PROSPECTUS SUPPLEMENT (To prospectus dated April 4, 2001)
$106,674,000 (APPROXIMATE)
SOUNDVIEW HOME EQUITY LOAN TRUST 2001-1
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 2001-1
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
SAXON MORTGAGE, INC.
SELLER AND MASTER SERVICER
------------------------------
- --------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 4 IN THE PROSPECTUS.
The certificates represent obligations of the trust only and do not represent an
interest in Financial Asset Securities Corp., Saxon Mortgage, Inc. or any of
their affiliates. This prospectus supplement may be used to offer and sell the
certificates only if accompanied by the prospectus.
The mortgage loans are not insured or guaranteed by any governmental agency or
by any other person.
- --------------------------------------------------------------------------------
Certificates Offered
o Only the five classes of asset backed certificates listed below are
being offered by this prospectus supplement and the accompanying
prospectus
Assets
o Fixed and adjustable rate, first and second lien, subprime residential
mortgage loans
Credit Enhancement
o Excess interest and overcollateralization
o Subordination
o For the class A and class IO certificates only, a financial guaranty
insurance policy issued by Financial Security Assurance Inc.
[GRAPHIC OMITTED]
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus supplement or the attached prospectus is accurate or complete. Making
any contrary representation is a criminal offense.
INITIAL CLASS UNDERWRITING PROCEEDS
CLASS CERTIFICATE BALANCE(1) CERTIFICATE RATE(2) PRICE TO PUBLIC DISCOUNT TO DEPOSITOR
----- ---------------------- ------------------- --------------- -------- ------------
Class A....... $ 93,075,000.00 6.265% 100.000000% 0.401500% 99.598500%
Class IO...... Notional 7.000% 13.281250% 0.041172% 13.240078%
Class M-1..... $ 6,400,000.00 7.100% 99.640625% 0.650000% 98.990625%
Class M-2..... $ 4,270,000.00 7.100% 97.312500% 0.762500% 96.550000%
Class B....... $ 2,929,000.00 7.100% (3) (3) (3)
--------------- --------------- ----------- --------------
Total...... $106,674,000.00 $109,309,372.20 $465,531.47 $108,843,840.72
=============== =============== =========== ==============
- ---------------------
(1) Subject to a permitted variance of plus or minus 10%, as described herein.
(2) The certificate rates on the offered certificates, other than the class IO
certificates, are subject to an interest rate cap and will increase after
the optional termination date.
(3) The class B certificates will be purchased by Greenwich Capital Markets,
Inc. from the depositor and may be offered from time to time for sale to
the public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. See "Underwriting" in this prospectus
supplement.
Subject to the satisfaction of specific conditions, the underwriter named below
will purchase the offered certificates from the depositor. The offered
certificates will be issued in book-entry form only on or about April 10, 2001.
[GRAPHIC OMITTED]
April 4, 2001
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
We provide information to you about the offered certificates in two
separate documents that provide progressively more detail:
o the prospectus, which provides general information, some of which may
not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of
your series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT
DIFFERS FROM THE RELATED DESCRIPTION IN THE PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Summary of Terms..................................................................................................S-3
Risk Factors......................................................................................................S-8
Description of the Mortgage Loans................................................................................S-14
The Seller.......................................................................................................S-26
The Originator...................................................................................................S-26
Prepayment and Yield Considerations..............................................................................S-33
Description of the Certificates..................................................................................S-43
The Certificate Insurer..........................................................................................S-58
The Servicer and the Master Servicer.............................................................................S-60
The Pooling and Servicing Agreement..............................................................................S-62
Use of Proceeds..................................................................................................S-74
Federal Income Tax Considerations................................................................................S-74
ERISA Considerations.............................................................................................S-78
Legal Investment Considerations..................................................................................S-81
Underwriting.....................................................................................................S-81
Experts..........................................................................................................S-82
Legal Matters....................................................................................................S-82
Ratings..........................................................................................................S-82
Annex I...........................................................................................................I-1
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Home Equity Loan Asset-Backed Certificates,
Series 2001-1 in any state where the offer is not permitted.
S-2
SUMMARY OF TERMS
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. TERMS USED IN THIS PROSPECTUS SUPPLEMENT BUT NOT DEFINED ARE DEFINED
IN THE PROSPECTUS. WE REFER YOU TO THE "INDEX OF DEFINED TERMS" IN THE
PROSPECTUS.
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.
TITLE OF CERTIFICATES...............Home Equity Loan Asset-Backed Certificates,
Series 2001-1.
ISSUER..............................Soundview Home Equity Loan Trust 2001-1.
DEPOSITOR...........................Financial Asset Securities Corp. See "The
Depositor" in the prospectus for additional
information.
SELLER AND MASTER SERVICER..........Saxon Mortgage, Inc. See "The Seller" and
"The Servicer and the Master Servicer" in
this prospectus supplement for additional
information.
SERVICER............................Meritech Mortgage Services, Inc. See "The
Servicer and the Master Servicer" in this
prospectus supplement for additional
information.
TRUSTEE AND CUSTODIAN...............Wells Fargo Bank Minnesota, National
Association. See "The Pooling and Servicing
Agreement--the Trustee" in this prospectus
supplement for additional information.
ORIGINATOR..........................Delta Funding Corporation. See "The
Originator" in this prospectus supplement
for additional information.
S-3
CERTIFICATE INSURER.................Financial Security Assurance Inc. See "The
Certificate Insurer" in this prospectus
supplement for additional information.
STATISTICAL CALCULATION DATE........The close of business on March 9, 2001.
CUT-OFF DATE........................The close of business on April 1, 2001.
CLOSING DATE........................On or about April 10, 2001.
DETERMINATION DATES.................For each month, the fifth business day prior
to the distribution date for that month.
DISTRIBUTION DATES..................The 15th day of each month or, if that day
is not a business day, the next business
day, beginning in May 2001.
RECORD DATES........................The last business day of the month before
the month in which the applicable
distribution date occurs.
FINAL SCHEDULED DISTRIBUTION
DATES...............................The final scheduled distribution date for
each class of offered certificates is as
follows:
FINAL SCHEDULED
CLASS DISTRIBUTION DATE
----- -----------------
Class A April 15, 2031
Class IO April 15, 2004
Class M-1 April 15, 2031
Class M-2 April 15, 2031
Class B April 15, 2031
S-4
DESIGNATIONS
Each class of certificates will have different characteristics. Some of those
characteristics are reflected in the following general designations. These
designations are used in this prospectus supplement and the prospectus to
provide a better understanding to potential investors.
o BOOK-ENTRY CERTIFICATES
All classes of offered certificates.
o NOTIONAL AMOUNT CERTIFICATES
Class IO certificates.
o SENIOR CERTIFICATES
Class A and class IO certificates.
o SUBORDINATE CERTIFICATES
Class M-1, class M-2 and class B certificates.
OFFERED CERTIFICATES
RATINGS
The offered certificates will not be issued unless they receive the respective
ratings set forth below from Standard & Poor's Ratings Services, Moody's
Investors Service and Fitch, Inc.:
STANDARD &
CLASS POOR'S MOODY'S FITCH
- ----- ------ ------- -----
A AAA Aaa AAA
IO AAA Aaa AAA
M-1 AA -- AA
M-2 A -- A
B BBB -- BBB
See "Ratings" in this prospectus supplement.
CERTIFICATE RATES
The interest rate for each class of offered certificates is set forth on the
cover page of, or described in, this prospectus supplement. Each interest rate,
other than the interest rate for the class IO certificates, is limited by a
maximum rate cap that will be determined based on the weighted average of the
interest rates on the mortgage loans, net of specified fees and expenses and
interest on the class IO certificates.
The certificate rate on each class of offered certificates, other than the class
IO certificates, will increase after the optional termination date.
INTEREST DISTRIBUTIONS
On each distribution date, each class of offered certificates will be entitled
to interest in an amount equal to
o the applicable certificate rate, MULTIPLIED BY
o the applicable class principal balance or notional amount on the day before
that distribution date, MULTIPLIED BY
o 1/12 MINUS
o the pro rata share of civil relief act interest shortfalls, PLUS
o any unpaid interest amounts from prior distribution dates, PLUS
o 30 days' interest on unpaid interest amounts at the applicable certificate
rate.
INTEREST ACCRUAL PERIOD
The calendar month preceding the month in which a distribution date occurs.
S-5
INTEREST CALCULATIONS
30/360 for all offered certificates.
CLASS PRINCIPAL BALANCES
The initial class principal balances of the offered certificates are set forth
on the cover page of this prospectus supplement. The notional amount of the
class IO certificates on any distribution date will equal the lesser of
o the amount for that distribution date set forth under "Description of the
Certificates" in this prospectus supplement
or
o the aggregate principal balances of the mortgage loans at the close of
business on the first day of the month prior to the month of the applicable
distribution date.
PRINCIPAL DISTRIBUTIONS
The trustee will distribute principal of the classes of offered certificates in
the priority discussed under the caption "Description of the
Certificates--Distribution priorities" in this prospectus supplement.
MINIMUM DENOMINATIONS
$25,000.
FORM
Book-Entry.
SMMEA ELIGIBILITY
The offered certificates will not be mortgage related securities.
ERISA ELIGIBILITY
The offered certificates may be eligible for purchase by persons investing
assets of employee benefit plans or similar arrangements. See "ERISA
Considerations" in this prospectus supplement.
OTHER CERTIFICATES
The trust will issue three additional classes of certificates. These
certificates will be designated as the class P certificates, subordinated class
BIO certificates and Residual certificates and are not being offered to the
public pursuant to this prospectus supplement and the prospectus. Information
about the class BIO certificates and the Residual certificates is being included
because they provide credit enhancement to the offered certificates.
THE MORTGAGE LOANS
Set forth below is selected information about the mortgage loans that existed at
the close of business on the statistical calculation date. The mortgage loan
information set forth in the pooling and servicing agreement will be adjusted
for payments of principal received on the mortgage loans as of the cut-off date
and are subject to a permitted variance of plus or minus 10%. The trust will be
entitled to all payments received after the cut-off date, other than payments of
principal and interest due on or before the cut-off date. All values are
approximate.
Number of loans.................................................................................................1,469
Aggregate principal balance...........................................................................$106,674,548.46
Range of principal balances....................................................................$9,908.41 - 370,872.14
Average principal balance..................................................................................$72,617.12
Range of interest rates.................................................................................7.69 - 15.09%
Weighted average interest rate................................................................................11.446%
Range of CLTV..........................................................................................13.14 - 90.00%
Weighted average CLTV..........................................................................................73.48%
Range of original terms to
maturity (months).......................................................................................60 - 360
S-6
Weighted average original term to
maturity (months)............................................................................................321
Range of remaining terms to maturity
(months)................................................................................................58 - 360
Weighted average remaining term to
maturity (months)............................................................................................319
Range of loan ages (months).....................................................................................0 - 5
Weighted average loan age (months)..................................................................................2
Subject to prepayment penalties (as %
of principal balance)......................................................................................80.36
ADJUSTABLE RATE MORTGAGE LOANS
Number of loans...................................................................................................438
Aggregate principal balance............................................................................$34,578,525.31
Range of principal balances...................................................................$13,196.84 - 357,000.00
Range of interest rates.................................................................................7.69 - 14.84%
Weighted average interest rate................................................................................11.454%
Range of gross margins...................................................................................3.29 - 8.69%
Weighted average gross margin..................................................................................6.212%
Range of lifetime caps.................................................................................14.69 - 21.84%
Weighted average lifetime cap.................................................................................18.454%
3/27 loans (as % of principal balance of the
Adjustable Rate Mortgage Loans)............................................................................99.49
2/28 loans (as % of principal balance of the
Adjustable Rate Mortgage Loans).............................................................................0.51
Weighted average periodic cap (first
adjustment date)...........................................................................................3.00%
Weighted average periodic cap
(subsequent adjustment dates)..............................................................................1.00%
FIXED RATE MORTGAGE LOANS
Number of loans.................................................................................................1,031
Aggregate principal balance............................................................................$72,096,023.15
Range of principal balances....................................................................$9,908.41 - 370,872.14
Range of interest rates.................................................................................7.94 - 15.09%
Weighted average interest rate................................................................................11.442%
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the holders
of specific classes of certificates against losses due to defaults by the
borrowers under the mortgage loans.
The offered certificates, other than the class B certificates, have the benefit
of two types of credit enhancement:
o the use of excess interest to cover losses and to create
overcollateralization
o subordination of distributions on the class or classes of certificates with
lower relative payment priorities
The class B certificates, which have the lowest relative payment priority, have
the benefit of only the first form of credit enhancement.
The senior certificates also will have the benefit of a financial guaranty
insurance policy issued by the certificate insurer. The financial guaranty
insurance policy will guarantee timely payment of interest and ultimate payment
of principal on the senior certificates.
OPTIONAL TERMINATION BY THE MASTER SERVICER
The master servicer may, at its option, terminate the trust on any distribution
date when the aggregate principal balance of the mortgage loans is less than or
equal to 10% of the sum of the principal balances of the mortgage loans as of
the cut-off date.
FEDERAL INCOME TAX CONSIDERATIONS
The trust will make separate elections to treat segregated pools of its assets
as "real estate mortgage investment conduits," creating a tiered REMIC
structure. The offered certificates, excluding any rights to receive net rate
cap carryover, will be designated as "regular interests" in a REMIC and, will be
treated as debt instruments of a REMIC for federal income tax purposes.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax Considerations"
in this prospectus supplement and in the prospectus.
S-7
RISK FACTORS
AN INVESTMENT IN THE OFFERED CERTIFICATES INVOLVES SIGNIFICANT RISKS.
BEFORE YOU DECIDE TO INVEST IN THE OFFERED CERTIFICATES, WE RECOMMEND THAT YOU
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS. UNLESS OTHERWISE SPECIFIED, ALL
REFERENCES TO PERCENTAGES AND DOLLAR AMOUNTS OF MORTGAGE LOANS REFER TO THE
MORTGAGE LOANS AS OF THE STATISTICAL CALCULATION DATE.
YOU MAY HAVE DIFFICULTY SELLING YOUR CERTIFICATES
The offered certificates will not be listed on any securities exchange.
As a result, if you wish to sell your certificates, you will have to find a
purchaser that is willing to purchase your certificates.
The underwriter intends to make a secondary market for the offered certificates.
The underwriter may do so by offering to buy the offered certificates from
investors that wish to sell. However, the underwriter will not be obligated to
make offers to buy the offered certificates and may stop making offers at any
time. In addition, the prices offered, if any, may not reflect prices that other
potential purchasers, were they to be given the opportunity, would be willing to
pay. There have been times in the past where there have been very few buyers of
similar asset backed securities, and there may be similar times in the future.
As a result, you may not be able to sell your certificates when you wish to do
so or you may not be able to obtain the price you wish to receive.
CERTAIN FEATURES OF THE MORTGAGE LOANS MAY RESULT IN LOSSES OR CASH FLOW
SHORTFALLS
There are a number of features of the mortgage loans that create risks
of loss, including the following:
o THE BORROWERS HAVE LESS THAN PERFECT CREDIT AND MAY BE MORE LIKELY TO
DEFAULT. The originator's underwriting standards are less restrictive than
those of Fannie Mae or Freddie Mac with respect to a borrower's credit
history and other factors. A derogatory credit history or a lack of credit
history will not necessarily prevent the originator from making a loan but
may reduce the size and the loan-to-value ratio of the loan the originator
will make. As a result of these less restrictive standards, the trust may
experience higher rates of delinquencies, defaults and losses than if the
mortgage loans were underwritten in a more traditional manner.
o NEWLY ORIGINATED MORTGAGE LOANS MAY BE MORE LIKELY TO DEFAULT WHICH MAY
CAUSE LOSSES. Defaults on mortgage loans tend to occur at higher rates
during the early years of the mortgage loans. Substantially all of the
mortgage loans will have been originated within 12 months prior to the
sale to the trust. As a result, the trust may experience higher rates of
default than if the mortgage loans had been outstanding for a longer
period of time.
o DEFAULTS ON SECOND LIEN MORTGAGE LOANS MAY RESULT IN MORE SEVERE LOSSES.
As of the statistical calculation date, approximately 11.61% of the
mortgage loans are secured by second liens on the related property. If a
borrower on a mortgage loan secured by a second lien defaults, the trust's
rights to proceeds on liquidation of the related property are subordinate
to the rights of the holder of the first lien on the related property.
There may not be enough proceeds to pay both the first lien and the second
lien, and the trust would suffer a loss.
S-8
o THE CONCENTRATION OF MORTGAGE LOANS IN SPECIFIC GEOGRAPHIC AREAS MAY
INCREASE THE RISK OF LOSS. Economic conditions in the states where
borrowers reside may affect the delinquency, loss and foreclosure
experience of the trust with respect to the mortgage loans. As of the
statistical calculation date, approximately 19.42%, 16.97%, 12.63%, 8.45%
and 8.10% of the mortgage loans are secured by properties in New York,
Ohio, Pennsylvania, Illinois and New Jersey, respectively. These states
may suffer economic problems or reductions in market values for
residential properties that are not experienced in other states. Because
of the concentration of mortgage loans in these states, those types of
problems may have a greater effect on the offered certificates than if
borrowers and properties were more spread out in different geographic
areas.
YOUR YIELD TO MATURITY MAY BE REDUCED BY PREPAYMENTS AND DEFAULTS
The pre-tax yield to maturity on your investment is uncertain and will
depend on a number of factors, including the following:
O THE RATE OF RETURN OF PRINCIPAL IS UNCERTAIN. The amount of distributions
of principal of the offered certificates and the time when those
distributions are received depend on the amount and the times at which
borrowers make principal payments on the mortgage loans. Those principal
payments may be regularly scheduled payments or unscheduled payments
resulting from prepayments or defaults of the mortgage loans. The rate of
prepayment may be affected by the credit standings of the borrowers. If a
borrower's credit standing improves, that borrower may be able to
refinance his existing loan on more favorable terms. If a borrower's
credit standing declines, the borrower may not be able to refinance.
The adjustable rate mortgage loans have fixed interest rates for two or
three years and then adjust. Those mortgage loans may have higher
prepayments as they approach their first adjustment dates because the
borrowers may want to avoid periodic changes to their monthly payments.
If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate. If you purchase your certificates at a premium and principal
is repaid faster than you anticipate, then your yield may be lower than
you anticipate.
The seller as a party to the mortgage loan purchase agreement may be
required to purchase mortgage 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 mortgage 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 the mortgage loans.
The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the offered
certificates then entitled to principal distributions at any time that the
overcollateralization provided by the mortgage pool falls below the
required level. This will result in an earlier return of the principal of
the offered certificates and will influence the yield on the offered
certificates in a manner similar to the manner in which principal
prepayments will influence the yield on the offered certificates.
S-9
o YOU MAY BE UNABLE TO REINVEST DISTRIBUTIONS IN COMPARABLE INVESTMENTS.
Asset backed securities, like the offered certificates, usually produce
more returns of principal to investors when market interest rates fall
below the interest rates on the mortgage loans and produce less returns of
principal when market interest rates rise above the interest rates on the
mortgage loans. If borrowers refinance their mortgage loans as a result of
lower interest rates, you will receive an unanticipated payment of
principal. As a result, you are likely to receive more money to reinvest
at a time when other investments generally are producing a lower yield
than that on the offered certificates, and are likely to receive less
money to reinvest when other investments generally are producing a higher
yield than that on the offered certificates. You will bear the risk that
the timing and amount of distributions on your offered certificates will
prevent you from attaining your desired yield.
o LIMITATIONS ON CERTIFICATE RATES WILL AFFECT YOUR YIELD TO MATURITY. The
rate at which interest accrues on each class of offered certificates,
other than the class IO certificates, is subject to a rate cap. The rate
cap for those offered certificates, is based on the weighted average of
the interest rates on the mortgage loans, net of specified fees and
expenses. If mortgage loans with relatively higher loan rates prepay, the
rate cap on the classes of offered certificates will be lower than
otherwise would be the case.
o OWNERS OF CLASS IO CERTIFICATES MAY NOT RECOVER THEIR INITIAL INVESTMENTS.
An investment in the class IO certificates is risky because the return of
the investment depends solely on the payments of interest by borrowers
under the mortgage loans. If the borrowers prepay their mortgage loans, no
further interest payments will be made. If borrowers prepay their mortgage
loans very quickly, investors in the class IO certificates may not recover
their initial investments. In addition, the class IO certificates are not
entitled to any distributions after the 36th distribution date.
THE SUBORDINATE CERTIFICATES WILL ABSORB CASH SHORTFALLS BEFORE THE SENIOR
CERTIFICATES
The subordinate certificates will not receive any distributions of
interest until the senior certificates receive their interest distributions and
will not receive any distributions of principal until the senior certificates
receive their principal distributions. If the available funds are insufficient
to make all of the required distributions on the offered certificates, one or
more classes of subordinate certificates will not receive all of their
distributions. In addition, losses due to defaults by borrowers, to the extent
not covered by the amount of overcollateralization and excess interest at that
time, will be allocated first to the subordinate certificates in the reverse
order of payment priority. Any allocation of a loss to a class of subordinate
certificates will reduce the amount of interest and, to the extent not
reimbursed from future excess interest, principal they will receive.
Distributions to the subordinate certificates are made in the following order:
to the class M-1 certificates, then to the class M-2 certificates and then to
the class B certificates, and losses are allocated to the subordinate
certificates in the reverse order, commencing with the class B certificates. The
class M-1 certificates receive distributions before, and are allocated losses
after, the other classes of subordinate certificates. Conversely, the class B
certificates receive distributions after, and are allocated losses before, the
other classes of subordinate certificates. As a result, the class B certificates
will be affected to a larger degree by any losses on the mortgage loans.
The subordinate certificates are not covered by the financial guaranty
insurance policy.
S-10
THE TRANSFER OF PRIMARY SERVICING MAY RESULT IN HIGHER DELINQUENCIES AND
DEFAULTS WHICH MAY ADVERSELY AFFECT THE YIELD ON YOUR CERTIFICATES
Saxon Mortgage, Inc. will be the master servicer under the pooling and
servicing agreement. Delta Funding Corporation was servicing the mortgage loans
on an interim basis pending the transfer of its servicing obligations to
Meritech Mortgage Services, Inc. as servicer and Saxon Mortgage, Inc., as master
servicer. Although the servicing transfer was completed on April 2, 2001, all
transfers of servicing involve the risk of disruption in collections due to data
input errors, misapplied or misdirected payments, system incompatibilities and
other reasons. As a result, the rate of delinquencies and defaults are likely to
increase at least for a period of time. We cannot assure you as to the extent or
duration of any disruptions associated with the transfer of servicing or as to
the resulting effects on the yield on your certificates.
ENVIRONMENTAL CONDITIONS AFFECTING THE MORTGAGED PROPERTIES MAY RESULT IN LOSSES
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the costs of clean-up. In
several states, this type of lien has priority over the lien of an existing
mortgage or owner's interest against real property. In addition, under the laws
of some states and under the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, a lender may be liable, as an owner or
operator, for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether or not the environmental damage or threat was caused by a
prior owner. A lender also risks liability on foreclosure of the mortgaged
property.
VIOLATIONS OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES
Applicable state laws generally regulate interest rates and other
charges and require specific disclosures. In addition, other state laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the mortgage loans.
The mortgage loans are also subject to federal laws, including:
(1) the federal Truth in Lending Act and Regulation Z
promulgated under the Truth in Lending Act, which require particular
disclosures to the borrowers regarding the terms of the
mortgage loans;
(2) the Equal Credit Opportunity Act and Regulation B
promulgated under the Equal Credit Opportunity Act, 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;
(3) the Americans with Disabilities Act, which, among other
things, prohibits discrimination on the basis of disability in the full
and equal enjoyment of the goods, services,
S-11
facilities, privileges, advantages or accommodations of any place of
public accommodation; and
(4) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
The seller will represent that none of the mortgage loans will be
subject to the Home Ownership and Equity Protection Act of 1994.
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 servicer to collect all or part of the
principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the trust, as
owner of the mortgage loans, to damages and administrative enforcement.
IF PAYMENTS ON THE MORTGAGE LOANS ARE INSUFFICIENT AND THE CREDIT ENHANCEMENT
FOR THE CERTIFICATES IS INADEQUATE, YOU WILL INCUR A LOSS
All distributions on the offered certificates will be made from
payments by borrowers under the mortgage loans or, in the case of the senior
certificates, payments under the financial guaranty insurance policy. The trust
has no other assets to make distributions on the offered certificates. The
mortgage loans are not insured or guaranteed by any person.
The credit enhancement features described in the summary of this
prospectus supplement are intended to enhance the likelihood that holders of the
senior certificates, and to a limited extent, the holders of the subordinate
certificates, will receive regular payments of interest and principal. However,
we cannot assure you that the applicable credit enhancement will adequately
cover any shortfalls in cash available to pay your certificates as a result of
delinquencies or defaults on the mortgage loans. If delinquencies or defaults
occur on the mortgage loans, neither the master servicer, the servicer nor any
other entity will advance scheduled monthly payments of interest and principal
on delinquent or defaulted mortgage loans if such advances are not likely to be
recovered. If excess interest and subordination are insufficient to protect
against shortfalls, the certificate insurer, subject to certain limitations
described in this prospectus supplement, will be required to make a payment to
the senior certificateholders. If the certificate insurer is unable to meet its
obligation under the financial guaranty insurance policy, you could a experience
a loss on your investment. If substantial losses occur as a result of defaults
and delinquent payments on the mortgage loans, holders of the subordinate
certificates may suffer losses.
The trust is the only person that is obligated to make distributions on
the offered certificates. The offered certificates are not insured by any
governmental agency.
INSOLVENCY OF THE SELLER MAY CAUSE LOSSES
The seller intends that its transfer of the mortgage loans to the
depositor will constitute a sale, the depositor intends that its transfer of the
mortgage loans to the trust will constitute a sale, and the trust will agree to
treat each transfer as a sale. In the event of the insolvency of the seller, the
trustee in bankruptcy or the seller, as debtor-in-possession, may attempt to
recharacterize a sale as a loan by
S-12
the trust to the seller secured by a pledge of the mortgage loans. If an attempt
were to be successful, holders of the offered certificates could receive a
prepayment of their certificates. Any prepayment could adversely affect the
yield on the offered certificates. Even if an attempt were to be unsuccessful,
holders of the offered certificates could experience delays in distributions
which would adversely affect the yield on the offered certificates.
WITHDRAWAL OR DOWNGRADING OF INITIAL RATINGS WILL REDUCE THE PRICES FOR
CERTIFICATES
A security rating is not a recommendation to buy, sell or hold
securities. Similar ratings on different types of securities do not necessarily
mean the same thing. We recommend that you analyze the significance of each
rating independently from any other rating. Any rating agency may change its
rating of the offered certificates after those offered certificates are issued
if that rating agency believes that circumstances have changed. Any subsequent
withdrawal or downgrade in rating will likely reduce the price that a subsequent
purchaser will be willing to pay for your certificates.
LEGAL ACTIONS ARE PENDING AGAINST DELTA FUNDING CORPORATION
Several class-action lawsuits have been filed against a number of
consumer finance companies alleging violations of various federal and state
consumer protection laws. The originator has been named in several lawsuits
styled as class actions and has entered into settlement agreements with various
governmental agencies following investigations of the originator's lending
practices. While it is impossible to estimate with any certainty the ultimate
legal and financial liability with respect to such claims, a judgment against
the originator could affect the enforceability or collectibility of the mortgage
loans and may result in the repurchase of some or all of the mortgage loans and
may adversely affect the yield on your certificates. See "The Originator" in
this prospectus supplement for a description of these lawsuits and settlement
agreements.
RECENT DEVELOPMENTS REGARDING SAXON MORTGAGE, INC.
On January 28, 2000, Dominion Resources, Inc. ("Dominion"), the
indirect parent of the seller, the master servicer and the servicer, announced
the completion of its merger with Consolidated Natural Gas Company. In
connection with the merger and the registration by Dominion as a public utility
holding company under the Public Utility Holding Company Act of 1935, the
Securities and Exchange Commission issued an order requiring Dominion to divest
Dominion Capital, Inc., the indirect parent of the seller, the master servicer
and the servicer, within three years after the date the merger was completed.
Dominion has divested substantial portions of the assets of First Source
Financial LLP and First Dominion Capital, LLC, which are owned by Dominion
Capital. While Dominion plans to divest the seller, the master servicer and the
servicer, as required by the order, there can be no assurance as to the timing
or the form of the divestiture transaction or whether any acquiror will be of
the same credit quality or have the same financial resources as Dominion.
THE OFFERED CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS
The offered certificates are not suitable investments for any investor
that requires a regular or predictable schedule of payments or payment on any
specific date. The offered certificates are complex investments that should be
considered only by investors who, either alone or with their financial, tax
S-13
and legal advisors, have the expertise to analyze the prepayment, reinvestment,
default and market risk, the tax consequences of an investment, and the
interaction of these factors.
DESCRIPTION OF THE MORTGAGE LOANS
The information set forth in the following paragraphs is based on
servicing records and representations about the mortgage loans that were made by
the originator at the time it sold the loans.
The seller is not affiliated with the originator. The seller did not participate
in the origination of the mortgage loans and the mortgage loans were not
originated according to the seller's underwriting guidelines. Under the mortgage
loan purchase agreement, the seller will make certain representations and
warranties to the depositor relating to, among other things, the characteristics
of the mortgage loans. Subject to certain limitations, the seller will be
obligated to repurchase any mortgage loan as to which there exists deficient
documentation or an uncured breach of any such representation or warranty, if
such breach of any such representation or warranty materially and adversely
affects the certificateholders' interests in such mortgage loan. The seller will
have no obligation with respect to the certificates in its capacity as a party
to the mortgage loan purchase agreement and pooling and servicing agreement
other than the repurchase obligation described above. The originator will have
no obligation with respect to the certificates in its capacity as originator.
Neither the underwriter nor any of their respective affiliates have made or will
make any representation as to the accuracy or completeness of such information.
GENERAL
The depositor will purchase the mortgage loans from the seller pursuant
to the mortgage loan purchase agreement, dated as of April 1, 2001, between the
seller and the depositor. Pursuant to the pooling and servicing agreement, dated
as of April 1, 2001, among the depositor, the seller, the master servicer, the
servicer and the trustee, the depositor will cause the mortgage loans and the
depositor's rights under the mortgage loan purchase agreement to be assigned to
the trustee for the benefit of the certificateholders. See "The Pooling and
Servicing Agreement" in this prospectus supplement and "The Agreements" in the
prospectus.
The mortgage loans were originated by the originator or acquired by the
originator in the secondary market in the ordinary course of its business and
were underwritten or re-underwritten by the originator in accordance with its
underwriting standards as described under "The Originator--Underwriting" in this
prospectus supplement.
Each mortgage loan will bear interest at a fixed rate or an adjustable
rate that is calculated on the "actuarial basis." The fixed rate mortgage loans
are secured by first or second liens, and the adjustable rate mortgage loans,
called ARMs, are secured by first liens, primarily on one- to four-family
residential properties, called the mortgaged properties.
The interest rate, also referred to as the loan rate, borne by each ARM
is subject to adjustment on the date set forth in the related promissory note,
each called a mortgage note, and at regular intervals thereafter, each referred
to as a change date, to equal the sum of (a) the applicable loan index and (b)
the number of basis points set forth in that mortgage note, called the gross
margin, subject to rounding and to the effects of the applicable periodic cap,
the applicable lifetime cap and the applicable lifetime floor. The periodic cap
limits changes in the loan rate for each ARM on each
S-14
change date. The lifetime cap is the maximum loan rate that may be borne by an
ARM at any point. The lifetime floor is the minimum loan rate that may be borne
by an ARM at any point. The ARMs do not provide for negative amortization.
For all of the mortgage loans that are ARMs, the loan index is the
London interbank offered rate for six-month United States dollar deposits, and
the change dates occur every six months after the initial change date. The
reference for each applicable loan index and the date prior to a change date as
of which the loan index is determined is set forth in the related mortgage note.
All of the mortgage loans that are ARMs have initial change dates that are
either 24 months after origination, referred to as the 2/28 loans or 36 months
after origination, referred to as the 3/27 loans. The periodic cap for all of
the ARMs, subsequent to the first change date, is 1.00%. However, the periodic
cap for the initial change date is 3.00%.
As of the statistical calculation date, substantially all of the
mortgage loans that are ARMs were accruing interest at loan rates that are below
the sum of the related gross margin and the loan index that would otherwise have
been applicable. On the first change date for each mortgage loan, the related
loan rate will adjust to the sum of the applicable loan index and the related
gross margin subject to the application of the related periodic cap, lifetime
cap and lifetime floor.
As of the statistical calculation date, approximately 2.48%, by
principal balance of the mortgage loans have repair escrows that are being held
by the seller. The appraisals for these mortgage loans were based on the
conditions of the mortgaged properties without the repairs, that is, the
appraisals were not "subject to" appraisals. The repairs are typically completed
within 30 to 60 days after the loan closes. The related mortgage loan documents
give the seller the right to apply the escrowed amounts to prepayment of the
mortgage loan if the repairs are not completed.
As of the statistical calculation date, approximately 80.36%, by
principal balance of the mortgage loans provided for payment by the mortgagor of
a prepayment charge on specific prepayments as provided in the related mortgage
note. The holders of the class P certificates will be entitled to all prepayment
charges received on the mortgage loans and such amounts will not be available
for distribution on the other classes of certificates.
Under certain circumstances, as described in the pooling and servicing
agreement, the servicer may waive the payment of any otherwise applicable
prepayment charge. Investors should conduct their own analysis of the effect, if
any, that the prepayment charges, and decisions by the servicer with respect to
the waiver thereof, may have on the prepayment performance of the mortgage
loans. The depositor makes no representations as to the effect that the
prepayment charges, and decisions by the servicer with respect to the waiver
thereof, may have on the prepayment performance of the mortgage loans.
Approximately 2.65%, by principal balance of the mortgage loans as of
the statistical calculation date provide that if the borrower makes the first 12
payments on or before their due dates, beginning in the thirteenth month the
loan rate on the borrower's mortgage loan will be reduced by 50 basis points
(0.50%). If a borrower qualifies for the first rate reduction, that borrower can
qualify for a second reduction of 50 basis points (0.50%) in the 25th month by
making each of the 13th through 24th payments on or before their due dates.
S-15
CREDIT SCORES
"Credit scores" are obtained by many lenders in connection with
mortgage loan applications to help assess a borrower's credit-worthiness. Credit
scores are obtained from credit reports provided by various credit reporting
organizations, each of which may employ differing computer models and
methodologies in calculating credit scores. The credit score is designed to
assess a borrower's credit history at a single point, using objective
information currently on file for the borrower at a particular credit reporting
organization. Information utilized to create a credit score may include, among
other things, payment history, delinquencies on accounts, level of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience. Credit scores range from approximately 400 to approximately 800,
with higher scores indicating an individual with a more favorable credit history
compared to an individual with a lower score. However, in making credit scores
available to lenders, credit reporting organizations purport only to be
providing lenders with a measurement of the relative degree of risk a borrower
represents to a lender, that is, a borrower with a higher score is statistically
expected to be less likely to default in payment than a borrower with a lower
score. In addition, it should be noted that credit scores were developed to
indicate a level of default probability over a two-year period, which does not
correspond to the life of a mortgage loan. Furthermore, credit scores were not
developed specifically for use in connection with mortgage loans, but for
consumer loans in general, and assess only the borrower's past credit history.
Therefore, a credit score does not take into consideration the differences
between mortgage loans and consumer loans generally or the specific
characteristics of the related mortgage loan including, for example, the LTV or
CLTV, the collateral for the mortgage loan, or the debt to income ratio. There
can be no assurance that the credit scores of the mortgagors will be an accurate
predictor of the likelihood of repayment of the related mortgage loans.
STATISTICAL INFORMATION
Set forth below is approximate statistical information as of the
statistical calculation date (except as otherwise noted) regarding the mortgage
loans. Prior to the closing date, mortgage loans may be removed as a result of
incomplete documentation or otherwise if the depositor deems such removal
necessary or desirable, and may be prepaid at any time. The mortgage loan
information set forth in the pooling and servicing agreement will be as of the
cut-off date, with principal balances adjusted for payments received on the
mortgage loans as of the cut-off date. The depositor will file a current report
on Form 8-K with the Commission, together with the pooling and servicing
agreement, within fifteen days after the initial issuance of the offered
certificates. The depositor believes that the information set forth in this
prospectus supplement is representative of the mortgage loans as of the cut-off
date subject to a variance of plus or minus 10% in the principal balance
thereof.
The sum of the percentage columns in the following tables may not equal
100% due to rounding.
As of the statistical calculation date, approximately 1.45%, of the
mortgage loans by principal balance, have payments which are 30 to 59 days
delinquent.
S-16
STATISTICAL CALCULATION DATE PRINCIPAL BALANCES
STATISTICAL CALCULATION % OF STATISTICAL
RANGE OF STATISTICAL CALCULATION NUMBER OF DATE CALCULATION DATE
DATE PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- -------------- ----------------- -----------------
$ 9,908.41-$ 50,000.00.......... 606 $ 20,195,422.35 18.93%
$ 50,000.01-$100,000.00............ 558 39,168,231.65 36.72
$100,000.01-$150,000.00............. 187 22,920,090.20 21.49
$150,000.01-$200,000.00............. 70 11,894,453.19 11.15
$200,000.01-$250,000.00............. 27 5,985,546.71 5.61
$250,000.01-$300,000.00............. 10 2,742,465.69 2.57
$300,000.01-$350,000.00............. 6 1,939,856.24 1.82
$350,000.01-$370,872.14............. 5 1,828,482.43 1.71
Total........................... 1,469 $ 106,674,548.46 100.00%
As of the statistical calculation date, the average principal balance of the
mortgage loans was approximately $72,617.12.
S-17
GEOGRAPHIC DISTRIBUTION BY STATE(1)
STATISTICAL CALCULATION % OF STATISTICAL
NUMBER OF DATE CALCULATION DATE
GEOGRAPHIC AREA MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------
Arizona........................... 1 $ 146,200.52 0.14%
Arkansas.......................... 10 462,381.28 0.43
California........................ 2 243,854.32 0.23
Colorado.......................... 8 812,562.27 0.76
Connecticut....................... 26 2,036,515.10 1.91
Delaware.......................... 7 419,489.27 0.39
District of Columbia.............. 3 224,663.12 0.21
Florida........................... 49 3,117,749.87 2.92
Georgia........................... 57 4,200,091.68 3.94
Illinois.......................... 98 9,009,294.60 8.45
Indiana........................... 45 2,512,844.90 2.36
Kansas............................ 5 216,047.90 0.20
Kentucky.......................... 11 520,177.05 0.49
Louisiana......................... 20 977,580.47 0.92
Maine............................. 2 81,737.57 0.08
Maryland.......................... 37 2,136,535.36 2.00
Massachusetts..................... 21 1,845,297.27 1.73
Michigan.......................... 62 3,337,210.17 3.13
Minnesota......................... 1 79,980.38 0.07
Mississippi....................... 12 538,709.95 0.51
Missouri.......................... 36 2,517,485.60 2.36
New Hampshire..................... 4 133,837.83 0.13
New Jersey........................ 82 8,637,540.12 8.10
New Mexico........................ 1 87,714.30 0.08
New York.......................... 225 20,717,012.21 19.42
North Carolina.................... 58 4,510,155.52 4.23
Ohio.............................. 266 18,105,078.50 16.97
Oklahoma.......................... 2 49,970.40 0.05
Pennsylvania...................... 236 13,469,459.12 12.63
Rhode Island...................... 3 404,855.84 0.38
South Carolina.................... 13 974,866.63 0.91
Tennessee......................... 31 2,043,150.69 1.92
Vermont........................... 1 29,974.21 0.03
Virginia.......................... 22 1,555,628.43 1.46
Washington........................ 1 69,693.03 0.07
West Virginia..................... 8 257,826.03 0.24
Wyoming........................... 3 191,376.95 0.18
----- --------------- ------
Total......................... 1,469 $106,674,548.46 100.00%
===== =============== ======
- ------------------------
(1) Determined by property address so designated in the related mortgage.
As of the statistical calculation date, no more than 0.67% of the
mortgage loans by principal balance are located in any one zip code.
S-18
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS(1)
RANGE OF ORIGINAL STATISTICAL CALCULATION % OF STATISTICAL
COMBINED NUMBER OF DATE CALCULATION DATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------
13.14% to 15.00%.................. 1 $ $26,733.64 0.03%
15.01% to 20.00%.................. 3 90,774.54 0.09
20.01% to 25.00%.................. 10 407,087.80 0.38
25.01% to 30.00%.................. 10 383,026.71 0.36
30.01% to 35.00%.................. 16 587,252.92 0.55
35.01% to 40.00%.................. 18 982,637.25 0.92
40.01% to 45.00%.................. 29 1,653,292.32 1.55
45.01% to 50.00%.................. 42 2,592,327.89 2.43
50.01% to 55.00%.................. 65 4,159,533.60 3.90
55.01% to 60.00%.................. 105 6,522,317.18 6.11
60.01% to 65.00%.................. 124 8,041,595.60 7.54
65.01% to 70.00%.................. 188 12,296,886.88 11.53
70.01% to 75.00%.................. 217 16,147,905.66 15.14
75.01% to 80.00%.................. 329 26,442,624.01 24.79
80.01% to 85.00%.................. 191 15,640,419.70 14.66
85.01% to 90.00%.................. 121 10,700,132.76 10.03
----- --------------- ------
Total......................... 1,469 $106,674,548.46 100.00%
===== =============== ======
- ---------------------
(1) The original combined loan-to-value ratios, referred to as CLTVs, shown
above are equal, with respect to each statistical calculation mortgage
loan, to (x) the sum of (a) the original principal balance of the
mortgage loan at the date of origination plus (b) in the case of a
second lien mortgage loan, the remaining balance of the senior lien(s),
if any, at the date of origination of the mortgage loan (y) divided by
the value of the related mortgaged property, based upon the lesser of
the appraisal made at the time of origination of the mortgage loan or
the purchase price of the mortgaged property, where the proceeds are
used to purchase the mortgaged property. No assurance can be given that
the values of mortgaged properties have remained or will remain at
their levels as of the dates of origination of the related statistical
calculation mortgage loans. If the residential real estate market
should experience an overall decline in property values such that the
outstanding balances of mortgage loans together with, in the case of a
second lien mortgage loan, the outstanding balances of the related
first liens, become equal to or greater than the value of the related
mortgaged properties, actual losses could be higher than those now
generally experienced in the mortgage lending industry.
As of the statistical calculation date the weighted average CLTV of the
mortgage loans is 73.48%.
S-19
STATISTICAL CALCULATION DATE LOAN RATES
STATISTICAL CALCULATION % OF STATISTICAL
RANGE OF STATISTICAL NUMBER OF DATE CALCULATION DATE
CALCULATION DATE LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------------- ----------------- -----------------
7.690%- 8.000%................... 10 $ 750,649.42 0.70%
8.001%- 8.500%................... 9 1,032,408.55 0.97
8.501%- 9.000%................... 32 3,018,837.81 2.83
9.001%- 9.500%................... 44 3,904,705.98 3.66
9.501%-10.000%................... 104 10,544,845.21 9.89
10.001%-10.500%................... 113 9,252,834.67 8.67
10.501%-11.000%................... 194 16,326,706.66 15.31
11.001%-11.500%................... 169 12,068,162.81 11.31
11.501%-12.000%................... 201 14,395,953.49 13.50
12.001%-12.500%................... 147 9,586,612.89 8.99
12.501%-13.000%................... 173 11,132,631.42 10.44
13.001%-13.500%................... 101 5,751,639.61 5.39
13.501%-14.000%................... 96 4,968,673.28 4.66
14.001%-14.500%................... 48 2,481,965.45 2.33
14.501%-15.000%................... 26 1,347,121.21 1.26
15.001%-15.090%................... 2 110,800.00 0.10
----- --------------- ------
Total ........................ 1,469 $106,674,548.46 100.00%
===== =============== ======
As of the statistical calculation date, the weighted average current
loan rate of the mortgage loans was approximately 11.446% per annum.
S-20
ORIGINAL TERM TO MATURITY
STATISTICAL CALCULATION % OF STATISTICAL
RANGE OF ORIGINAL TERM NUMBER OF DATE CALCULATION DATE
TO MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- -------------- ----------------- -----------------
60- 90......................... 25 $ 867,492.82 0.81%
91-150......................... 68 3,411,740.77 3.20
151-210......................... 224 13,198,469.14 12.37
211-270......................... 93 5,796,194.45 5.43
271-330......................... 9 906,660.70 0.85
331-360......................... 1,050 82,493,990.58 77.33
----- ------------- ------
Total....................... 1,469 $106,674,548.46 100.00%
===== =============== ======
As of the statistical calculation date, the weighted average original
term to maturity of the mortgage loans was approximately 321 months.
REMAINING TERM TO MATURITY
RANGE OF REMAINING STATISTICAL CALCULATION % OF STATISTICAL
TERM TO MATURITY NUMBER OF DATE CALCULATION DATE
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------- -------------- ----------------- -----------------
58-60.......................... 9 $ 237,711.45 0.22%
61-120......................... 70 3,065,101.43 2.87
121-180......................... 233 13,566,051.39 12.72
181-240......................... 95 6,084,197.82 5.70
241-300......................... 12 1,227,495.79 1.15
301-360......................... 1,050 82,493,990.58 77.33
----- --------------- ------
Total....................... 1,469 $106,674,548.46 100.00%
===== =============== ======
As of the statistical calculation date, the weighted average remaining
term to maturity of the mortgage loans was approximately 319 months.
MONTHS SINCE ORIGINATION
STATISTICAL CALCULATION % OF STATISTICAL
RANGE OF MONTHS NUMBER OF DATE PRINCIPAL CALCULATION DATE
SINCE ORIGINATION MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ------- -----------------
0............................... 57 $ 4,393,978.11 4.12%
1-5............................. 1,412 102,280,570.35 95.88
----- -------------- ------
Total........................... 1,469 $106,674,548.46 100.00%
===== =============== ======
As of the statistical calculation date, the weighted average months
since origination was approximately two months.
S-21
PROPERTY TYPE
STATISTICAL CALCULATION % OF STATISTICAL
NUMBER OF DATE CALCULATION DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
Single Family................... 1,247 $ 87,250,825.94 81.79%
Two Family...................... 105 7,956,279.35 7.46
Three Family.................... 38 4,408,363.33 4.13
Condominium..................... 48 3,603,229.65 3.38
Four Family..................... 15 2,235,052.50 2.10
Manufactured Housing
(DW, Permanent)................. 10 657,621.08 0.62
Multi-Use....................... 6 563,176.61 0.53
----- --------------- ------
Total....................... 1,469 $106,674,548.46 100.00%
===== =============== ======
DOCUMENTATION PROGRAM
STATISTICAL CALCULATION % OF STATISTICAL
NUMBER OF DATE CALCULATION DATE
DOCUMENTATION PROGRAM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
Full Documentation................ 1,106 $ 78,749,094.26 73.82%
No Income Documentation........... 205 17,541,533.27 16.44
Limited Documentation............. 123 7,618,605.50 7.14
Stated Income
Documentation..................... 35 2,765,315.43 2.59
----- --------------- ------
Total:............................ 1,469 $106,674,548.46 100.00%
===== =============== ======
OCCUPANCY TYPE(1)
STATISTICAL CALCULATION % OF STATISTICAL
NUMBER OF DATE CALCULATION DATE
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
Owner Occupied.................... 1,299 $ 95,852,076.60 89.85%
Non-Owner Occupied................ 170 10,822,471.86 10.15
----- --------------- ------
Total......................... 1,469 $106,674,548.46 100.00%
===== =============== ======
- -----------------------
(1) Based upon representations made by the borrowers at the time of origination
of such mortgage loans.
S-22
CREDIT GRADE
STATISTICAL CALCULATION % OF STATISTICAL
NUMBER OF DATE PRINCIPAL CALCULATION DATE
CREDIT GRADE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ------------ -------------- ------- -----------------
A................................. 859 $ 69,975,231.72 65.60%
B................................. 275 17,140,837.12 16.07
C................................. 221 13,560,894.73 12.71
D................................. 114 5,997,584.89 5.62
----- --------------- ------
Total......................... 1,469 $106,674,548.46 100.00%
===== =============== ======
CREDIT SCORES
STATISTICAL CALCULATION % OF STATISTICAL
NUMBER OF DATE PRINCIPAL CALCULATION DATE
RANGE OF CREDIT SCORES MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ------- -----------------
Not Available..................... 72 $ 3,214,952.84 3.01%
401-450........................... 14 1,033,351.63 0.97
451-500........................... 141 9,466,784.87 8.87
501-550........................... 359 24,768,809.87 23.22
551-600........................... 327 23,905,948.83 22.41
601-650........................... 270 21,800,639.46 20.44
651-700........................... 174 12,777,049.34 11.98
701-750........................... 88 7,659,330.04 7.18
751-800 .......................... 23 1,978,792.65 1.85
801-809 .......................... 1 68,888.93 0.06
----- --------------- ------
Total......................... 1,469 $106,674,548.46 100.00%
===== =============== ======
As of the statistical calculation date, the weighted average credit
score of the mortgage loans was approximately 591.
S-23
GROSS MARGIN--ARMS
STATISTICAL CALCULATION % OF ARMs STATISTICAL
NUMBER OF DATE CALCULATION DATE
RANGE OF GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
3.290%-3.500% ..................... 2 $ 170,024.65 0.49%
3.501%-4.000%...................... 3 207,995.94 0.60
4.001%-4.500%...................... 10 773,380.48 2.24
4.501%-5.000%...................... 25 2,594,428.18 7.50
5.001%-5.500%...................... 63 5,697,513.01 16.48
5.501%-6.000%...................... 84 7,802,417.44 22.56
6.001%-6.500%...................... 57 4,078,611.38 11.80
6.501%-7.000%...................... 69 5,434,582.19 15.72
7.001%-7.500%...................... 49 3,164,411.61 9.15
7.501%-8.000%...................... 45 2,810,356.74 8.13
8.001%-8.500%...................... 29 1,754,844.71 5.07
8.501%-8.690%...................... 2 89,958.98 0.26
--- -------------- ------
Total.......................... 438 $34,578,525.31 100.00%
=== ============== ======
As of the statistical calculation date, the weighted average gross
margin of the mortgage loans that are ARMs was approximately 6.212% per annum.
LIFETIME CAP--ARMS
STATISTICAL CALCULATION % OF ARMS STATISTICAL
NUMBER OF DATE PRINCIPAL CALCULATION DATE
RANGE OF LIFETIME CAPS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ------- -----------------
14.690%-15.000% .................. 1 $ 107,845.21 0.31%
15.001%-15.500% .................. 5 412,369.45 1.19
15.501%-16.000% .................. 8 689,470.65 1.99
16.001%-16.500% .................. 9 724,364.69 2.09
16.501%-17.000% .................. 29 3,342,848.25 9.67
17.001%-17.500% .................. 46 4,513,485.57 13.05
17.501%-18.000%................... 65 5,629,224.93 16.28
18.001%-18.500%................... 44 3,504,846.82 10.14
18.501%-19.000%................... 53 4,265,597.06 12.34
19.001%-19.500%................... 40 3,383,456.48 9.78
19.501%-20.000%................... 40 2,646,329.84 7.65
20.001%-20.500%................... 31 1,792,682.60 5.18
20.501%-21.000%................... 40 2,023,574.20 5.85
21.001%-21.500%................... 19 1,053,892.46 3.05
21.501%-21.840%................... 8 488,537.10 1.41
--- -------------- ------
Total 438 $34,578,525.31 100.00%
=== ============== ======
As of the statistical calculation date, the weighted average lifetime
cap rate of the mortgage loans that are ARMs was approximately 18.454% per
annum.
S-24
LIFETIME FLOOR--ARMS
STATISTICAL CALCULATION % OF ARMS STATISTICAL
NUMBER OF DATE PRINCIPAL CALCULATION DATE
RANGE OF LIFETIME FLOORS MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ------------------------ -------------- ------- -----------------
7.690%-8.000%..................... 1 $ 107,845.21 0.31%
8.001%-8.500%..................... 5 412,369.45 1.19
8.501%-9.000%..................... 8 689,470.65 1.99
9.001%-9.500%..................... 9 724,364.69 2.09
9.501%-10.000%.................... 29 3,342,848.25 9.67
10.001%-10.500%................... 46 4,513,485.57 13.05
10.501%-11.000%................... 65 5,629,224.93 16.28
11.001%-11.500%................... 44 3,504,846.82 10.14
11.501%-12.000%................... 53 4,265,597.06 12.34
12.001%-12.500%................... 40 3,383,456.48 9.78
12.501%-13.000%................... 40 2,646,329.84 7.65
13.001%-13.500%................... 31 1,792,682.60 5.18
13.501%-14.000%................... 40 2,023,574.20 5.85
14.001%-14.500%................... 19 1,053,892.46 3.05
14.501%-14.840%................... 8 488,537.10 1.41
--- -------------- ------
Total............................. 438 $34,578,525.31 100.00%
=== ============== ======
As of the statistical calculation date, the weighted average lifetime
floor rate of the mortgage loans that are ARMs was approximately 11.454% per
annum.
MONTH OF NEXT CHANGE DATE--ARMS
STATISTICAL CALCULATION % OF ARMS STATISTICAL
NUMBER OF DATE PRINCIPAL CALCULATION DATE
MONTH OF NEXT CHANGE DATE MORTGAGE LOANS BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ------- -----------------
November 2002..................... 1 $ 74,714.58 0.22%
February 2003 .................... 1 102,800.00 0.30
October 2003 ..................... 8 781,042.41 2.26
November 2003..................... 62 4,702,542.16 13.60
December 2003..................... 157 12,745,592.27 36.86
January 2004...................... 100 7,696,480.27 22.26
February 2004..................... 108 8,417,753.62 24.34
March 2004........................ 1 57,600.00 0.17
--- -------------- ------
Total......................... 438 $34,578,525.31 100.00%
=== ============== ======
As of the statistical calculation date, the weighted average number of
months to the next change date for the 3/27 loans was 34 months and for the 2/28
loans was 23 months.
S-25
THE SELLER
The information set forth in the following paragraphs has been provided
by Saxon Mortgage, Inc. None of the depositor, the trustee, the certificate
insurer, the underwriter, any of their affiliates or any other party has made or
will make any representation as to the accuracy or completeness of such
information.
The seller, Saxon Mortgage, Inc., is a Virginia corporation
headquartered at 4880 Cox Road, Glen Allen, Virginia. The seller originates and
purchases residential mortgage and home equity loans and sponsors residential
mortgage and home equity loan securitizations, with all such loans serviced by
its affiliate, Meritech Mortgage Services, Inc. The seller began its business in
1992, primarily as a purchaser of non-conforming loans. Beginning in 1994, the
seller increasingly focused its business on subprime credits, building broker
and direct-to-consumer origination channels in addition to its loan purchase
production channel. In 1996, the seller was acquired as an indirect subsidiary
of Dominion Resources, Inc. See "Risk Factors--Recent developments regarding
Saxon Mortgage, Inc." in this prospectus supplement.
The seller is not affiliated with the originator. The seller did not
participate in the origination of the mortgage loans and the mortgage loans were
not originated or re-underwritten according to the seller's underwriting
guidelines.
THE ORIGINATOR
The information set forth in the following paragraphs has been provided
by Delta Funding Corporation. None of the depositor, the seller, the master
servicer, the servicer, the trustee, the underwriter, the certificate insurer,
any of their affiliates or any other party has made or will make any
representation as to the accuracy or completeness of such information.
GENERAL
Delta Funding Corporation (the "originator") is a New York corporation
headquartered at 1000 Woodbury Road, Woodbury, New York. The originator is a
specialty consumer finance company that has engaged in originating, acquiring,
selling and servicing home equity loans since 1982. Throughout its operating
history, the originator has focused on lending to individuals who generally do
not qualify for conforming credit. The originator makes loans to these borrowers
for a variety of purposes, for example debt consolidation, home improvement,
refinancing or education, and these loans are primarily secured by first
mortgages on one- to four-family residential properties. The originator's
corporate headquarters is located at 1000 Woodbury Road, Woodbury, New York
11797. Its telephone number is (516) 364-8500.
UNDERWRITING
All of the originator's brokers and correspondents are provided with
the originator's underwriting guidelines. Loan applications received from
brokers and correspondents are classified according to particular
characteristics, including but not limited to: ability to pay, credit history of
the applicant, loan-to-value ratio and general stability of the applicant in
terms of employment history,
S-26
time in residence and condition and location of the collateral. The originator
has established classifications with respect to the credit profile of the
applicant, and each loan is placed into one of four letter ratings "A" through
"D," with subratings within those categories. Terms of loans made by the
originator, as well as maximum loan-to-value ratios and debt-to-income ratios,
vary depending on the classification of the applicant. Loan applicants with less
favorable credit ratings are generally offered loans with higher interest rates
and lower loan-to-value ratios than applicants with more favorable credit
ratings. The general criteria used by the originator's underwriting staff in
classifying loan applicants are set forth below.
UNDERWRITING CRITERIA OF DELTA FUNDING CORPORATION
"A" RISK "B" RISK "C" RISK "D" RISK
-------- -------- -------- --------
Credit profile Excellent credit Good overall credit Good to fair credit Fair to poor credit
history
Existing mortgage Current at application Current at application Up to 30 days 90 days delinquent or
history time and a maximum time and a maximum delinquent at more
of two 30-day late of four 30-day late application time and
payments in the last payments in the last a maximum of four
12 months 12 months 30-day late payments
and one 90-day late
payment in the last
12 months
Other credit Minor 30-day late Some slow pays Slow pays, some Not a factor.
items allowed with a allowed but majority open delinquencies Derogatory credit
letter of explanation; of credit and allowed. Isolated must be paid with
no open collection installment debt paid charge-offs, collection proceeds. Must
accounts, charge-offs, as agreed. Small accounts or demonstrate ability to
judgments isolated charge-offs, judgments case-by-case pay
collections, or
judgments allowed
case-by-case
Bankruptcy filings Discharged more than Discharged more than Discharged more than May be open at
three years prior to two years prior to one year prior to closing, but must be
closing and excellent closing and excellent closing and good paid off with
reestablished credit reestablished credit reestablished credit proceeds
Maximum loan-to-value
ratio:
Owner-occupied Generally 80% (up to Generally 80% (up to Generally 75% (up to Generally 65% (up to
90%*) for a one- to 85%*) for a one- to 80%*) for a one- to 70%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Non-owner occupied Generally 75% (up to Generally 70% (up to Generally 65% (up to Generally 55% (up to
85%*) for a one- to 80%*) for a one- to 75%*) for a one- to 60%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Employment Minimum 2 years Minimum 2 years No minimum No minimum
employment in the employment in the required required
same field same field
- -------------------
* On an exception basis
The originator uses the foregoing categories and characteristics as
guidelines only. On a case-by-case basis, the originator may determine that the
prospective borrower warrants an exception, if sufficient compensating factors
exist. Examples of compensating factors are:
o low loan-to-value ratio,
o low debt ratio,
o long-term stability of employment and/or residence,
S-27
o excellent payment history on past mortgages, or
o a significant reduction in monthly expenses.
The mortgage loans originated by the originator have amortization
schedules ranging from 5 years to 30 years, generally bear interest at fixed
rates and require equal monthly payments which are due as of a scheduled day of
each month which is fixed at the time of origination. Substantially all of the
originator's mortgage loans are fully amortizing loans. The originator primarily
purchases fixed rate loans which amortize over a period not to exceed 30 years.
Loans that are not fully amortizing generally provide for scheduled amortization
over 30 years, with a due date and a balloon payment at the end of the fifteenth
year. The principal amounts of the loans purchased or originated by the
originator generally range from a minimum of $10,000 to a maximum of $350,000.
The originator generally does not acquire or originate any mortgage loans where
the combined loan-to-value ratio exceeds 90%. The collateral securing loans
acquired or originated by the originator are generally one- to four-family
residences, including condominiums and townhomes, and these properties may or
may not be occupied by the owner. It is the originator's policy not to accept
commercial properties or unimproved land as collateral. However, the originator
will accept mixed-use properties such as a property where a portion of the
property is used for residential purposes and the balance is used for commercial
purposes and will accept small multifamily properties of 5 to 8 units, both at
reduced loan-to-value ratios. The originator does not purchase loans where any
senior mortgage contains open-end advance, negative amortization or shared
appreciation provisions.
The originator's mortgage loan program includes:
o a full documentation program for salaried borrowers,
o a limited documentation program,
o a non-income verification program for self-employed borrowers,
and
o a stated income program.
The total monthly debt obligations, which include principal and
interest on the new loan and all other mortgages, loans, charge accounts and
scheduled indebtedness, generally is 55% or less of the borrower's monthly gross
income. Loans to borrowers who are salaried employees must be supported by
current employment information in addition to employment history. This
information for salaried borrowers is verified based on written confirmation
from employers, one or more pay-stubs, recent W-2 tax forms, recent tax returns
or telephone confirmation from the employer. For the originator's limited
documentation program, the originator requires a job letter to be submitted
which contains the same information one would find on a standard verification of
employment form:
o job position,
o length of time on job,
o current salary, and
o the job letter should appear on the employer's letterhead.
For the originator's non-income verification program, proof of
self-employment in the same business plus proof of current self-employed status
is required. The originator's stated income
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program, which represents a very small percentage of the originator's loans, is
only offered for better credit quality borrowers where a telephone verification
is done by an underwriter to verify that the borrower is employed. The
originator usually requires lower combined loan-to-value ratios with respect to
loans made under programs other than the full documentation program.
Assessment of an applicant's ability and willingness to pay is another
important element employed by the originator. The originator employs experienced
non-conforming mortgage loan credit underwriters to scrutinize the applicant's
credit profile and to evaluate whether an impaired credit history is a result of
adverse circumstances or a continuing inability or unwillingness to meet credit
obligations in a timely manner. Personal circumstances including divorce, family
illnesses or deaths and temporary job loss due to layoffs and corporate
downsizing will often impair an applicant's credit record.
The originator has instituted underwriting checks and balances that are
designed to ensure that every loan is reviewed and approved by a minimum of two
underwriters, with some higher loan amounts requiring a third approval. The
originator believes that by requiring each file be seen by a minimum of two
underwriters, a high degree of accuracy and quality control is ensured
throughout the underwriting process and before funding. The originator's
underwriting of every loan submitted consists not only of a thorough credit
review, but also
o a separate appraisal review conducted by the originator's
appraisal review department and
o a full compliance review, to ensure that all documents have been
properly prepared, all applicable disclosures given in a timely
fashion, and proper compliance with all federal and state
regulations.
Appraisals are performed by third party, fee-based appraisers or by the
originator's approved appraisers and generally conform to current Fannie Mae and
Freddie Mac secondary market requirements for residential property appraisals.
Each appraisal includes, among other things, an inspection of both the exterior
and interior of the subject property and data from sales within the preceding 12
months of similar properties within the same general location as the subject
property.
The originator performs an appraisal review on each loan prior to
closing or prior to purchasing. In addition to reviewing each appraisal for
accuracy, the originator accesses other sources to validate sales used in the
appraisal to determine market value. These sources include:
o Multiple Listing Services in nine states;
o assessment and sales services, such as Comps, Inc., Pace, 1st
American and Transamerica;
o internet services such as Realtor.com; and
o other sources for verification, including broker price opinions
and market analyses by local real estate agents.
Post closing, in addition to its normal due diligence, the originator
randomly selects one out of every ten appraisals, and performs a drive-by
appraisal. This additional step gives the originator an added degree of comfort
with respect to appraisers with which the originator has had limited experience.
The originator actively tracks and grades, on criteria that it has developed
over time, all
S-29
appraisers from which it accepts appraisals for quality control purposes and
does not accept work from appraisers who have not conformed to its review
standards.
Upon completion of a broker loan's underwriting and processing, the
closing of the loan is scheduled with a closing attorney or agent approved by
the originator. The closing attorney or agent is responsible for completing the
loan closing transaction in accordance with applicable law and the originator's
operating procedures. Title insurance that insures the originator's interest as
mortgagee and evidence of adequate homeowner's insurance naming the originator
as an additional insured party are required on all loans.
The originator performs a post-funding quality control review to
monitor and evaluate the originator's loan origination policies and procedures.
The quality control department is separate from the underwriting department, and
reports directly to a member of senior management.
At least 10% of all loan originations and purchases are subjected to a
full quality control re-underwriting and review, the results of which are
reported to senior management on a monthly basis. Discrepancies noted by the
audit are analyzed and corrective actions are instituted. A typical quality
control review currently includes:
o obtaining a new drive-by appraisal for each property;
o running a new credit report from a different credit report agency;
o reviewing loan applications for completeness, signatures, and for
consistency with other processing documents;
o obtaining new written verification of income and employment;
o obtaining new written verification of mortgage to re-verify any
outstanding mortgages; and
o analyzing the underwriting and program selection decisions.
The quality control process is updated from time to time as the
originator's policies and procedures change.
CONSUMER LAWSUITS
The originator's lending practices have been the subject of several
lawsuits styled as class actions and of investigations by various regulatory
agencies including the Office of the Attorney General of the State of New York
(the "NYOAG"), the Banking Department of the State of New York (the "NYBD") and
the United States Department of Justice (the "DOJ"). The current status of these
actions are summarized below.
A. In or about November 1998, the originator received notice that it
had been named in a lawsuit filed in the United States District Court for the
Eastern District of New York. In December 1998, plaintiffs filed an amended
complaint alleging that the originator had violated the Home Equity and
Ownership Protection Act ("HOEPA"), the Truth in Lending Act ("TILA") and New
York State
S-30
General Business Law ss. 349. The complaint seeks (a) certification of a class
of plaintiffs, (b) declaratory judgment permitting rescission, (c) unspecified
actual, statutory, treble and punitive damages (including attorneys' fees), (d)
certain injunctive relief, and (e) declaratory judgment declaring the loan
transactions void and unconscionable.
On December 7, 1998, plaintiff filed a motion seeking a temporary
restraining order and preliminary injunction, enjoining the originator from
conducting foreclosure sales on 11 properties. The district court judge ruled
that in order to consider such a motion, plaintiff must move to intervene on
behalf of these 11 borrowers. Thereafter, plaintiff moved to intervene on behalf
of 3 of these 11 borrowers and sought the injunctive relief on their behalf. The
originator opposed the motions. On December 14, 1998, the district court judge
granted the motion to intervene and on December 23, 1998, the district court
judge issued a preliminary injunction enjoining the originator from proceeding
with the foreclosure sales of the three intervenors' properties. The originator
has filed a motion for reconsideration of the December 23, 1998 order.
In January 1999, the originator filed an answer to plaintiff's first
amended complaint. In July 1999, plaintiffs were granted leave, on consent, to
file a second amended complaint. In August 1999, plaintiffs filed a second
amended complaint that, among other things, added additional parties but
contained the same causes of action alleged in the first amended complaint. In
September 1999, the originator filed a motion to dismiss the complaint which was
opposed by plaintiffs and in June 2000 was granted in part and denied in part by
the Court. In or about October 1999, plaintiffs filed a motion seeking an order
preventing the originator, its attorneys and/or the NYBD from issuing notices to
certain of the originator's borrowers, in accordance with a settlement agreement
entered into by and between the originator and the NYBD. In or about October
1999 and November 1999, respectively, the originator and the NYBD submitted
opposition to plaintiffs' motion. In March 2000, the court issued an order that
permits the originator to issue an approved form of notice. In September 1999,
plaintiffs filed a motion for class certification which was opposed by the
originator in February 2000, and ultimately withdrawn without prejudice by
plaintiffs in January 2001. The originator believes that it has meritorious
defenses and intends to defend this suit, but cannot estimate with any certainty
its ultimate legal or financial liability, if any, with respect to the alleged
claims.
B. In or about March, 1999, the originator received notice that it had
been named in a lawsuit filed in the Supreme Court of the State of New York, New
York County, alleging that the originator had improperly charged certain
borrowers processing fees. The complaint seeks (1) certification of a class of
plaintiffs, (2) an accounting, and (3) unspecified compensatory and punitive
damages (including attorneys' fees), based upon alleged (a) unjust enrichment,
(b) fraud, and (c) deceptive trade practices. In April 1999, the originator
filed an answer to plaintiff's complaint. In September 1999, the originator
filed a motion to dismiss the complaint, which was opposed by plaintiffs and in
February 2000, the court denied the motion to dismiss. In April 1999, the
originator filed a motion to change venue and plaintiffs opposed the motion. In
July 1999, the court denied the motion to change venue.
The originator appealed and in March 2000, the appellate court granted the
originator's appeal to change venue from New York County to Nassau County. In
August 1999, the plaintiffs filed a motion for class certification, which the
originator opposed in July 2000. In or about September 2000, the court granted
plaintiffs' motion for class certification from which the originator filed a
notice of appeal. The originator believes that it has meritorious defenses and
intends to defend this suit, but cannot estimate with any certainty its ultimate
legal or financial liability, if any, with respect to the alleged claims.
S-31
C. In or about July 1999, the originator received notice that it had
been named in a lawsuit filed in the United States District Court for the
Western District of New York, alleging that amounts collected and maintained by
it in certain borrowers' tax and insurance escrow accounts exceeded certain
statutory (RESPA) and/or contractual (the respective borrowers' mortgage
agreements) ceilings. The complaint seeks (a) certification of a class of
plaintiffs, (b) declaratory relief finding that the originator's practices
violate applicable statutes and/or the mortgage agreements, (c) injunctive
relief, and (d) unspecified compensatory and punitive damages (including
attorneys' fees). In October 1999, the originator filed a motion to dismiss the
complaint. In or about November 1999, the case was transferred to the United
States District Court for the Northern District of Illinois. In February 2000,
the plaintiff opposed the originator's motion to dismiss. In March 2000, the
court granted the originator's motion to dismiss in part, and denied it in part.
The originator believes that it has meritorious defenses and intends to defend
this suit, but cannot estimate with any certainty its ultimate legal or
financial liability, if any, with respect to the alleged claims.
D. In or about April 2000, the originator received notice that it had
been named in a lawsuit filed in the Supreme Court of the State of New York,
Nassau County, alleging that the originator has improperly charged and collected
from borrowers certain fees when they paid off their mortgage loans with the
originator. The complaint seeks (a) certification of a class of plaintiffs, (b)
declaratory relief finding that the payoff statements used include unauthorized
charges and are deceptive and unfair, (c) injunctive relief and (d) unspecified
compensatory, statutory and punitive damages (including legal fees), based upon
alleged violations of Real Property Law 274-a, unfair and deceptive practices,
money had and received and unjust enrichment, and conversion. The originator
answered the complaint in June 2000. The originator believes that it has
meritorious defenses and intends to defend this suit, but cannot estimate with
any certainty its ultimate legal or financial liability, if any, with respect to
the alleged claims.
REGULATORY ACTIONS
In or about August 1999, the NYOAG filed a lawsuit against the
originator alleging violations of (a) RESPA (by paying yield spread premiums),
(b) HOEPA and TILA, (c) ECOA, (d) New York Executive Law ss. 296-a, and (e) New
York Executive Law ss. 63(12). In September 1999, the originator and the NYOAG
settled the lawsuit, as part of a global settlement by and among the originator,
the NYOAG and the NYBD, evidenced by that certain (a) Remediation Agreement by
and between the originator and the NYBD, dated as of September 17, 1999 and (b)
Stipulated Order on Consent by and among the originator, Delta Financial
Corporation and the NYOAG, dated as of September 17, 1999. As part of the
settlement, the originator has, among other things, implemented agreed upon
changes to its lending practices; is providing reduced loan payments aggregating
$7.25 million to certain borrowers identified by the NYBD; and created a fund
financed by the grant of 525,000 shares of Delta Financial Corporation's common
stock. The proceeds of the fund will be used, for, among other things, to pay
borrowers and to pay for a variety of consumer educational and counseling
programs. As a result, the NYOAG lawsuit has been dismissed as against the
originator.
The Remediation Agreement and Stipulated Order on Consent supersede the
originator's previously announced settlements with the NYOAG and the NYBD. In
March 2000, the originator finalized a settlement agreement with DOJ, the
Federal Trade Commission and the Department of Housing and Urban Renewal, to
complete the global settlement it had reached with the NYSBD and NYOAG. The
Federal agreement mandates some additional compliance efforts for the
originator, but it does not require any additional financial commitment.
S-32
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on the offered certificates, the
aggregate amount of distributions on the offered certificates and the yield to
maturity of the offered certificates will be related primarily to the rate and
timing of payments of principal on the mortgage loans. The rate of principal
payments on the mortgage loans will in turn be affected by their amortization
schedules and by the rate of principal prepayments, including for this purpose
prepayments resulting from refinancing, liquidations of the mortgage loans due
to defaults, casualties, condemnations and repurchases by the seller or
purchases by the servicer. The mortgage loans may be prepaid by the mortgagors
at any time. However, a majority of the mortgage loans are subject to a
prepayment charge.
THE CERTIFICATE RATES
The certificate rate for each class of offered certificates, other than
the class IO certificates, is subject to the available funds cap. The available
funds cap on any distribution date is determined, in part, by reference to the
weighted average loan rate of the mortgage loans net of certain fees and
expenses and interest on the class IO certificates. If mortgage loans bearing
higher loan rates were to prepay at rates faster than mortgage loans with lower
loan rates, the available funds cap would be lower than otherwise would be the
case.
The yield to investors in the certificates also will be sensitive to,
among other things, the levels of the loan index on the ARMs. All of the
mortgage loans that are ARMs are either 2/28 loans which will bear interest at
fixed loan rates for 24 months after origination of the mortgage loans or 3/27
loans which will bear interest at fixed loan rates for 36 months after
origination of the mortgage loans. Although each of the ARMs bears interest at
an adjustable rate, this rate is subject to a periodic rate cap, a lifetime
floor and a lifetime cap. If the loan index increases substantially between
change dates, the adjusted loan rate on the related mortgage loan may not equal
the loan index plus the related gross margin due to the constraint of the caps.
In this event, the related loan rate will be less than would have been the case
in the absence of the caps. In addition, the loan rate applicable to any change
date will be based on the loan index related to the change date. Thus, if the
value of the loan index with respect to a mortgage loan rises, the lag in time
before the corresponding loan rate increases will, all other things being equal,
slow the upward adjustment of the available funds cap. Furthermore, mortgage
loans that have not reached their first change date are more likely to be
subject to the applicable periodic rate cap on their first change date. See
"Description of the Mortgage Loans" in this prospectus supplement. Although the
holders of the offered certificates, other than the class IO certificates, will
be entitled to receive the related net rate carryover to the extent funds are
available for that purpose as described and in the priority set forth in this
prospectus supplement, there is no assurance that sufficient funds will be
available. The financial guaranty insurance policy does not cover, and the
ratings on the certificates do not address the likelihood of, the payment of any
net rate carryover.
SUBORDINATE CERTIFICATES
The subordinate certificates provide credit enhancement for the senior
certificates and may absorb losses on the mortgage loans. The weighted average
lives of, and the yields to maturity on, the subordinate certificates, in
reverse order of their relative payment priorities, will be progressively more
S-33
sensitive to the rate and timing of mortgagor defaults and the severity of
ensuing losses on the mortgage loans. If the actual rate and severity of losses
on the mortgage loans is higher than those assumed by a holder of a subordinate
certificate, the actual yield to maturity on the holder's certificate may be
lower than the yield expected by the holder based on that assumption. Realized
losses on the mortgage loans will reduce the class principal balance of the
class of subordinate certificates then outstanding with the lowest relative
payment priority if and to the extent that the aggregate of the class principal
balances of all classes of certificates, following all distributions on a
distribution date, exceeds the pool balance. As a result of these reductions,
less interest will accrue on the class of subordinate certificates than
otherwise would be the case.
The basic principal amount includes the net proceeds in respect of
principal received upon liquidation of a liquidated mortgage loan. If the net
proceeds are less than the unpaid principal balance of the liquidated mortgage
loan, the pool balance will decline more than the aggregate class principal
balance of the offered certificates, thus reducing the overcollateralization
amount. If this difference is not covered by the overcollateralization amount or
the application of excess interest, the class of subordinate certificates then
outstanding with the lowest relative payment priority will bear the loss.
In addition, the subordinate certificates will not be entitled to any principal
distributions prior to the stepdown date or during the continuation of a
delinquency event, unless all of the certificates with a higher relative payment
priority have been paid in full. Because of the disproportionate distribution of
principal of the senior certificates, depending on the timing of realized
losses, the subordinate certificates may bear a disproportionate percentage of
the realized losses on the mortgage loans.
For all purposes, the class B certificates will have the lowest payment
priority of any class of subordinate certificates.
The subordinate certificates are not covered by the financial guaranty
insurance policy.
YIELD SENSITIVITY OF THE NOTIONAL AMOUNT CERTIFICATES
As the owner of interest-only strip securities, the holders of the
notional amount certificates will be entitled to receive monthly distributions
only of interest, as described in this prospectus supplement. Because they will
not receive any distributions of principal, the holders of the notional amount
certificates will generally be affected by prepayments, liquidations and other
dispositions, including optional purchases described in this prospectus
supplement, of the mortgage loans to a greater degree than holders of the other
classes of offered certificates. However, except in the case of very rapid
prepayment rates, the notional amount will decline in accordance with a
pre-determined schedule. Thus, the yield sensitivity of the notional amount
certificates is likely to be more stable than if the notional amount were
calculated based on the amortization of the underlying mortgage loans directly.
However, there can be no assurance that this will be the case. Holders of the
notional amount certificates will not be entitled to any distributions after the
36th distribution date.
PREPAYMENT CONSIDERATIONS
Prepayments, liquidations and purchases of the mortgage loans,
including any optional purchase by the servicer of a delinquent mortgage loan
and any optional purchase of the remaining mortgage loans in connection with the
termination of the trust, in each case as described in this prospectus
supplement, will result in distributions on the offered certificates then
entitled to
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distributions of principal which would otherwise be distributed over the
remaining terms of the mortgage loans. Since the rate of payment of principal of
the mortgage loans will depend on future events and a variety of factors, no
assurance can be given as to the rate or the rate of principal prepayments. The
extent to which the yield to maturity of a class of offered certificates may
vary from the anticipated yield will depend upon the degree to which a
certificate of a class is purchased at a discount or premium, and the degree to
which the timing of payments on that certificate is sensitive to prepayments,
liquidations and purchases of the mortgage loans.
Holders of the offered certificates should consider, in the case of any
certificates purchased at a discount, and particularly the subordinate
certificates, the risk that a slower than anticipated rate of principal payments
on the mortgage loans could result in an actual yield that is lower than the
anticipated yield and, in the case of any offered certificates purchased at a
premium, the risk that a faster than anticipated rate of principal payments on
the mortgage loans could result in an actual yield that is lower than the
anticipated yield. The timing of losses on the mortgage loans also will affect
an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the trust are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity.
The rate of prepayment on the mortgage loans cannot be predicted. Home
equity loans such as the mortgage loans have been originated in significant
volume only during the past few years. Generally, home equity loans are not
viewed by borrowers as permanent financing. Accordingly, the mortgage loans may
experience a higher rate of prepayment than traditional first mortgage loans.
The prepayment experience of the trust with respect to the mortgage loans may be
affected by a wide variety of factors, including economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and changes affecting the deductibility for federal income tax purposes
of interest payments on home equity loans. The increased availability of credit
to borrowers with impaired or limited credit profiles may affect the prepayment
experience on the mortgage loans. As borrowers re-establish or establish an
acceptable credit profile, they may be able to refinance their loans at lower
rates reflecting their improved credit profiles. Substantially all of the
mortgage loans contain "due-on-sale" provisions and the servicer is required by
the agreement to enforce these provisions, unless enforcement is not permitted
by applicable law. The enforcement of a "due-on-sale" provision will have the
same effect as a prepayment of the related mortgage loan. See "Certain Legal
Aspects of the Loans-Due-on-Sale Clauses" in the prospectus.
The rate of prepayment on fixed rate mortgage loans is affected by
prevailing market rates for mortgage loans of a comparable term and risk level.
When the market interest rate is below the applicable loan rate, mortgagors may
have an increased incentive to refinance their mortgage loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to meet
cash flow needs or to make other investments.
As is the case with conventional fixed-rate mortgage loans, the ARMs
may be subject to a greater rate of principal prepayments in a declining
interest rate environment. For example, if prevailing interest rates fall
significantly, ARMs could be subject to higher prepayment rates than if
prevailing interest rates remain constant because the availability of fixed-rate
mortgage loans at competitive interest rates may encourage mortgagors to
refinance their ARMs to "lock in" a lower fixed interest rate. The 2/28 loans
and 3/27 loans may become subject to higher prepayment rates as
S-35
these loans near their respective initial change dates, even if prevailing
interest rates for mortgage loans of a comparable term and risk level are at or
even slightly above the loan rates, as the borrowers attempt to avoid increases
in their monthly payments. However, no assurance can be given as to the level of
prepayments that the mortgage loans will experience.
In addition to the foregoing factors affecting the weighted average
lives of the offered certificates, the use of excess interest to pay principal
of the offered certificates will result in acceleration of the offered
certificates then entitled to principal distributions, relative to the
amortization of the mortgage loans, particularly in the early months of the
transaction. This acceleration feature creates overcollateralization which
equals the excess of the pool principal balance over the aggregate class
principal balance of the certificates. Once the required level of
overcollateralization is reached, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization.
FINAL SCHEDULED DISTRIBUTION DATES
The final scheduled distribution date for each class of offered
certificates is set forth under "Summary of Terms-Final Scheduled Distribution
Dates" in this prospectus supplement. The final scheduled distribution date for
the notional amount certificates is the 36th distribution date. The final
scheduled distribution date for the class A, class M-1, class M-2 and class B
certificates is the distribution date immediately following the month of the
last due date of the latest maturing statistical calculation mortgage loan plus
one month. It is expected that the last actual distribution date for each class
of offered certificates will occur significantly earlier than the final
scheduled distribution dates but the final distribution date could occur later
than the applicable final scheduled distribution date.
PAYMENT DELAY FEATURE
The effective yield to the certificateholders of each class of offered
certificates will be lower than the yield otherwise produced by the certificate
rate for each class and the purchase price of these certificates because
distributions will not be payable to the certificateholders until the 15th day
of the month following the month of accrual, without any additional distribution
of interest or earnings on that certificate in respect of the delay.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will
increase the yield on offered certificates purchased at a price less than par
and will decrease the yield on offered certificates purchased at a price greater
than par. The effect on an investor's yield due to principal payments on the
mortgage loans occurring at a rate that is faster or slower than the rate
anticipated by the investor in the period immediately following the issuance of
the certificates will not be entirely offset by a subsequent like reduction or
increase in the rate of principal payments. The weighted average lives of the
offered certificates also will be affected by the amount and timing of
delinquencies and defaults on the mortgage loans and the recoveries, if any, on
liquidated mortgage loans and foreclosed properties. The weighted average life
of a certificate refers to the average amount of time that will elapse from the
date of issuance to the date each dollar in respect of principal of the
certificate is repaid. The weighted average life of any class of offered
certificates will be influenced by, among other factors, the rate at which
principal payments are made on the mortgage loans. Prepayments on
S-36
mortgage loans are commonly measured relative to a prepayment standard or model.
The model used in this prospectus supplement is called the prepayment assumption
and represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of the pool of mortgage loans for the life of the
mortgage loans. With respect to the fixed rate mortgage loans, a 100% prepayment
assumption assumes a constant prepayment rate, referred to as a CPR, of 4% per
annum of the outstanding principal balance of the fixed rate mortgage loans in
the first month of the life of such mortgage loans and an additional amount of
approximately 1.454545%, precisely 16/11 percent per annum, in each month
thereafter until the twelfth month; beginning in the twelfth month and in each
month thereafter during the life of the mortgage loans, a constant prepayment
rate of 20% per annum each month is assumed. With respect to the ARMs, a 100%
prepayment assumption assumes a constant prepayment rate of 4% per annum of the
outstanding principal balance of the ARMs in the first month of the life of such
mortgage loans and an additional amount of approximately 1.068966%, precisely
31/ 29 percent per annum, in each month thereafter until the 30th month;
beginning in the 30th month and in each month thereafter during the life of the
mortgage loans, a constant prepayment rate of 35% per annum each month is
assumed. A 50% prepayment assumption assumes prepayment rates equal to 50% of
the applicable prepayment assumption. Correspondingly, a 150% prepayment
assumption assumes prepayment rates equal to 150% of the applicable prepayment
assumption, and so forth. Neither prepayment assumption purports to be an
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans. The depositor believes that no existing statistics of which it
is aware provide a reliable basis for holders of the offered certificates to
predict the amount or the timing of receipt of prepayments on the mortgage
loans.
The tables set forth under the heading "--Decrement tables" reflect
various combinations of the prepayment assumptions for the fixed rate mortgage
loans and the adjustable rate mortgage loans.
STRUCTURING ASSUMPTIONS
For the purposes of the tables below, it is assumed that:
(1) the mortgage loans consist of pools of loans with the
level-pay characteristics as set forth below,
(2) the amount of interest accrued on the mortgage loans is
reduced by amounts sufficient to pay the trustee fee, master servicing
fee and servicing fee,
(3) the closing date is April 10, 2001,
(4) the settlement date is April 10, 2001,
(5) distributions on the offered certificates are made on the 15th
day of each month regardless of the date on which the distribution date
actually occurs, commencing in the month after the closing date, and
are made in accordance with the priorities described in this
prospectus supplement,
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(6) the scheduled monthly payments of principal and interest on
each mortgage loan will be timely paid on the first day of each due
period, with no delinquencies or defaults,
commencing on May 1, 2001,
(7) all prepayments are prepayments in full received on the last
day of each prepayment period commencing in the calendar month
following delivery of the related mortgage loans with 30 days of
accrued interest,
(8) the mortgage loans prepay in accordance with the applicable
prepayment scenario,
(9) the optional termination is not exercised except in the
calculation of weighted average life to call,
(10) each class of offered certificates has the respective
certificate rate and initial class principal balance or notional amount
as set forth in this prospectus supplement,
(11) the overcollateralization levels are set initially as
specified in this prospectus supplement, and thereafter decrease in
accordance with the provisions specified in the agreement,
(12) the loan index is 4.7875% on each change date,
(13) all of the ARMs have change dates every six months after
their initial change dates, and
(14) the insurance premium is determined as provided in the
pooling and servicing agreement.
The foregoing assumptions are referred to in this prospectus supplement
collectively as the structuring assumptions.
S-38
FIXED RATE MORTGAGE LOANS
MORTGAGE GROUP ORIGINAL TERM TO REMAINING TERM TO ORIGINAL AMORTIZATION
NUMBER PRINCIPAL BALANCE ($) LOAN RATE (%) MATURITY (MONTHS) MATURITY (MONTHS) TERM (MONTHS)
------ --------------------- ------------- ----------------- ----------------- -------------
Level Pay 1................. 474,928.28 10.13621 88 87 88
Level Pay 2................. 894,174.03 10.15836 85 83 85
Level Pay 3................. 1,086,201.94 10.92731 131 129 131
Level Pay 4................. 2,880,841.22 10.21328 140 138 140
Level Pay 5................. 3,851,125.57 11.07338 180 178 180
Level Pay 6................. 7,341,470.98 10.76484 180 178 180
Level Pay 7................. 1,699,052.99 11.36263 230 228 230
Level Pay 8................. 4,385,144.83 10.86290 237 236 237
Level Pay 9................. 134,213.19 12.45686 300 299 300
Level Pay 10................ 1,171,863.29 9.57459 289 288 289
Level Pay 11................ 12,915,301.61 12.01632 360 358 360
Level Pay 12................ 35,261,705.22 11.71407 360 358 360
ADJUSTABLE RATE MORTGAGE LOANS
REMAINING
ORIGINAL TERM ORIGINAL GROSS
MORTGAGE TERM TO TO AMORTIZATION GROSS COUPON
GROUP PRINCIPAL LOAN MATURITY MATURITY TERM MARGIN LIFETIME LIFE
NUMBER BALANCE($) RATE(%) (MONTHS) (MONTHS) (MONTHS) (%) CAP(%) FLOOR(%)
------ ---------- ------- -------- -------- -------- --- ------ --------
Level Pay 13................ 177,514.58 10.33462 360 359 360 5.71104 17.33462 10.33462
Level Pay 14................ 340,122.25 10.19564 180 178 180 5.36704 17.19564 10.19564
Level Pay 15................ 788,578.99 11.53874 360 357 360 6.55973 18.53874 11.53874
Level Pay 16................ 33,272,309.49 11.47045 360 358 360 6.21498 18.47045 11.47045
NUMBER
OF PERIODIC PERIODIC
MONTHS TO RATE RATE CAPT
MORTGAGE NEXT CAP (FIRST) (SUBSEQUENT)
GROUP CHANGE CHANGE CHANGE
NUMBER DATE DATE(%) DATES(%)
------ ---- ------- --------
Level Pay 13................ 23 3.00000 1.00000
Level Pay 14................ 34 3.00000 1.00000
Level Pay 15................ 33 3.00000 1.00000
Level Pay 16................ 34 3.00000 1.00000
S-39
DECREMENT TABLES
Subject to the foregoing discussion and assumptions, the following
tables set forth the percentages of the initial class principal balance of each
class of offered certificates, other than the class IO certificates, that would
be outstanding after each of the dates shown under the various prepayment
scenarios and the corresponding weighted average lives.
Since the tables were prepared on the basis of the structuring
assumptions, there are discrepancies between characteristics of the actual
mortgage loans and the characteristics of the mortgage loans assumed in
preparing the tables. Any discrepancy may have an effect upon the percentages of
the class principal balances outstanding and weighted average lives of the
certificates set forth in the tables. In addition, since the actual mortgage
loans in the trust have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
certificates may be made earlier or later than as indicated in the tables.
S-40
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS COMBINATIONS OF THE PREPAYMENT ASSUMPTIONS
CLASS M-1
---------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 175% 200%
- ----------------- -- --- --- ---- ---- ---- ----
Initial Percent................. 100 100 100 100 100 100 100
April 15, 2002 ................. 97 89 85 81 74 70 66
April 15, 2003 ................. 95 76 67 59 43 36 29
April 15, 2004 ................. 93 63 51 39 20 13 6
April 15, 2005 ................. 92 52 38 29 17 12 6
April 15, 2006 ................. 90 43 31 22 11 7 5
April 15, 2007 ................. 88 36 25 17 7 4 3
April 15, 2008 ................. 86 31 20 12 5 3 2
April 15, 2009 ................. 83 27 16 9 3 2 1
April 15, 2010 ................. 81 23 13 7 2 1 0
April 15, 2011 ................. 78 20 10 5 1 0 0
April 15, 2012 ................. 75 17 8 4 1 0 0
April 15, 2013 ................. 72 14 7 3 0 0 0
April 15, 2014 ................. 69 12 5 2 0 0 0
April 15, 2015 ................. 65 10 4 2 0 0 0
April 15, 2016 ................. 62 9 3 1 0 0 0
April 15, 2017 ................. 59 7 3 1 0 0 0
April 15, 2018 ................. 56 6 2 1 0 0 0
April 15, 2019 ................. 53 5 2 0 0 0 0
April 15, 2020 ................. 49 4 1 0 0 0 0
April 15, 2021 ................. 46 4 1 0 0 0 0
April 15, 2022 ................. 42 3 1 0 0 0 0
April 15, 2023 ................. 38 3 0 0 0 0 0
April 15, 2024 ................. 35 2 0 0 0 0 0
April 15, 2025 ................. 32 2 0 0 0 0 0
April 15, 2026 ................. 28 1 0 0 0 0 0
April 15, 2027 ................. 23 1 0 0 0 0 0
April 15, 2028 ................. 18 0 0 0 0 0 0
April 15, 2029 ................. 12 0 0 0 0 0 0
April 15, 2030 ................. 6 0 0 0 0 0 0
April 15, 2031.................. 0 0 0 0 0 0 0
Weighted Average Life (years)(1)
To Maturity ............... 17.78 6.16 4.49 3.51 2.40 2.03 1.73
To Call.................... 17.74 5.77 4.16 3.25 2.22 1.88 1.60
CLASS M-1
---------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 175% 200%
- ----------------- -- --- --- ---- ---- ---- ----
Initial Percent................. 100 100 100 100 100 100 100
April 15, 2002 ................. 100 100 100 100 100 100 100
April 15, 2003 ................. 100 100 100 100 100 100 100
April 15, 2004 ................. 100 100 100 100 100 100 100
April 15, 2005 ................. 100 100 95 73 41 30 59
April 15, 2006 ................. 100 100 76 55 27 18 12
April 15, 2007 ................. 100 90 62 41 18 11 7
April 15, 2008 ................. 100 77 50 31 12 7 1
April 15, 2009 ................. 100 67 40 24 8 2 0
April 15, 2010 ................. 100 57 32 18 4 0 0
April 15, 2011 ................. 100 49 26 13 0 0 0
April 15, 2012 ................. 100 42 21 10 0 0 0
April 15, 2013 ................. 100 35 17 8 0 0 0
April 15, 2014 ................. 100 30 13 6 0 0 0
April 15, 2015 ................. 100 25 11 3 0 0 0
April 15, 2016 ................. 100 21 8 0 0 0 0
April 15, 2017 ................. 100 18 7 0 0 0 0
April 15, 2018 ................. 100 16 5 0 0 0 0
April 15, 2019 ................. 100 13 3 0 0 0 0
April 15, 2020 ................. 100 11 0 0 0 0 0
April 15, 2021 ................. 100 9 0 0 0 0 0
April 15, 2022 ................. 100 8 0 0 0 0 0
April 15, 2023 ................. 96 6 0 0 0 0 0
April 15, 2024 ................. 88 5 0 0 0 0 0
April 15, 2025 ................. 78 2 0 0 0 0 0
April 15, 2026 ................. 68 0 0 0 0 0 0
April 15, 2027 ................. 57 0 0 0 0 0 0
April 15, 2028 ................. 45 0 0 0 0 0 0
April 15, 2029 ................. 31 0 0 0 0 0 0
April 15, 2030 ................. 15 0 0 0 0 0 0
April 15, 2031.................. 0 0 0 0 0 0 0
Weighted Average Life (years)(1)
To Maturity ............... 26.33 11.38 8.21 6.34 4.62 4.34 4.38
To Call.................... 26.22 10.49 7.50 5.79 4.24 4.02 4.04
- -------------------
(1) The weighted average life of a class of certificates is determined by (a)
multiplying the amount of each distribution in reduction of the related
class principal balance by the number of years from the date of issuance of
the certificate to the related distribution date, (b) adding the results,
and (c) dividing by the highest related class principal balance of the
class of certificates.
S-41
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT VARIOUS COMBINATIONS OF THE PREPAYMENT ASSUMPTIONS
CLASS M-2
---------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 175% 200%
- ----------------- -- --- --- ---- ---- ---- ----
Initial Percent................. 100 100 100 100 100 100 100
April 15, 2002 ................. 100 100 100 100 100 100 100
April 15, 2003 ................. 100 100 100 100 100 100 100
April 15, 2004 ................. 100 100 100 100 100 100 100
April 15, 2005 ................. 100 100 95 73 41 30 22
April 15, 2006 ................. 100 100 76 55 27 18 12
April 15, 2007 ................. 100 90 62 41 18 11 3
April 15, 2008 ................. 100 77 50 31 12 3 0
April 15, 2009 ................. 100 67 40 24 5 0 0
April 15, 2010 ................. 100 57 32 18 0 0 0
April 15, 2011 ................. 100 49 26 13 0 0 0
April 15, 2012 ................. 100 42 21 10 0 0 0
April 15, 2013 ................. 100 35 17 5 0 0 0
April 15, 2014 ................. 100 30 13 0 0 0 0
April 15, 2015 ................. 100 25 11 0 0 0 0
April 15, 2016 ................. 100 21 6 0 0 0 0
April 15, 2017 ................. 100 18 3 0 0 0 0
April 15, 2018 ................. 100 16 0 0 0 0 0
April 15, 2019 ................. 100 13 0 0 0 0 0
April 15, 2020 ................. 100 11 0 0 0 0 0
April 15, 2021 ................. 100 8 0 0 0 0 0
April 15, 2022 ................. 100 5 0 0 0 0 0
April 15, 2023 ................. 96 2 0 0 0 0 0
April 15, 2024 ................. 88 0 0 0 0 0 0
April 15, 2025 ................. 78 0 0 0 0 0 0
April 15, 2026 ................. 68 0 0 0 0 0 0
April 15, 2027 ................. 57 0 0 0 0 0 0
April 15, 2028 ................. 45 0 0 0 0 0 0
April 15, 2029 ................. 31 0 0 0 0 0 0
April 15, 2030 ................. 15 0 0 0 0 0 0
April 15, 2031.................. 0 0 0 0 0 0 0
Weighted Average Life (years)(1)
To Maturity ............... 26.32 11.23 8.07 6.23 4.45 4.06 3.87
To Call.................... 26.22 10.49 7.50 5.79 4.15 3.81 3.65
CLASS B
-------
DISTRIBUTION DATE 0% 50% 75% 100% 150% 175% 200%
- ----------------- -- --- --- ---- ---- ---- ----
Initial Percent................. 100 100 100 100 100 100 100
April 15, 2002 ................. 100 100 100 100 100 100 100
April 15, 2003 ................. 100 100 100 100 100 100 100
April 15, 2004 ................. 100 100 100 100 100 100 100
April 15, 2005 ................. 100 100 95 73 41 30 21
April 15, 2006 ................. 100 100 76 55 27 14 3
April 15, 2007 ................. 100 90 62 41 13 2 0
April 15, 2008 ................. 100 77 50 31 3 0 0
April 15, 2009 ................. 100 67 40 24 0 0 0
April 15, 2010 ................. 100 57 32 14 0 0 0
April 15, 2011 ................. 100 49 26 6 0 0 0
April 15, 2012 ................. 100 42 19 0 0 0 0
April 15, 2013 ................. 100 35 12 0 0 0 0
April 15, 2014 ................. 100 30 6 0 0 0 0
April 15, 2015 ................. 100 25 1 0 0 0 0
April 15, 2016 ................. 100 20 0 0 0 0 0
April 15, 2017 ................. 100 15 0 0 0 0 0
April 15, 2018 ................. 100 10 0 0 0 0 0
April 15, 2019 ................. 100 6 0 0 0 0 0
April 15, 2020 ................. 100 2 0 0 0 0 0
April 15, 2021 ................. 100 0 0 0 0 0 0
April 15, 2022 ................. 100 0 0 0 0 0 0
April 15, 2023 ................. 96 0 0 0 0 0 0
April 15, 2024 ................. 88 0 0 0 0 0 0
April 15, 2025 ................. 78 0 0 0 0 0 0
April 15, 2026 ................. 68 0 0 0 0 0 0
April 15, 2027 ................. 57 0 0 0 0 0 0
April 15, 2028 ................. 45 0 0 0 0 0 0
April 15, 2029 ................. 31 0 0 0 0 0 0
April 15, 2030 ................. 8 0 0 0 0 0 0
April 15, 2031.................. 0 0 0 0 0 0 0
Weighted Average Life (years)(1)
To Maturity ............... 26.27 10.81 7.74 5.97 4.23 3.83 3.58
To Call.................... 26.22 10.48 7.49 5.78 4.11 3.72 3.49
- ----------------------
(1) The weighted average life of a class of certificates is determined by (a)
multiplying the amount of each distribution in reduction of the related
class principal balance by the number of years from the date of issuance of
the certificate to the related distribution date, (b) adding the results,
and (c) dividing by the highest related class principal balance of the
class of certificates.
S-42
DESCRIPTION OF THE CERTIFICATES
GENERAL
The property of the trust will consist of, to the extent provided in
the pooling and servicing agreement:
(a) the mortgage loans;
(b) payments received after the cut-off date, other than
payments of principal and interest on the mortgage
loans due on or before April 1, 2001;
(c) mortgaged properties relating to the mortgage loans
that are acquired by foreclosure or deed in lieu of
foreclosure together with all collections on and
proceeds of the mortgaged properties; and
(d) the collection account, the custodial account and the
distribution account and any assets deposited in
these accounts from time to time and any investment
proceeds of these accounts.
Physical certificates representing the offered certificates if issued,
will be transferable and exchangeable at the corporate trust office of the
trustee, which will initially act as certificate registrar.
See "--Book-entry certificates" below. No service charge will be made for any
registration of exchange or transfer of certificates, but the trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
The principal balance of a class of certificates, other than the
notional amount certificates, on any distribution date is equal to the
applicable class principal balance on the closing date reduced by the
o aggregate of amounts actually distributed as
principal to the holders of the class of certificates
prior to the applicable date and
o in the case of a subordinate certificate, any
reductions in the class principal balance of the
subordinate certificate due to realized losses as
described in this prospectus supplement.
The notional amount certificates do not have a class principal balance
but will have a notional amount which for any distribution date prior to the
37th distribution date will equal the lesser of
(a) the pool balance as of the end of the second
preceding Due Period and
(b) the applicable amount set forth below:
DISTRIBUTION DATES NOTIONAL AMOUNT
------------------ ---------------
1-3....................... $42,933,673
4-6....................... $41,502,551
7-9....................... $40,071,429
S-43
10-12..................... $38,640,306
13-15..................... $37,209,184
16-18..................... $34,346,939
19-21..................... $30,053,571
22-24..................... $25,760,204
25-27..................... $21,466,837
28-30..................... $18,604,592
31-33..................... $14,311,224
34-36..................... $12,880,102
On and after the 37th distribution date, the notional amount of the
notional amount certificates will be zero.
The percentage interest of a certificate of any class as of any date of
determination will equal the percentage obtained by dividing the denomination of
the certificate by the original class principal balance or notional amount for
the related class of certificates.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the trust, other than the net rate cap
fund, created by the pooling and servicing agreement will include multiple
segregated asset pools, each of which will be treated as a separate REMIC,
creating a tiered REMIC structure. The offered certificates, excluding any
rights to receive net rate cap carryover, will be designated as regular
interests in a REMIC.
BOOK-ENTRY CERTIFICATES
The book-entry certificates will be issued in one or more certificates
which equal the aggregate principal balance of the offered certificates and will
initially be registered in the name of Cede & Co., referred to as Cede, the
nominee of the Depository Trust Company, referred to as DTC. Persons acquiring
beneficial ownership interests in the offered certificates will hold their
certificates through DTC in the United States, or upon request, Clearstream,
Luxembourg or the Euroclear System, referred to as Euroclear, in Europe, if they
are participants of these systems, or indirectly through organizations which are
participants in these systems. Clearstream, Luxembourg and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Clearstream, Luxembourg's and Euroclear's names on the books of
their respective depositaries which in turn will hold positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A., referred to as Citibank, will act as depositary for Clearstream,
Luxembourg and The Chase Manhattan Bank, referred to as Chase, will act as
depositary for Euroclear. Collectively these entities are referred to as the
European depositaries.
Investors may hold beneficial interests in the book-entry certificates
in minimum denominations representing class principal balances or notional
amount of $25,000 and in integral multiples of $1,000 in excess of the notional
amount of $25,000. One certificate of each class of offered certificates may be
issued in a different principal amount to accommodate the remainder of the
initial principal amount of the certificates of the class. Unless and until
definitive certificates are
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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 agreement. Certificate owners
are only permitted to exercise their rights indirectly through participants and
DTC. For a description of the features of the book-entry registration system,
see "Description of the Securities--Book-entry securities" in the prospectus.
For information with respect to tax documentation procedures relating to the
certificates, see "Federal Income Tax Considerations--Federal Income Tax
Consequences to Foreign Investors" and "--Backup Withholding" in this prospectus
supplement and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I to this prospectus supplement.
None of the seller, the master servicer, the 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 beneficial ownership interests.
DISTRIBUTION DATES
Distributions on the certificates will be made by the trustee on the
15th day of each month or, if that day is not a business day, on the first
business day thereafter, commencing in May 2001, each called a distribution
date, to the persons in whose names the certificates are registered, each called
a certificateholder, as of the related record date. The record date for any
distribution date is the last business day of the calendar month preceding the
month of the applicable distribution date. Distributions will be made (1) in
immediately available funds by wire transfer or otherwise, to the account of the
certificateholder at a domestic bank or other entity having appropriate
facilities for distribution, if the certificateholder has so notified the
trustee five business days prior to the related distribution date, or (2) by
check mailed to the address of the person entitled to the distribution as it
appears on the certificate register maintained by the trustee as certificate
registrar. Notwithstanding the foregoing, the final distribution on any
certificate will be made in like manner but only upon presentment and surrender
of the certificate at the office or agency appointed for that purpose.
GLOSSARY
For purposes of describing the cash flow structure of the trust, the
following terms have the respective meanings set forth below:
AVAILABLE FUNDS: As to any distribution date, the sum, without
duplication of the following amounts with respect to the mortgage loans:
(1) scheduled payments of principal and interest on the
mortgage loans due during the related Due Period and received by the
servicer on or prior to the determination date, net of amounts
representing the servicing fee, the master servicing fee and the
trustee fee with respect to each mortgage loan and reimbursement for
related monthly advances and servicing advances;
(2) Net Liquidation Proceeds and insurance proceeds with
respect to the mortgage loans, net of amounts applied to the
restoration or repair of a mortgaged property and
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unscheduled payments of principal and interest on the mortgage loans
received by the servicer during the related Prepayment Period, net of
amounts representing the servicing fee, the master servicing fee and
the trustee fee with respect to each mortgage loan and reimbursement
for related monthly advances and servicing advances;
(3) the purchase price for repurchased defective mortgage
loans; and
(4) payments from the servicer or the master servicer in
connection with
(a) monthly advances,
(b) prepayment interest shortfalls and
(c) the termination of the trust with respect to
the mortgage loans as provided in the
agreement.
AVAILABLE FUNDS CAP: As to any distribution date, a rate per annum
equal to (1) the weighted average net loan rate of the mortgage loans minus (2)
the product of (x) the certificate rate on the class IO certificates and (y) a
fraction, the numerator of which is the notional amount of the class IO
certificates and the denominator of which is the Pool Balance as of the last day
of the second preceding Due Period minus (3) the premium payable to the
certificate insurer on the senior certificates, expressed as a per annum rate.
BASIC PRINCIPAL AMOUNT: As to any distribution date, an amount equal to
the sum of the following amounts, without duplication, with respect to the
mortgage loans:
(1) each payment of principal on a mortgage loan due during
the related Due Period and received by the servicer on or prior to the
determination date;
(2) the Net Liquidation Proceeds allocable to principal and
all full and partial principal prepayments received by the servicer
during the related Prepayment Period;
(3) the portion of the purchase price allocable to principal
of all repurchased defective mortgage loans with respect to the
distribution date; and
(4) any monthly advances with respect to scheduled payments of
principal due during the related Due Period.
CIVIL RELIEF ACT SHORTFALLS: Reductions in the amount of interest due
from borrowers as a result of the application of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended.
CLASS B PRINCIPAL DISTRIBUTION AMOUNT: As to any distribution date on
or after the Stepdown Date and as long as a Delinquency Event is not in effect,
the lesser of (1) the Principal Distribution Amount, calculated as if the
Subordination Increase Amount is zero, remaining after payments to the class A,
class M-1 and class M-2 certificates and (2) the excess of:
(1) the sum of
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(A) the class principal balance of the class A
certificates, after taking into account distributions
of the Senior Principal Distribution Amount for the
applicable
distribution date,
(B) the class principal balance of the class M-1
certificates, after taking into account distribution
of the Class M-1 Principal Distribution Amount for
the applicable distribution date,
(C) the class principal balance of the class M-2
certificates, after taking into account distribution
of the Class M-2 Principal Distribution Amount for
the applicable distribution date, and
(D) the class principal balance of the class B
certificates immediately prior to the applicable
distribution date over
(2) the lesser of
(A) 100.00% of the Pool Balance as of the last day of the
related Due Period less the Subordination Required
Overcollateralization Amount for that distribution
date, and
(B) the Pool Balance as of the last day of the related
Due Period minus the OC Floor,
provided, however, that after the class principal balances of the class A, class
M-1 and class M-2 certificates are reduced to zero, the Class B Principal
Distribution Amount for the applicable distribution date will equal 100% of the
Principal Distribution Amount.
CLASS INTEREST CARRYOVER SHORTFALL: As to any class of certificates and
any distribution date, an amount equal to the sum of (1) the excess of the
related Class Monthly Interest Amount for the preceding distribution date and
any outstanding Class Interest Carryover Shortfall with respect to that class on
the preceding distribution date, over the amount in respect of interest that is
actually distributed to the holders of the class on the preceding distribution
date plus (2) one month's interest on the excess, to the extent permitted by
law, at the related certificate rate.
CLASS INTEREST DISTRIBUTION: As to any class of certificates and
distribution date, an amount equal to the sum of (a) the related Class Monthly
Interest Amount and (b) any Class Interest Carryover Shortfall for that class of
certificates for the applicable distribution date.
CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT: As to any distribution date on
or after the Stepdown Date, (x) 100% of the Principal Distribution Amount,
calculated as if the Subordination Increase Amount for that distribution date is
zero, if the class principal balance of the class A certificates has been
reduced to zero and a Delinquency Event exists, or (y) if a Delinquency Event is
not in effect, the lesser of (1) the Principal Distribution Amount, calculated
as if the Subordination Increase Amount is zero, remaining after payments to the
class A certificates and (2) the excess of
(1) the sum of
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(A) the class principal balance of the class A
certificates, after taking into account distributions
of the Senior Principal Distribution Amount for the
applicable distribution date, and
(B) the class principal balance of the class M-1
certificates immediately prior to the applicable
distribution date over
(2) the lesser of
(A) 86.50% of the Pool Balance as of the last day of the
related Due Period less the Subordination Required
Overcollateralization Amount for that distribution
date; and
(B) the Pool Balance as of the last day of the related
Due Period minus the OC Floor.
CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT: As to any distribution date on
or after the Stepdown Date, (x) 100% of the Principal Distribution Amount,
calculated as if the Subordination Increase Amount for that distribution date is
zero, if the aggregate class principal balance of each of the class A and class
M-1 certificates has been reduced to zero and a Delinquency Event exists, or (y)
if a Delinquency Event is not in effect, the lesser of (1) Principal
Distribution Amount, calculated as if the Subordination Increase Amount for that
distribution date is zero, remaining after payments to the class A and class M-1
certificates and (2) the excess of
(1) the sum of
(A) the class principal balance of the class A
certificates, after taking into account distributions
of the Senior Principal Distribution Amount for the
applicable
distribution date,
(B) the class principal balance of the class M-1
certificates, after taking into account distribution
of the Class M-1 Principal Distribution Amount for
the applicable distribution date, and
(C) the class principal balance of the class M-2
certificates immediately prior to the applicable
distribution date over
(2) the lesser of
(A) 94.51% of the Pool Balance as of the last day of the
related Due Period less the Subordination Required
Overcollateralization Amount for that distribution
date; and
(B) the Pool Balance as of the last day of the related
Due Period minus the OC Floor.
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CLASS MONTHLY INTEREST AMOUNT: As to any distribution date and class of
certificates, interest for the related Interest Period at the related
certificate rate (taking into account the Available Funds Cap) on the related
class principal balance or notional amount minus the pro rata portion of any
Civil Relief Act Shortfalls during the related Due Period, based on the amount
of interest to which the class would otherwise be entitled in the absence of the
shortfall.
CLASS PRINCIPAL CARRYOVER SHORTFALL: As to any class of subordinate
certificates and any distribution date, the excess, if any, of (1) the sum of
(x) the amount of the reduction in the class principal balance of that class of
subordinate certificates on the applicable distribution date as provided under
"-Allocation of Realized Losses" below and (y) the amount of any reductions on
prior distribution dates over (2) the amount distributed in respect of the Class
Principal Carryover Shortfall for that class of subordinate certificates on
prior distribution dates.
CUMULATIVE LOSS EVENT: The occurrence of rates of cumulative losses
during particular periods of time as specified in the pooling and servicing
agreement.
DELINQUENCY AMOUNT: As to any distribution date, the aggregate
principal balance of the mortgage loans that are (a) 60 or more days delinquent
plus (b) in bankruptcy or foreclosure and REO properties as of the last day of
the related Prepayment Period.
DELINQUENCY EVENT: A Delinquency Event shall have occurred and be
continuing, if at any time, (x) the three-month rolling average of the
percentage equivalent of a fraction, the numerator of which is the Delinquency
Amount and the denominator of which is the Pool Balance as of the last day of
the related Due Period exceeds (y) 40% of the Senior Enhancement Percentage.
DUE PERIOD: With respect to each distribution date for scheduled
payments of both interest and principal, the period from and including the
second day of the month preceding the month of the applicable distribution date
to and including the first day of the month of that distribution date.
EXCESS INTEREST: As to any distribution date, the Available Funds
remaining after the application of payments pursuant to clauses 1. through 8.
under "--Distribution Priorities," below.
EXCESS OVERCOLLATERALIZATION AMOUNT: As to any distribution date, the
lesser of (1) the Basic Principal Amount for the applicable distribution date
and (2) the excess, if any, of (x) the Overcollateralization Amount, assuming
100% of the Basic Principal Amount is distributed on the offered certificates,
over (y) the Required Overcollateralization Amount.
INTEREST PERIOD: For any distribution date the calendar month preceding
the month of the applicable distribution date, calculated on the basis of a
360-day year comprised of twelve 30-day months.
INTEREST REMITTANCE AMOUNT: As to any distribution date, the portion of
the Available Funds that constitutes amounts in respect of interest.
LIQUIDATED MORTGAGE LOAN: As to any distribution date, a mortgage loan
with respect to which the servicer has determined, in accordance with the
servicing procedures specified in the pooling and servicing agreement, as of the
end of the preceding Prepayment Period, that all liquidation proceeds
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which it expects to recover with respect to that mortgage loan, including the
disposition of the related REO, have been received.
NET LIQUIDATION PROCEEDS: With respect to any Liquidated Mortgage Loan,
liquidation proceeds, net of unreimbursed servicing fees and master servicing
fees, servicing advances and monthly advances with respect to the related
Liquidated Mortgage Loan.
NET RATE CAP CARRYOVER: As to any distribution date and class of
certificates, other than the class IO certificates, the sum of
(a) the excess, if any, of the related Class Monthly Interest
Amount, calculated at the applicable certificate rate, without
regard to the Available Funds Cap, over the Class Monthly
Interest Amount for the applicable distribution date,
(b) any Net Rate Cap Carryover remaining unpaid from prior
distribution dates and
(c) 30 days' interest on the amount in clause (b) calculated at
the applicable certificate rate, without regard to the
Available Funds Cap.
OC FLOOR: An amount equal to 0.50% of the aggregate class principal
balance of the offered certificates as of the closing date.
OVERCOLLATERALIZATION AMOUNT: As to any distribution date, the excess,
if any, of (1) the Pool Balance as of the end of the related Due Period over (2)
the aggregate class principal balance of the offered certificates after giving
effect to the distribution of the Principal Distribution Amount on the
applicable distribution date.
POOL BALANCE: As of any date of determination, the aggregate of the
principal balances of the mortgage loans as of the applicable date.
PREPAYMENT PERIOD: As to any distribution date, the preceding calendar
month.
PRINCIPAL BALANCE: As to any mortgage loan and any date of
determination, the unpaid principal balance of the mortgage loan as of the
cut-off date after deduction of payments of principal due on or before that
date, minus all amounts credited against the Principal Balance prior to the date
of determination.
PRINCIPAL DISTRIBUTION AMOUNT: As to any distribution date, the lesser
of (a) the aggregate class principal balance of the offered certificates
immediately preceding the applicable distribution date and (b) the sum of (1)
the Basic Principal Amount minus the Excess Overcollateralization Amount and (2)
the Subordination Increase Amount.
REQUIRED OVERCOLLATERALIZATION AMOUNT: As to any distribution date (a)
prior to the Stepdown Date, the product of (x) 2.20% and (y) the aggregate
original class principal balance of the offered certificates; and (b) on and
after the Stepdown Date, the greater of (1) the lesser of (x) the product of
2.20% and the aggregate original class principal balance of the offered
certificates and (y) the product of 4.40% and the Pool Balance as of the end of
the related Due Period and (2) the OC Floor; provided,
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however, that on each distribution date during the continuance of (a) a
Cumulative Loss Event, the Required Overcollateralization Amount will equal the
greater of (1) the lesser of (x) 8.80% of the Pool Balance as of the last day of
the related Due Period and (y) 2.20% of the aggregate original class principal
balance of the offered certificates and (2) the OC Floor or (b) a Delinquency
Event, provided that a Cumulative Loss Event is not then continuing, the
Required Overcollateralization Amount will equal the Required
Overcollateralization Amount in effect as of the immediately preceding
distribution date.
SENIOR ENHANCEMENT PERCENTAGE: As to any distribution date, the
percentage equivalent of a fraction, the numerator of which is the sum of (1)
the aggregate class principal balance of the subordinate certificates and (2)
the Overcollateralization Amount, in each case, after taking into account the
distribution of the Principal Distribution Amount on the applicable distribution
date, and the denominator of which is the Pool Balance as of the last day of the
related Due Period.
SENIOR PRINCIPAL DISTRIBUTION AMOUNT: As to (a) any distribution date
prior to the Stepdown Date or during the continuation of a Delinquency Event,
the lesser of (1) 100% of the Principal Distribution Amount, calculated as if
the Subordination Increase Amount for that distribution date is zero, and (2)
the class principal balance of the class A certificates, and (b) any other
distribution date, an amount equal to the lesser of (1) the Principal
Distribution Amount, calculated as if the Subordination Increase Amount for that
distribution date is zero, and (2) the excess, if any, of (x) the class
principal balance of the class A certificates immediately prior to the
applicable distribution date over (y) the lesser of (A) 74.50% of the Pool
Balance as of the last day of the related Due Period less the Subordination
Required Overcollateralization Amount for that distribution date and (B) the
Pool Balance as of the last day of the related Due Period minus the OC Floor.
STEPDOWN DATE: The later to occur of (x) the earlier to occur of (A)
the distribution date in May 2004 and (B) the distribution date on which the
class principal balance of the class A certificates is reduced to zero, and (y)
the first distribution date on which the Senior Enhancement Percentage, assuming
100% of the Principal Distribution Amount is distributed on the offered
certificates, is at least equal to 29.90%.
SUBORDINATION DEFICIENCY: As to any distribution date, the excess, if
any, of (x) the Required Overcollateralization Amount for the applicable
distribution date over (y) the Overcollateralization Amount for that
distribution date after giving effect to the distribution of the Basic Principal
Amount on that distribution date.
SUBORDINATION DEFICIT: As to any distribution date, the excess, if any,
of (x) the class principal balance of the class A certificates over (y) the Pool
Balance as of the end of the related Due Period.
SUBORDINATION INCREASE AMOUNT: As to any distribution date, the lesser
of (x) the Subordination Deficiency and (y) the Excess Interest.
SUBORDINATION REQUIRED OVERCOLLATERALIZATION AMOUNT: As to any
distribution date on which a Delinquency Event has not occurred, the amount
equal to the Required Overcollateralization Amount for that distribution date
exclusive of the OC Floor calculation; as to any other distribution date, the
Required Overcollateralization Amount for that distribution date.
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DISTRIBUTION PRIORITIES
On each distribution date the trustee will withdraw (x) any payments
made under the financial guaranty insurance policy and (y) from the distribution
account the Available Funds and apply this amount in the following order of
priority, in each case, to the extent of the funds remaining; provided that
payments under the financial guaranty insurance policy may only be applied to
make the Guaranteed Distributions (as defined below under "--the Policy").
1. To the certificate insurer, the insurance premium payable
to the certificate insurer for the applicable distribution date.
2. Concurrently, to each class of senior certificates, the
related Class Interest Distribution for the applicable distribution
date.
3. Sequentially, to the class M-1, class M-2 and class B
certificates, in that order, the related Class Monthly Interest Amount
for the applicable distribution date.
4. To the class A certificates, the Senior Principal
Distribution Amount for the applicable distribution date.
5. To the certificate insurer, any amounts owing to the
certificate insurer under the insurance agreement.
6. To the class M-1 certificates, the Class M-1 Principal
Distribution Amount for the applicable distribution date.
7. To the class M-2 certificates, the Class M-2 Principal
Distribution Amount for the applicable distribution date.
8. To the class B certificates, the Class B Principal
Distribution Amount for the applicable distribution date.
9. Sequentially, to the offered certificates, the
Subordination Increase Amount for the applicable distribution date, in
the same order as other principal distributions above until the related
class of certificates is retired.
10. To the class M-1 certificates, any related (a) Class
Interest Carryover Shortfall and then (b) Class Principal Carryover
Shortfall.
11. To the class M-2 certificates, any related (a) Class
Interest Carryover Shortfall and then (b) Class Principal Carryover
Shortfall.
12. To the class B certificates, any related (a) Class
Interest Carryover Shortfall and then (b) Class Principal Carryover
Shortfall.
13. To the class BIO certificates for deposit in the net rate
cap fund; as required by the pooling and servicing agreement.
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14. Sequentially, to the class A, the class M-1, class M-2 and
class B certificates, in that order, the related Net Rate Cap
Carryover, from the net rate cap fund.
15. To the class BIO certificates, the amount required by the
pooling and servicing agreement.
16. To the successor servicer or the successor master
servicer, reimbursement for expenses incurred by the trustee relating
to the transition of servicing functions to the successor following the
resignation or termination of the servicer or the master servicer, as
the case may be, as provided in the pooling and servicing agreement.
17. To the residual certificates, any remaining amounts.
On each distribution date, the Class Interest Distribution for each
class of senior certificates will be distributed on an equal priority and any
shortfall in the amount required to be distributed as interest will be allocated
between the classes pro rata based on the amount that would have been
distributed on each class in the absence of a shortfall.
On each distribution date, the holders of the class P certificates will
be entitled to all prepayment charges received with respect to the mortgage
loans during the related prepayment period, and these amounts will not be
available for distribution on the other classes of certificates.
CERTIFICATE RATES
The certificate rate for each class of certificates is set forth on the
cover page or described in this prospectus supplement. The certificate rate for
each of the offered certificates, other than the class IO certificates, is
subject to the Available Funds Cap. The certificate rate on the class A, class
M-1, class M-2 and class B certificates will increase by 0.50% after the
optional termination date.
THE POLICY
The following summary of the terms of the policy does not purport to be
complete and is qualified in its entirety by reference to the policy. A form of
the policy may be obtained, upon request, from the trustee.
Simultaneously with the issuance of the certificates, the certificate
insurer will deliver the policy to the trustee for the benefit of each
certificateholder of a senior certificate. Under the policy, the certificate
insurer unconditionally and irrevocably guarantees to the trustee for the
benefit of each senior certificateholder the full and complete payment of (i)
Guaranteed Distributions (as defined below) on the senior certificates and (ii)
the amount of any Guaranteed Distribution which subsequently is avoided in whole
or in part as a preference payment under applicable law.
"Guaranteed Distributions" means the sum of (x) the Class Monthly
Interest Amount on each class of senior certificates, plus (y) the Subordination
Deficit, plus (z) without duplication of clause (y) the outstanding class
principal balance of the class A certificates on their Final Scheduled
Distribution Date after giving effect to distributions thereon on that
distribution date, determined in accordance with the original terms of the
senior certificates when issued and without regard to any
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subsequent amendment or modification of the senior certificates; payments which
become due on an accelerated basis do not constitute "Guaranteed Distributions,"
unless the certificate insurer elects, in its sole discretion, to pay that
principal due upon acceleration, together with any accrued interest to the date
of acceleration.
Payment of claims on the policy made in respect of Guaranteed
Distributions will be made by the certificate insurer following Receipt by the
certificate insurer of the appropriate notice for payment on the later to occur
of (x) 12:00 noon, New York City time, on the second Business Day following
Receipt of the notice for payment, and (y) 12:00 noon, New York City time, on
the date on which such payment was due on the senior certificates.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the policy, the certificate insurer shall cause the payment to be made on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (1) the fourth Business Day following Receipt
by the certificate insurer from the trustee of
(A) a certified copy of the order (the "Order") of the court or other
governmental body which exercised jurisdiction to the effect that the
certificateholder is required to return principal or interest paid on the senior
certificates during the term of the policy because those payments were avoidable
as preference payments under applicable bankruptcy law,
(B) a certificate of the certificateholder that the Order has been
entered and is not subject to any stay, and
(C) an assignment duly executed and delivered by the certificateholder,
in a form as is reasonably required by the certificate insurer and provided to
the certificateholder by the certificate insurer, irrevocably assigning to the
certificate insurer all rights and claims of the certificateholder relating to
or arising under the senior certificates against the trust or otherwise with
respect to the applicable preference payment, or
(2) the date of Receipt by the certificate insurer from the trustee of the items
referred to in clauses (A), (B) and (C) above if, at least four Business Days
prior to the date of Receipt, the certificate insurer shall have Received
written notice from the trustee that the items were to be delivered on that date
and that date was specified in the applicable notice. The payment shall be
disbursed to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order and not to the trustee or any certificateholder
directly, unless a certificateholder has previously paid the applicable amount
to the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the Order, in which case the applicable payment shall be disbursed to
the trustee, for distribution to such certificateholder upon proof of payment
reasonably satisfactory to the certificate insurer.
The terms "Receipt" and "Received," with respect to the policy, shall
mean actual delivery to the certificate insurer and to the fiscal agent, if any,
prior to 12:00 noon, New York City time, on a Business Day; delivery either on a
day that is not a Business Day or after 12:00 noon, New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the policy by the trustee is not in proper form or is
not properly completed, executed or
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delivered, it shall be deemed not to have been Received, and the certificate
insurer or the fiscal agent shall promptly so advise the trustee and the trustee
may submit an amended notice.
Under the policy, "Business Day" means any day other than (x) a
Saturday or Sunday or (y) a day on which banking institutions in New York, New
York, or in the city or cities in which the corporate trust office of the
trustee is located are authorized or obligated by law or executive order to be
closed.
The certificate insurer's obligations under the policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the trustee as provided in the policy whether or not those funds are properly
applied by the trustee.
The certificate insurer shall be subrogated to the rights of each
senior certificateholder to receive payments of principal and interest under the
senior certificates to the extent of any payment by the certificate insurer
under the policy. To the fullest extent permitted by applicable law, the
certificate insurer agrees under the policy not to assert, and waives, for the
benefit of each senior certificateholder, all its rights (whether by
counterclaim, setoff or otherwise) and defenses (including, without limitation,
the defense of fraud), whether acquired by subrogation, assignment or otherwise,
to the extent that those rights and defenses may be available to the certificate
insurer to avoid payment of its obligations under the policy in accordance with
the express provisions of the policy.
Claims under the policy constitute direct, unsecured and unsubordinated
obligations of the certificate insurer ranking not less than pari passu with
other unsecured and unsubordinated indebtedness of the certificate insurer for
borrowed money. Claims against the certificate insurer under the policy and
claims against the certificate insurer under each other financial guaranty
insurance policy issued thereby constitute pari passu claims against the general
assets of the certificate insurer.
The terms of the policy cannot be modified or altered by any other agreement or
instrument, nor by the merger, consolidation or dissolution of the Trust. The
policy may not be canceled or revoked prior to payment in full of the senior
certificates. 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 governed by the laws of the State of New York.
The depositor, the seller and the certificate insurer will enter into
the insurance agreement pursuant to which the seller will agree to reimburse,
with interest, the certificate insurer for amounts paid pursuant to claims under
the policy. The seller will further agree to pay the certificate insurer all
reasonable charges and expenses which the certificate insurer may pay or incur
relative to any amounts paid under the policy or otherwise in connection with
the transaction and to indemnify the certificate insurer against certain
liabilities. Amounts owing by the seller under the insurance agreement will be
secured by, and payable solely from, the trust except as provided in the
insurance agreement.
Except during the continuation of a certificate insurer default, the
certificate insurer will have the power to exercise all of the voting rights of
the holders of the senior certificates.
OVERCOLLATERALIZATION PROVISIONS
On each distribution date, the Excess Interest will be applied to,
among other things, the accelerated amortization of the offered certificates
then entitled to distributions of principal until the
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Overcollateralization Amount equals the Required Overcollateralization Amount.
Subject to particular floors, caps and triggers, the Required
Overcollateralization Amount may increase or decrease over time. An increase in
the required level of overcollateralization will result on the basis of
cumulative realized losses or the Delinquency Amount.
ALLOCATION OF REALIZED LOSSES
The Basic Principal Amount includes the Net Liquidation Proceeds in
respect of principal received upon liquidation of a Liquidated Mortgage Loan. If
the Net Liquidation Proceeds are less than the unpaid principal balance of the
related Liquidated Mortgage Loan, the Pool Balance will decline more than the
aggregate class principal balance of the offered certificates. If the difference
is not covered by the Overcollateralization Amount or the application of Excess
Interest, the class of subordinate certificates then outstanding with the lowest
relative payment priority will bear the loss.
If, following the distributions on a distribution date, the aggregate
class principal balance of the offered certificates exceeds the Pool Balance,
that is, the certificates are undercollateralized, the class principal balance
of the class of subordinate certificates then outstanding with the lowest
relative payment priority will be reduced by the amount of the excess. Any
reduction will constitute a Class Principal Carryover Shortfall for the
applicable class. Although a Class Principal Carryover Shortfall will not accrue
interest, this amount may be paid on a future distribution date to the extent
funds are available for distribution as provided above under "-Distribution
priorities."
For all purposes of this prospectus supplement the class B certificates
will have the lowest payment priority of any class of subordinate certificates.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to certificateholders, the trustee,
based on information received from the servicer, will prepare and make available
to each certificateholder a statement setting forth, among other items the
following, to the extent applicable to each class of certificates:
(a) the aggregate amount of the distribution to each class of
certificates on the applicable distribution date;
(b) the amount of the distribution set forth in paragraph (a)
above in respect of interest and the amount of that distribution in
respect of any Class Interest Carryover Shortfall, and the amount of
any Class Interest Carryover Shortfall remaining;
(c) the amount of the distribution set forth in paragraph (a)
above in respect of principal;
(d) the amount of Excess Interest for each loan group paid as
principal;
(e) the master servicing fee and servicing fee;
(f) the Pool Balance as of the close of business on the last
day of the preceding Due Period;
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(g) the class principal balance of each class of certificates
after giving effect to payments allocated to principal above;
(h) the Overcollateralization Amount, the Required
Overcollateralization Amount and the Subordination Required
Overcollateralization Amount as of the close of business on the
distribution date, after giving effect to distributions of principal on
the applicable distribution date;
(i) the number and aggregate Principal Balances of the
mortgage loans as to which the minimum monthly payment is delinquent
for 30-59 days, 60-89 days, or 90 or more days, including mortgage
loans in foreclosure, in bankruptcy and real estate owned, each
separately stated, respectively, as of the end of the preceding month;
(j) whether a Cumulative Loss Event or a Delinquency Event has
occurred and is continuing and the calculations of those events;
(k) the book value of any real estate which is acquired by the
trust through foreclosure or grant of deed in lieu of foreclosure;
(l) the amounts of realized losses for the applicable Due
Period and the cumulative amount of realized losses to date;
(m) the weighted average loan rate on the mortgage loans as of
the first day of the month prior to the distribution date;
(n) the amount of Net Rate Cap Carryover distributed to the
offered certificates and the amount of Net Rate Cap Carryover remaining
for each class;
(o) the amount of any Class Principal Carryover Shortfall paid
with respect to each class of subordinate certificates and any amounts
remaining; and
(p) the amount paid under the policy on that distribution date
in respect of interest and principal.
In the case of information furnished pursuant to clauses (b) and (c)
above, the amounts shall be expressed as a dollar amount per certificate with a
$1,000 denomination.
The trustee will make the statement to certificateholders available
each month via the trustee's internet website. The trustee's internet website
will initially be located at "www.ctslink.com". Assistance in using the website
can be obtained by calling the trustee's customer service desk at (301)
815-6600. Parties that are unable to use the above distribution method are
entitled to have a paper copy mailed to them via first class mail by calling the
customer service desk and indicating such.
Within 60 days after the end of each calendar year, the trustee will
forward to each person, if requested in writing by that person, who was a
certificateholder during the prior calendar year a statement containing the
information set forth in clauses (b) and (c) above aggregated for the applicable
calendar year.
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THE CERTIFICATE INSURER
The certificate insurer is a monoline insurance company incorporated in
1984 under the laws of the State of New York. The certificate insurer is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Guam.
The certificate insurer and its subsidiaries are engaged in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. Financial guaranty insurance
provides a guaranty of scheduled payments of an issuer's securities, thereby
enhancing the credit rating of those securities, in consideration for the
payment of a premium to the insurer. The certificate insurer and its
subsidiaries principally insure asset-backed, collateralized and municipal
securities. Asset-backed securities are typically supported by residential
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities include general obligation bonds, special revenue bonds and
other special obligations of state and local governments. The certificate
insurer insures both newly-issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the certificate
insurer's underwriting criteria.
The certificate insurer is a wholly-owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"). Holdings is an indirect
subsidiary of Dexia S.A., a publicly held Belgian corporation. Dexia S.A.,
through its bank subsidiaries, is primarily engaged in the business of public
finance in France, Belgium and other European countries. No shareholder of
Holdings or the certificate insurer is obligated to pay any debts of the
certificate insurer or any claim under any insurance policy issued by the
certificate insurer or to make any additional contribution to the capital of the
certificate insurer.
The principal executive offices of the certificate insurer are located
at 350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
REINSURANCE
Under an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the certificate insurer or
its domestic or Bermuda operating insurance company subsidiaries are generally
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the certificate insurer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. This reinsurance is used by the certificate
insurer as a risk management device and to comply with statutory and rating
agency requirements; it does not alter or limit the certificate insurer's
obligations under any financial guaranty insurance policy.
RATINGS
The certificate insurer's financial strength is rated "Aaa" by Moody's
and "AAA" by Fitch. The certificate insurer's insurer financial strength is
rated "AAA" by Standard & Poor's Rating Services and Standard & Poor's
(Australia) Pty. Ltd. The certificate insurer's claims paying ability is rated
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"AAA" by Japan Rating and Investment Information, Inc. These ratings reflect
only the views of the respective rating agencies, are not recommendations to
buy, sell or hold securities and are subject to revision or withdrawal at any
time by those rating agencies.
CAPITALIZATION
The following table, derived from audited financial statements, sets
forth the capitalization of the certificate insurer and its subsidiaries as of
December 31, 2000, on the basis of accounting principles generally accepted in
the United States of America:
DECEMBER 31, 2000
(IN THOUSANDS)
--------------
Deferred Premium Revenue (net of prepaid reinsurance
premiums)............................................... $ 582,709
---------------
Surplus Notes.............................................. 120,000
---------------
Minority Interest.......................................... 37,228
---------------
Shareholder's Equity:
Common Stock............................................... 15,000
---------------
Additional Paid-In Capital................................. 789,922
---------------
Accumulated Other Comprehensive Income (net of
deferred income taxes).................................. 69,553
---------------
Accumulated Earnings....................................... 614,391
---------------
Total Shareholder's Equity................................. 1,488,866
---------------
Total Deferred Premium Revenue, Surplus Notes, Minority
Interest and Shareholder's Equity....................... $ 2,228,803
===============
For further information concerning the certificate insurer, see the
Consolidated Financial Statements of Financial Security Assurance Inc. and
Subsidiaries, and the notes thereto, incorporated by reference herein. The
certificate insurer's financial statements are included as exhibits to the
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that are filed
with the Securities and Exchange Commission (the "Commission") by Holdings and
may be viewed at the EDGAR website maintained by the Commission and at the
Holdings website at http://www.FSA.com. Copies of the statutory quarterly and
annual financial statements filed with the State of New York Insurance
Department by Financial Security are available upon request to the State of New
York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The financial statements of the certificate insurer and subsidiaries
included in, or as exhibits to, the following documents which have been filed
with the Commission by Holdings, are hereby incorporated by reference in this
prospectus supplement: the Annual Report on Form 10-K for the year ended
December 31, 2000.
All financial statements of the certificate insurer and subsidiaries
included in, or as exhibits to, documents filed by Holdings pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this prospectus supplement and prior
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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 such documents.
The depositor will provide without charge to any person to whom this
prospectus supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the foregoing financial statements incorporated
in this prospectus supplement by reference. Requests for such copies should be
directed to 600 Steamboat Road, Greenwich, Connecticut 06830, Attention:
Corporate Secretary.
The depositor on behalf of the trust hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the trust's annual report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934, and each filing of the financial
statements of the certificate insurer included in or as an exhibit to the annual
report of Holdings filed pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934, that is incorporated by reference in the
registration statement, as defined in the prospectus, shall be deemed to be a
new registration statement relating to the certificates offered hereby, and the
offering of those offered certificates at that time shall be deemed to be the
initial bona fide offering thereof.
INSURANCE REGULATION
The certificate insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the certificate insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, the certificate insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of a financial
guaranty insurer to writing financial guarantee insurance and related business
lines, requires each financial guaranty insurer to maintain a minimum surplus to
policyholders, establishes contingency, loss and unearned premium reserve
requirements for each financial guaranty insurer, and limits the size of
individual transactions and the volume of transactions that may be underwritten
by each financial guaranty insurer. Other provisions of the New York Insurance
Law, applicable to non-life insurance companies such as the certificate insurer,
regulate, among other things, permitted investments, payment of dividends,
transactions with affiliates, mergers, consolidations, acquisitions or sales of
assets and incurrence of liability for borrowings.
THE SERVICER AND THE MASTER SERVICER
The information set forth in the following paragraphs have been
provided by Meritech Mortgage Services, Inc. and Saxon Mortgage, Inc. None of
the depositor, the originator, the trustee, the underwriter, the certificate
insurer or any of their affiliates has made or will make any representation as
to the accuracy or completeness of such information.
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THE SERVICER
Meritech Mortgage Services, Inc., an affiliate of the master servicer,
will service the mortgage loans. The servicer began its servicing operations in
1960 and operated under the name Cram Mortgage Service, Inc., before September
1994. The principal offices of the servicer are located in Fort Worth, Texas.
The servicer is a HUD-approved originator and is approved by and in good
standing with Fannie Mae and Freddie Mac. The servicer will provide customary
servicing functions with respect to the mortgage loans. Among other things, the
servicer is obligated under some circumstances to advance delinquent payments of
principal and interest with respect to the mortgage loans and to pay prepayment
interest shortfalls with respect to mortgage loans serviced by it provided,
however, that the aggregate amount that the servicer will pay to cover
prepayment interest shortfalls on any distribution date will not exceed an
amount equal to the product of (i) 1/12, (ii) 0.50% and (iii) the balance of the
mortgage loans as of the first day of the related Due Period. The servicer must
obtain approval of the master servicer with respect to some of its servicing
activities.
As of December 31, 2000, the servicer serviced a portfolio of
approximately 60,176 one-to-four family conventional residential mortgage loans
totaling approximately $5.59 billion. The following table sets forth certain
unaudited information concerning the delinquency experience, including loans in
foreclosure, and mortgage loans foreclosed with respect to the servicer's
conventional loan servicing portfolio as of the end of the indicated periods.
The indicated periods of delinquency are based on the number of days past due on
a contractual basis. No mortgage loan is considered delinquent for these
purposes until it is 31 days past due on a contractual basis.
Percentage of Total Portfolio
-----------------------------
December 31, 2000 December 31,1999 December 31, 1998 December 31, 1997
----------------- ---------------- ----------------- -----------------
By No By Dollar By No By Dollar By No By Dollar By No By Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------ -------- ------
Period of
Delinquency
31-60 days 6.86% 6.91% 5.62% 5.48% 6.48% 6.36% 5.82% 6.25%
61-90 days 1.69% 1.76% 1.67% 1.62% 1.28% 1.34% 1.61% 1.49%
91 days or more 3.04% 2.94% 1.96% 1.97% 1.46% 1.60% 1.37% 1.20%
----- ----- ---- ---- ---- ---- ---- ----
Total
Delinquency(1) 11.60% 11.62% 9.25% 9.07% 9.22% 9.30% 8.80% 8.94%
Loans in
foreclosure 3.92% 4.00% 2.88% 3.04% 2.03% 2.45% 2.07% 1.47%
December 31, 1996
-----------------
By No By Dollar
of Loans Amount
-------- ------
Period of
Delinquency
31-60 days 3.72% 3.10%
61-90 days 1.02% 1.03%
91 days or more 1.33% 1.48%
---- ----
Total
Delinquency(1) 6.07% 5.61%
Loans in
foreclosure 0.91% 1.31%
- -------------------------------------------------
(1) Totals may not sum due to rounding.
These statistics represent the recent experience of the servicer. There
can be no assurance that the delinquency and foreclosure experience of the
mortgage loans in the trust will be comparable. In addition, these statistics
are based on all the one-to-four family residential mortgage loans in the
servicer's servicing portfolio, including mortgage loans with a variety of
payment and other characteristics, including geographic locations and
underwriting standards. Not all the mortgage loans in the servicer's servicing
portfolio constitute non-conforming credits. Accordingly, there can be no
assurance that the delinquency and foreclosure experience of the trust's
mortgage loans in the future will correspond to the future delinquency and
foreclosure experience of the servicer's one-to-four family conventional
residential mortgage loan servicing portfolio. The actual delinquency and
foreclosure experience of the mortgage loans will depend, among other things,
upon:
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o the value of real estate securing the mortgage loans; and
o the ability of borrowers to make required payments.
THE MASTER SERVICER
Saxon Mortgage, Inc., will act as master servicer of the mortgage
loans. The master servicer has limited experience master servicing mortgage
loans. The master servicer will:
o supervise the servicing of the mortgage loans;
o provide specified reports to the trustee regarding the mortgage
loans;
o make advances to the extent described in this prospectus
supplement with respect to the mortgage loans if the servicer
fails to make a required advance;
o make payments of prepayment interest shortfalls if the servicer
fails to do so up to the same amount required to be paid by the
servicer; and
o appoint a successor servicer if a servicer is terminated.
The master servicer is entitled to a master servicing fee, payable on
each distribution date from interest payments in respect of the mortgage loans
in the amount equal to 0.01% per annum on the Principal Balance of each mortgage
loan as of the first day of the related Due Period.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued pursuant to the pooling and servicing
agreement. A form of pooling and servicing agreement has been filed as an
exhibit to the registration statement of which this prospectus supplement and
the prospectus are a part. The following summaries together with the information
in this prospectus supplement under "Description of the Certificates" and in the
prospectus under the headings "Description of the Securities" and "The
Agreements" describe the material provisions of the pooling and servicing
agreement. 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
pooling and servicing agreement. Wherever particular sections or defined terms
of the pooling and servicing agreement are referred to, these sections or
defined terms are incorporated by reference in this prospectus supplement.
ASSIGNMENT OF MORTGAGE LOANS
On the closing date the depositor will transfer to the trust all of its
right, title and interest in and to each mortgage loan, the related mortgage
note, mortgages and other related documents, collectively, referred to as the
related documents, including all payments received after the cut-off date other
than payments of principal and interest on the mortgage loans due on or before
the cut-off date. The trustee,
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concurrently with the transfer, will deliver the certificates to the depositor.
Each mortgage loan transferred to the trust will be identified on a mortgage
loan schedule delivered to the trustee pursuant to the pooling and servicing
agreement. This schedule will include information as to the Principal Balance of
each mortgage loan as of the cut-off date, as well as information with respect
to the loan rate.
The pooling and servicing agreement will require that, within the time
period specified in the agreement, the depositor will deliver or cause to be
delivered to the trustee, or the custodian, as the trustee's agent for this
purpose, the mortgage loans endorsed to the trustee and the related documents.
In lieu of delivery of original mortgages, if the original is not available, the
depositor may deliver or cause to be delivered true and correct copies of the
original mortgages.
Under the terms of the pooling and servicing agreement, the depositor
will promptly and in no event later than 30 days after the closing date prepare
and record, or cause to be prepared or recorded, assignments of the mortgages
related to each mortgage loan in favor of the trustee. If the recording
information with respect to any assignment of mortgage is unavailable within 30
days of the closing date or subsequent transfer date, as the case may be, the
assignment will be prepared and recorded within 30 days after receipt of this
information, but in no event later than one year after the closing date or
subsequent transfer date, as the case may be.
Within 45 days of the closing date the trustee, or the custodian on
behalf of the trustee, will review the mortgage loans and the related documents
pursuant to the agreement and if any mortgage loan or related document is found
to be defective in any material respect and the defect is not cured within 90
days following notification of the defect to the seller by the trustee, the
seller will be obligated to purchase the mortgage loan at a price equal to the
outstanding Principal Balance of the mortgage loan as of the date of purchase,
plus unpaid interest on the mortgage loan from the date interest was last paid
or with respect to which interest was advanced and not reimbursed through the
end of the calendar month in which the purchase occurred, computed at the loan
rate, net of the master servicing fee if the seller is the master servicer, plus
if the seller is not the master servicer the amount of any unreimbursed
servicing advances, if any, made by the master servicer. The purchase price will
be deposited in the collection account on or prior to the next succeeding
determination date after the obligation arises. The obligation of the seller to
repurchase a defective mortgage loan is the sole remedy regarding any defects in
the mortgage loans and related documents available to the trustee or the
certificateholders.
On the closing date, the depositor will also assign to the trustee all
the depositor's right, title and interest in the mortgage loan purchase
agreement between the seller and the depositor insofar as it relates to the
representations and warranties made therein by the seller in respect of the
mortgage loans and the remedies provided for breach of such representations and
warranties. The seller will represent and warrant, on the closing date that,
among other things: (a) at the time of transfer to the depositor, the seller has
transferred or assigned all of its right, title and interest in each mortgage
loan and the related documents, free of any lien; and (b) each mortgage loan
complied, at the time of origination, in all material respects with applicable
state and federal laws. In addition, the seller will make representations and
warranties as to the accuracy in all material respects of information furnished
to the trustee with respect to each mortgage loan. Upon discovery of a breach of
any representation and warranty which materially and adversely affects the value
of, or the interests of the certificateholders in, the related mortgage loan and
related documents, the seller will have a period of 60 days after
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discovery or notice of the breach to effect a cure. If the breach cannot be
cured within the 60-day period, the seller will be obligated to purchase the
mortgage loan from the trust. The same procedure and limitations that are set
forth above for the purchase of defective mortgage loans as a result of
deficient documentation relating to the defective mortgage loans will apply to
the purchase of a mortgage loan as a result of a breach of a representation or
warranty in the pooling and servicing agreement that materially and adversely
affects the interests of the certificateholders.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT, CUSTODIAL ACCOUNT
AND DISTRIBUTION ACCOUNT
The servicer will establish and maintain in the name of the trustee a
separate collection account for the benefit of the holders of the certificates.
The collection account will be an eligible account, as defined in this
prospectus supplement. Upon receipt by the servicer of amounts in respect of the
mortgage loans, excluding amounts representing the servicing fee, reimbursement
for monthly advances and servicer advances and insurance proceeds to be applied
to the restoration or repair of a mortgaged property or similar items and
amounts in respect of principal and interest due on or before April 1, 2001, the
servicer will deposit these amounts in the collection account. Amounts so
deposited may be invested in eligible investments, as described in the pooling
and servicing agreement, maturing no later than one business day prior to the
date on which the amount on deposit is required to be deposited in the custodial
account.
The master servicer will establish and maintain in the name of the
trustee a separate custodial account for the benefit of the holders of the
certificates. The custodial account will be an eligible account. Amounts on
deposit in the custodial account may be invested in eligible investments
maturing on or before the business day prior to the date on which the amount on
deposit is required to be deposited in the distribution account.
The trustee will establish a distribution account. No later than 1:00
p.m. New York time on or before the business day prior to each distribution
date, the Available Funds for that distribution date are required to be
deposited into the distribution account. The distribution account will be an
eligible account. Amounts on deposit in the distribution account may be invested
in eligible investments maturing on or before the business day prior to the
related distribution date or, if the eligible investments are an obligation of
the trustee or are money market funds for which the trustee or any affiliate is
the manager or the advisor, the eligible investments shall mature no later than
the related distribution date. Investment earnings from amounts on deposit in
the distribution account will not be part of Available Funds.
An eligible account is a segregated account that is
1. maintained with a depository institution whose debt obligations at
the time of any deposit in the eligible account have the highest
short-term debt rating by the rating agencies and whose accounts
are insured to the maximum extent provided by either the Savings
Association Insurance Fund or the Bank Insurance Fund of the
Federal Deposit Insurance Corporation with a minimum long-term
unsecured debt rating of A by Standard & Poor's Ratings Services
and A2 by Moody's Investor Services, Inc. and which is any of
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(A) a federal savings and loan association duly organized,
validly existing and in good standing under the federal
banking laws,
(B) an institution duly organized, validly existing and in good
standing under the applicable banking laws of any state,
(C) a national banking association duly organized, validly
existing and in good standing under the federal banking
laws, or
(D) a principal subsidiary of a bank holding company;
2. a segregated trust account maintained with the corporate trust
department of a federal or state chartered depository institution
or trust company, having capital and surplus of not less than
$50,000,000, acting in its fiduciary capacity; or
3. otherwise acceptable to each rating agency as evidenced by a
letter from each rating agency to the trustee, without reduction
or withdrawal of the then current ratings of the offered
certificates without regard to the financial guaranty insurance
policy.
ADVANCES
The determination date for each distribution date is on the fifth
business day prior to that distribution date. On or prior to the fourth business
day before each distribution date, the servicer will remit to the master
servicer for deposit in the custodial account an amount equal to each scheduled
payment due on a mortgage loan during the related Due Period but not received by
the servicer as of the related determination date, net of the servicing fee,
called a monthly advance. The obligation of the servicer continues with respect
to each mortgage loan until the mortgage loan becomes a Liquidated Mortgage
Loan. So long as the servicer is Meritech Mortgage Services, Inc. or has
long-term debt rated at least investment grade, the servicer may fund monthly
advances from amounts in the collection account that are being held for future
distribution but must replace any of those funds so used prior to the next
distribution date.
In the event the servicer fails to make a monthly advance when due, the
master servicer will be obligated, before each distribution date, to deposit in
the distribution account the amount of the aggregate monthly payments on the
mortgage loans that were due during the related Due Period, net of the servicing
fee and the master servicing fee, but which were not received or advanced by the
servicer and remitted to the master servicer prior to that date. The master
servicer will remit to the trustee for deposit in the distribution account all
monthly advances received from the servicer or made by it.
In the course of performing its servicing obligations, the servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of
o the preservation, restoration and protection of the mortgaged
properties,
o any enforcement or judicial proceedings, including foreclosures,
and
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o the management and liquidation of mortgaged properties acquired in
satisfaction of the related mortgage.
Each expenditure will constitute a servicing advance.
The servicer's right to reimbursement for servicing advances is limited
to late collections on the related mortgage loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and any other
amounts as may be collected by the servicer from the related mortgagor or
otherwise relating to the mortgage loan in respect of which the unreimbursed
amounts are owed. The servicer's right to reimbursement for monthly advances is
limited to late collections on any mortgage loan and to liquidation proceeds and
insurance proceeds on the related mortgage loan.
The servicer's right to reimbursements is prior to the rights of
certificateholders.
Notwithstanding the foregoing, neither the servicer nor the master
servicer is required to make any monthly advance or servicing advance if in the
good faith judgment and sole discretion of the servicer or the master servicer,
as applicable, the servicer or the master servicer, as applicable, determines
that the advance will not be ultimately recoverable from collections received
from the mortgagor in respect of the related mortgage loan or other recoveries
in respect of the mortgage loan. In addition, if any servicing advance or
monthly advance is determined in good faith by the servicer or the master
servicer, as applicable, to be non-recoverable from these sources, the amount of
the nonrecoverable advances may be reimbursed to the servicer or the master
servicer, as the case may be, from other amounts on deposit in the collection
account or the custodial account, as applicable.
NET RATE CAP FUND
The pooling and servicing agreement provides for a reserve fund, the
net rate cap fund, which is held by the trustee on behalf of the holders of the
certificates, other than the class IO certificates. To the extent amounts on
deposit are sufficient, holders of the applicable certificates will be entitled
to receive payments from the net rate cap fund equal to any Net Rate Cap
Carryover. The amount required to be deposited in the net rate cap fund on any
distribution date will equal any Net Rate Cap Carryover for the applicable
distribution date, or, if no Net Rate Cap Carryover, is payable on the
applicable distribution date, an amount that when added to other amounts already
on deposit in the net rate cap fund, the aggregate amount on deposit is equal to
$10,000. Any investment earnings on amounts on deposit in the net rate cap fund
will be paid to, and for the benefit of, the holders of the class BIO
certificates and will not be available to pay any Net Rate Cap Carryover. The
net rate cap fund will not be included as an asset of any REMIC.
SERVICING PROCEDURES
The servicer will make reasonable efforts to collect all payments
required to be made under the mortgage loans and will, consistent with the terms
of the pooling and servicing agreement, follow the same collection procedures as
it follows with respect to comparable loans held in its own portfolio.
Consistent with the above and subject to the limitations set forth in the
pooling and servicing agreement, the servicer may, in its discretion, (a) waive
any assumption fee, late payment charge, or other charge in connection with a
mortgage loan and (b) arrange with an obligor a schedule for the liquidation of
delinquencies by extending the due dates for scheduled payments on the mortgage
loans. In addition, the servicer has the right to modify the terms of the
mortgage loans if the modification
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would be made by the servicer if the mortgage loan were held for the servicer's
own account and it first delivers to the trustee written notice of the
modification together with the calculations demonstrating that the modification
is permitted by the REMIC provisions of the Internal Revenue Code and applicable
Treasury regulations.
SERVICING COMPENSATION, PAYMENT OF EXPENSES AND PREPAYMENT INTEREST SHORTFALLS
With respect to each Due Period, the servicer will receive from
interest payments in respect of the mortgage loans a portion of the interest
payments as a monthly servicing fee in the amount equal to 0.50% per annum, on
the Principal Balance of each mortgage loan as of the first day of each Due
Period. All assumption fees, late payment charges and other fees and charges,
excluding prepayment charges, to the extent collected from borrowers, will be
retained by the servicer as additional servicing compensation. On each
distribution date the master servicer will receive from interest payments in
respect of the mortgage loans a portion of the interest payments as a monthly
master servicing fee in the amount equal to 0.01% per annum on the Principal
Balance of each mortgage loan as of the first day of each Due Period.
Not later than the determination date, the servicer is required to
remit to the master servicer, without any right of reimbursement, an amount
equal to, with respect to each mortgage loan as to which a principal prepayment
in full was received during the related prepayment period, the lesser of (a) the
excess, if any, of the sum of 30 days' interest on the Principal Balance of each
mortgage loan at the related loan rate, or at any lower rate as may be in effect
for the mortgage loan because of application of the Civil Relief Act, minus the
servicing fee and master servicing fee for the mortgage loan, over the amount of
interest actually paid by the related mortgagor in connection with each
principal prepayment, with respect to all these mortgage loans, referred to as
the prepayment interest shortfall, and (b) an amount equal to one twelfth of
0.50% per annum times the aggregate Principal Balance of the mortgage loans as
of the first day of the related Due Period.
The servicer is not obligated to offset any of the servicing fee
against, or to provide any other funds to cover, any Civil Relief Act
Shortfalls.
EVIDENCE AS TO COMPLIANCE
The pooling and servicing agreement provides for delivery by the master
servicer and the servicer on or before March 1 of each year beginning March 1,
2002, to the trustee, the certificate insurer and the rating agencies of an
annual statement, each signed by an appropriate officer to the effect that the
master servicer or servicer, as applicable, has fulfilled its material
obligations under the pooling and servicing agreement throughout the preceding
fiscal year, except as specified in the statement.
On or before March 1 of each year beginning March 1, 2002, the master
servicer and the servicer will each furnish a report prepared by a firm of
nationally recognized independent public accountants, who may also render other
services to the master servicer, the servicer, the trustee, the certificate
insurer and the rating agencies to the effect that the firm has examined
particular documents and the records relating to servicing of the mortgage loans
by the master servicer or the servicer, as applicable, under the Uniform Single
Attestation Program for Mortgage Bankers and the firm's conclusions.
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CERTAIN MATTERS REGARDING THE SERVICER AND THE MASTER SERVICER
The pooling and servicing agreement provides that the servicer and the
master servicer each may not resign from its respective obligations and duties
under that agreement, except in connection with a permitted transfer of
servicing, unless (1) these duties and obligations are no longer permissible
under applicable law as evidenced by an opinion of counsel delivered to the
trustee and the certificate insurer or (2) upon the satisfaction of the
following conditions:
(a) the servicer has proposed a successor servicer to the master
servicer or the master servicer has proposed a successor master servicer to the
depositor and the trustee in writing and the proposed successor servicer or
successor master servicer, as applicable, is reasonably acceptable to the master
servicer or the depositor and the trustee, as applicable;
(b) the proposed successor master servicer
o is an affiliate of Wells Fargo Bank Minnesota, National
Association that services similar collateral,
or
o if the class principal balance of the senior certificates
is greater than 50% of the aggregate class principal
balance of all the certificates, the proposed successor
master servicer is approved by the holders of certificates
evidencing more than 50% of the voting rights in the
trust,
or
o if the class principal balance of the senior certificates
is 50% or less than the aggregate class principal balance
of all the certificates, the proposed successor master
servicer is an approved master servicer by Standard &
Poor's Ratings Services;
(c) if the senior certificates have not yet been retired, the
certificate insurer has confirmed to the master servicer or the trustee, as
applicable, its consent to the appointment of the successor servicer or the
successor master servicer, as applicable, and
(d) the rating agencies have confirmed to the master servicer or
trustee, as applicable, that the appointment of the proposed successor servicer
as the servicer or the successor master servicer as the master servicer, as
applicable, will not result in the reduction or withdrawal of the then current
ratings of the offered certificates (without giving effect to the policy).
No resignation will become effective until a successor servicer or a successor
master servicer has assumed the servicer's or the master servicer's, as
applicable, obligations and duties under the pooling and servicing agreement.
The servicer may perform any of its duties and obligations under the
pooling and servicing agreement through one or more subservicers or delegates,
which may be affiliates of the servicer.
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Notwithstanding any arrangement, the servicer will remain liable and obligated
to the trustee and the certificateholders for the servicer's duties and
obligations under the pooling and servicing agreement, without any diminution of
these duties and obligations and as if the servicer itself were performing the
duties and obligations.
Any corporation into which the servicer or the master servicer may be
merged or consolidated, or any corporation resulting from any merger, conversion
or consolidation to which the servicer or the master servicer shall be a party,
or any corporation succeeding to the business of the servicer or the master
servicer shall be the successor of the servicer or master servicer, as
applicable, under the pooling and servicing agreement, without the execution or
filing of any paper or any further act on the part of any of the parties to the
pooling and servicing agreement, anything in the pooling and servicing agreement
to the contrary notwithstanding.
EVENTS OF DEFAULT
Events of default with respect to the servicer and the master servicer
will consist of the following, as applicable:
o in the case of the servicer, any failure by the servicer (a)
to make any required monthly advance which failure continues
unremedied for one business day after the date due or (b) to
deposit in the collection account or the custodial account any
deposit required to be made under the pooling and servicing
agreement, which failure continues unremedied for two business
days after the date due;
o in the case of the master servicer, any failure by the master
servicer (a) to make any required monthly advance or (b) to
deposit in the distribution account any deposit required to be
made under the pooling and servicing agreement which failure
continues unremedied until the close of business on the
business day before the distribution date;
o any failure by the servicer or master servicer duly to observe
or perform in any material respect any other of its respective
covenants or agreements in the pooling and servicing agreement
which, in each case, materially and adversely affects the
interests of the certificateholders and continues unremedied
for 60 days after knowledge or the giving of written notice of
the failure to the servicer or the master servicer, as
applicable, by the trustee, or to the servicer or the master
servicer, as applicable, and the trustee by certificateholders
evidencing at least 25% of the voting rights;
o any failure by the servicer to make any required servicing
advance, which failure continues unremedied for the lesser of
the time at which the failure would have a material adverse
effect on the trust or for a period of 60 days after knowledge
or the giving of written notice of the failure to the master
servicer by the trustee, or to the servicer and the trustee by
certificateholders evidencing at least 25% of the voting
rights;
o particular events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings
relating to the servicer or the master servicer, as
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applicable, and particular actions by the servicer or the
master servicer, as applicable, indicating insolvency,
reorganization or inability to pay its obligations; and
o cumulative losses or delinquency levels exceed the levels set
forth in the pooling and servicing agreement.
So long as an event of default with respect to the servicer remains
unremedied, the master servicer, with the approval of or at the request of the
certificate insurer, if the senior certificates have not yet been retired and a
certificate insurer default does not exist, or, if the senior certificates have
been retired, with the approval of or at the request of the trustee or holders
of certificates evidencing a majority of the voting rights, shall terminate all
of the rights and obligations of the servicer under the pooling and servicing
agreement, other than its right to recovery of expenses and amounts advanced
pursuant to the terms of the pooling and servicing agreement; provided, however,
that in the case of the last event of default listed above, those holders, in
their sole discretion, must first determine that the loss and delinquency levels
were exceeded through the fault of the servicer. If the master servicer fails to
terminate the servicer at the permitted request of the certificate insurer, the
certificate insurer may so terminate the servicer.
Notwithstanding anything to the contrary in the prospectus, pursuant to
the terms of the pooling and servicing agreement, the master servicer shall
appoint a successor servicer acceptable to the rating agencies and, if the
senior certificates have not yet been retired and a certificate insurer default
does not exist, the certificate insurer. Until such time as a successor servicer
accepts such appointment, the master servicer shall assume, satisfy, perform and
carry out all obligations which would otherwise have been satisfied, performed
and carried out by the servicer under the pooling and servicing agreement.
As compensation to the master servicer for any servicing obligations fulfilled
by the master servicer, the master servicer shall be entitled to the servicing
compensation to which the terminated servicer would have been entitled under the
pooling and servicing agreement.
So long as an event of default with respect to the master servicer
remains unremedied, the trustee or holders of certificates evidencing greater
than 50% of the aggregate voting rights in the trust may terminate all of the
rights and obligations of both the master servicer as master servicer and the
servicer as servicer under the pooling and servicing agreement, other than the
right of each to recover expenses and amounts advanced pursuant to the terms of
the pooling and servicing agreement; provided, however, that in the case of the
last event of default listed above, those holders, in their sole discretion,
must first determine that the loss or delinquency levels were exceeded through
the fault of the master servicer.
Notwithstanding anything to the contrary in the prospectus, pursuant to
the terms of the pooling and servicing agreement, within ninety (90) days of the
removal of the master servicer, called the transition period, the trustee will
be the successor master servicer and successor servicer and will assume all of
the rights and obligations of the master servicer and the servicer.
Notwithstanding the foregoing sentence, the successor will be obligated to make
monthly advances and servicing advances upon the removal of the master servicer
and servicer unless it determines reasonably and in good faith that the advances
would not be recoverable. The successor shall have no responsibility or
obligation (x) to repurchase or substitute for any mortgage loan or (y) for any
act or omission of a predecessor master servicer or predecessor servicer during
the transition period. If, however, the trustee is unable or unwilling to act as
successor master servicer and servicer, or if the majority of certificateholders
so
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requests, the trustee may appoint, or petition a court of competent jurisdiction
to appoint as the successor master servicer and servicer in the assumption of
all or any part of the responsibilities, duties or liabilities of the master
servicer and servicer any established mortgage loan servicing institution
meeting the following requirements:
o having a net worth of not less than $25,000,000,
o if the class principal balance of the senior certificates is
greater than 50% of the aggregate class principal balance of
all the certificates, the proposed successor is approved by
the holders of certificates evidencing more than 50% of the
voting rights in the trust,
or
o if the class principal balances of the senior certificates is
50% or less than the aggregate class principal balance of all
the certificates, the proposed successor is an approved
servicer by Standard & Poor's Ratings Services.
Pending the appointment, the trustee will be obligated to act in that capacity
unless prohibited by law. The successor master servicer and servicer will be
entitled to receive the same compensation that the master servicer and servicer
each would otherwise have received or the lesser compensation as the trustee and
that successor may agree. A receiver or conservator for the master servicer may
be empowered to prevent the termination and replacement of the master servicer
and servicer if the only event of default that has occurred is an insolvency
event.
If an event of default occurs under the pooling and servicing agreement
and the defaulting master servicer and the servicer is not replaced by the
successor master servicer and servicer or another person in accordance with the
pooling and servicing agreement, the appointment of the defaulting master
servicer and servicer shall be limited to 90 days. If the appointment is so
limited, the trustee will automatically renew the appointment for successive
90-day terms unless directed in writing not to renew by the holders of
certificates evidencing more than 50% of the voting rights in the trust.
However, if the defaulting master servicer and servicer are replaced, the
successor's appointment will not be limited to 90 days unless and until an event
of default exists with respect to that successor.
AMENDMENT
The pooling and servicing agreement may be amended from time to time by
the seller, the master servicer and the trustee, subject in the case of any
amendment which affects any right, benefit, duty or obligation of the
certificate insurer, to the consent of the certificate insurer, without the
consent of the certificateholders, to
o cure any ambiguity,
o correct or supplement any provisions in the pooling and
servicing agreement which may be defective or inconsistent
with any other provisions of the pooling and servicing
agreement,
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o add to the duties of the servicer or master servicer,
o comply with any requirements imposed by the Internal Revenue
Code or any regulation under the Internal Revenue Code, or to
add or amend any provisions of the pooling and servicing
agreement as required by the rating agencies in order to
maintain or improve any rating of the offered certificates, it
being understood that, after obtaining the ratings in effect
on the closing date, none of the seller, the trustee, the
servicer or the master servicer is obligated to obtain,
maintain, or improve any rating, or
o add any other provisions with respect to matters or questions
arising under the pooling and servicing agreement which shall
not be inconsistent with the provisions of the pooling and
servicing agreement,
provided that the action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any certificateholder;
provided, that any amendment will be deemed to not materially and adversely
affect the certificateholders and no opinion will be required to be delivered if
the person requesting the amendment obtains a letter from the rating agencies
stating that the amendment would not result in a downgrading of the then current
rating of the offered certificates.
The pooling and servicing agreement also may be amended from time to
time by the seller, the master servicer, the servicer and the trustee, subject
in the case of any amendment which affects any right, benefit, duty or
obligation of the certificate insurer, to the consent of the certificate
insurer, with the consent of certificateholders holding certificates evidencing
at least 51% of the voting rights of each class affected by the amendment, or
51% of all of the voting rights if all classes are affected, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the agreement or of modifying in any manner the rights of the
certificateholders, provided that no amendment will (x) reduce in any manner the
amount of, or delay the timing of, collections of payments on the certificates
or distributions or payments which are required to be made on any certificate
without the consent of the certificateholder or (y) reduce the aforesaid
percentage required to consent to any amendment, without the consent of the
holders of all certificates of the affected class then outstanding.
Notwithstanding the foregoing, if the trustee is acting as the servicer
or the master servicer at the time of any proposed amendment and the senior
certificates are still outstanding, any proposed amendment will require the
consent of the certificate insurer.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The trust will terminate on the distribution date following the later
of (x) payment in full of all amounts owing to the certificate insurer, unless
the certificate insurer otherwise consents, and (y) the earliest of
(a) the distribution date on which the aggregate class principal
balance of all the certificates has been reduced to zero,
(b) the final payment or other liquidation of the last mortgage
loan in the trust and
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(c) the optional purchase of the mortgage loans, as described
below.
Subject to provisions in the pooling and servicing agreement concerning
adopting a plan of complete liquidation, the master servicer may, at its option,
terminate the pooling and servicing agreement on any distribution date following
the Due Period during which the aggregate Principal Balance of the mortgage
loans is less than or equal to 10% of the sum of the Principal Balances of the
mortgage loans as of the cut-off date, called the optional termination date, by
purchasing all of the outstanding mortgage loans and REO properties at a price
equal to the sum of the outstanding Pool Balance, subject to reduction of the
purchase price based in part on the appraised value of any REO property included
in the trust if the appraised value is less than the Principal Balance of the
related mortgage loan, as provided in the pooling and servicing agreement, and
accrued and unpaid interest on the related mortgage loan at the weighted average
of the loan rates through the end of the related Due Period together with all
amounts due to the certificate insurer.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The master servicer has the option to purchase from the trust any
mortgage loan 90 days or more delinquent at a purchase price equal to the
outstanding principal balance of the mortgage loan as of the date of purchase,
plus all accrued and unpaid interest on that principal balance computed at the
loan rate.
VOTING RIGHTS
Under the pooling and servicing agreement, the portion of the voting
rights allocated to the offered certificates will equal 100% minus the portion
allocated to the class BIO certificates, and the portion of the voting rights
allocated to the class BIO certificates will equal the percentage equivalent of
a fraction, the numerator of which is the Required Overcollateralization Amount
and the denominator of which is the Pool Balance. Voting rights allocated to the
certificates will be allocated 1% to the class IO certificates, 1% to the
Residual certificates and among the other classes in proportion to their
respective class principal balances. Voting rights allocated to a class of
certificates will be further allocated among the certificates of the class on
the basis of their respective percentage interests. Except during the
continuance of a certificate insurer default, the certificate insurer will have
the power to exercise all of the voting rights of the holders of the senior
certificates.
THE TRUSTEE
Wells Fargo Bank Minnesota, National Association will be named trustee
pursuant to the pooling and servicing agreement. Wells Fargo Bank Minnesota,
National Association, a direct, wholly-owned subsidiary of Wells Fargo & Co., is
a national banking association originally chartered in 1872 and is engaged in a
wide range of activities typical of a national bank. Its principal office is
located at Wells Fargo Center, Sixth Street and Marquette Avenue, Minneapolis,
Minnesota 55479-0113. It otherwise conducts its securities administration
services at its offices in Columbia, Maryland. Its address there is 11000 Broken
Land Parkway, Columbia, Maryland 21044-3562. The trustee may have banking
relationships with the seller, the master servicer and the servicer. The trustee
may appoint one or more co-trustees if necessary to comply with the fiduciary
requirements imposed by any jurisdiction in which a mortgaged property is
located.
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In order to provide for the payment of the fees and expenses of the
trustee which shall include the fees and expenses of any custodian appointed by
the trustee, the trustee will receive from interest payments on the mortgage
loans a portion of the interest payments as a monthly trustee fee in the amount
equal to 0.03% per annum. The master servicer will remit to the trustee from
amounts on deposit in the custodial account, payment of the trustee fee to the
trustee on each master servicer remittance date.
The trustee may resign at any time, in which event the seller will be
obligated to appoint a successor trustee. The seller may also remove the trustee
if the trustee ceases to be eligible to continue as such under the pooling and
servicing agreement or if the trustee becomes insolvent. Upon becoming aware of
these circumstances, the seller will be obligated to appoint a successor
trustee. Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of the appointment
by the successor trustee. If the successor trustee is to act as the successor
master servicer and servicer under the pooling and servicing agreement, the
successor trustee must satisfy the conditions in clause (b) under the caption
"Certain matters regarding the master servicer" above.
No holder of a certificate will have any right under the agreement to
institute any proceeding with respect to the pooling and servicing agreement
unless the holder previously has given to the trustee written notice of default
and unless certificateholders evidencing at least 51% of the voting rights have
made written requests upon the trustee to institute a proceeding in its own name
as trustee under the pooling and servicing agreement and have offered to the
trustee reasonable indemnity and the trustee for 60 days has neglected or
refused to institute any proceeding. The trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the pooling and servicing
agreement or to make any investigation of matters arising under the pooling and
servicing agreement or to institute, conduct or defend any litigation under the
pooling and servicing agreement or in relation to the pooling and servicing
agreement at the request, order or direction of any of the certificateholders,
unless the certificateholders have offered to the trustee reasonable security or
indemnity against the cost, expenses and liabilities which may be incurred.
USE OF PROCEEDS
The net proceeds to be received from the sale of the certificates will
be applied by the seller for general corporate purposes.
FEDERAL INCOME TAX CONSIDERATIONS
Separate elections will be made to treat particular assets of the
trust, excluding the net rate cap fund, as a real estate mortgage investment
conduit, also referred to as a REMIC, for federal income tax purposes under the
Internal Revenue Code of 1986, as amended, creating a tiered REMIC structure.
The offered certificates, excluding any associated rights to receive Net Rate
Cap Carryover, will be designated as "regular interests" in a REMIC, named REMIC
regular certificates. The REMIC regular certificates generally will be treated
as debt instruments issued by a REMIC for federal income tax purposes. Income on
the REMIC regular certificates must be reported under an accrual method of
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accounting. See "Federal Income Tax Considerations--Taxation of the REMIC and
its holders" in the prospectus.
The notional amount certificates will, and the other classes of REMIC
regular certificates may, depending on their issue price, be issued with
original issue discount, called OID, for federal income tax purposes. In this
event, holders of the certificates will be required to include OID in income as
it accrues under a constant yield method, in advance of the receipt of cash
attributable to that income. The Treasury regulations relating to OID do not
contain provisions specifically interpreting Internal Revenue Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the trustee
intends to base its computation on Internal Revenue Code Section 1272(a)(6) and
the OID regulations as described in the prospectus. However, because no
regulatory guidance currently exists under Internal Revenue Code Section
1272(a)(6), there can be no assurance that the methodology represents the
correct manner of calculating OID.
The yield used to calculate accruals of OID with respect to the REMIC
regular certificates with OID will be the original yield to maturity of the
certificates, determined by assuming that the fixed rate and adjustable rate
mortgage loans will prepay in accordance with 115% and 100%, respectively, of
the applicable prepayment assumption. No representation is made as to the actual
rate at which the mortgage loans will prepay.
If the method used for computing OID results in a negative amount for
any period with respect to any certificateholders, in particular, the holders of
the class IO certificates, the amount of OID 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 Treasury 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 a certificate may be
able to select a method for recognizing OID that differs from that used by the
trustee in preparing reports to the certificateholders and the IRS.
The REMIC regular certificates will be treated as regular interests in
a REMIC under section 860G of the Internal Revenue Code. Accordingly, the REMIC
regular certificates will be treated as (a) assets described in section
7701(a)(19)(C) of the Internal Revenue Code, and (b) "real estate assets" within
the meaning of section 856(c)(4)(A) of the Internal Revenue Code, in each case
to the extent described in the prospectus. Interest on the REMIC regular
certificates will be treated as interest on obligations secured by mortgages on
real property within the meaning of section 856(c)(3)(B) of the Internal Revenue
Code to the same extent that the REMIC regular certificates are treated as real
estate assets. See "Federal Income Tax Considerations" in the prospectus.
NET RATE CAP CARRYOVER
The beneficial owners of the certificates, other than the class IO
certificates, and the related rights to receive Net Rate Cap Carryover, will be
treated for tax purposes as owning two separate
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assets: (a) the applicable certificates without the rights to receive Net Rate
Cap Carryover, which constitute regular interests in a REMIC, and (b) the
related rights to receive Net Rate Cap Carryover. Accordingly, a purchaser of a
certificate, other than the class IO certificates, must allocate its purchase
price between the two assets comprising the related certificate. In general, the
allocation would be based on the relative fair market values of the assets on
the date of purchase of the certificates. No representation is or will be made
as to the relative fair market values. We recommend that all holders of
applicable certificates consult their tax advisors regarding the taxation of Net
Rate Cap Carryover which is generally governed by the provisions of the Internal
Revenue Code and Treasury regulations relating to notional principal contracts
and possibly those relating to straddles.
The rights to receive Net Rate Cap Carryover will not constitute
(a) a "real estate asset" within the meaning of section
856(c)(4)(A) of the Internal Revenue Code for a real estate
investment trust;
(b) a "qualified mortgage" or a "permitted investment" within the
meaning of section 860G(a)(3) and section 860G(a)(5),
respectively, of the Internal Revenue Code if held by a REMIC;
or
(c) an asset described in section 7701(a)(19)(C)(xi) of the
Internal Revenue Code if held by a domestic building and loan
association.
Further, the Net Rate Cap Carryover will not constitute income
described in section 856(c)(3)(B) of the Internal Revenue Code for a real estate
investment trust. Moreover, other special rules may apply to some investors,
including dealers in securities and dealers in notional principal contracts.
BACKUP WITHHOLDING
Some certificate owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the offered certificates if the
certificate owners, upon issuance, fail to supply the trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments", as defined in the Internal Revenue Code, properly, or, under specific
circumstances, fail to provide the trustee or their broker with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding.
The trustee will be required to report annually to the Internal Revenue
Service, and to each certificateholder of record, the amount of interest paid,
and OID accrued, if any, on the offered certificates, and the amount of interest
withheld for federal income taxes, if any, for each calendar year, except as to
exempt holders, generally, holders that are corporations, some tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents. As long as the only "certificateholder" of record is Cede, as
nominee for DTC, certificate owners and the Internal Revenue Service will
receive tax and other information including the amount of interest paid on the
certificates owned from participants and indirect participants rather than from
the trustee. The trustee, however, will respond to requests for necessary
information to enable participants, indirect participants and other persons to
complete their reports. Each non-exempt certificate owner will be required to
provide,
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under penalty of perjury, a certificate on Internal Revenue Service Form W-9
containing his or her name, address, correct federal taxpayer identification
number and a statement that he or she is not subject to backup withholding.
Should a non-exempt certificate owner fail to provide the required
certification, the participants or indirect participants, or the paying agent,
will be required to withhold 31% of the interest, and principal, otherwise
payable to the holder, and remit the withheld amount to the Internal Revenue
Service as a credit against the holder's federal income tax liability. These
amounts will be deemed distributed to the affected certificate owner for all
purposes of the certificates and the agreement.
Treasury regulations, called final withholding regulations, which are
generally effective with respect to payments made after December 31, 2000,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide particular presumptions regarding the status of holders when
payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. We recommend that all holders consult their
tax advisors regarding the application of the final withholding regulations.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income
tax treatment of holders that are foreign investors. The term foreign investor
means any person other than
o a citizen or resident of the United States,
o 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, any state thereof or the District of Columbia,
o an estate the income of which is includible in gross income
for United States federal income tax purposes, regardless of
its source, or
o a trust if a court within the United States is able to
exercise primary supervision of the administration of the
trust and one or more United States persons have the authority
to control all substantial decisions of the trust.
The Internal Revenue Code and Treasury regulations generally subject
interest paid to a foreign investor to a withholding tax at a rate of 30%,
unless this rate were changed by an applicable treaty. The withholding tax,
however, is eliminated with respect to particular "portfolio debt investments"
issued to foreign investors. Portfolio debt investments include debt instruments
issued in registered form for which the United States payor receives a statement
that the beneficial owner of the instrument is a foreign investor. The offered
certificates will be issued in registered form; therefore, if the information
required by the Internal Revenue Code is furnished, as described below, and no
other exceptions to the withholding tax exemption are applicable, no withholding
tax will apply to the offered certificates.
For the offered certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the certificate owner an executed
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Internal Revenue Service Form W-8BEN signed under penalty of perjury by the
certificate owner stating that the certificate owner is a foreign investor and
providing the certificate owner's name and address. The statement must be
received by the withholding agent in the calendar year in which the interest
payment is made, or in either of the two preceding calendar years.
As indicated above, the final withholding regulations consolidate and
modify the current certification requirements and means by which a foreign
investor may claim exemption from United States federal income tax withholding.
All foreign investors should consult their tax advisors regarding the
application of the final withholding regulations, which are generally effective
with respect to payments made after December 31, 2000.
A certificate owner that is a nonresident alien or foreign corporation
will not be subject to United States federal income tax on gain realized on the
sale, exchange, or redemption of the offered certificate, provided that
o the gain is not effectively connected with a trade or business
carried on by the certificate owner in the United States,
o in the case of a certificate owner that is an individual, the
certificate owner is not present in the United States for 183
days or more during the taxable year in which the sale,
exchange or redemption occurs and
o in the case of gain representing accrued interest, the
conditions described in the second preceding paragraph are
satisfied.
ERISA CONSIDERATIONS
Any fiduciary of an employee benefit plan or other retirement
arrangement subject to Title I of the Employee Retirement Income Security Act of
1974, as amended, called ERISA, and/or Section 4975 of the Internal Revenue
Code, which proposes to cause the benefit plan or other retirement arrangement,
collectively called a plan, to acquire any of the offered certificates should
consult with its counsel with respect to the potential consequences, under ERISA
and the Internal Revenue Code, of the plan's acquisition and ownership of the
certificates. See "ERISA Considerations" in the prospectus.
The U.S. Department of Labor has granted an administrative exemption to
Greenwich Capital Markets, Inc. (Prohibited Transaction Exemption 90-59; which
was amended by Prohibited Transaction Exemptions 97-34 and 2000-58), called the
exemption, which exempts from the application of the prohibited transaction
rules transactions relating to (1) the acquisition, sale and holding by plans of
particular certificates representing an undivided interest in mortgage and
asset-backed pass-through trusts, with respect to which Greenwich Capital
Markets, Inc. or any of its affiliates is the sole underwriter or the manager or
co-manager of the underwriting syndicate; and (2) the servicing, operation and
management of the mortgage and asset-backed pass-through trusts, provided that
the general conditions and other conditions set forth in the exemption are
satisfied. See "ERISA Considerations" in the prospectus. The exemption will
apply to the acquisition, holding and resale by a plan of the certificates
backed by fully secured mortgage loans such as the Mortgage Loans; provided that
particular conditions, some of which are described below, are met.
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Among the conditions which must be satisfied for the exemption to apply
are the following:
(1) The acquisition of the certificates by a plan is on terms,
including the price for the certificates, that are at least as
favorable to the investing plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The certificates acquired by the plan have received a
rating at the time of the acquisition that is at least "BBB-" from
either S&P or Fitch or "Baa3" from Moody's Investors
Service;
(3) The sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
seller pursuant to the sale of the mortgage loans to the trust
represents not more than the fair market value of the mortgage loans;
the sum of all payments made to and retained by the servicer represent
not more than reasonable compensation for the servicer's services under
the agreement and reimbursement of the servicer's reasonable expenses
in connection with service;
(4) The trustee is not an affiliate of the underwriters, the
seller, the servicer, the insurer, any borrower whose obligations under
one or more mortgage loans constitute more than 5% of the aggregate
unamortized principal balance of the assets in the trust, or any of
their respective affiliates; and
(5) The plan investing in the certificates is 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, as
amended.
It is expected that the exemption will apply to the acquisition and
holding of the certificates by plans and that all conditions of the exemption
other than those within the control of the investors will be met.
No exemption is provided from the restrictions of ERISA for the
acquisition or holding of offered certificates on behalf of an excluded plan by
any person who is a fiduciary with respect to the assets of the excluded plan.
For purposes of the offered certificates, an excluded plan is a plan sponsored
by the seller, the underwriters, the trustee, the securities administrator, the
servicer, any other servicers or any mortgagor with respect to mortgage loans
included in the trust constituting more than 5% of the aggregate unamortized
principal balance of the assets in the trust or any affiliate of the parties,
called the restricted group. In addition, the fiduciary may not be an obligor
with respect to more than 5% of the fair market value of the loans. Also, no
plan's investment in any class of offered certificates may exceed 25% of all of
the certificates of the class outstanding at the time of the plan's acquisition
and after the plan's acquisition of the class of offered certificates, no more
than 25% of the assets over which the fiduciary has investment authority may be
invested in securities of a trust containing assets which are sold or serviced
by the same entity. Finally, in the case of initial issuance, but not secondary
market transactions, at least 50% of each class of offered certificates, and at
least 50% of the aggregate interest in the trust, must be acquired by persons
independent of the restricted group.
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Whether the conditions of the exemption will be satisfied with respect
to the certificates will depend upon the relevant facts and circumstances
existing at the time a plan acquires the certificates.
Plan investors should make their own determination, in consultation with their
counsel, before acquiring certificates in reliance on the applicability of the
exemption.
In the absence of the exemption, the purchase and holding of the class
M-1, class M-2 or class B certificates by a plan or by individual retirement
accounts or other plans subject to Section 4975 of the Internal Revenue Code may
result in prohibited transactions or the imposition of excise tax or civil
penalties. Consequently, transfers of the class M-1, class M-2 and class B
certificates will not be registered by the trustee unless the trustee receives:
(a) a representation from the transferee of the certificate, acceptable
to and in form and substance satisfactory to the trustee, to the effect that the
transferee is not an employee benefit plan subject to Section 406 of ERISA or a
plan or arrangement subject to Section 4975 of the Internal Revenue Code, nor a
person acting on behalf of any plan or arrangement nor using the assets of any
plan or arrangement to effect the transfer, called a benefit plan investor;
(b) a representation that the purchaser is a benefit plan investor and
understands that the eligibility of the certificates for purchase is conditioned
upon the certificate being rated at least "BBB-" at the time of acquisition of
the certificate by the benefit plan investor;
(c) if the purchaser is an insurance company, a representation that the
purchaser is an insurance company which is purchasing the certificates with
funds contained in an "insurance company general account", as the term is
defined in Section V(e) of Prohibited Transaction Class Exemption 95-60, called
PTCE 95-60, and that the purchase and holding of the certificates are covered
under Sections I and III of PTCE 95-60; or
(d) an opinion of counsel satisfactory to the trustee that the purchase
or holding of the certificate by a plan, any person acting on behalf of a plan
or using the plan's assets will not result in the assets of the trust being
deemed to be "plan assets" and, subject to the prohibited transaction
requirements of ERISA and the Internal Revenue Code, will not subject the
trustee to any obligation in addition to those undertaken in the agreement.
The representation as described above shall be deemed to have been made
to the trustee by the transferee's acceptance of a class M-1, class M-2 or class
B certificate in book-entry form. In the event that the representation is
violated, or any attempt to transfer to a plan or person acting on behalf of a
plan or using the plan's assets is attempted without the opinion of counsel, the
attempted transfer or acquisition shall be void and of no effect.
We recommend that any plan fiduciary considering whether to purchase
any offered certificates on behalf of a plan consult with its counsel regarding
the applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Internal Revenue Code to the investment. Among other
things, before purchasing any offered certificates, a fiduciary of a plan
subject to the fiduciary responsibility provisions of ERISA or an employee
benefit plan subject to the prohibited transaction provisions of the Internal
Revenue Code should make its own determination as to the availability of the
exemptive relief provided in the exemption, and also consider the availability
of any other prohibited transaction exemptions.
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LEGAL INVESTMENT CONSIDERATIONS
The offered certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984. Accordingly, many institutions with legal authority to invest in
comparably rated securities may not be legally authorized to invest in the
offered certificates. See "Legal Investment" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated April 4, 2001, among the depositor and the underwriter, the
depositor has agreed to sell to the underwriter, and the underwriter has agreed
to purchase from the depositor the offered certificates. In connection with the
sale of the offered certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting discounts.
The depositor has been advised by the underwriter that it presently
intends to make a market in the offered certificates. However, the underwriter
is not obligated to do so, any market-making may be discontinued at any time,
and there can be no assurance that an active public market for any class of
offered certificates will develop or if one does develop, that it will continue
for the life of the applicable class or that it will provide certificateholders
with a sufficient level of liquidity of investment.
Until the distribution of the offered certificates is completed, rules
of the Securities and Exchange Commission may limit the ability of the
underwriter and some selling group members to bid for and purchase the offered
certificates, other than the class B certificates. As an exception to these
rules, the underwriter is permitted to engage in particular transactions that
stabilize the prices of the offered certificates, other than the class B
certificates. These transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the offered 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 these purchases.
Neither the depositor nor the underwriter 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 related offered certificates. In
addition, neither the depositor nor the underwriter makes any representation
that the underwriter will engage in these transactions or that the transactions,
once commenced, will not be discontinued without notice.
The underwriting agreement provides that the depositor will indemnify
the underwriter against particular civil liabilities, including liabilities
under the Securities Act of 1933, as amended.
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EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and Subsidiaries as of December 31, 2000 and December 31, 1999 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 2000,
incorporated by reference in this prospectus supplement have been incorporated
in this prospectus supplement in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the offered certificates will be
passed upon for the depositor and the underwriter by Thacher Proffitt & Wood,
New York, New York.
RATINGS
The offered certificates will be rated by Standard & Poor's Ratings
Services, referred to as S&P, Moody's Investors Service, referred to as Moody's,
and Fitch, Inc., referred to as Fitch, each called a rating agency. It is a
condition to the issuance of the offered certificates that they receive ratings
by the rating agencies as follows:
Class S&P Moody's Fitch
Class A AAA Aaa AAA
Class IO AAA Aaa AAA
Class M-1 AA --- AA
Class M-2 A --- A
Class B BBB --- BBB
The ratings assigned by the rating agencies to mortgage pass-through
certificates address the likelihood of the receipt of all distributions on the
mortgage loans by the related certificateholders under the agreements pursuant
to which such certificates are issued. The ratings take into consideration the
credit quality of the related mortgage pool, including any credit support
providers, structural and legal aspects associated with such certificates, and
the extent to which the payment stream on such mortgage pool is adequate to make
the payments required by such certificates. The ratings on such certificates do
not, however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
A securities 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. The ratings do not address the possibility that
holders of the notional amount certificates may fail to recoup their initial
investments or the likelihood that holders of the applicable certificates will
receive any related Net Rate Cap Carryover. Each securities rating should be
evaluated independently of similar ratings on different securities.
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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
another rating agency. The rating assigned by another rating agency to the
offered certificates of any class could be lower than the respective ratings
assigned by the applicable rating agency.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the globally offered Home Equity Loan
Asset-Backed Certificates, Series 2001-1, referred to as the global securities,
will be available only in book-entry form. Investors in the global securities
may hold the global securities through any of The Depository Trust Company,
Clearstream, Luxembourg 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, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice, i.e., seven calendar day
settlement.
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior home equity loan asset-backed
certificates issues.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC participants holding certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg and Euroclear, in this capacity, and as DTC
participants.
Non-U.S. holders, as described below, of global securities will be
subject to U.S. withholding taxes unless the holders meet particular
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,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold the positions in
accounts as DTC participants.
Investors electing to hold their global securities through DTC will
follow the settlement practices applicable to prior home equity loan
asset-backed certificates issues. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their global securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds.
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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 home
equity loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM, LUXEMBOURG OR EUROCLEAR
PURCHASER. When global securities are to be transferred from the account of a
DTC participant to the account of a Clearstream, Luxembourg participant or a
Euroclear participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg participant or
Euroclear participant at least one business day prior to settlement.
Clearstream, Luxembourg 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 a 360-day year of twelve 30-day months. 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, Luxembourg
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, Luxembourg or Euroclear cash debt will be valued instead as of
the actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will
need to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the global securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended
a line of credit to them, Clearstream 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, Luxembourg 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
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substantially reduce or offset the amount of the overdraft charges, although
this result will depend on each Clearstream, Luxembourg participant's or
Euroclear participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending global securities
to the respective European depositary for the benefit of Clearstream, Luxembourg
participants or Euroclear participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC participants a
cross-market transaction will settle no differently than a trade between two DTC
participants.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which global 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, Luxembourg or
Euroclear through a Clearstream, Luxembourg participant or Euroclear participant
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg 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 a 360-day year of twelve 30- day months. 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, Luxembourg participant or Euroclear participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
participant's or Euroclear participant's account would be back-valued to the
value date, which would be the preceding day, when settlement occurred in New
York. Should the Clearstream, Luxembourg participant or Euroclear participant
have a line of credit with its respective clearing system and elect to be in
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, Luxembourg participant's
or Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and
that purchase global securities from DTC participants for delivery to
Clearstream, Luxembourg participants or Euroclear participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for one day,
until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts, 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,
Luxembourg or Euroclear account in order to settle the sale side of the
trade; or
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(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,
Luxembourg participant or Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Clearstream, Luxembourg 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 (1) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (2) the 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 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-8 BEN changes, a new Form W-8BEN must be
filed within 30 days of the 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 1001 OR 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 1001 (Ownership, Exemption or Reduced Rate certificate) or Form
W-8BEN. If Form 1001 is provided and the treaty provides only for a reduced
rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8 or Form W-8BEN.
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 effective
until the third succeeding calendar year from the date the form is signed.
The term "U.S. person" means
(a) a citizen or resident of the United States,
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(b) a corporation or partnership, or other entity treated as a
corporation or partnership for U.S. federal income tax purposes, organized in or
under the laws of the United States, any state thereof or the District of
Columbia,
(c) an estate the income of which is includible in gross income for
United States tax purposes, regardless of its source or
(d) a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the global securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the global securities.
I-5
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.
April 4, 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.
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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.
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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
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"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.
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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.
29
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
30
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.
31
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.
32
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"
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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.
37
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.
39
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.
40
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
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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.
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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.
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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
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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
59
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
60
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
62
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
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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
69
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.
79
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
84
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
87
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.
On November 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.
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
You should rely 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 any other information or to make any
representations not contained in this prospectus supplement and the prospectus.
This prospectus supplement and the prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, the securities offered hereby by
anyone in any jurisdiction in which the person making such offer or solicitation
is not qualified to do so or to anyone to whom it is unlawful to make any such
offer or solicitation. We represent the accuracy of this information in this
prospectus supplement and the accompanying prospectus only as of the dates on
their respective covers.
$106,674,000 (APPROXIMATE)
SOUNDVIEW HOME EQUITY LOAN TRUST
2001-1
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES
SERIES 2001-1
FINANCIAL ASSET SECURITIES CORP.
DEPOSITOR
SAXON MORTGAGE, INC.
SELLER AND MASTER SERVICER
CLASS A CERTIFICATES
CLASS IO CERTIFICATES
CLASS M-1 CERTIFICATES
CLASS M-2 CERTIFICATES
CLASS B CERTIFICATES
-----------------------
PROSPECTUS SUPPLEMENT
-----------------------
[GRAPHIC OMITTED]
APRIL 4, 2001
Dealers will be required to deliver a prospectus supplement and
prospectus when acting as underwriters of the notes offered hereby and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the notes, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until ninety days
after the date of this prospectus supplement.