrection, civil war, certain governmental action, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear or chemical reactions, flood (if the Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will be
specified in the related Prospectus Supplement. Each Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the Property securing the Loan have been kept in force and
other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in
the related Prospectus Supplement, each Special Hazard Insurance Policy will
provide that where there has been damage to Property securing a foreclosed Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if any,
maintained by the borrower or the Master Servicer, the Special Hazard Insurer
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the Property to the Special Hazard Insurer, the unpaid
principal balance of such Loan at the time of acquisition of such Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement and certain expenses incurred by the Master Servicer with
respect to such Property. If the unpaid principal balance of a Loan plus accrued
interest and certain expenses is paid by the Special Hazard Insurer, the amount
of further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the Property.
Any amount paid as the cost of repair of the Property will further reduce
coverage by such amount.
The Master Servicer may deposit cash, an irrevocable letter of credit
or any other instrument acceptable to each Rating Agency rating the Securities
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account relating to such Securities in lieu thereof may be reduced so long
as any such reduction will not result in a downgrading of the rating of such
Securities by any such Rating Agency.
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BANKRUPTCY BONDS
A bankruptcy bond ("Bankruptcy Bond") for proceedings under the federal
Bankruptcy Code may be issued by an insurer named in such Prospectus Supplement.
Each Bankruptcy Bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a Loan or a
reduction by such court of the principal amount of a Loan and will cover certain
unpaid interest on the amount of such a principal reduction from the date of the
filing of a bankruptcy petition. The required amount of coverage under each
Bankruptcy Bond will be set forth in the related Prospectus Supplement. The
Master Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each Rating Agency rating the Securities of the related
Series in a special trust account to provide protection in lieu of or in
addition to that provided by a Bankruptcy Bond. Coverage under a Bankruptcy Bond
may be cancelled or reduced by the Master Servicer if such cancellation or
reduction would not adversely affect the then current rating or ratings of the
related Securities. See "Certain Legal Aspects of the Loans-Anti-Deficiency
Legislation and Other Limitations on Lenders".
RESERVE ACCOUNTS
Credit support with respect to a Series of Securities may be provided
by the establishment and maintenance with the Trustee for such Series of
Securities, in trust, of one or more Reserve Accounts for such Series. The
related Prospectus Supplement will specify whether or not any such Reserve
Accounts will be included in the Trust Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit
therein of cash, United States Treasury securities, instruments evidencing
ownership of principal or interest payments thereon, letters of credit, demand
notes, certificates of deposit or a combination thereof in the aggregate amount
specified in the related Prospectus Supplement, (ii) by the deposit therein from
time to time of certain amounts, as specified in the related Prospectus
Supplement to which the Subordinate Securityholders, if any, would otherwise be
entitled or (iii) in such other manner as may be specified in the related
Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
Permitted Investments which may include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the Trustee,
such letter of credit will be irrevocable. Any instrument deposited therein will
name the Trustee, in its capacity as trustee for the holders of the Securities,
as beneficiary and will be issued by an entity acceptable to each Rating Agency
that rates the Securities. Additional information with respect to such
instruments deposited in the Reserve Accounts will be set forth in the related
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Securities for the purposes, in the manner and at the times specified
in the related Prospectus Supplement.
POOL INSURANCE POLICIES
A separate pool insurance policy ("POOL INSURANCE POLICY") may be
obtained for the Pool and issued by the insurer (the "POOL INSURER") named in
the related Prospectus Supplement. Each Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
Loans in the Pool in an amount equal to a percentage specified in such
Prospectus Supplement of the aggregate principal balance of such Loans on the
Cut-off Date which are not covered as to their entire outstanding principal
balances by Primary Mortgage Insurance Policies. As more fully described below,
the Master Servicer will present claims thereunder to the Pool Insurer on behalf
of itself, the Trustee and the holders of the Securities. The Pool Insurance
Policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted Loans and only upon
satisfaction of certain conditions precedent described below. Unless otherwise
specified in the related Prospectus Supplement, the Pool Insurance Policies will
not cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
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Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted Loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real estate
taxes and other protection and preservation expenses have been paid; (iii) if
there has been physical loss or damage to the Property, it has been restored to
its physical condition (reasonable wear and tear excepted) at the time of
issuance of the policy; and (iv) the insured has acquired good and merchantable
title to the Property free and clear of liens except certain permitted
encumbrances. Upon satisfaction of these conditions, the Pool Insurer will have
the option either (a) to purchase the property securing the defaulted Loan at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Loan Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Securityholders, or (b) to pay the
amount by which the sum of the principal balance of the defaulted Loan plus
accrued and unpaid interest at the Loan Rate to the date of payment of the claim
and the aforementioned expenses exceeds the proceeds received from an approved
sale of the Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
Property securing a defaulted Loan is damaged and proceeds, if any, from the
related hazard insurance policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged Property to a condition
sufficient to permit recovery under the Pool Insurance Policy, the Master
Servicer will not be required to expend its own funds to restore the damaged
Property unless it determines that (i) such restoration will increase the
proceeds to securityholders on liquidation of the Loan after reimbursement of
the Master Servicer for its expenses and (ii) such expenses will be recoverable
by it through proceeds of the sale of the Property or proceeds of the related
Pool Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will not insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Loan, including misrepresentation by the borrower, the originator
or persons involved in the origination thereof, or (ii) failure to construct a
Property in accordance with plans and specifications. A failure of coverage
attributable to one of the foregoing events might result in a breach of the
related Seller's representations described above, and, in such events might give
rise to an obligation on the part of such Seller to purchase the defaulted Loan
if the breach cannot be cured by such Seller. No Pool Insurance Policy will
cover (and many Primary Mortgage Insurance Policies do not cover) a claim in
respect of a defaulted Loan occurring when the servicer of such Loan, at the
time of default or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities 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 may include certain expenses incurred by the Master
Servicer as well as accrued interest on delinquent Loans to the date of payment
of the claim. 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 the
Securityholders.
FHA INSURANCE; VA GUARANTEES
Loans designated in the related Prospectus Supplement as insured by the
FHA will be insured by the FHA as authorized under the United States Housing Act
of 1934, as amended. In addition to the Title I Program of the FHA (see "Certain
Legal Aspects of the Loans - The Title I Program" herein), certain Loans will be
insured under various FHA programs which generally limit the principal amount
and interest rates of the mortgage loans insured.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") or
by the Master Servicer or any Sub-Servicer and are paid to the FHA.
The regulations governing FHA single-family mortgage insurance programs provide
that insurance benefits are payable either upon foreclosure (or other
acquisition of possession) and conveyance of the mortgaged premises to the
United States of America or upon assignment of the defaulted Loan to the United
States of America. With respect to a defaulted FHA-insured Loan, the Master
Servicer or any Sub-Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Master Servicer or any
Sub-Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Master Servicer or any Sub-Servicer is expected to make
an effort
33
to avoid foreclosure by entering, if feasible, into one of a number of available
forms of forbearance plans with the mortgagor. Such plans may involve the
reduction or suspension of regular mortgage payments for a specified period,
with such payments to be made upon or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than Loans
originated under the Title I Program of the FHA, beyond the maturity date. In
addition, when a default caused by such circumstances is accompanied by certain
other criteria, HUD may provide relief by making payments to the Master Servicer
or any Sub-Servicer in partial or full satisfaction of amounts due under the
Loan (which payments are to be repaid by the mortgagor to HUD) or by accepting
assignment of the loan from the Master Servicer or any Sub-Servicer. With
certain exceptions, at least three full monthly installments must be due and
unpaid under the Loan, and HUD must have rejected any request for relief from
the mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Loan upon default for an amount equal to the
principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Loan adjusted to reimburse the Master Servicer
or Sub-Servicer for certain costs and expenses and to deduct certain amounts
received or retained by the Master Servicer or Sub-Servicer after default. When
entitlement to insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the Master Servicer or Sub-Servicer is
compensated for no more than two-thirds of its foreclosure costs, and is
compensated for interest accrued and unpaid prior to such date but in general
only to the extent it was allowed pursuant to a forbearance plan approved by
HUD. When entitlement to insurance benefits results from assignment of the Loan
to HUD, the insurance payment includes full compensation for interest accrued
and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA-insured Loan, bears interest from a date 30 days after the
borrower's first uncorrected failure to perform any obligation to make any
payment due under the mortgage and, upon assignment, from the date of assignment
to the date of payment of the claim, in each case at the same interest rate as
the applicable HUD debenture interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by
the VA will be partially guaranteed by the VA under the Serviceman's
Readjustment Act of 1944, as amended (a "VA GUARANTY POLICY"). The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran (or in certain instances
the spouse of a veteran) to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no Loan guaranteed by the
VA will have an original principal amount greater than five times the partial VA
guarantee for such Loan.
The maximum guarantee that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a), as
amended. As of November 1, 1998, the maximum guarantee that may be issued by the
VA under a VA guaranteed mortgage loan of more than $144,000 is the lesser of
25% of the original principal amount of the mortgage loan and $50,750. The
liability on the guarantee is reduced or increased pro rata with any reduction
or increase in the amount of indebtedness, but in no event will the amount
payable on the guarantee exceed the amount of the original guarantee.
The VA may, at its option and without regard to the guarantee, make full payment
to a mortgage holder of unsatisfied indebtedness on a mortgage upon its
assignment to the VA.
With respect to a defaulted VA guaranteed Loan, the Master Servicer or
Sub-Servicer is, absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for three months.
Generally, a claim for the guarantee is submitted after liquidation of the
Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Loan originally guaranteed applied to indebtedness outstanding as of
the applicable date of computation specified in the VA regulations. Payments
under the guarantee will be equal to the unpaid principal amount of the Loan,
interest accrued on the unpaid balance
34
of the Loan to the appropriate date of computation and limited expenses of the
mortgagee, but in each case only to the extent that such amounts have not been
recovered through liquidation of the Property. The amount payable under the
guarantee may in no event exceed the amount of the original guarantee.
CROSS-SUPPORT
The beneficial ownership of separate groups of assets included in a
Trust Fund may be evidenced by separate classes of the related Series of
Securities. In such case, credit support may be provided by a cross-support
feature which requires that distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or secured by, other asset groups
within the same Trust Fund. The related Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A Trust Fund may also include insurance, guaranties, surety bonds,
letters of credit or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the assets
included in such Trust Fund, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of such
assets or principal payment rate on such assets. Such arrangements may include
agreements under which Securityholders are entitled to receive amounts deposited
in various accounts held by the Trustee upon the terms specified in such
Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities
will be affected primarily by the amount and timing of principal payments
received on or in respect of the Trust Fund Assets included in the related Trust
Fund. With respect to a Trust Fund which includes Private Asset Backed
Securities, the possible effects of the amount and timing of principal payments
received with respect to the underlying mortgage loans will be described in the
related Prospectus Supplement. The original terms to maturity of the Loans in a
given Pool will vary depending upon the type of Loans included therein. Each
Prospectus Supplement will contain information with respect to the type and
maturities of the Loans in the related Pool. Unless otherwise specified in the
related Prospectus Supplement, Loans may be prepaid without penalty in full or
in part at any time. The prepayment experience on the Loans in a Pool will
affect the life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity
loans and home improvement contracts have been originated in significant volume
only during the past few years and the Depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, the Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because home equity loans such as the Revolving Credit Line Loans generally are
not fully amortizing, the absence of voluntary borrower prepayments could cause
rates of principal payments lower than, or similar to, those of traditional
fully-amortizing first mortgages. The prepayment experience of the related Trust
Fund may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing and homeowner mobility and the frequency and amount of any future
draws on any Revolving Credit Line Loans. Other factors that might be expected
to affect the prepayment rate of a pool of home equity mortgage loans or home
improvement contracts include the amounts of, and interest rates on, the
underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations on
the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
Loans. The enforcement of a "due-on-sale"
35
provision (as described below) will have the same effect as a prepayment of the
related Loan. See "Certain Legal Aspects of the Loans-Due-on-Sale Clauses"
herein. The yield to an investor who purchases Securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Loans is actually different than the rate anticipated
by such investor at the time such Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among
other things, borrowers may (i) make payments during any month as low as the
minimum monthly payment for such month or, during the interest-only period for
certain Revolving Credit Line Loans and, in more limited circumstances,
Closed-End Loans, with respect to which an interest-only payment option has been
selected, the interest and the fees and charges for such month or (ii) make
payments as high as the entire outstanding principal balance plus accrued
interest and the fees and charges thereon. It is possible that borrowers may
fail to make the required periodic payments. In addition, collections on the
Loans may vary due to seasonal purchasing and the payment habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, the
Loans will contain due-on-sale provisions permitting the mortgagee to accelerate
the maturity of the loan upon sale or certain transfers by the borrower. Loans
insured by the FHA, and Single Family Loans partially guaranteed by the VA, are
assumable with the consent of the FHA and the VA, respectively. Thus, the rate
of prepayments on such Loans may be lower than that of conventional Loans
bearing comparable interest rates. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Property and reasonably believes that it is entitled to do so
under applicable law; provided, however, that the Master Servicer will not take
any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. See "The Agreements-Collection Procedures"
and "Certain Legal Aspects of the Loans" for a description of certain provisions
of each Agreement and certain legal developments that may affect the prepayment
experience on the Loans.
There are no uniform statistics compiled for prepayments of contracts
relating to Manufactured Homes. Prepayments on the Manufactured Home Contracts
may be influenced by a variety of economic, geographic, social and other
factors, including repossessions, aging, seasonality and interest rate
fluctuations. Other factors affecting prepayment of Manufactured Home Contracts
include changes in housing needs, job transfers, unemployment and servicing
decisions. An investment in Securities evidencing interests in Manufactured Home
Contracts may be affected by, among other things, a downturn in regional or
local economic conditions. These regional or local economic conditions are often
volatile, and historically have affected the delinquency, loan loss and
repossession experience of the Manufactured Home Contracts. To the extent that
losses on the Manufactured Home Contracts are not covered by any form of credit
enhancement, holders of the Securities of a Series evidencing interests in such
Manufactured Home Contracts will bear all risk of loss resulting from default by
obligors and will have to look primarily to the value of the Manufactured Homes,
which generally depreciate in value, for recovery of the outstanding principal
and unpaid interest of the defaulted Manufactured Home Contracts.
While most Manufactured Home Contracts will contain "due-on-sale"
provisions permitting the holders of the Manufactured Home Contract to
accelerate the maturity of the Manufactured Home Contract upon conveyance by the
borrower, the Master Servicer may permit proposed assumptions of Manufactured
Home Contracts where the proposed buyer meets the underwriting standards
described in the related Prospectus Supplement. Such assumptions of Manufactured
Home Contracts would have the effect of extending the average life of the
Manufactured Home Contract. FHA Manufactured Home Contracts and VA Manufactured
Home Contracts are not permitted to contain "due-on-sale" clauses, and are
freely assignable.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. If prevailing rates fall significantly
below the Loan Rates borne by the Loans, such Loans may be subject to higher
prepayment rates than if prevailing interest rates remain at or above such Loan
Rates. Conversely, if prevailing interest rates rise appreciably above the Loan
Rates borne by the Loans, such Loans may experience a lower prepayment rate than
if prevailing rates remain at or below such Loan Rates. However, there can be no
assurance that such will be the case.
When a full prepayment is made on a Loan, the borrower is charged
interest on the principal amount of the Loan so prepaid only for the number of
days in the month actually elapsed up to the date of the prepayment, rather than
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for a full month. Unless the Master Servicer remits amounts otherwise payable to
it as servicing compensation, see "Description of the Securities-Compensating
Interest", the effect of prepayments in full will be to reduce the amount of
interest passed through in the following month to holders of Securities because
interest on the principal amount of any Loan so prepaid will be paid only to the
date of prepayment. Partial prepayments in a given month may be applied to the
outstanding principal balances of the Loans so prepaid on the first day of the
month of receipt or the month following receipt. In the latter case, partial
prepayments will not reduce the amount of interest passed through in such month.
Unless otherwise specified in the related Prospectus Supplement, neither full
nor partial prepayments will be passed through until the month following
receipt.
Even assuming that the Properties provide adequate security for the
Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Loans and corresponding delays in the receipt of
related proceeds by Securityholders could occur. An action to foreclose on a
Property securing a Loan is regulated by state statutes and rules and is subject
to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a property. In the event of a default
by a borrower, these restrictions among other things, may impede the ability of
the Master Servicer to foreclose on or sell the Property or to obtain
liquidation proceeds sufficient to repay all amounts due on the related Loan. In
addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of certain
originators and servicers of Loans. In addition, most have other laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and practices which may apply to the origination,
servicing and collection of the Loans. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Master Servicer
to collect all or part of the principal of or interest on the Loans, may entitle
the borrower to a refund of amounts previously paid and, in addition, could
subject the Master Servicer to damages and administrative sanctions.
If the rate at which interest is passed through to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to Securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate and purchase price, because while interest will accrue on each Loan from
the first day of the month (unless otherwise specified in the related Prospectus
Supplement), the distribution of such interest will not be made earlier than the
month following the month of accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund thereby
effecting earlier retirement of the related Series of Securities. See "The
Agreements-Termination; Optional Termination".
Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Securities. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of the Trust Fund Assets
at any time or over the lives of the Securities.
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The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements. Except as otherwise specified, the Agreement
described herein contemplates a Trust Fund comprised of Loans. The provisions of
an Agreement with respect to a Trust Fund which consists of or includes Private
Asset Backed Securities may contain provisions similar to those described herein
but will be more fully described in the related Prospectus Supplement.
ASSIGNMENT OF THE TRUST FUND ASSETS
ASSIGNMENT OF THE LOANS. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund to
be assigned to the Trustee, together with all principal and interest received by
or on behalf of the Depositor on or with respect to such Loans after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest specified in the related Prospectus Supplement.
The Trustee will, concurrently with such assignment, deliver the Securities to
the Depositor in exchange for the Loans. Each Loan will be identified in a
schedule appearing as an exhibit to the related Agreement. Such schedule will
include information as to the outstanding principal balance of each Loan after
application of payments due on or before the Cut-off Date, as well as
information regarding the Loan Rate or APR, the current scheduled monthly
payment of principal and interest, the maturity of the Loan, the Combined
Loan-to-Value Ratios at origination and certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and, other
than in the case of unsecured Home Improvement Contracts, the security interest
in the Property securing such Home Improvement Contract. In order to give notice
of the right, title and interest of Securityholders to the Home Improvement
Contracts, the Depositor will cause a UCC-1 financing statement to be executed
by the Depositor or the Seller identifying the Trustee as the secured party and
identifying all Home Improvement Contracts as collateral. Unless otherwise
specified in the related Prospectus Supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the
Trustee. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of such assignment, the interest of Securityholders in
the Home Improvement Contracts could be defeated. See "Certain Legal Aspects of
the Loans-The Home Improvement Contracts" herein.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Home Equity Loan, among other
things, (i) the mortgage note or contract endorsed without recourse in blank or
to the order of the Trustee, (ii) the mortgage, deed of trust or similar
instrument (a "MORTGAGE") with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office, in which case
the Depositor will deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered to
such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form in the case of a Mortgage
assignment, and (iv) such other security documents, including those relating to
any senior interests in the Property, as may be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will promptly cause the assignments of the related
Loans to be recorded in the appropriate public office for real property records,
except in states in which, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in such Loans
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the originator of such Loans.
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The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the Securityholders. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective in any material respect, the Trustee (or such custodian) will notify
the Master Servicer and the Depositor, and the Master Servicer will notify the
related Seller. If the Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice (or such other period as
may be specified in the related Prospectus Supplement), the Seller will be
obligated either (i) to purchase the related Loan from the Trust at the Purchase
Price or (ii) to remove such Loan from the Trust Fund and substitute in its
place one or more other Loans. There can be no assurance that a Seller will
fulfill this purchase or substitution obligation. Although the Master Servicer
may be obligated to enforce such obligation to the extent described above under
"Loan Program-Representations by Sellers; Repurchases", neither the Master
Servicer nor the Depositor will be obligated to purchase or replace such Loan if
the Seller defaults on its obligation, unless such breach also constitutes a
breach of the representations or warranties of the Master Servicer or the
Depositor, as the case may be. Unless otherwise specified in the related
Prospectus Supplement, this purchase obligation constitutes the sole remedy
available to the Securityholders or the Trustee for omission of, or a material
defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Securityholders in a Loan, the Master Servicer will be obligated either to cure
the breach in all material respects or to purchase or replace the Loan at the
Purchase Price. Unless otherwise specified in the related Prospectus Supplement,
this obligation to cure, purchase or substitute constitutes the sole remedy
available to the Securityholders or the Trustee for such a breach of
representation by the Master Servicer.
ASSIGNMENT OF PRIVATE ASSET BACKED SECURITIES. The Depositor will cause
Private Asset Backed Securities to be registered in the name of the Trustee. The
Trustee (or the custodian) will have possession of any certificated Private
Asset Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Asset Backed Security. See "The Trust
Fund-Private Asset Backed Securities" herein. Each Private Asset Backed Security
will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date and certain other pertinent information for each Private
Asset Backed Security conveyed to the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund
for which a REMIC election is to be made, no purchase or substitution of a Loan
will be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
ASSIGNMENT OF MANUFACTURED HOME CONTRACTS
The Depositor will cause the Manufactured Home Contracts constituting
the Manufactured Home Contract Pool to be assigned to the Trustee, together with
principal and interest due on or with respect to the Manufactured Home Contracts
after the Cut-off Date, but not including principal and interest due on or
before the Cut-off Date. If the Depositor is unable to obtain a perfected
security interest in a Manufactured Home Contract prior to transfer and
assignment to the Trustee, the Seller will be obligated to repurchase such
Manufactured Home Contract. The Trustee, concurrently with such assignment, will
authenticate and deliver the Securities. Each Manufactured Home Contract will be
identified in a schedule appearing as an exhibit to the Agreement (the
"MANUFACTURED HOME CONTRACT SCHEDULE"). Unless otherwise specified in the
related Prospectus Supplement, the Manufactured Home Contract Schedule will
specify, with respect to each Manufactured Home Contract, among other things:
the original principal amount and the adjusted principal balance as of the close
of business on the Cut-off Date; the APR; the current scheduled monthly level
payment of principal and interest; and the maturity of the Manufactured Home
Contract.
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In addition, the Depositor, as to each Manufactured Home Contract, will
deliver or cause to be delivered to the Trustee, or, as specified in the related
Prospectus Supplement, the Custodian, the original Manufactured Home Contract
and copies of documents and instruments related to each Manufactured Home
Contract and the security interest in the Manufactured Home securing each
Manufactured Home Contract. In order to give notice of the right, title and
security interest of the Securityholders to the Manufactured Home Contracts, the
Depositor will cause a UCC-1 financing statement to be executed by the Depositor
identifying the Trustee as the secured party and identifying all Manufactured
Home Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Manufactured Home Contracts will not be stamped or
otherwise marked to reflect their assignment from the Depositor to the Trust
Fund. Therefore, if a subsequent purchaser were able to take physical possession
of the Manufactured Home Contracts without notice of such assignment, the
interest of the Securityholders in the Manufactured Home Contracts could be
defeated. See "Certain Legal Aspects of the Loans--Manufactured Home Contracts."
PAYMENTS ON LOANS; DEPOSITS TO SECURITY ACCOUNT
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing
Agreement (as defined below under "-Sub-Servicing of Loans") will establish and
maintain an account (the "SUB-SERVICING ACCOUNT") which meets the following
requirements and is otherwise acceptable to the Master Servicer. A Sub-Servicing
Account must be established with a Federal Home Loan Bank or with a depository
institution (including the Sub-Servicer itself) whose accounts are insured by
either the Bank Insurance Fund (the "BIF") of the FDIC or the Savings
Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation ("SAIF")) of the Federal Deposit Insurance Corporation
(the "FDIC"). If a Sub-Servicing Account is maintained at an institution that is
a Federal Home Loan Bank or an FDIC-insured institution and, in either case, the
amount on deposit in the Sub-Servicing Account exceeds the FDIC insurance
coverage amount, then such excess amount must be remitted to the Master Servicer
within one business day of receipt. In addition, the Sub-Servicer must maintain
a separate account for escrow and impound funds relating to the Loans. Each
Sub-Servicer is required to deposit into its Sub-Servicing Account on a daily
basis all amounts described below under "-Sub-Servicing of Loans" that are
received by it in respect of the Loans, less its servicing or other
compensation. On or before the date specified in the Sub-Servicing Agreement,
the Sub-Servicer will remit or cause to be remitted to the Master Servicer or
the Trustee all funds held in the Sub-Servicing Account with respect to Loans
that are required to be so remitted. The Sub-Servicer may also be required to
advance on the scheduled date of remittance an amount corresponding to any
monthly installment of interest and/or principal, less its servicing or other
compensation, on any Loan for which payment was not received from the mortgagor.
Unless otherwise specified in the related Prospectus Supplement, any such
obligation of the Sub-Servicer to advance will continue up to and including the
first of the month following the date on which the related Property is sold at a
foreclosure sale or is acquired on behalf of the Securityholders by deed in lieu
of foreclosure, or until the related Loan is liquidated.
The Master Servicer will establish and maintain or cause to be
established and maintained with respect to the related Trust Fund a separate
account or accounts for the collection of payments on the related Trust Fund
Assets in the Trust Fund (the "SECURITY ACCOUNT") must be either (i) maintained
with a depository institution the debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the obligations of which) are rated in one of the two highest rating categories
by the Rating Agency or Rating Agencies that rated one or more classes of the
related Series of Securities, (ii) an account or accounts the deposits in which
are fully insured by either the BIF or SAIF, (iii) an account or accounts the
deposits in which are insured by the BIF or SAIF (to the limits established by
the FDIC), and the uninsured deposits in which are otherwise secured such that,
as evidenced by an opinion of counsel, the Securityholders have a claim with
respect to the funds in the Security Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained, or (iv) an account or
accounts otherwise acceptable to each Rating Agency. The collateral eligible to
secure amounts in the Security Account is limited to United States government
securities and other high-quality investments ("PERMITTED INVESTMENTS"). A
Security Account may be maintained as an interest bearing account or the funds
held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive any
such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security Account
the amount of any loss immediately as realized. The Security Account may be
maintained with the Master Servicer or with a depository institution that is an
affiliate of the Master Servicer, provided it meets the standards set forth
above.
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The Master Servicer will deposit or cause to be deposited in the
Security Account for each Trust Fund on a daily basis, to the extent applicable
and provided in the Agreement, the following payments and collections received
or advances made by or on behalf of it subsequent to the Cut-off Date (other
than payments due on or before the Cut-off Date and exclusive of any amounts
representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and any applicable prepayment penalties, on the
Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property
taxes, insurance premiums and similar items ("Insured
Expenses") incurred, and unreimbursed advances made, by the
related Sub-Servicer, if any) of the hazard insurance policies
and any Primary Mortgage Insurance Policies, to the extent
such proceeds are not applied to the restoration of the
property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures (collectively,
"Insurance Proceeds") and all other cash amounts (net of
unreimbursed expenses incurred in connection with liquidation
or foreclosure ("Liquidation Expenses") and unreimbursed
advances made, by the related Sub-Servicer, if any) received
and retained in connection with the liquidation of defaulted
Loans, by foreclosure or otherwise ("Liquidation Proceeds"),
together with any net proceeds received on a monthly basis
with respect to any properties acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any
Sub-Servicer or any Seller as described under "Loan
Program-Representations by Sellers; Repurchases or
Substitutions" herein or "-Assignment of Trust Fund Assets"
above and all proceeds of any Loan repurchased as described
under "-Termination; Optional Termination" below;
(v) all payments required to be deposited in the Security
Account with respect to any deductible clause in any blanket
insurance policy described under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master
Servicer in connection with losses realized on investments for
the benefit of the Master Servicer of funds held in the
Security Account; and
(vii) all other amounts required to be deposited in the
Security Account pursuant to the Agreement.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master
Servicer will establish and maintain a pre-funding account (a "PRE-FUNDING
ACCOUNT"), in the name of the related Trustee on behalf of the related
Securityholders, into which the Depositor will deposit the pre-funded amount
(the "PRE-FUNDED AMOUNT") on the related Closing Date. The Pre-Funded Amount
will not exceed 25% of the initial aggregate principal amount of the
Certificates and Notes of the related Series. The Pre-Funded Amount will be used
by the related Trustee to purchase Subsequent Loans from the Depositor from time
to time during the Funding Period. The Funding Period, if any, for a Trust Fund
will begin on the related Closing Date and will end on the date specified in the
related Prospectus Supplement, which in no event will be later than the date
that is three months after the Closing Date. Any amounts remaining in the
Pre-Funding Account at the end of the Funding Period will be distributed to the
related Securityholders in the manner and priority specified in the related
Prospectus Supplement, as a prepayment of principal of the related Securities.
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SUB-SERVICING OF LOANS
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for such Loan pursuant to an agreement (each, a "SUB-SERVICING
AGREEMENT"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Agreement pursuant to which a
Series of Securities is issued will provide that, if for any reason the Master
Servicer for such Series of Securities is no longer the Master Servicer of the
related Loans, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but such Sub-Servicer will
remain obligated under the related Sub-Servicing Agreement. Each Sub-Servicer
will be required to perform the customary functions of a servicer of mortgage
loans. Such functions generally include collecting payments from mortgagors or
obligors and remitting such collections to the Master Servicer; maintaining
hazard insurance policies as described herein and in any related Prospectus
Supplement, and filing and settling claims thereunder, subject in certain cases
to the right of the Master Servicer to approve in advance any such settlement;
maintaining escrow or impoundment accounts of mortgagors or obligors for payment
of taxes, insurance and other items required to be paid by the mortgagor or
obligor pursuant to the related Loan; processing assumptions or substitutions,
although, the Master Servicer is generally required to exercise due-on-sale
clauses to the extent such exercise is permitted by law and would not adversely
affect insurance coverage; attempting to cure delinquencies; supervising
foreclosures; inspecting and managing Properties under certain circumstances;
maintaining accounting records relating to the Loans; and, to the extent
specified in the related Prospectus Supplement, maintaining additional insurance
policies or credit support instruments and filing and settling claims
thereunder. A Sub-Servicer will also be obligated to make advances in respect of
delinquent installments of interest and/or principal on Loans, as described more
fully above under "-Payments on Loans; Deposits to Security Account", and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the Mortgage Note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Loans if the
Sub-Servicer elects to release the servicing of such Loans to the Master
Servicer. See "-Servicing and Other Compensation and Payment of Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is earlier terminated by the Master Servicer or
unless servicing is released to the Master Servicer. The Master Servicer may
terminate a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer in the manner specified in such Sub-Servicing Agreement.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Loans or enter into new
Sub-Servicing Agreements with other Sub-Servicers. If the Master Servicer acts
as servicer, it will not assume liability for the representations and warranties
of the Sub-Servicer which it replaces. Each Sub-Servicer must be a Seller or
meet the standards for becoming a Seller or have such servicing experience as to
be otherwise satisfactory to the Master Servicer and the Depositor. The Master
Servicer will make reasonable efforts to have the new Sub-Servicer assume
liability for the representations and warranties of the terminated Sub-Servicer,
but no assurance can be given that such an assumption will occur. In the event
of such an assumption, the Master Servicer may in the exercise of its business
judgment release the terminated Sub-Servicer from liability in respect of such
representations and warranties. Any
42
amendments to a Sub-Servicing Agreement or new Sub-Servicing Agreements may
contain provisions different from those which are in effect in the original
Sub-Servicing Agreement. However, each Agreement will provide that any such
amendment or new agreement may not be inconsistent with or violate such
Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the Loans
and will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and Bankruptcy Bond
or alternative arrangements, follow such collection procedures as are customary
with respect to loans that are comparable to the Loans.
Consistent with the above, the Master Servicer may, in its discretion, (i) waive
any assumption fee, late payment or other charge in connection with a Loan and
(ii) to the extent not inconsistent with the coverage of such Loan by a Pool
Insurance Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty
or Bankruptcy Bond or alternative arrangements, if applicable, arrange with a
borrower a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment. Both the
Sub-Servicer and the Master Servicer may be obligated to make Advances during
any period of such an arrangement.
Except as otherwise specified in the related Prospectus Supplement, in
any case in which property securing a Loan has been, or is about to be, conveyed
by the mortgagor or obligor, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law. If these conditions are not met or if the Master
Servicer reasonably believes it is unable under applicable law to enforce such
due-on-sale clause, or the Master Servicer will enter into or cause to be
entered into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Loan and, to the extent permitted by
applicable law, the mortgagor remains liable thereon. Any fee collected by or on
behalf of the Master Servicer for entering into an assumption agreement will be
retained by or on behalf of the Master Servicer as additional servicing
compensation. See "Certain Legal Aspects of the Loans-Due-on-Sale Clauses". In
connection with any such assumption, the terms of the related Loan may not be
changed.
HAZARD INSURANCE
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to maintain a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary for the type of
Property in the state in which such Property is located. All amounts collected
by the Master Servicer under any hazard policy (except for amounts to be applied
to the restoration or repair of the Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Security Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Loans comprising part of a Trust Fund, it will conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance.
Such blanket policy may contain a deductible clause, in which case the Master
Servicer will be required to deposit from its own funds into the related
Security Account the amounts which would have been deposited therein but for
such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements securing a Loan by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all inclusive. If
the Property securing a Loan is located in a federally designated special flood
area at the time of origination, the Master Servicer will require the mortgagor
or obligor to obtain and maintain flood insurance.
43
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of the full replacement value of the
insured property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, then the insurer's
liability in the event of partial loss will not exceed the larger of (i) the
actual cash value (generally defined as replacement cost at the time and place
of loss, less physical depreciation) of the improvements damaged or destroyed or
(ii) such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements. Since
the amount of hazard insurance the Master Servicer may cause to be maintained on
the improvements securing the Loans declines as the principal balances owing
thereon decrease, and since improved real estate generally has appreciated in
value over time in the past, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. If specified in the related Prospectus
Supplement, a special hazard insurance policy will be obtained to insure against
certain of the uninsured risks described above. See "Credit Enhancement-Special
Hazard Insurance Policies".
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property, the Master Servicer is not required to expend its own funds to
restore the damaged Property unless it determines (i) that such restoration will
increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is
not available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the defaulted
Loan are less than the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Trust Fund will realize a loss
in the amount of such difference plus the aggregate of expenses incurred by the
Master Servicer in connection with such proceedings and which are reimbursable
under the Agreement. In the unlikely event that any such proceedings result in a
total recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Master Servicer will be entitled
to withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added to
any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the Master
Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such
Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds in an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the Master Servicer,
no such payment or recovery will result in a recovery to the Trust Fund which
exceeds the principal balance of the defaulted Loan together with accrued
interest thereon. See "Credit Enhancement".
REALIZATION UPON DEFAULTED LOANS
PRIMARY MORTGAGE INSURANCE POLICIES. The Master Servicer will maintain
or cause each Sub-Servicer to maintain, as the case may be, in full force and
effect, to the extent specified in the related Prospectus Supplement, a Primary
Mortgage Insurance Policy with regard to each Loan for which such coverage is
required. The Master Servicer will not cancel or refuse to renew any such
Primary Mortgage Insurance Policy in effect at the time of the initial issuance
of a Series of Securities that is required to be kept in force under the
applicable Agreement unless the replacement Primary Mortgage Insurance Policy
for such cancelled or nonrenewed policy is maintained with an insurer whose
44
claims-paying ability is sufficient to maintain the current rating of the
classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Loan will consist of the insured percentage of the unpaid principal
amount of the covered Loan and accrued and unpaid interest thereon and
reimbursement of certain expenses, less (i) all rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Property, (ii)
hazard insurance proceeds in excess of the amount required to restore the
Property and which have not been applied to the payment of the Loan, (iii)
amounts expended but not approved by the issuer of the related Primary Mortgage
Insurance Policy (the "PRIMARY INSURER"), (iv) claim payments previously made by
the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. Primary Mortgage Insurance
Policies will not insure against, and exclude from coverage, a loss sustained by
reason of a default arising from or involving certain matters, including (i)
fraud or negligence in origination or servicing of the Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Loans; (ii) failure to construct the Property subject to the
Loan in accordance with specified plans; (iii) physical damage to the Property;
and (iv) the related Master Servicer or Sub-servicer not being approved as a
servicer by the Primary Insurer.
RECOVERIES UNDER A PRIMARY MORTGAGE INSURANCE POLICY. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Loan, the insured will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Property in at least as good a
condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted, (3) Property sales expenses, (4) any
outstanding liens (as defined in such Primary Mortgage Insurance Policy) on the
Property and (5) foreclosure costs, including court costs and reasonable
attorneys' fees; (ii) in the event of any physical loss or damage to the
Property, to have the Property restored and repaired to at least as good a
condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted; and (iii) tender to the Primary Insurer
good and merchantable title to and possession of the Property.
In those cases in which a Loan is serviced by a Sub-Servicer, the
Sub-Servicer, on behalf of itself, the Trustee and Securityholders, will present
claims to the Primary Insurer, and all collection thereunder will be deposited
in the Sub-Servicing Account. In all other cases, the Master Servicer, on behalf
of itself, the Trustee and the Securityholders, will present claims to the
insurer under each Primary Mortgage Insurance Policy, and will take such
reasonable steps as are necessary to receive payment or to permit recovery
thereunder with respect to defaulted Loans. As set forth above, all collections
by or on behalf of the Master Servicer under any Primary Mortgage Insurance
Policy and, when the Property has not been restored, the hazard insurance
policy, are to be deposited in the Security Account, subject to withdrawal as
heretofore described.
If the Property securing a defaulted Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged Property to a condition sufficient to permit recovery under the related
Primary Mortgage Insurance Policy, if any, the Master Servicer is not required
to expend its own funds to restore the damaged Property unless it determines (i)
that such restoration will increase the proceeds to Securityholders on
liquidation of the Loan after reimbursement of the Master Servicer for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Loan is not covered by a Primary Mortgage
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Loan. If the proceeds of any liquidation of the
Property securing the defaulted Loan are less than the principal balance of such
Loan plus interest accrued thereon that is payable to Securityholders, the Trust
Fund will realize a loss in the amount of such difference plus the aggregate of
expenses incurred by the Master Servicer in connection with such proceedings and
which are reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to the
Master
45
Servicer of its expenses, in excess of the principal balance of such Loan plus
interest accrued thereon that is payable to Securityholders, the Master Servicer
will be entitled to withdraw or retain from the Security Account amounts
representing its normal servicing compensation with respect to such Loan and,
except as otherwise specified in the Prospectus Supplement, amounts representing
the balance of such excess, exclusive of any amount required by law to be
forwarded to the related borrower, as additional servicing compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer's primary servicing compensation with respect to a Series of
Securities will come from the monthly payment to it, out of each interest
payment on a Loan, of an amount equal to the percentage per annum specified in
the related Prospectus Supplement of the outstanding principal balance thereof.
Since the Master Servicer's primary compensation is a percentage of the
outstanding principal balance of each Loan, such amounts will decrease as the
Loans amortize. In addition to primary compensation, the Master Servicer or the
Sub-Servicers may be entitled to retain all assumption fees and late payment
charges, to the extent collected from borrowers, and, if so provided in the
related Prospectus Supplement, any prepayment penalties and any interest or
other income which may be earned on funds held in the Security Account or any
Sub-Servicing Account. Unless otherwise specified in the related Prospectus
Supplement, any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, the Master Servicer
will, unless otherwise specified in the related Prospectus Supplement, pay from
its servicing compensation certain expenses incurred in connection with its
servicing of the Loans, including, without limitation, payment of any premium
for any insurance policy, guaranty, surety or other form of credit enhancement
as specified in the related Prospectus Supplement, payment of the fees and
disbursements of the Trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to Securityholders, and
payment of any other expenses described in the related Prospectus Supplement.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans or private
asset backed securities, or under pooling and servicing agreements substantially
similar to each other (including the related Agreement) was conducted in
compliance with such agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Audit Program for Mortgages
serviced for FHLMC, or the Uniform Single Audit Program for Mortgage Bankers, it
is required to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of Loans or Private Asset Backed
Securities by Sub-Servicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered
within one year of such statement) of firms of independent public accountants
with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of the Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
46
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign
from its obligations and duties under the Agreement except upon a determination
that its duties thereunder are no longer permissible under applicable law. The
Master Servicer may, however, be removed from its obligations and duties as set
forth in the Agreement. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
the Depositor nor any director, officer, employee, or agent of the Master
Servicer or the Depositor will be under any liability to the related Trust Fund
or Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of wilful misfeasance or gross negligence in the performance of duties
thereunder or by reasons of reckless disregard of obligations and duties
thereunder. To the extent provided in the related Agreement, the Master
Servicer, the Depositor and any director, officer, employee or agent of the
Master Servicer or the Depositor may be entitled to indemnification by the
related Trust Fund and may be held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Agreement
or the Securities, other than any loss, liability or expense related to any
specific Loan or Loans (except any such loss, liability or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, each Agreement will provide that neither the
Master Servicer nor the Depositor will be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. The Master Servicer or the Depositor may, however, in
its discretion undertake any such action which it may deem necessary or
desirable with respect to the Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders thereunder. In such event, the
legal expenses and costs of such action and any liability resulting therefrom
will be expenses, costs and liabilities of the Trust Fund and the Master
Servicer or the Depositor, as the case may be, will be entitled to be reimbursed
therefor out of funds otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master Servicer
is a party, or any person succeeding to the business of the Master Servicer,
will be the successor of the Master Servicer under each Agreement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
business days after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Securities of such class evidencing
not less than 25% of the aggregate Percentage Interests evidenced by such class;
(ii) any failure by the Master Servicer to make an Advance as required under the
Agreement, unless cured as specified therein; (iii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or agreements in the Agreement which continues unremedied for thirty
days after the giving of written notice of such failure to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class; and (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Master Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
47
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will be
sold only under the circumstances and in the manner specified in the related
Prospectus Supplement.
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of Securities
of any class evidencing not less than 51% of the aggregate Percentage Interests
constituting such class and under such other circumstances as may be specified
in such Agreement, the Trustee shall, terminate all of its rights and
obligations of the Master Servicer under the Agreement relating to such Trust
Fund and in and to the Trust Fund Assets, whereupon the Trustee will succeed to
all of the responsibilities, duties and liabilities of the Master Servicer under
the Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution with a net worth of a least
$10,000,000 to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
Master Servicer under the Agreement.
No Securityholder, solely by virtue of such holder's status as a
Securityholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for five (5) days or more in the payment of any principal
of or interest on any Note of such Series; (ii) failure to perform any other
covenant of the Depositor or the Trust Fund in the Indenture which continues for
a period of thirty (30) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Depositor or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within thirty (30) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series have a
Pass-Through Rate of 0%, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related Prospectus
Supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the holders of more than 50% of the Percentage Interests of the Notes of such
Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, unless (a) the holders of 100% of the
Percentage Interests of the Notes of such Series consent to such sale, (b) the
proceeds of such sale or liquidation are sufficient to pay in full the principal
of and accrued interest, due and unpaid, on the outstanding Notes of such Series
at the date of such sale or (c) the Trustee determines that such collateral
would not be sufficient on an ongoing basis to make all payments on such Notes
as such payments would have become due if such Notes had not been declared due
and payable, and the Trustee obtains the consent of the holders of 66% of the
Percentage Interests of each Class of Notes of such Series.
48
Except as otherwise specified in the related Prospectus Supplement, in
the event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee shall be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes of such Series, unless such holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement,
each Agreement may be amended by the Depositor, the Master Servicer and the
Trustee, without the consent of any of the Securityholders, (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein; or (iii) to make any
other revisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
Securityholder. In addition, to the extent provided in the related Agreement, an
Agreement may be amended without the consent of any of the Securityholders, to
change the manner in which the Security Account is maintained, provided that any
such change does not adversely affect the then current rating on the class or
classes of Securities of such Series that have been rated. In addition, if a
REMIC election is made with respect to a Trust Fund, the related Agreement may
be amended to modify, eliminate or add to any of its provisions to such extent
as may be necessary to maintain the qualification of the related Trust Fund as a
REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such qualification.
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may also be amended by the Depositor, the Master Servicer and the
Trustee with consent of holders of Securities of such Series evidencing not less
than 66% of the aggregate Percentage Interests of each class affected thereby
for the purpose of adding any provisions to or changing in an manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the holders of the related Securities; provided, however, that no
such amendment may (i) reduce in any manner the amount of or delay the timing
of, payments received on Loans which are required to be distributed on any
Security without the consent of the holder of such Security, or (ii) reduce the
aforesaid percentage of Securities of any class of holders which are required to
consent to any such amendment without the consent of the holders of all
Securities of such class covered by such Agreement then outstanding. If a REMIC
election is made with respect to a Trust Fund, the Trustee will not be entitled
to consent to an amendment to the related Agreement without having first
received an opinion of counsel to the effect that such amendment will not cause
such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held in
the Security Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Prospectus Supplement, by the holder of the residual interest in the REMIC (see
"Certain Material Federal Income Tax Considerations" below), from the related
Trust Fund of all of the remaining Trust Fund Assets and all property acquired
in respect of such Trust Fund Assets.
49
Unless otherwise specified by the related Prospectus Supplement, any
such purchase of Trust Fund Assets and property acquired in respect of Trust
Fund Assets evidenced by a Series of Securities will be made at the option of
the Master Servicer or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement of
the aggregate principal balance of the Trust Fund Assets at the Cut-off Date for
the Series. The foregoing is subject to the provision that if a REMIC election
is made with respect to a Trust Fund, any repurchase pursuant to clause (ii)
above will be made only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(g)(4) of the Code.
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the last scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Depositor, the Master Servicer
and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal laws and the appropriate laws of
the states in which Loans may be originated.
GENERAL
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. If specified
in the Prospectus Supplement relating to a series of Securities, a Trust Fund
may also contain (i) Manufactured Home Contracts evidencing both (a) the
obligation of the obligor to repay the loan evidenced thereby and (b) the grant
of a security interest in the related Manufactured Home to secure repayment of
such loan. A mortgage creates a lien upon the real property encumbered by the
mortgage, which lien is generally not prior to the lien for real estate taxes
and assessments. Priority between mortgages depends on their terms and generally
on the order of recording with a state or county office. There are two parties
to a mortgage, the mortgagor, who is the borrower and owner of the mortgaged
property, and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee
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a note or bond and the mortgage. Although a deed of trust is similar to a
mortgage, a deed of trust formally has three parties, the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or deed to secure debt, the
grantor conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid. The
trustee's authority under a deed of trust, the mortgagee's authority under a
mortgage and the grantee's authority under a security deed or deed to secure
debt are governed by law and, with respect to some deeds of trust, the
directions of the beneficiary.
FORECLOSURE/REPOSSESSION
Foreclosure of a deed of trust is generally accomplished by a
non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In addition to any
notice requirements contained in a deed of trust, in some states, the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In
general, the borrower, or any other person having a junior encumbrance on the
real estate, may, during a statutorily prescribed reinstatement period, cure a
monetary default by paying the entire amount in arrears plus other designated
costs and expenses incurred in enforcing the obligation. Generally, state law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. After the reinstatement period has
expired without the default having been cured, the borrower or junior lienholder
no longer has the right to reinstate the loan and must pay the loan in full to
prevent the scheduled foreclosure sale. If the deed of trust is not reinstated,
a notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties.
Judicial foreclosure proceedings are often not contested by any of the parties.
When the mortgagee's right to foreclosure is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of a
judicial foreclosure proceeding, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property. In some states, mortgages may also be foreclosed by advertisement,
pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making such repairs at its own expense
as are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice
51
require that borrowers under deeds of trust receive notice longer than that
prescribed by statute. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust does not involve sufficient state action to afford constitutional
protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "-Junior Mortgages; Rights of Senior Mortgagees" below.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks,
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at
off-site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property. Under CERCLA, such
a lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner" or "operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator.
CERCLA imposes liability for such costs on any and all "responsible parties,"
including owners or operators. However, CERCLA excludes from the definition of
"owner or operator" a secured creditor who holds indicia of ownership primarily
to protect its security interest but does not "participate in the management" of
the property (the "secured creditor exclusion"). Thus, if a lender's activities
begin to encroach on the actual management of a contaminated facility or
property, the lender may incur liability as an "owner or operator" under CERCLA.
Similarly, if a lender forecloses and takes title to a contaminated facility or
property, the lender may incur CERCLA liability in various circumstances,
including, but not limited to, when it holds the facility or property as an
investment (including leasing the facility or property to a third party), or
fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute such participation
in the management of a property, so that the lender would lose the protection of
the secured creditor exclusion, has been a matter of judicial interpretation of
the statutory language, and court decisions have historically been inconsistent.
In 1990, the United States Court of Appeals for the Eleventh Circuit suggested,
in United States v. Fleet Factors Corp., that the mere capacity of the lender to
influence a borrower's decisions regarding disposal of hazardous substances was
sufficient participation in the management of the borrower's business to deny
the protection of the secured creditor exclusion to the lender, regardless of
whether the lender actually exercised such influence. Other judicial decisions
did not interpret the secured creditor exclusion as narrowly as did the Eleventh
Circuit.
This ambiguity appears to have been resolved by the enactment of the
Asset Conservation, Lender Liabiltiy and Deposit Insurance Protection Act of
1996 (the "ASSET CONSERVATION ACT"), which took effect on September 30, 1996.
The Asset Conservation Act provides that in order to be deemed to have
participated in the management of a
52
secured property, a lender must actually participate in the operational affairs
of the property or of the borrower. The Asset Conservation Act also provides
that participation in the management of the property does not include "merely
having the capacity to influence, or unexercised right to control" operations.
Rather, a lender will lose the protection of the secured creditor exclusion only
if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the secured property.
If a lender is or becomes liable, it can bring an action for
contribution against any other "responsible parties," including a previous owner
or operator, who crated the environmental hazard, but those persons or entities
may be bankrupt or otherwise judgment proof. The costs associated with
environmental cleanup may be substantial. It is conceivable that such costs
arising from the circumstances set forth above would result in a loss to
Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. Moreover, under the Asset Conservation Act, the protections accorded
to lenders under CERCLA are also accorded to holders of security interests in
underground petroleum storage tanks. It should be noted, however, that liability
for cleanup of petroleum contamination may be governed by state law, which may
not provide for any specific protection for secured creditors.
The Asset Conservation Act specifically addresses the potential
liability of lenders who hold mortgages or similar conventional security
interests in real property, such as the Trust Fund does in connection with the
Home Equity Loans and the Home Improvement Contracts. The Asset Conservation
Act, however, does not clearly address the potential liability of lenders who
retain legal title to a property and enter into an agreement with the purchaser
for the payment of the purchase price and interest over the term of the
contract, such as the Trust Fund does in connection with the Installment
Contracts.
If a lender (including a lender under an Installment Contract) is or
becomes liable under CERCLA, it may be authorized to bring a statutory action
for contribution against any other "responsible parties", including a previous
owner or operator. However, such persons or entities may be bankrupt or
otherwise judgment proof, and the costs associated with environmental cleanup
and related actions may be substantial. Moreover, some state laws imposing
liability for addressing hazardous substances do not contain exemptions from
liability for lenders. Whether the costs of addressing a release or threatened
release at a property pledged as collateral for one of the Loans (or at a
property subject to an Installment Contract), would be imposed on the Trust
Fund, and thus occasion a loss to the Securityholders, therefore depends on the
specific factual and legal circumstances at issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due.
The effect of a statutory right of redemption would defeat the title of any
purchaser from the lender subsequent to foreclosure or sale under a deed of
trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem property
after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in
53
most cases to the difference between the amount due to the lender and the fair
market value of the real property sold at the foreclosure sale. Other statutes
require the beneficiary or mortgagee to exhaust the security afforded under a
deed of trust or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower. In certain other states,
the lender has the option of bringing a personal action against the borrower on
the debt without first exhausting such security; however, in some of these
states, the lender, following judgment on such personal action, may be deemed to
have elected a remedy and may be precluded from exercising remedies with respect
to the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions 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 public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Relief Act (as defined
below) and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on the Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Property is not
the debtor's principal residence and the court determines that the value of the
Property is less than the principal balance of the mortgage loan, for the
reduction of the secured indebtedness to the value of the Property as of the
date of the commencement of the bankruptcy, rendering the lender a general
unsecured creditor for the difference, and also may reduce the monthly payments
due under such mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Loans underlying a Series of Securities
and possible reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the
lien of a mortgage or secured party. Numerous federal and state consumer
protection laws impose substantive requirements upon mortgage lenders in
connection with the origination, servicing and enforcement of loans secured by
Single Family Properties. These 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 and state laws impose specific statutory liabilities upon lenders
who fail to comply with the provisions of the law. In some cases, this liability
may affect assignees of the loans or contracts.
Certain Loans may be subject to the Riegle Community Development and
Regulatory Improvement Act of 1994, known as the Riegle Act, which incorporates
the Home Ownership and Equity Protection Act of 1994. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with high interest rates or high up-front fees
and charges. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. These provisions can
impose specific statutory liabilities upon creditors who fail to comply with
these provisions and may affect the enforceability of the related loans. In
addition, any assignee of the creditor would generally be subject to all claims
and defenses that the consumer could assert against the creditor, including the
right to rescind the mortgage loan.
DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will provide that if
the mortgagor or obligor sells, transfers or conveys the Property, the loan or
contract may be accelerated by the mortgagee or secured party. The Garn-St.
Germain Depository Institutions Act of 1982 (the "GARN-ST. GERMAIN ACT"),
subject to certain exceptions, preempts state constitutional, statutory and case
law prohibiting the enforcement of due-on-sale clauses. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of such
clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St. Germain Act which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other than
national banks, federal savings institutions and federal credit unions. FHLMC
has taken the position in its published mortgage servicing standards that, out
of a total of eleven "window period states," five states (Arizona, Michigan,
54
Minnesota, New Mexico and Utah) have enacted statutes extending, on various
terms and for varying periods, the prohibition on enforcement of due-on-sale
clauses with respect to certain categories of window period loans. Also, the
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St.
Germain Act sets forth nine specific instances in which a mortgagee covered by
the Act may not exercise its rights under a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. The inability to
enforce a due-on-sale clause may result in transfer of the related Property to
an uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from such bankruptcy
proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in some cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1993 deadline. In addition, even
where Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
55
THE HOME IMPROVEMENT CONTRACTS
GENERAL. The Home Improvement Contracts, other than those Home
Improvement Contracts that are unsecured or secured by mortgages on real estate
(such Home Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the Uniform Commercial Code (the "UCC").
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the related Agreement,
the Depositor will transfer physical possession of the contracts to the Trustee
or a designated custodian or may retain possession of the contracts as custodian
for the Trustee. In addition, the Depositor will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the contracts. Unless otherwise specified in the related
Prospectus Supplement, the contracts will not be stamped or otherwise marked to
reflect their assignment from the Depositor to the Trustee. Therefore, if
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of such assignment, the
Trustee's interest in the contracts could be defeated.
SECURITY INTERESTS IN HOME IMPROVEMENTS. The contracts that are secured
by the Home Improvements financed thereby grant to the originator of such
contracts a purchase money security interest in such Home Improvements to secure
all or part of the purchase price of such Home Improvements and related
services. A financing statement generally is not required to be filed to perfect
a purchase money security interest in consumer goods. Such purchase money
security interests are assignable. In general, a purchase money security
interest grants to the holder a security interest that has priority over a
conflicting security interest in the same collateral and the proceeds of such
collateral. However, to the extent that the collateral subject to a purchase
money security interest becomes a fixture, in order for the related purchase
money security interest to take priority over a conflicting interest in the
fixture, the holder's interest in such Home Improvement must generally be
perfected by a timely fixture filing. In general, a security interest does not
exist under the UCC in ordinary building material incorporated into an
improvement on land. Home Improvement Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
such characterization upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the Home
Improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS. So long as the
Home Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments, and in many cases
the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
CONSUMER PROTECTION LAWS. The so-called "Holder-in-Due Course" rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract which is the seller of goods which gave rise to
the transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose
56
requirements applicable to the origination and lending pursuant to the
contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Fair Credit Billing Act, the Fair Credit Reporting Act, the Equal Credit
Opportunity Act, the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related contract.
APPLICABILITY OF USURY LAWS. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any contract
which is secured by a first lien on certain kinds of consumer goods. The
contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts. Under an
installment contract ("INSTALLMENT CONTRACT") the seller (hereinafter referred
to in this section as the "lender") retains legal title to the property and
enters into an agreement with the purchaser hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the contract is the lender obligated to convey title to the property to the
purchaser. As with mortgage or deed of trust financing, during the effective
period of the Installment Contract, the borrower is generally responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
MANUFACTURED HOME CONTRACTS
GENERAL. Under the laws of most states, manufactured housing
constitutes personal property and is subject to the motor vehicle registration
laws of the state or other jurisdiction in which the unit is located. In a few
states, where certificates of title are not required for manufactured homes,
security interests are perfected by the filing of a financing statement under
Article 9 of the UCC which has been adopted by all states. Such financing
statements are effective for five years and must be renewed at the end of each
five years. The certificate of title laws adopted by the majority of states
provide that ownership of motor vehicles and manufactured housing shall be
evidenced by a certificate of title
57
issued by the motor vehicles department (or a similar entity) of such state. In
the states that have enacted certificate of title laws, a security interest in a
unit of manufactured housing, so long as it is not attached to land in so
permanent a fashion as to become a fixture, is generally perfected by the
recording of such interest on the certificate of title to the unit in the
appropriate motor vehicle registration office or by delivery of the required
documents and payment of a fee to such office, depending on state law.
SECURITY INTEREST IN MANUFACTURED HOMES. The Master Servicer will be
required under the related Agreement to effect such notation or delivery of the
required documents and fees, and to obtain possession of the certificate of
title, as appropriate under the laws of the state in which any Manufactured Home
is registered. In the event the Master Servicer fails, due to clerical errors or
otherwise, to effect such notation or delivery, or files the security interest
under the wrong law (for example, under a motor vehicle title statute rather
than under the UCC, in a few states), the Trustee may not have a first priority
security interest in the Manufactured Home securing a Manufactured Home
Contract. As manufactured homes have become larger and often have been attached
to their sites without any apparent intention by the borrowers to move them,
courts in many states have held that manufactured homes may, under certain
circumstances, become subject to real estate title and recording laws. As a
result, a security interest in a manufactured home could be rendered subordinate
to the interests of other parties claiming an interest in the home under
applicable state real estate law. In order to perfect a security interest in a
manufactured home under real estate laws, the holder of the security interest
must file either a "fixture filing" under the provisions of the UCC or a real
estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located. Generally, Manufactured Home Contracts will
contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home that is prior to
the security interest originally retained by the seller and transferred to the
Depositor.
The Depositor will assign or cause to be assigned a security interest
in the Manufactured Homes to the Trustee, on behalf of the Securityholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Depositor, the Master Servicer nor the Trustee will amend the certificates of
title to identify the Trustee, on behalf of the Securityholders, as the new
secured party and, accordingly, the Depositor or the Seller will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Depositor's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Depositor or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Depositor
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee, on
behalf of the Securityholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and re- register
the Manufactured Home in such state, and if the Depositor did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Depositor must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
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registered in states that provide for notation of lien, the Depositor would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Depositor would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Agreement, the Master Servicer will be obligated to
take such steps, at the Master Servicer's expense, as are necessary to maintain
perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will obtain the representation of the Seller that it has no knowledge
of any such liens with respect to any Manufactured Home securing a Manufactured
Home Contract. However, such liens could arise at any time during the term of a
Manufactured Home Contract. No notice will be given to the Trustee or
Securityholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTEREST IN MANUFACTURED HOMES. Repossession of
manufactured housing is governed by state law. A few states have enacted
legislation that requires that the debtor be given an opportunity to cure its
default (typically 30 days to bring the account current) before repossession can
commence. So long as a manufactured home has not become so attached to real
estate that it would be treated as a part of the real estate under the law of
the state where it is located, repossession of such home in the event of a
default by the obligor will generally be governed by the UCC (except in
Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must
receive notice of the right to cure a default, repossession can
commence immediately upon default without prior notice. Repossession
may be effected either through self-help (peaceable retaking without
court order), voluntary repossession or through judicial process
(repossession pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession methods are more commonly employed, and
are accomplished simply by retaking possession of the manufactured
home. In cases in which the debtor objects or raises a defense to
repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured
home to a secure location for refurbishment and resale or by removing
the occupants and their belongings from the manufactured home and
maintaining possession of the manufactured home on the location where
the occupants were residing. Various factors may affect whether the
manufactured home is physically removed or left on location, such as
the nature and term of the lease of the site on which it is located and
the condition of the unit. In many cases, leaving the manufactured home
on location is preferable, in the event that the home is already set
up, because the expenses of retaking and redelivery will be saved.
However, in those cases where the home is left on location, expenses
for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation
for the subsequent disposition of the manufactured home can commence.
The disposition may be by public or private sale provided the method,
manner, time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to
repossession expenses (expenses incurred in retaking, storage,
preparing for sale to include refurbishing costs and selling) and then
to satisfaction of the indebtedness. While some states impose
prohibitions or limitations on deficiency judgments if the net proceeds
from resale do not cover the full amount of the indebtedness, the
remainder may be sought from the debtor in the form of a deficiency
judgment in those states that do not prohibit or limit such judgments.
The deficiency judgment is a personal judgment against the debtor for
the shortfall. Occasionally, after resale of a manufactured home and
payment of all expenses and indebtedness, there is a surplus of funds.
In that case, the UCC requires the party suing for the deficiency
judgment to remit the surplus to the debtor. Because the defaulting
owner of a manufactured home generally has very little capital or
income available following
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repossession, a deficiency judgment may not be sought in many cases or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's strained financial condition.
Any contract secured by a manufactured home located in Louisiana will
be governed by Louisiana law rather than Article 9 of the UCC. Louisiana laws
provide similar mechanisms for perfection and enforcement of security interests
in manufactured housing used as collateral for an installment sale contract or
installment loan agreement.
LOUISIANA LAW. Under Louisiana law, a manufactured home that has been
permanently affixed to real estate will nevertheless remain subject to the motor
vehicle registration laws unless the obligor and any holder of a security
interest in the property execute and file in the real estate records for the
parish in which the property is located a document converting the unit into real
property. A manufactured home that is converted into real property but is then
removed from its site can be converted back to personal property governed by the
motor vehicle registration laws if the obligor executes and files various
documents in the appropriate real estate records and all mortgagees under real
estate mortgages on the property and the land to which it was affixed file
releases with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES.
While state laws do not usually require notice to be given to debtors prior to
repossession, many states do require delivery of a notice of default and of the
debtor's right to cure defaults before repossession. The law in most states also
requires that the debtor be given notice of sale prior to the resale of the home
so that the owner may redeem at or before resale. In addition, the sale must
comply with the requirements of the UCC.
CONSUMER PROTECTION LAWS WITH RESPECT TO MANUFACTURED HOME CONTRACTS.
Manufactured housing contracts often contain provisions obligating the obligor
to pay late charges if payments are not timely made. In certain cases, federal
and state law may specifically limit the amount of late charges that may be
collected. Unless otherwise provided in the related Prospectus Supplement, under
the Agreement, late charges will be retained by the Master Servicer as
additional servicing compensation, and any inability to collect these amounts
will not affect payments to Securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC RULE") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods.
Liability under the FTC Rule is limited to the amounts paid by a debtor on the
contract, and the holder of the contract may also be unable to collect amounts
still due thereunder.
Most of the Manufactured Home Contracts in a Trust Fund will be subject
to the requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Manufactured Home Contracts, will be subject to any claims or defenses that
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the purchaser of the related manufactured home may assert against the seller of
the manufactured home, subject to a maximum liability equal to the amounts paid
by the obligor on the Manufactured Home Contract. If an obligor is successful in
asserting any such claim or defense, and if the Seller had or should have had
knowledge of such claim or defense, the Master Servicer will have the right to
require the Seller to repurchase the Manufactured Home Contract because of a
breach of its Seller's representation and warranty that no claims or defenses
exist that would affect the obligor's obligation to make the required payments
under the Manufactured Home Contract. The Seller would then have the right to
require the originating dealer to repurchase the Manufactured Home Contract from
it and might also have the right to recover from the dealer for any losses
suffered by the Seller with respect to which the dealer would have been
primarily liable to the obligor.
TRANSFER OF MANUFACTURED HOMES. Generally, manufactured housing
contracts contain provisions prohibiting the sale or transfer of the related
manufactured homes without the consent of the obligee on the contract and
permitting the acceleration of the maturity of such contracts by the obligee on
the contract upon any such sale or transfer that is not consented to. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
will, to the extent it has knowledge of such conveyance or proposed conveyance,
exercise or cause to be exercised its rights to accelerate the maturity of the
related Manufactured Home Contracts through enforcement of due-on-sale clauses,
subject to applicable state law. In certain cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Manufactured Home
Contract, the Master Servicer's ability to do so will depend on the
enforceability under state law of the due-on-sale clause. The Garn-St Germain
Act preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of due-on-sale clauses applicable to the Manufactured
Homes. Consequently, in some cases the Master Servicer may be prohibited from
enforcing a due-on-sale clause in respect of certain Manufactured Homes.
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOME CONTRACTS. A
number of lawsuits are pending in the United States alleging personal injury
from exposure to the chemical formaldehyde, which is present in many building
materials, including such components of manufactured housing as plywood flooring
and wall paneling. Some of these lawsuits are pending against manufacturers of
manufactured housing, suppliers of component parts, and related persons in the
distribution process. The Depositor is aware of a limited number of cases in
which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Manufactured Home Contract secured by a Manufactured
Home with respect to which a formaldehyde claim has been successfully asserted
may be liable to the obligor for the amount paid by the obligor on the related
Manufactured Home Contract and may be unable to collect amounts still due under
the Manufactured Home Contract. The successful assertion of such claim
constitutes a breach of a representation or warranty of the Seller, and the
Securityholders would suffer a loss only to the extent that (i) the Seller
breached its obligation to repurchase the Manufactured Home Contract in the
event an obligor is successful in asserting such a claim, and (ii) the Seller,
the Depositor or the Trustee were unsuccessful in asserting any claim of
contribution or subrogation on behalf of the Securityholders against the
manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
APPLICABILITY OF USURY LAWS. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any loan that
is secured by a first lien on certain kinds of manufactured housing. The
Manufactured Housing Contracts would be covered if they satisfy certain
conditions, among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of or foreclosure with respect to
the related unit. In any state in which application of Title V was expressly
rejected or a provision limiting discount points or other charges has been
adopted, no Manufactured Home Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "RELIEF ACT"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Loans. Any shortfall in interest
collections resulting from the application of the Relief Act could result in
losses to the Securityholders. The Relief Act also imposes limitations which
would impair the ability of the Master Servicer to foreclose on an affected Loan
during the borrower's period of active duty status. Moreover, the Relief Act
permits the extension of a Loan's maturity and the re-adjustment of its payment
schedule beyond the completion of military service. Thus, in the event that such
a Loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the Property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the Trust Fund (and therefore the
Securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the Loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, 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 thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
Cut-off Date with respect to any mortgage will not be included in the Trust
Fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under
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the trust deed or mortgage, notwithstanding the fact that there may be junior
trust deeds or mortgages and other liens which intervene between the date of
recording of the trust deed or mortgage and the date of the future advance, and
notwithstanding that the beneficiary or lender had actual knowledge of such
intervening junior trust deeds or mortgages and other liens at the time of the
advance. In most states, the trust deed or mortgage lien securing mortgage loans
of the type which includes home equity credit lines applies retroactively to the
date of the original recording of the trust deed or mortgage, provided that the
total amount of advances under the home equity credit line does not exceed the
maximum specified principal amount of the recorded trust deed or mortgage,
except as to advances made after receipt by the lender of a written notice of
lien from a judgment lien creditor of the trustor.
THE TITLE I PROGRAM
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "TITLE I PROGRAM").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under
the Title I Program include property improvement loans ("PROPERTY IMPROVEMENT
LOANS" or "TITLE I LOANS"). A Property Improvement Loan or Title I Loan means a
loan made to finance actions or items that substantially protect or improve the
basic livability or utility of a property and includes single family improvement
loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from the lender. The lender may disburse proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties to the
transaction. With respect to a dealer Title I Loan, a dealer may include a
seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed
interest rates and generally provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually where a borrower has an irregular flow of income. The first or
last payments (or both) may vary in amount but may not exceed 150% of the
regular installment payment, and the first payment may be due no later than two
months from the date of the loan. The note must contain a provision permitting
full or partial prepayment of the loan. The interest rate must be negotiated and
agreed to by the borrower and the lender and must be fixed for the term of the
loan and recited in the note. Interest on an insured loan must accrue from the
date of the loan and be calculated according to the actuarial method. The lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD unless the lender determines and documents in
the loan file the existence of compensating factors concerning the borrower's
creditworthiness which support approval of the loan.
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Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS. The maximum principal amount for Title
I Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I Loans in the same
property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property. In the case of a Title I Loan with a total principal balance
in excess of $15,000, if the property is not occupied by the owner, the borrower
must have equity in the property being improved at least equal to the principal
amount of the loan, as demonstrated by a current appraisal. Any Title I Loan in
excess of $7,500 must be secured by a recorded lien on the improved property
which is evidenced by a mortgage or deed of trust executed by the borrower and
all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than 6 months after disbursement of the loan proceeds with one 6 month extension
if necessary, a completion certificate, signed by the borrower. The lender is
required to conduct an on-site inspection on any Title I Loan where the
principal obligation is $7,500 or more, and on any direct Title I Loan where the
borrower fails to submit a completion certificate.
FHA INSURANCE COVERAGE. Under the Title I Program, the FHA establishes
an insurance coverage reserve account for each lender which has been granted a
Title I contract of insurance. The amount of insurance coverage in this account
is a maximum of 10% of the amount disbursed, advanced or expended by the lender
in originating or purchasing eligible loans registered with the FHA for Title I
insurance, with certain adjustments. The balance in the insurance coverage
reserve account is the maximum amount of insurance claims the FHA is required to
pay to the Title I lender. Loans to be insured under the Title I Program will be
registered for insurance by the FHA and the insurance coverage attributable to
such loans will be included in the insurance coverage reserve account for the
originating or purchasing lender following the receipt and acknowledgment by the
FHA of a loan report on the prescribed form pursuant to the Title I regulations.
For each eligible loan reported and acknowledged for insurance, the FHA charges
a fee (the "PREMIUM"). For loans having a maturity of 25 months or less, the FHA
bills the lender for the entire Premium in an amount equal to the product of
0.50% of the original loan amount and the loan term. For home improvement loans
with a maturity greater than 25 months, each year that a loan is outstanding the
FHA bills the lender for a Premium in an amount equal to 0.50% of the original
loan amount. If a loan is prepaid during the year, the FHA will not refund or
abate the Premium paid for such year.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance
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claims rejected by the FHA. The balance of the lender's FHA insurance coverage
reserve account will be further adjusted as required under Title I or by the
FHA, and the insurance coverage therein may be earmarked with respect to each or
any eligible loans insured thereunder, if a determination is made by the
Secretary of HUD that it is in its interest to do so. Originations and
acquisitions of new eligible loans will continue to increase a lender's
insurance coverage reserve account balance by 10% of the amount disbursed,
advanced or expended in originating or acquiring such eligible loans registered
with the FHA for insurance under the Title I Program. The Secretary of HUD may
transfer insurance coverage between insurance coverage reserve accounts with
earmarking with respect to a particular insured loan or group of insured loans
when a determination is made that it is in the Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guaranty or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD. Amounts which may be recovered by the Secretary of HUD after
payment of an insurance claim are not added to the amount of insurance coverage
in the related lender's insurance coverage reserve account.
CLAIMS PROCEDURES UNDER TITLE I. Under the Title I Program the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the
lender may either (a) proceed against the property under any security
instrument, or (b) make a claim under the lender's contract of insurance. If the
lender chooses to proceed against the property under a security instrument (or
if it accepts a voluntary conveyance or surrender of the property), the lender
may file an insurance claim only with the prior approval of the Secretary of
HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than 9 months after the date of default of such loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lien of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. Although the FHA may contest
any insurance claim and make a demand for repurchase of the loan at any time up
to two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender,
the FHA has expressed an intention to limit the period of time within which it
will take such action to one year from the date the claim was certified for
payment.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the purposes
hereof, the "Claimable Amount" means an amount equal to 90% of the sum of: (a)
the unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender
65
has proceeded against property securing such loan; (b) the interest on the
unpaid amount of the loan obligation from the date of default to the date of the
claim's initial submission for payment plus 15 calendar days (but not to exceed
9 months from the date of default), calculated at the rate of 7% per annum; (c)
the uncollected court costs; (d) the attorney's fees not to exceed $500; and (e)
the expenses for recording the assignment of the security to the United States.
The Secretary of HUD may deny a claim for insurance in whole or in part
for any violations of the regulations governing the Title I Program; however,
the Secretary of HUD may waive such violations if it determines that enforcement
of the regulations would impose an injustice upon a lender which has
substantially complied with the regulations in good faith.
OTHER LEGAL CONSIDERATIONS
The Loans are also subject to federal laws, including: (i) Regulation
Z, which requires certain disclosures to the borrowers regarding the terms of
the Loans; (ii) the Equal Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; and (iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience. Violations
of certain provisions of these federal laws may limit the ability of the Sellers
to collect all or part of the principal of or interest on the Loans and in
addition could subject the Sellers to damages and administrative enforcement.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated material federal
income tax consequences of the purchase, ownership, and disposition of the
Securities and is based on the opinion of Brown & Wood LLP and Thacher Proffitt
& Wood, special counsel to the Depositor (in such capacity, "TAX COUNSEL"). The
summary is based upon the provisions of the Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of section 1221 of the Code.
Prospective investors may wish to consult their own tax advisers concerning the
federal, state, local and any other tax consequences as relates specifically to
such investors in connection with the purchase, ownership and disposition of the
Securities.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a REMIC under the Internal Revenue Code of 1986, as amended (the
"CODE"); (iii) the Securities represent an ownership interest in some or all of
the assets included in the Trust Fund for a Series; (iv) an election is made to
treat the Trust Fund relating to a particular Series of Certificates as a
partnership or (v) an election is made to treat the Trust Fund as a FASIT under
the Code. The Prospectus Supplement for each Series of Securities will specify
how the Securities will be treated for federal income tax purposes and will
discuss whether a REMIC election, if any, will be made with respect to such
Series.
As used herein, the term "U.S. 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, any state thereof or the
District of Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations; provided that, for
purposes solely of the restrictions on the transfer of REMIC residual interests,
no partnership or other entity treated as a partnership for United States
federal income tax purposes shall be treated as a U.S. Person unless all persons
that own an interest in such partnership either directly or through any entity
that is not
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a corporation for United States federal income tax purposes are required by the
applicable operative agreement to be U.S. Persons), an estate whose income is
subject to U.S. federal income tax regardless of its source, or a trust with
respect to which (i) a court within the United States is able to exercise
primary supervision over the administration of the trust and (ii) one or more
U.S. persons have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996 and treated as
United States Persons prior to such date that elect to continue to be treated as
United States persons shall be considered U.S. Persons as well.
STATUS AS REAL PROPERTY LOANS. Except to the extent otherwise provided
in the related Prospectus Supplement, if the Securities are regular interests in
a REMIC ("REGULAR INTEREST SECURITIES") or represent interests in a grantor
trust, Tax Counsel is of the opinion that: (i) Securities held by a domestic
building and loan association will constitute "loans... secured by an interest
in real property" within the meaning of section 7701(a)(19)(C)(v) of the Code;
and (ii) Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of section 856(c)(4)(A) of the Code and
interest on Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of section 856(c)(3)(B) of the Code.
TAXATION OF DEBT SECURITIES
INTEREST AND ACQUISITION DISCOUNT. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to holders in the same manner
as evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as "DEBT SECURITIES."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID which are set forth in
sections 1271 through 1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended on June 11, 1996 (the "OID
REGULATIONS"). A holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Debt Securities.
In general, OID, if any, will equal the excess of the stated redemption
price at maturity of a Debt Security over its issue price. In the opinion of Tax
Counsel, a holder of a Debt Security must include such OID in gross income as
ordinary interest income as it accrues under a method taking into account an
economic accrual of the discount. In general, OID must be included in income in
advance of the receipt of the cash representing that income. The amount of OID
on a Debt Security will be considered to be zero if it is less than a de minimis
amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or
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nonpayment of interest. In the opinion of Tax Counsel, the interest on such Debt
Securities will be unconditionally payable and constitute qualified stated
interest, not OID. However, absent clarification of the OID Regulations, where
Debt Securities do not provide for default remedies, the interest payments will
be included in the Debt Security's stated redemption price at maturity and taxed
as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution Date on a
Debt Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of the
Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and such income will be capital gain if the
Debt Security is held as a capital asset. However, accrual method holders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The Internal Revenue Service (the "IRS") issued regulations (the
"CONTINGENT REGULATIONS") governing the calculation of OID on instruments having
contingent interest payments. The Contingent Regulations represent the only
guidance regarding the views of the IRS with respect to contingent interest
instruments and specifically do not apply for purposes of calculating OID on
debt instruments subject to section 1272(a)(6) of the Code, such as the Debt
Securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, the Trustee intends to base its computation on
section 1272(a)(6) of the Code and the OID Regulations as described in this
Prospectus. However, because no regulatory guidance currently exists under
section 1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a holder will be computed by allocating to
each day during a taxable year a PRO RATA portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the Loans, the amount
of OID includible in income of a holder for an accrual period (generally the
period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The
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adjusted issue price is the sum of its issue price plus prior accruals or OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "PAY-THROUGH SECURITY"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"PREPAYMENT ASSUMPTION"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of original issue discount required to be included in income by a
holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to holders of Pay-Through Securities
based on the Prepayment Assumption, no representation is made to holders that
Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that it
believes to be appropriate, to take account of realized losses on the Loans,
although the OID Regulations do not provide for such adjustments. If the
Internal Revenue Service were to require that OID be accrued without such
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include
OID in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. In the opinion of Tax Counsel,
holders will be required to report income with respect to the related Securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the Loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of such a Security in any period could significantly exceed the amount of
cash distributed to such holder in that period. The holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is reduced
as a result of a Loan default. However, the timing and character of such losses
or reductions in income are uncertain and, accordingly, holders of Securities
should consult their own tax advisors on this point.
INTEREST WEIGHTED SECURITIES. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under "-Tax Status as a Grantor Trust; General" below) the payments on
which consist solely or primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC or on Loans underlying
Pass-Through Securities ("INTEREST WEIGHTED SECURITIES"). The Issuer intends to
take the position that all of the income derived from an Interest Weighted
Security should be treated as OID and that the amount and rate of accrual of
such OID should be calculated by treating the Interest Weighted Security as a
Compound Interest Security. However, in the case of Interest Weighted Securities
that are entitled to some payments of principal and that are Regular Interest
Securities the IRS could assert that income derived from an Interest Weighted
Security
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should be calculated as if the Security were a security purchased at a premium
equal to the excess of the price paid by such holder for such Security over its
stated principal amount, if any. Under this approach, a holder would be entitled
to amortize such premium only if it has in effect an election under section 171
of the Code with respect to all taxable debt instruments held by such holder, as
described below. Alternatively, the IRS could assert that an Interest Weighted
Security should be taxable under the rules governing bonds issued with
contingent payments. Such treatment may be more likely in the case of Interest
Weighted Securities that are Stripped Securities as described below. See "-Tax
Status as a Grantor Trust-Discount or Premium on Pass-Through Securities" below.
VARIABLE RATE DEBT SECURITIES. In the opinion of Tax Counsel, in the
case of Debt Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i) the
yield to maturity of such Debt Securities and (ii) in the case of Pay-Through
Securities, the present value of all payments remaining to be made on such Debt
Securities, should be calculated as if the interest index remained at its value
as of the issue date of such Securities. Because the proper method of adjusting
accruals of OID on a variable rate Debt Security is uncertain, holders of
variable rate Debt Securities should consult their own tax advisers regarding
the appropriate treatment of such Securities for federal income tax purposes.
MARKET DISCOUNT. In the opinion of Tax Counsel, a purchaser of a
Security may be subject to the market discount rules of sections 1276 through
1278 of the Code. A Holder that acquires a Debt Security with more than a
prescribed de minimis amount of "market discount" (generally, the excess of the
principal amount of the Debt Security over the purchaser's purchase price) will
be required to include accrued market discount in income as ordinary income in
each month, but limited to an amount not exceeding the principal payments on the
Debt Security received in that month and, if the Securities are sold, the gain
realized. Such market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, such market
discount would in general accrue either (i) on the basis of a constant yield (in
the case of a Pay-Through Security, taking into account a prepayment assumption)
or (ii) in the ratio of (a) in the case of Securities (or in the case of a
Pass-Through Security, as set forth below, the Loans underlying such Security)
not originally issued with original issue discount, stated interest payable in
the relevant period to total stated interest remaining to be paid at the
beginning of the period or (b) in the case of Securities (or, in the case of a
Pass-Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the underlying
Loans) with market discount over interest received on such Security is allowed
as a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
PREMIUM. In the opinion of Tax Counsel, a holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the Security at a premium, which it may
elect to amortize as an offset to interest income on such Security (and not as a
separate deduction item) on a constant yield method. The legislative history of
the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a class
of Pay-Through Securities will be calculated using the prepayment assumption
used in pricing such class. If a holder makes an election to amortize premium on
a Debt Security, such election will apply to all taxable debt instruments
(including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations) held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments acquired thereafter by such holder, and will
be irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the application of recently finalized regulations under
Section 171 issued December 30, 1997.
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ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
GENERAL. In the opinion of Tax Counsel, if a REMIC election is made
with respect to a Series of Securities, then the arrangement by which the
Securities of that Series are issued will be treated as a REMIC as long as all
of the provisions of the applicable Agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "Regular Interests" or "Residual Interests" in a REMIC, as
specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if
a REMIC election is made with respect to a Series of Securities, in the opinion
of Tax Counsel (i) Securities held by a domestic building and loan association
will constitute "a regular or a residual interest in a REMIC" within the meaning
of section 7701(a)(19)(C)(xi) of the Code (assuming that at least 95% of the
REMIC's assets consist of cash, government securities, "loans secured by an
interest in real property," and other types of assets described in section
7701(a)(19)(C)) of the Code; and (ii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of
section 856(c)(4)(A) of the Code, and income with respect to the Securities will
be considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of section 856(c)(3)(B) of the
Code (assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in clause (i) or (ii) above, then a Security will qualify for the tax
treatment described in clause (i) or (ii) in the proportion that such REMIC
assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses
of a REMIC will be taken into account by holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses will be
allocated, under Treasury regulations, among the holders of the Regular Interest
Securities and the holders of the Residual Interest Securities on a daily basis
in proportion to the relative amounts of income accruing to each holder on that
day. In the case of a holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), such expenses will be deductible
only to the extent that such expenses, plus other "miscellaneous itemized
deductions" of the holder, exceed 2% of such Holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a holder. In general terms, a single class REMIC is one that either (i)
would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and which is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise specified in the related
Prospectus Supplement, the expenses of the REMIC will be allocated to holders of
the related residual interest securities.
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TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
CALCULATION OF REMIC INCOME. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between (i) the gross income produced by the REMIC's assets, including stated
interest and any original issue discount or market discount on loans and other
assets, and (ii) deductions, including stated interest and original issue
discount accrued on Regular Interest Securities, amortization of any premium
with respect to Loans, and servicing fees and other expenses of the REMIC. A
holder of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited transaction."
For this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding classes of Securities of such REMIC.
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RESIDUAL INTEREST SECURITIES
In the opinion of Tax Counsel, the holder of a Certificate representing
a residual interest (a "RESIDUAL INTEREST SECURITY") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
In the opinion of Tax Counsel, the holder of a Residual Interest
Security must report its proportionate share of the taxable income of the REMIC
whether or not it receives cash distributions from the REMIC attributable to
such income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, in certain REMIC issues in which the
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interests issued without any discount or at an
insubstantial discount (if this occurs, it is likely that cash distributions
will exceed taxable income in later years). Taxable income may also be greater
in earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on REMIC Regular
Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
LIMITATION ON LOSSES. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a holder may take into account currently is limited to the
holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A holder's basis in a Residual Interest Security will initially equal
such holder's purchase price, and will subsequently be increased by the amount
of the REMIC's taxable income allocated to the holder, and decreased (but not
below zero) by the amount of distributions made and the amount of the REMIC's
net loss allocated to the holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of holders of Residual Interest Securities to deduct
net losses may be subject to additional limitations under the Code, as to which
such holders should consult their tax advisers.
DISTRIBUTIONS. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a holder of a Residual Interest Security. If the amount of such payment
exceeds a holder's adjusted basis in the Residual Interest Security, however,
the holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
SALE OR EXCHANGE. In the opinion of Tax Counsel, a holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. Except to the extent provided in regulations,
which have not yet been issued, any loss upon disposition of a Residual Interest
Security will be disallowed if the selling holder acquires any residual interest
in a REMIC or similar mortgage pool within six months before or after such
disposition.
EXCESS INCLUSIONS. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a holder of a Residual Interest Security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such holder's federal income tax return.
Further, if the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by section 511 of the
Code, such holder's excess inclusion income will be treated as unrelated
business taxable income of such holder. In addition, under Treasury regulations
yet to be issued, if a real estate investment trust, a regulated investment
company, a common trust fund, or certain cooperatives were to own a Residual
Interest Security, a portion of dividends (or other distributions)
73
paid by the real estate investment trust (or other entity) would be treated as
excess inclusion income. If a Residual Security is owned by a foreign person
excess inclusion income is subject to tax at a rate of 30% which may not be
reduced by treaty, is not eligible for treatment as "portfolio interest" and is
subject to certain additional limitations. See "-Tax Treatment of Foreign
Investors" below. The Small Business Job Protection Act of 1996 has eliminated
the special rule permitting section 593 institutions ("thrift institutions") to
use net operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to residual certificates
continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. 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. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Startup Day
multiplied by (ii) the adjusted issue price of such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest), increased by the aggregate of the daily accruals for
prior calendar quarters, and decreased (but not below zero) by the amount of
loss allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "-RESTRICTIONS ON OWNERSHIP AND
TRANSFER OF RESIDUAL INTEREST SECURITIES" and "-Tax Treatment of Foreign
Investors" below.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by sections 1 through 1399 of
the Code, if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the
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anticipated excess inclusions and the highest rate of tax for the year in which
the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. If a transfer of a Residual Interest is
disregarded, the transferor would be liable for any Federal income tax imposed
upon taxable income derived by the transferee from the REMIC. The REMIC
Regulations provide no guidance as to how to determine if a significant purpose
of a transfer is to impede the assessment or collection of tax. A similar type
of limitation exists with respect to certain transfers of residual interests by
foreign persons to United States persons. See "-Tax Treatment of Foreign
Investors" below.
The IRS has issued proposed changes to the REMIC regulations that would
add to the conditions necessary to assure that a transfer of a noneconomic
residual interest would be respected. The proposed additional condition would
require that 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 a
residual interest reduced by the present value of the projected payments to be
received on the residual interest. The change is proposed to be effective for
transfers of residual interests occurring after February 4, 2000.
The IRS has issued proposed changes to REMIC Regulations that would add
to the conditions necessary to assure that a transfer of a noneconomic residual
interest would be respected. The proposed additional condition would require
that 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 a
residual interest reduced by the present value of the projected payments to be
received on the residual interest. In Revenue Procedure 2001-12, pending
finalization of the new regulations, the IRS has expanded the "safe harbor" for
transfers of non-economic residual interests to include certain transfers to
domestic taxable corporations with large amounts of gross and net assets where
agreement is made that all future transfers will be to taxable domestic
corporations in transactions that qualify for one of the "safe harbor"
provisions. Eligibility for this 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 changes would be effective
for transfers of residual interests occurring after February 4, 2000. Prior to
purchasing a REMIC Residual Certificate, prospective purchasers should consider
the possibility that a purported transfer of the REMIC Residual Certificate by
such a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by the purchaser.
MARK TO MARKET RULES. Prospective purchasers of a REMIC Residual
Interest Security should be aware that the IRS finalized regulations (the
"MARK-TO-MARKET REGULATIONS") which provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market. Prospective
purchasers of a REMIC Residual Interest Security should consult their tax
advisors regarding the possible application of the Mark-to-Market Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
GENERAL. As further specified in the related Prospectus Supplement, if
a REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under subpart E, part 1 of subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"PASS-THROUGH SECURITIES"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("STRIPPED SECURITIES"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
75
In the opinion of Tax Counsel, each holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the Trustee and the Servicer and
similar fees (collectively, the "SERVICING FEE")), at the same time and in the
same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through Securities
other than Stripped Securities, such income will consist of a pro rata share of
all of the income derived from all of the Loans and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the holder owns an interest.
The holder of a Security will generally be entitled to deduct such Servicing
Fees under section 162 or section 212 of the Code to the extent that such
Servicing Fees represent "reasonable" compensation for the services rendered by
the Trustee and the Servicer (or third parties that are compensated for the
performance of services). In the case of a noncorporate holder, however,
Servicing Fees (to the extent not otherwise disallowed, e.g., because they
exceed reasonable compensation) will be deductible in computing such holder's
regular tax liability only to the extent that such fees, when added to other
miscellaneous itemized deductions, exceed 2% of adjusted gross income and may
not be deductible to any extent in computing such holder's alternative minimum
tax liability. In addition, for taxable years beginning after December 31, 1990,
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES. In the opinion of Tax
Counsel, the holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values, determined
as of the time of purchase of the Securities. In the typical case, the Trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
Loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the Loans that it represents, since the Securities,
unless otherwise specified in the related Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
Loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the Loan allocable to the Security, the interest in the
Loan allocable to the Pass-Through Security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to the
Security. A holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "-Taxation of Debt Securities; Market Discount"
and "-Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
STRIPPED SECURITIES. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to receive
only principal payments on the Loans, or a right to receive certain payments of
both interest and principal. Certain Stripped Securities ("RATIO STRIP
SECURITIES") may represent a right to receive differing
76
percentages of both the interest and principal on each Loan. Pursuant to section
1286 of the Code, the separation of ownership of the right to receive some or
all of the interest payments on an obligation from ownership of the right to
receive some or all of the principal payments results in the creation of
"stripped bonds" with respect to principal payments and "stripped coupons" with
respect to interest payments. Section 1286 of the Code applies the OID rules to
stripped bonds and stripped coupons. For purposes of computing original issue
discount, a stripped bond or a stripped coupon is treated as a debt instrument
issued on the date that such stripped interest is purchased with an issue price
equal to its purchase price or, if more than one stripped interest is purchased,
the ratable share of the purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Loan
principal balance) or the Securities are initially sold with a de minimis
discount (assuming no prepayment assumption is required), any non-de minimis
discount arising from a subsequent transfer of the Securities should be treated
as market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Loan by Loan basis, which could result in some Loans being
treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "CASH FLOW BOND METHOD"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted
Security, the Trustee intends, absent contrary authority, to report income to
Security holders as OID, in the manner described above for Interest Weighted
Securities.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped principal payments; (ii) the
non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped
Securities and the different federal income tax consequences that result from
each alternative, potential purchasers are urged to consult their own tax
advisers regarding the proper treatment of the Securities for federal income tax
purposes.
CHARACTER AS QUALIFYING LOANS. In the case of Stripped Securities,
there is no specific legal authority existing regarding whether the character of
the Securities, for federal income tax purposes, will be the same as the Loans.
The IRS could take the position that the Loans character is not carried over to
the Securities in such circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of section
856(c)(4)(A) of the Code, and "loans secured by an interest in real property"
within the meaning of section 7701(a)(19)(C)(v) of the Code; and interest income
77
attributable to the Securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) of the Code. Reserves or
funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, in the opinion of Tax Counsel, a holder's tax
basis in its Security is the price such holder pays for a Security, plus amounts
of original issue or market discount included in income and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a Security, measured by the difference between the amount realized and the
Security's basis as so adjusted, will generally be capital gain or loss,
assuming that the Security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the security is one year
or more. Non-corporate taxpayers are subject to reduced maximum rates on
long-term capital gains and are generally subject to tax at ordinary income
rates on short-term capital gains. The deductibility of capital losses is
subject to certain limitations. Prospective investors should consult their own
tax advisors concerning these tax law provisions.
In the case of a Security held by a bank, thrift, or similar
institution described in section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of the amount that would
have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a holder, other than a
holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the holder of a Security (i) fails to furnish the Trustee
with its taxpayer identification number ("TIN"); (ii) furnishes the Trustee an
incorrect TIN; (iii) fails to report properly interest, dividends or other
"reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the Trustee or such holder's securities broker
with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the holder is not subject to backup
withholding. Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain Nonresidents (as defined below). Holders
should consult their tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining the exemption.
The Trustee will report to the holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new final regulations which revise
procedures for complying with, or obtaining exemptions under, the withholding,
backup withholding and information reporting rules described above. Prospective
investors are urged to consult their tax advisors regarding the procedures for
obtaining an exemption from withholding under the new regulations.
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TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("NONRESIDENTS"), in the opinion of Tax Counsel, such interest will normally
qualify as portfolio interest (except where (i) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, (ii) the recipient is a controlled foreign corporation to which the
issuer is a related person) and will be exempt from federal income tax, or (iii)
the recipient is a bank receiving interest described in section 881(c)(3)(A) of
the Code). Upon receipt of appropriate ownership statements, the issuer normally
will be relieved of obligations to withhold tax from such interest payments.
These provisions supersede the generally applicable provisions of United States
law that would otherwise require the issuer to withhold at a 30% rate (unless
such rate were reduced or eliminated by an applicable tax treaty) on, among
other things, interest and other fixed or determinable, annual or periodic
income paid to Nonresidents. It is possible that the IRS may assert that the
foregoing tax exemption should not apply with respect to a Regular Interest
Security held by a Residual Interest Securityholder that owns directly or
indirectly a 10% or greater interest in the Residual Interest Securities. If the
holder does not qualify for exemption, distributions of interest, including
distributions in respect of accrued original issue discount, to such holder may
be subject to a tax rate of 30%, subject to reduction under any applicable tax
treaty. Holders of Pass-Through Securities and Stripped Securities, including
Ratio Strip Securities, however, may be subject to withholding to the extent
that the Loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the regular
United States income tax.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on the
United States shareholder's allocable portion of the interest income received by
the controlled foreign corporation.
Payments to holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
holder of a Residual Interest Security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all Federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "-Residential Interest Securities-Excess Inclusions" above.
Special rules apply to partnerships, estates and trusts, and in certain
circumstances certifications as to foreign status and other matters may be
required to be provided by partners and beneficiaries thereof.
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TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust
Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel is,
except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a DE MINIMIS amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the Notes
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
regulations, a holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "SHORT-TERM NOTE") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
80
SALE OR OTHER DISPOSITION. In the opinion of Tax Counsel, if a
Noteholder sells a Note, the holder will recognize gain or loss in an amount
equal to the difference between the amount realized on the sale and the holder's
adjusted tax basis in the Note. The adjusted tax basis of a Note to a particular
Noteholder will equal the holder's cost for the Note, increased by any market
discount, acquisition discount, OID and gain previously included by such
Noteholder in income with respect to the Note and decreased by the amount of
bond premium (if any) previously amortized and by the amount of principal
payments previously received by such Noteholder with respect to such Note.
Any such gain or loss will be capital gain or loss if the Note was held as a
capital asset, except for gain representing accrued interest and accrued market
discount not previously included in income. Capital losses generally may be used
only to offset capital gains.
FOREIGN HOLDERS. In the opinion of Tax Counsel, interest payments made
(or accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be considered
"portfolio interest", and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust or the Seller (including a holder of 10% of
the outstanding Certificates) or a "controlled foreign corporation" with respect
to which the Trust or the Seller is a "related person" within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
might be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
certain tax-exempt entities (including pension funds) would be "unrelated
business taxable income", income to foreign holders generally would be subject
to U.S. tax and U.S. tax return filing and withholding requirements, and
individual holders might be subject to certain limitations on their ability to
deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets
81
of the partnership being the assets held by the Trust Fund, the partners of the
partnership being the Certificateholders, and the Notes being debt of the
partnership. However, the proper characterization of the arrangement involving
the Trust Fund, the Certificates, the Notes, the Trust Fund and the Servicer is
not clear because there is no authority on transactions closely comparable to
that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
INDEXED SECURITIES, ETC. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
PARTNERSHIP TAXATION. If the Trust Fund is a partnership, in the
opinion of Tax Counsel, the Trust Fund will not be subject to federal income
tax. Rather, in the opinion of Tax Counsel, each Certificateholder will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that the Certificateholders will be
allocated taxable income of the Trust Fund for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, in the opinion of Tax Counsel,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, in the opinion of Tax Counsel, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
82
disallowed to the individual in whole or in part and might result in such holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to such holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loans were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, in
the opinion of Tax Counsel, the Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
SECTION 708 TERMINATION. Pursuant to final Treasury regulations issued
May 9, 1997 under section 708 of the Code a sale or exchange of 50 percent or
more of the capital and profits in the issuer entity within a 12-month tax
period would cause a deemed contribution of assets of the issuer entity (the
"old partnership") to a new partnership (the "new partnership") in exchange for
interest in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
DISPOSITION OF CERTIFICATES. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the holder's cost increased by the holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the holder's
share of the Notes and other liabilities of the Trust Fund. A holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Receivables would generally
be treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust
83
Fund might be reallocated among the Certificateholders. The Trust Fund's method
of allocation between transferors and transferees may be revised to conform to a
method permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Trust will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable share
of items of Trust Fund income and expense to holders and the IRS on Schedule
K-1. The Trust Fund will provide the Schedule K-l information to nominees that
fail to provide the Trust Fund with the information statement described below
and such nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, holders must file tax returns that are
consistent with the information return filed by the Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies .
Under section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under section 17A of the Securities Exchange Act of 1934, as amended,
is not required to furnish any such information statement to the Trust Fund. The
information referred to above for any calendar year must be furnished to the
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust Fund with the information
described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
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withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described herein make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after December
31, 2000, subject to certain transition rules. Prospective investors are urged
to consult their own tax advisors regarding the New Regulations.
FASIT SECURITIES
GENERAL. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities. Although the
FASIT provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussions contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series. The Prospectus Supplement for
each Series of Securities will indicate whether one or more FASIT elections will
be made for that Series and which Securities of such Series will be designated
as Regular Securities, and which, if any, will be designated as Ownership
Securities.
QUALIFICATION AS A FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (A) the composition of the FASIT's assets and (B) the nature of
the Securityholders' interest in the FASIT are met on a continuing basis, and
(iii) the Trust Fund is not a regulated company as defined in section 851(a) of
the Code.
ASSET COMPOSITION. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ("IO") type rate, (iii)
foreclosure property, (iv) certain hedging instruments (generally, interest and
currency rate swaps and credit enhancement contracts) that are
85
reasonably required to guarantee or hedge against the FASIT's risks associated
with being the obligor on FASIT interests, (v) contract rights to acquire
qualifying debt instruments or qualifying hedging instruments, (vi) FASIT
regular interests, and (vii) REMIC regular interests. Permitted assets do not
include any debt instruments issued by the holder of the FASIT's ownership
interest or by any person related to such holder.
INTERESTS IN A FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more classes of regular interests or (ii) a single class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and (vi) if it pays interest, such
interest is payable at either (a) a fixed rate with respect to the principal
amount of the regular interest or (b) a permissible variable rate with respect
to such principal amount. Permissible variable rates for FASIT regular interests
are the same as those for REMIC regular interest (i.e., certain qualified
floating rates and weighted average rates). See "-TAXATION OF DEBT
SECURITIES-VARIABLE RATE DEBT SECURITIES" above.
If a FASIT Security fails to meet one or more of the requirements set
out in clauses (iii), (iv) or (v) above, but otherwise meets the above
requirements, it may still qualify as a type of regular interest known as a
"HIGH-YIELD INTEREST." In addition, if a FASIT Security fails to meet the
requirements of clause (vi), but the interest payable on the Security consists
of a specified portion of the interest payments on permitted assets and that
portion does not vary over the life of the Security, the Security also will
qualify as a High-Yield Interest. A High-Yield Interest may be held only by
domestic corporations that are fully subject to corporate income tax ("ELIGIBLE
CORPORATIONS"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "-TREATMENT OF HIGH-YIELD INTERESTS" below.
CONSEQUENCES OF DISQUALIFICATION. If a Series of FASIT Securities fails
to comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
TAX TREATMENT OF FASIT REGULAR SECURITIES. Payments received by holders
of FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of holders of REMIC Regular
Securities, holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Securityholder and a
principal payment on such Security will be treated as a return of capital to the
extent that the Securityholder's basis is allocable to that payment. FASIT
Regular Securities issued with OID or acquired with market discount or premium
generally will treat interest and principal payments on such Securities in the
same manner described for REMIC Regular Securities. See "-Taxation of Debt
Securities", "-Market Discount", and "-Premium" above. High-Yield Securities may
be held only by fully taxable domestic corporations, other FASITs, and certain
securities dealers. Holders of High-Yield Securities are subject to limitations
on their ability to use current losses or net operating loss carryforwards or
carrybacks to offset any income derived from those Securities.
86
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See "-Sale or Exchange" above. In addition,
if a FASIT Regular Security becomes wholly or partially worthless as a result of
Default and Delinquencies of the underlying Assets, the holder of such Security
should be allowed to deduct the loss sustained (or alternatively be able to
report a lesser amount of income). See "-Taxation of Debt Instruments-EFFECTS OF
DEFAULT AND DELINQUENCIES" above.
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in section 7701(a)(19) of the Code to the same extent that REMIC
Securities would be so considered. See "Certain Material Federal Income Tax
Considerations-Taxation of Debt Securities-STATUS AS REAL PROPERTY LOANS." In
addition, FASIT Regular Securities held by a financial institution to which
section 585 of the Code applies will be treated as evidences of indebtedness for
purposes of section 582(c)(1) of the Code. FASIT Securities will not qualify as
"Government Securities" for either REIT or RIC qualification purposes.
TREATMENT OF HIGH-YIELD INTERESTS. High-Yield Interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular Federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
TAX TREATMENT OF FASIT OWNERSHIP SECURITIES. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the holders of High-Yield
Interests. See "-TREATMENT OF HIGH-YIELD INTERESTS" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value
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of the reasonably expected payments under the instrument using a discount rate
of 120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal
to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income derived
from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT, and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a FASIT
election is made generally will be structured in order to avoid application of
the prohibited transaction tax.
BACKUP WITHHOLDING, REPORTING AND TAX ADMINISTRATION. Holders of FASIT
Securities will be subject to backup withholding to the same extent holders of
REMIC Securities would be subject. See "-Miscellaneous Tax Aspects-Backup
Withholding" above. For purposes of reporting and tax administration, holders of
record of FASIT Securities generally will be treated in the same manner as
holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Certain Material Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Securities. State and local income tax law may
differ substantially from the corresponding federal law, and this discussion
does not purport to describe any aspect of the income tax laws of any state or
locality. Therefore, potential investors should consult their own tax advisors
with respect to the various state and local tax consequences of an investment in
the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the
Code, which apply only to Securities of a Series that are not divided into
subclasses. If Securities are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively "Plans") subject to ERISA and on persons who are fiduciaries with
respect to such Plans. Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)) and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in ERISA Section 3(33)), are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described above and below, subject to the provisions
of applicable state law. Any such plan which is qualified and exempt from
taxation under Code Sections 401(a) and 501(a), however, is subject to the
prohibited transaction rules set forth in Code Section 503.
OnNovember 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan
88
makes an "equity" investment could be deemed for purposes of ERISA to be assets
of the investing Plan in certain circumstances. However, the regulation provides
that, generally, the assets of a corporation or partnership in which a Plan
invests will not be deemed for purposes of ERISA to be assets of such Plan if
the equity interest acquired by the investing Plan is a publicly-offered
security. A publicly-offered security, as defined in the Labor Reg. Section
2510.3-101, is a security that is widely held, freely transferable and
registered under the Securities Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("PARTIES IN INTEREST") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan. Because the
Loans may be deemed Plan assets of each Plan that purchases Securities, an
investment in the Securities by a Plan might be a prohibited transaction under
ERISA Sections 406 and 407 and subject to an excise tax under Code Section 4975
unless a statutory or administrative exemption applies.
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 certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in Securities that represent interests
in a Pool consisting of Loans ("SINGLE FAMILY SECURITIES") will be exempt from
the prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Securities.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinate Security or a Security which is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only
to Single Family Securities. The Depositor believes that, for purposes of PTE
83-1, the term "mortgage pass-through certificate" would include: (i) Securities
issued in a Series consisting of only a single class of Securities; and (ii)
Securities issued in a Series in which there is only one class of Trust
Securities; provided that the Securities in the case of clause (i), or the
Securities in the case of clause (ii), evidence the beneficial ownership of both
a specified percentage of future interest payments (greater than 0%) and a
specified percentage (greater than 0%) of future principal payments on the
Loans. It is not clear whether a class of Securities that evidences the
beneficial ownership in a Trust Fund divided into Loan groups, beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments, or
a class of Securities entitled to receive payments of interest and principal on
the Loans only after payments to other classes or after the occurrence of
certain specified events would be a "mortgage pass-through certificate" for
purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Securityholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal balance
of the largest covered pooled mortgage loan; (ii) the existence of a pool
trustee who is not an affiliate of the pool sponsor; and (iii) a limitation on
the amount of the payment retained by the pool sponsor, together with other
funds inuring to its benefit, to not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided by
the pool sponsor to the Pool. The Depositor believes that the first general
condition referred to above will be satisfied with respect to the Securities in
a Series issued without a subordination feature, or the Securities only in a
Series issued with a
89
subordination feature, provided that the subordination and Reserve Account,
subordination by shifting of interests, the pool insurance or other form of
credit enhancement described herein (such subordination, pool insurance or other
form of credit enhancement being the system of insurance or other protection
referred to above) with respect to a Series of Securities 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 Loan. See
"Description of the Securities" herein. In the absence of a ruling that the
system of insurance or other protection with respect to a Series of Securities
satisfies the first general condition referred to above, there can be no
assurance that these features will be so viewed by the DOL. The Trustee will not
be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Single Family
Securities must make its own determination as to whether the first and third
general conditions, and the specific conditions described briefly in the
preceding paragraph, of PTE 83-1 have been satisfied, or as to the availability
of any other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
On September 6, 1990, the DOL issued to Greenwich Capital Markets, Inc.
an individual exemption (Prohibited Transaction Exemption 90-59; Exemption
Application No. D-8374, 55 Fed. Reg. 36724 , and amended on July 21, 1997 by PTE
97-34; Exemption Application No. D-10245 and D-10246, 62 F.R. 39021 and further
amended on November 13, 2000 by PTE 2000-58; Exemption Application No. D-10829,
65 F.R. 67765) (the "UNDERWRITER EXEMPTION") which applies to certain sales and
servicing of "securities" that are obligations of an "issuer" with respect to
which Greenwich Capital Markets, Inc. is the underwriter, manager or co-manager
of an underwriting syndicate. The Underwriter Exemption provides relief which is
generally similar to that provided by PTE 83-1, but is broader in several
respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains a definition
of "security" which provides for an expanded definition of "certificate" which
includes an interest which entitles the holder to pass-through payments of
principal, interest and/or other payments and which also includes debt
instruments. The Underwriter Exemption contains an expanded definition of
"trust" which permits the trust corpus to consist of secured consumer
receivables. The definition of "trust", however, does not include any investment
pool unless, inter alia, (i) the investment pool consists only of assets of the
type which have been included in other investment pools, (ii) securities
evidencing interests in such other investment pools have been purchased by
investors other than Plans for at least one year prior to the Plan's acquisition
of securities pursuant to the Underwriter Exemption, and (iii) securities in
such other investment pools have been rated in one of the four highest generic
rating categories of the three credit rating agencies noted below. However, the
securities must be rated in one of the two highest generic categories by one of
the below-mentioned rating agencies if the loan-to-value ratio or combined
loan-to-value ratio of any single-family residential mortgage loan or home
equity loan held in the trust exceeds 100% at the date of issuance of the
certificates, and in that case the Underwriter's PTE will not apply: (1) to any
of the certificates if (x) any mortgage loan or other asset held in the trust
(other than a single-family residential mortgage loan or home equity loan) has a
loan-to-value ratio that exceeds 100% at the date of issuance of the securities
or (y) any single-family residential mortgage loan has a loan-to-value ratio
that exceeds 125% at the date of issuance of the securities or (2) to any
subordinate securities. Generally, the Underwriter Exemption holds that the
acquisition of the securities by a Plan must be on terms (including the price
for the securities) that are at least as favorable to the Plan as they would be
in an arm's length transaction with an unrelated party. The Underwriter
Exemption requires that the rights and interests evidenced by the securities not
be "subordinated" to the rights and interests evidenced by other securities of
the same trust unless none of the mortgage loans has a loan-to-value ratio or
combined loan-to-value ratio at the date of issuance of the securities that
exceeds 100%. The Underwriter Exemption requires that securities acquired by a
Plan have received a rating at the time of their acquisition that is in one of
the four highest generic rating categories of Standard & Poor's, a division of
the McGraw-Hill Companies, Inc., Moody's Investors Service, Inc. or Fitch, Inc.,
(the "EXEMPTION RATING AGENCIES"). The Underwriter Exemption specifies that the
pool trustee must not be an affiliate of the pool sponsor, nor an affiliate of
the Underwriter, the pool servicer, any obligor with respect to mortgage loans
included in the trust constituting more than five percent of the aggregate
unamortized principal balance of the assets in the trust, or any affiliate of
such entities. Finally, the Underwriter Exemption stipulates that any Plan
investing in the
90
securities must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities Act
of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase
Securities should consult with its counsel concerning the impact of ERISA and
the Code, the applicability of PTE 83-1 and the Underwriter Exemption, and the
potential consequences in its specific circumstances, prior to making such
investment. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
The Exemption also extends exemptive relief to certain mortgage-backed
and asset-backed securities transactions using pre-funding accounts for trusts
issuing securities. The amendment generally allows mortgage loans (the
"Obligations") supporting payments to securityholders, and having a value equal
to no more than twenty-five percent (25%) of the total principal amount of the
certificates being offered by the trust, to be transferred to the trust within a
90-day or three-month period following the closing date ("PRE-FUNDING PERIOD"),
instead of requiring that all such Obligations be either identified or
transferred on or before the closing date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the
pre-funding account to the total principal amount of
the securities being offered (the "PRE-FUNDING
LIMIT") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the closing
date (the "ADDITIONAL Obligations") must meet the
same terms and conditions for eligibility as the
original Obligations used to create the trust, which
terms and conditions have been approved by an
Exemption Rating Agency.
(3) The transfer of such Additional Obligations to
the trust during the Pre-Funding Period must not
result in the securities to be covered by the
Exemption receiving a lower credit rating from an
Exemption Rating Agency upon termination of the
Pre-Funding Period than the rating that was obtained
at the time of the initial issuance of the securities
by the trust.
(4) Solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate (the
"AVERAGE INTEREST RATE") for all of the Obligations
in the trust at the end of the Pre-Funding Period
must not be more than 100 basis points lower than the
average interest rate for the Obligations which were
transferred to the trust on the closing date.
(5) Either:
(i) the characteristics of the
Additional Obligations must be monitored by an
insurer or other credit support provider which is
independent of the depositor; or
(ii) an independent accountant
retained by the depositor must provide the depositor
with a letter (with copies provided to each Exemption
Rating Agency rating the certificates, the related
underwriter and the related trustee) stating whether
or not the characteristics of the Additional
Obligations conform to the characteristics described
in the related prospectus or prospectus supplement
and/or pooling and servicing agreement. In preparing
such letter, the independent accountant must use the
same type of procedures as were applicable to the
Obligations which were transferred to the trust as of
the closing date.
(6) The Pre-Funding Period must end no later than
three months or 90 days after the closing date or
earlier in certain circumstances if the pre-funding
account falls below the
91
minimum level specified in the pooling and servicing
agreement or an event of default occurs.
(7) Amounts transferred to any pre-funding account
and/or capitalized interest account used in
connection with the pre-funding may be invested only
in investments which are permitted by the Exemption
Rating Agencies rating the certificates and must:
(i) be direct obligations of, or
obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any
agency or instrumentality thereof (provided that such
obligations are backed by the full faith and credit
of the United States); or
(ii) have been rated (or the obligor
has been rated) in one or the three highest generic
rating categories by an Exemption Rating Agency ("DOL
Permitted Investments").
(8) The related prospectus or prospectus supplement
must describe:
(i) any pre-funding account and/or
capitalized interest account used in connection with
a pre-funding account;
(ii) the duration of the Pre-Funding
Period;
(iii) the percentage and/or dollar
amount of the Pre-Funding Limit for the trust; and
(iv) that the amounts remaining in
the pre-funding account at the end of the Pre-Funding
Period will be remitted to certificateholders as
repayments of principal.
(9) The related pooling and servicing
agreement must describe the DOL Permitted Investments
for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related
prospectus or prospectus supplement, the terms and
conditions for eligibility of Additional Obligations.
On August 23, 2000, the DOL proposed certain amendments to the
Underwriter Exemption which, if published in final form as proposed, would
permit the subordinated Securities to be purchased and held by or on behalf of,
or with Plan Assets of, a Plan if those Securities are rated "BBB-" or better at
the time of purchase. See Department of Labor Exemption Application No. D-
10809, 65 Fed. Reg. 51454 (August 23, 2000). Theses amendments will not apply
until they are finalized by the DOL and published in final form in the Federal
Register, but the proposed effective date is August 23, 2000. Accordingly,
prospective investors should consult counsel regarding the effect of these
proposed amendments.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify
which, if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities",
securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
92
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractual commitment was made or such securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
Securities without limitations as to the percentage of their assets represented
thereby, federal credit unions may invest in mortgage related securities, and
national banks may purchase certificates for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ("NCUA") Letter to Credit
Unions No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities and the NCUA's regulation "Investment and Deposit
Activities" (12 C.F.R. Part 703), which sets forth certain restrictions on
investment by federal credit unions in mortgage related securities.
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "POLICY STATEMENT") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities", which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement such "high-risk mortgage securities" include securities
such as Securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depositors institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices to be determined at the time of
sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Greenwich Capital Markets, Inc.
("GCM") acting as underwriter with other underwriters, if any, named therein. In
such event, the related Prospectus Supplement may also specify that the
underwriters will not be obligated to pay for any Securities agreed to be
purchased by purchasers pursuant to purchase agreements acceptable to the
Depositor. In connection with the sale of the Securities, underwriters may
receive compensation from the Depositor or from purchasers of the Securities in
the form of discounts, concessions or commissions. The related Prospectus
Supplement will describe any such compensation paid by the Depositor.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by GCM acting as agent or in some cases as
principal with respect to Securities that it has previously purchased or agreed
to purchase. If GCM acts as agent in the sale of Securities, GCM will receive a
selling commission with respect to each Series of Securities, depending on
market conditions, expressed as a percentage of the aggregate principal balance
of
93
the related Trust Fund Assets as of the Cut-off Date. The exact percentage for
each Series of Securities will be disclosed in the related Prospectus
Supplement. To the extent that GCM elects to purchase Securities as principal,
GCM may realize losses or profits based upon the difference between its purchase
price and the sales price. The Prospectus Supplement with respect to any Series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Securities of such Series.
The Depositor will indemnify GCM and any underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, or
will contribute to payments GCM and any underwriters may be required to make in
respect thereof.
In the ordinary course of business, GCM and the Depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the Depositor's loans or private asset backed
securities, pending the sale of such loans or private asset backed securities,
or interests therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
material federal income tax consequences with respect thereto, will be passed
upon for the Depositor by Brown & Wood LLP, New York, New York 10048 or Thacher
Proffitt & Wood, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
AVAILABLE INFORMATION
The Depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Securities. This
Prospectus, which forms a part of the Registration Statement, and the Prospectus
Supplement relating to each Series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the SEC at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. In addition, the SEC
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Depositor, that file electronically with the Commission.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "RATING AGENCY") specified in the
related Prospectus Supplement.
94
Any such rating would be based on, among other things, the adequacy of
the value of the Trust Fund Assets and any credit enhancement with respect to
such class and will reflect such Rating Agency's assessment solely of the
likelihood that holders of a class of Securities of such class will receive
payments to which such Securityholders are entitled under the related Agreement.
Such rating will not constitute an assessment of the likelihood that principal
prepayments on the related Loans will be made, the degree to which the rate of
such prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the Series of Securities. Such rating should
not be deemed a recommendation to purchase, hold or sell Securities, inasmuch as
it does not address market price or suitability for a particular investor. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect
for any given period of time or that it may not be lowered or withdrawn entirely
by the Rating Agency in the future if in its judgment circumstances in the
future so warrant. In addition to being lowered or withdrawn due to any erosion
in the adequacy of the value of the Trust Fund Assets or any credit enhancement
with respect to a Series, such rating might also be lowered or withdrawn among
other reasons, because of an adverse change in the financial or other condition
of a credit enhancement provider or a change in the rating of such credit
enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of mortgage loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the related Loans. If the residential real estate markets
should experience an overall decline in property values such that the
outstanding principal balances of the Loans in a particular Trust Fund and any
secondary financing on the related Properties become equal to or greater than
the value of the Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In additional, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any Trust Fund.
To the extent that such losses are not covered by credit enhancement, such
losses will be borne, at least in part, by the holders of one or more classes of
the Securities of the related Series.
95
INDEX OF DEFINED TERMS
Accrual Securities...............................................................................................24
Additional Obligations...........................................................................................91
Agreement ...............................................................................................11
APR ...............................................................................................15
Asset Conservation Act...........................................................................................52
Available Funds ...............................................................................................23
Average Interest Rate............................................................................................91
Bankruptcy Bond ...............................................................................................32
BIF ...............................................................................................40
Book-Entry Securities............................................................................................27
Cash Flow Bond Method............................................................................................77
Cede ...............................................................................................27
CEDEL ...............................................................................................27
CEDEL Participants...............................................................................................28
CERCLA ...............................................................................................52
Certificates ...............................................................................................11
Code ...............................................................................................66
Collateral Value ...............................................................................................15
Combined Loan-to-Value Ratio.....................................................................................15
Contingent Regulations...........................................................................................68
Cooperative ...............................................................................................29
Cut-off Date ...............................................................................................11
Debt Securities ...............................................................................................67
Definitive Security..............................................................................................27
Detailed Description.............................................................................................12
Determination Date...............................................................................................23
DOL ...............................................................................................88
DOL Permitted Investments........................................................................................92
DTC ................................................................................................9
Eligible Corporations............................................................................................86
Euroclear ...............................................................................................27
Euroclear Participants...........................................................................................29
European Depositaries............................................................................................27
FASCO ...............................................................................................17
FASIT Qualification Test.........................................................................................85
FDIC ...............................................................................................40
Financial Intermediary...........................................................................................27
FTC Rule ...............................................................................................60
Garn-St. Germain Act.............................................................................................54
GCM ...............................................................................................93
High-Yield Interest..............................................................................................86
Home Equity Loans ...............................................................................................12
Home Improvement Contracts.......................................................................................12
Home Improvements ...............................................................................................12
HUD ...............................................................................................33
Indenture ...............................................................................................21
Installment Contract.............................................................................................57
Insurance Proceeds...............................................................................................41
Insured Expenses ...............................................................................................41
Interest Weighted Securities.....................................................................................69
IO ...............................................................................................85
IRS ...............................................................................................68
96
Liquidation Expenses.............................................................................................41
Liquidation Proceeds.............................................................................................41
Loan Rate ...............................................................................................13
Manufactured Home ...............................................................................................14
Manufactured Home Contract........................................................................................7
Manufactured Home Contract Pool..................................................................................14
Manufactured Home Contract Schedule..............................................................................39
Manufacturer's Invoice Price.....................................................................................15
Mark-to-Market Regulations.......................................................................................75
Mortgage ...............................................................................................38
NCUA ...............................................................................................93
Nonresidents ...............................................................................................79
Notes ...............................................................................................11
Obligations ...............................................................................................91
OID ...............................................................................................67
OID Regulations ...............................................................................................67
PABS Agreement ...............................................................................................15
PABS Issuer ...............................................................................................16
PABS Servicer ...............................................................................................16
PABS Trustee ...............................................................................................15
Participants ...............................................................................................27
Parties in Interest..............................................................................................89
Pass-Through Rate ...............................................................................................11
Pass-Through Securities..........................................................................................75
Pay-Through Security.............................................................................................69
Permitted Investments............................................................................................40
Plans ...............................................................................................88
Policy Statement ...............................................................................................93
Pool ...............................................................................................11
Pool Insurance Policy............................................................................................32
Pool Insurer ...............................................................................................32
Pooling and Servicing Agreement..................................................................................21
Pre-Funded Amount ...............................................................................................41
Pre-Funding Account..............................................................................................41
Pre-Funding Limit ...............................................................................................91
Pre-Funding Period...............................................................................................91
Premium ...............................................................................................64
Prepayment Assumption............................................................................................69
Primary Insurer ...............................................................................................45
Principal Prepayments............................................................................................24
Properties ...............................................................................................12
Property Improvement Loans.......................................................................................63
PTE 83-1 ...............................................................................................89
Purchase Price ...............................................................................................19
Rating Agency ...............................................................................................94
Ratio Strip Securities...........................................................................................76
RCRA ...............................................................................................53
Record Date ...............................................................................................22
Refinance Loan ...............................................................................................15
Regular Interest Securities......................................................................................67
Relevant Depositary..............................................................................................27
Relief Act ...............................................................................................62
REMIC ...............................................................................................22
Reserve Account ...............................................................................................23
Residual Interest Security.......................................................................................73
97
Retained Interest ...............................................................................................21
Rules ...............................................................................................28
SAIF ...............................................................................................40
SEC ...............................................................................................17
Security Account ...............................................................................................40
Security Owners ...............................................................................................27
Security Register ...............................................................................................22
Sellers ...............................................................................................11
Senior Securities ...............................................................................................30
Servicing Agreement..............................................................................................11
Servicing Fee ...............................................................................................76
Short-Term Note ...............................................................................................80
Single Family Properties.........................................................................................12
Single Family Securities.........................................................................................89
Small Mixed-Use Properties.......................................................................................13
SMMEA ...............................................................................................92
Special Hazard Insurance Policy..................................................................................31
Special Hazard Insurer...........................................................................................31
Stripped Securities..............................................................................................75
Sub-Servicers ...............................................................................................11
Sub-Servicing Account............................................................................................40
Sub-Servicing Agreement..........................................................................................42
Support Agreement ...............................................................................................25
Support Servicer ...............................................................................................25
Tax Counsel ...............................................................................................66
Terms and Conditions.............................................................................................29
TIN ...............................................................................................78
Title I Loans ...............................................................................................63
Title I Program ...............................................................................................63
Title V ...............................................................................................55
Trust Agreement ...............................................................................................11
Trust Fund ...............................................................................................11
Trust Fund Assets ...............................................................................................11
Trustee ...............................................................................................21
U.S. Person ...............................................................................................66
Underwriter Exemption............................................................................................90
VA Guaranty Policy...............................................................................................34
98
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$254,126,000 (APPROXIMATE)
NEW SOUTH HOME EQUITY TRUST 2001-1
SELLER AND MASTER SERVICER
FINANCIAL ASSET SECURITIES CORPORATION
DEPOSITOR
ASSET-BACKED CERTIFICATES, SERIES 2001-1
--------------------
PROSPECTUS SUPPLEMENT
--------------------
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 Asset-Backed Certificates, Series 2001-1 in any state
where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Asset-Backed Certificates, Series 2001-1 and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
Asset-Backed Certificates, Series 2001-1 will be required to deliver a
prospectus supplement and prospectus for ninety days following the date of this
prospectus supplement.
GREENWICH CAPITAL MARKETS, INC.
FIRST UNION SECURITIES, INC.
UBS WARBURG LLC
March 26, 2001
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