Rule No. 424(b)(5)
Registration No. 333-43091
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 24, 1998)
$349,000,000
OCWEN HOME EQUITY LOAN TRUST 1998-OFS4
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(DEPOSITOR)
LMAC, INC.
(SELLER)
[OCWEN LOGO] OCWEN FINANCIAL SERVICES, INC.
(MASTER SERVICER)
The depositor will form a trust, and the trust will issue Home Equity Loan
Asset-Backed Certificates, Series 1998-OFS4. The depositor is offering only
those classes of certificates listed in the table below.
The trust will include a pool of fixed and adjustable rate mortgage loans
that are secured by first and second liens on residential properties. The
mortgage loans are not insured or guaranteed by any person.
The certificates are obligations only of the trust. Financial Security
Assurance Inc. will guarantee certain distributions on the Class A Certificates.
The Class B Certificates are not insured.
An investment in the offered certificates, and particularly the Class B
Certificates, involves significant risks. You should review the
information under the caption "Risk Factors" beginning on page S-7 of this
prospectus supplement and on page 15 of the attached prospectus before
making a decision to invest in the offered certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the offered certificates or determined
if this prospectus supplement or the attached prospectus is accurate
or complete. Making any contrary representation is a criminal offense.
Initial Class Certificate
Principal Balance Rate
Class A.................................................................... $ 331,550,000 (1)
Class B.................................................................... $ 17,450,000 (1)
Total...................................................................... $ 349,000,000
(1) The interest rate on this class may change from month to month based
on the London inter-bank offered rate for one-month U.S. dollar
deposits.
Subject to the satisfaction of certain conditions, the underwriter named
below will purchase the offered certificates from the depositor. See
"Underwriting" in this prospectus supplement. The underwriter will offer the
offered certificates to the public from time to time in negotiated transactions
or otherwise at varying prices to be determined at the time of sale. The
underwriter will pay the depositor an amount equal to approximately 99.5% of the
aggregate principal balance of the offered certificates plus accrued interest,
before deducting issuance expenses payable by the depositor estimated to be
$625,000. The offered certificates will be issued only in book-entry form only
on or about December 30, 1998.
The offered certificates are offered subject to prior sale, when, as and if
issued by the trust and accepted by the underwriter and subject to its right to
reject orders in whole or in part.
------------------------
BEAR, STEARNS & CO. INC.
UNDERWRITER
DECEMBER 22, 1998
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered certificates in two
separate documents that provide progressively more detail:
o the accompanying 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 ACCOMPANYING PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You can find a listing of the pages where capitalized terms used in the
prospectus supplement are defined under the caption "Index of Principal Terms"
beginning on page S-70 in this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
------
Summary...................................... S- 3
Risk Factors................................. S- 7
The Mortgage Pool............................ S-12
The Master Servicer.......................... S-32
Ocwen Federal Bank F.S.B..................... S-32
Prepayment and Yield Considerations ......... S-35
Description of the Certificates.............. S-42
Pooling and Servicing Agreement.............. S-54
The Certificate Insurer...................... S-59
Description of the Purchase Agreement........ S-62
Use of Proceeds.............................. S-62
Certain Federal Income Tax Considerations.... S-62
State Taxes.................................. S-65
ERISA Considerations......................... S-65
Legal Investment............................. S-68
Experts...................................... S-68
Legal Matters................................ S-68
Underwriting................................. S-68
Ratings...................................... S-69
Index of Principal Terms..................... S-70
Annex I...................................... A-I-1
PROSPECTUS
PAGE
------
Prospectus Supplement........................ 3
Reports to Holders........................... 3
Available Information........................ 3
Incorporation of Certain Documents by
Reference.................................. 4
Summary of Terms............................. 5
Risk Factors................................. 13
Description of the Securities................ 16
The Trust Funds.............................. 20
Enhancement.................................. 26
Servicing of Loans........................... 28
The Agreements............................... 34
Certain Legal Aspects of Loans............... 42
The Depositor................................ 50
Use of Proceeds.............................. 50
Certain Federal Income Tax Considerations.... 50
ERISA Considerations......................... 72
Legal Investment............................. 75
Plan of Distribution......................... 75
Legal Matters................................ 75
Glossary of Terms............................ 76
S-2
SUMMARY
This section gives a brief summary of the information contained in this
prospectus supplement. The summary does not include all of the important
information about the offered certificates. To better understand this offering,
you should review carefully the more detailed information in this prospectus
supplement and in the attached prospectus.
TITLE OF CERTIFICATES..................... Home Equity Loan Asset-Backed Certificates, Series 1998-OFS4.
ISSUER.................................... Ocwen Home Equity Loan Trust 1998-OFS4.
DEPOSITOR................................. Bear Stearns Asset Backed Securities, Inc., an affiliate of the
underwriter. See "THE DEPOSITOR" in the attached prospectus.
SELLER.................................... LMAC, Inc., an affiliate of the master servicer.
MASTER SERVICER........................... Ocwen Financial Services, Inc. See "THE MASTER SERVICER" in this
prospectus supplement.
SPECIAL SERVICER AND SUBSERVICER.......... Ocwen Federal Bank FSB. See "OCWEN FEDERAL BANK FSB" in this
prospectus supplement.
TRUSTEE................................... Norwest Bank Minnesota, National Association.
THE CERTIFICATE INSURER................... Financial Security Assurance Inc., a New York stock insurance
company. See "THE CERTIFICATE INSURER" in this prospectus supplement.
CUT-OFF DATE.............................. December 1, 1998, except that the Cut-off Date for any Mortgage Loan
originated after December 1, 1998 will be the date of origination of
that Mortgage Loan.
CLOSING DATE.............................. On or about December 30, 1998.
DISTRIBUTION DATES........................ The 25th day of each month or, if such day is not a business day, the
next business day, beginning in January 1999.
RECORD DATES.............................. The day immediately before the applicable distribution date.
FINAL SCHEDULED DISTRIBUTION DATES........ The final scheduled distribution date for each class of offered
certificates is as follows:
FINAL SCHEDULED
CLASS DISTRIBUTION DATE
----- ------------------
A March 25, 2031
B March 25, 2031
See "PREPAYMENT AND YIELD CONSIDERATIONS--Final Scheduled
Distribution Dates" in this prospectus supplement.
OFFERED CERTIFICATES
Certificate Rates....................... The interest rate for each class of offered certificates will adjust
monthly to equal the lesser of
o one-month Libor plus the margin for that class
or
o the weighted average interest rate on the mortgage loans minus
0.6975% per annum for the first 60 distribution dates and 1.1975%
for each distribution date thereafter.
The margin for each class is set forth below
Class Margin(1) Margin(2)
----- --------- ---------
A 0.68% 1.36%
B 3.00% 3.50%
------------------------
(1) Prior to the clean-up call date
(2) On and after the clean-up call date
See "DESCRIPTION OF THE CERTIFICATES--Certificate Rate" in this
prospectus supplement.
S-3
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 on the day before that
distribution date, multiplied by
o the days in the accrual period divided by 360, minus
o the pro rata share of certain interest shortfalls, plus
o any unpaid interest amounts from prior distribution dates.
Interest Accrual Period................. The period from the prior distribution date (or in the case of the
first distribution date from the closing date) to the day before the
applicable distribution date.
Interest Calculations................... Actual/360.
Principal Distributions................. The trustee will distribute principal of the classes of offered
certificates in the priority discussed under the caption "DESCRIPTION
OF THE CERTIFICATES--Priority of Distributions" in this prospectus
supplement.
Minimum Denominations................... $100,000 and integral multiples of $1,000 in excess of $25,000.
Form.................................... Book-Entry. See "DESCRIPTION OF THE CERTIFICATES--Book-Entry
Certificates" in this prospectus supplement.
SMMEA Eligibility....................... The offered certificates will not be mortgage related securities.
ERISA Eligibility....................... Subject to satisfaction of certain conditions, ERISA plans may
purchase the Class A Certificates. See "ERISA CONSIDERATIONS" in this
prospectus supplement.
OTHER CERTIFICATES........................ The trust will issue subordinated Class X Certificates and Residual
Certificates. The depositor is not offering these classes to the
public pursuant to this prospectus supplement and the attached
prospectus. The depositor is including information about these
classes because they provide credit enhancement to the offered
certificates.
THE MORTGAGE LOANS
General................................. The trust initially will include mortgage loans that existed on
December 1, 1998 and additional mortgage loans that will be delivered
on the closing date. Set forth below is selected information about
the mortgage loans that existed on December 1, 1998.
Fixed Rate Mortgage Loans............... Number of loans 748
Aggregate principal amount $ 85,664,883
Range of loan sizes $ 13,500 to
$ 1,949,305
Average principal amount $ 114,525
Range of interest rates 6.38% to 18.55%
Weighted average interest rate 10.20%
Range of CLTV 19.98% to 93.50%
Weighted average CLTV 74.92%
Range of original terms to maturity (months)
120 to 360
Weighted average original term to maturity
(months) 339
Range of remaining amortization
terms (months) 104 to 360
S-4
Weighted average remaining amortization term
(months) 347
First liens (by principal) 99.83%
Owner occupied (by principal) 88.03%
Adjustable Rate Mortgage Loans.......... Number of loans 1,307
Aggregate principal amount $150,553,428
Range of loan sizes $17,283 to
$2,392,898
Average principal amount $115,190
Range of current interest rates 6.99% to 15.75%
Weighted average interest rate 10.83%
Range of LTV 21.79% to 90.00%
Weighted average LTV 76.73%
Range of original terms to maturity (months) 240 to 360
Weighted average original term to maturity
(months) 360
Range of remaining amortization
term (months) 230 to 360
Weighted average remaining amortization
term (months) 357
Range of gross margins 4.00% to 9.00%
Weighted average gross margin 5.67%
Range of maximum rates 13.49% to 22.25%
Weighted average maximum rate 17.26%
Range of minimum rates 4.50% to 15.75%
Weighted average minimum rate 10.75%
2/28 loans (by principal) 85.26%
3/27 loans (by principal) 4.42%
5/25 loans (by principal) 0.23%
6 month (by principal) 10.09%
PRE-FUNDING ACCOUNT....................... On the closing date, the depositor will deposit an amount not greater
than approximately $87,250,000 into a segregated pre- funding account
maintained with the trustee. The trust will use this amount to buy
subsequent mortgage loans from the seller after the closing date. The
seller must satisfy certain conditions before it can sell subsequent
mortgage loans to the trust. See "THE MORTGAGE POOL--Conveyance of
Subsequent Mortgage Loans" in this prospectus supplement.
CREDIT ENHANCEMENT........................ Credit enhancement refers to a mechanism that is intended to protect
the holders of certain classes of certificates against losses due to
defaults by the borrowers under the mortgage loans.
The Class A Certificates have the benefit of three types of credit
enhancement:
o the use of excess interest to cover losses and to create
overcollateralization
o subordination of distributions on the Class B Certificates
o the financial guaranty insurance policy
The Class B Certificates have the benefit of only the first form of
credit enhancement. THE CLASS B CERTIFICATES ARE NOT COVERED BY THE
FINANCIAL GUARANTY INSURANCE POLICY.
See "DESCRIPTION OF THE CERTIFICATES" and "THE CERTIFICATE INSURER"
in this prospectus supplement.
S-5
OPTIONAL TERMINATION...................... The majority holder of the Residual Certificates may, at its option,
terminate the trust on any distribution date when the aggregate
principal balance of the mortgage loans is less than 10% of the sum
of the principal balances of the mortgage loans delivered on the
closing date and the amount initially deposited in the pre-funding
account. If that holder doesn't exercise its option, the master
servicer or the Certificate Insurer may do so. See "POOLING AND
SERVICING AGREEMENT--Termination" in this prospectus supplement.
FEDERAL INCOME TAX CONSIDERATIONS......... The trust will make separate elections to treat certain of its assets
as a "real estate mortgage investment conduit" (the "REMIC"),
creating a tiered REMIC structure. The offered certificates will
represent "regular interests" in a REMIC (which will be treated as
debt instruments of a REMIC for federal income tax purposes), and the
right to receive certain basis risk shortfalls as described in this
prospectus supplement.
For further information regarding the federal income tax consequences
of investing in the offered certificates, see "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS" in this prospectus supplement and in the
prospectus.
CERTIFICATE RATING........................ The offered certificates will not be issued unless they receive the
following ratings from Standard & Poor's, a division of the
McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc.
("Moody's") and Fitch IBCA, Inc. ("Fitch"):
CLASS S&P MOODY'S FITCH
-------- ---- ------- -----
Class A AAA Aaa NA
Class B NA Baa3 BBB-
See "RATINGS" in this prospectus supplement.
S-6
RISK FACTORS
An investment in the offered certificates involves significant risks.
Before you decide to invest, you should consider the following risk factors and
the risk factors discussed under the heading "Risk Factors" beginning on
page 15 of the prospectus.
INVESTORS MAY HAVE DIFFICULTY SELLING 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 will 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 asset backed securities
(i.e., there has been a lack of liquidity), and there may be such 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.
THE UNIQUE FEATURES OF THE MORTGAGE LOANS CREATE SPECIAL RISKS
There are a number of unique features of the mortgage loans that create
risks which are not present with other types of residential mortgage loans
including the following:
o The Borrowers Have Less Than Perfect Credit. 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. The originator's approach to
underwriting focuses primarily on the value of the mortgaged
property. As a result, the trust may experience higher rates of
delinquencies, defaults and losses than if the mortgage loans were
underwritten in a more traditional manner.
o Certain Borrowers Have Little Equity in the Properties. Approximately
25.85% of the mortgage loans in existence on December 1, 1998
(based on principal balances) had original combined loan-to-value
or loan-to-value ratios that were greater than 80% but do not have
primary mortgage insurance. The values of the mortgaged properties
may have declined since those mortgage loans were originated or the
borrowers may have obtained additional financing on the properties.
If a borrower on one of those mortgage loans defaults, there may
not be enough value in the property to repay the mortgage loan, and
the trust may suffer a loss.
o Newly Originated Mortgage Loans May Default. 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 Balloon Loans May Have Higher Rates of Default. A balloon loan has
monthly payments that will not fully pay off the loan balance by
the maturity date. As a result, the borrower usually will have to
refinance the balloon loan in order to pay the amount due. The
borrower may not be able to refinance the balloon loan for any
number of reasons, including the level of available mortgage rates,
the value of the property or the borrower's payment or credit
history. The trust will not have any funds to refinance a ballooon
loan, and the originator is not obligated to do so.
o Defaults on Second Lien Mortgage Loans May Result in More Severe
Losses. 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. There may
S-7
not be enough proceeds to pay both the holder of the first lien and
the holder of the second lien, and the trust would suffer a loss.
o Geographic Concentration Increases Risks. Approximately 31.47%, 13.37%,
8.39% and 6.53% of the mortgage loans in existence on December 1,
1998 (based on principal balances) are secured by properties in
California, Florida, Illinois and New York, respectively. Those
states may suffer economic problems or reductions in market values
for residential properties that are not experienced in other
states. In addition, California and Florida are more likely to
experience natural disasters than many other areas. 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.
THE RETURN ON INVESTMENT WILL CHANGE OVER TIME
Your pre-tax return on your investment will change from time to time for a
number of reasons 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 you receive those distributions depends 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 the borrower's
existing loan on more favorable terms. If a borrower's credit
standing declines, the borrower may not be able to refinance.
A substantial majority of the mortgage loans impose a penalty on
certain prepayments by the borrowers within differing periods of
time (not more than five years) after the mortgage loan was
originated.
Most of the adjustable rate mortgage loans have fixed interest
rates for two or three years. 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.
o Pre-Funding May Result in Prepayments. If the seller is unable to
deliver sufficient, eligible subsequent mortgage loans to the trust
during the permitted period, amounts remaining in the pre-funding
account will be distributed as a prepayment to the owners of the
Class A Certificates.
o You Bear Reinvestment Risk. 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 are above the interest rates on the mortgage
loans. 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 certificates, and are likely to
receive less money to reinvest when other investments generally are
producing a higher yield than that on the 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 The Optional Termination May Affect the Yield. Your investment in the
offered certificates may be ended before you desire if the optional
termination is exercised. See "Description of the
Certificates--Optional Termination" in this prospectus supplement.
o Certificate Rates May be Limited. The rate at which interest accrues on
each class of offered certificates is subject to a maximum rate
based on the weighted average of the interest rates on the mortgage
loans. If mortgage loans with relatively higher mortgage rates
prepay, the maximum rates on the offered certificates will be lower
than otherwise would be the case.
S-8
The interest rates on approximately 36.27% of the mortgage loans in
existence on December 1, 1998 (based on principal balances) are
fixed for the lives of those mortgage loans. In addition the level
of one-month LIBOR may change in a direction and/or at a rate that
is different from the level of the index used to determine the
interest rates on the adjustable rate mortgage loans.
ORIGINATOR HAS LITTLE PERFORMANCE HISTORY
Ocwen Financial Services, Inc. only began its operations in May 1997. As a
result, there is no meaningful history of the delinquency, default or loss
experience of the mortgage loans it originates or acquires. This lack of a
meaningful track record makes it more difficult to estimate the future
performances of the mortgage loans in a variety of interest rate and economic
environments. This difficulty may affect the prices other investors are willing
to pay for your offered certificates if you try to sell them. Ocwen Financial
Corporation, the parent of the master servicer, is currently analyzing possible
strategic alternatives with respect to its subprime domestic wholesale
operations, including the master servicer.
THE CLASS B CERTIFICATES HAVE A GREATER RISK OF LOSS THAN THE CLASS A
CERTIFICATES
The Class B Certificates will not receive any distributions of interest
until the Class A Certificates receive their interest distributions and the
certificate insurer receives the supplemental premium, if any. Similarly, the
Class B Certificates will not receive any principal distributions until the
certificate insurer has been reimbursed for certain other payments it made to
the Class A Certificates and amounts owed to it under the insurance agreement
and the Class A Certificates receive their principal distributions. If the
available funds are insufficient to make all of the required prior
distributions, the Class B Certificates will not receive all of their
distributions. In addition, losses due to defaults by borrowers may be allocated
to the Class B Certificates.
Under the pooling and servicing agreement, the certificate insurer has the
right to waive defaults by the master servicer, to direct the trustee to take
certain actions and to prevent amendments without its consent. Although the
certificate insurance policy does not insure the Class B Certificates, the
certificate insurer will control all of the significant decisions available to
certificateholders under the pooling and servicing agreement.
THE TRUST ASSETS ARE THE ONLY SOURCE OF PAYMENTS ON THE OFFERED CERTIFICATES
All distributions on the offered certificates will be made from payments by
borrowers under the mortgage loans or, in the case of the Class A Certificates,
payments under the financial guaranty issuance 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 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.
COMPUTER PROBLEMS IN THE YEAR 2000 MAY RESULT IN LOSSES
As is the case with most companies using computers in their operations, the
master servicer is faced with the task of completing its compliance goals in
connection with the year 2000 issue. The year 2000 issue is the result of prior
computer programs being written using two digits, rather than four digits, to
define the applicable year. Any of the master servicer's computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. Any such occurrence could result in major computer
system failures or miscalculations. The master servicer is presently engaged in
various procedures to ensure that its computer systems and software will be year
2000 compliant. However, in the event that the master servicer, or any of its
suppliers, customers, brokers or agents, do not successfully and timely achieve
year 2000 compliance, the performance of the master servicer's obligations under
the pooling and servicing agreement could be materially adversely affected.
S-9
WITHDRAWAL OR DOWNGRADING OF INITIAL RATINGS WILL AFFECT 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. You are encouraged to 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 including, in the case of
the Class A Certificates, a change in the claims paying ability of the
certificate insurer. Any subsequent change in rating will likely affect the
price that a subsequent purchaser will be willing to pay for the offered
certificates.
REMOVAL OF THE MASTER SERVICER MAY CAUSE LOSSES
Under the pooling and servicing agreement, the master servicer may be
removed in certain circumstances with the consent of the certificate insurer.
The certificate insurer also may remove or fail to renew the master servicer if
the master servicer or its affiliates do not comply with their obligations to
the certificate insurer. Finally, an affiliate of the depositor and the
underwriter may cause the master servicer to be removed under the terms of a
financing agreement between an affiliate of the master servicer and the
affiliate of the depositor and the underwriter. The circumstances permitting the
removal of the master servicer include, among others, breaches of financial
covenants and failures to make margin calls, and do not necessarily relate to
the master servicer's performance of its servicing obligations to the Trust.
If the master servicer is removed for any reason, the rate and severity of
delinquencies, defaults and losses on the mortgage loans in the trust are likely
to increase, and may increase significantly, at least for some period of time.
If that were to happen, the rate and timing of distributions on the offered
certificates, particularly on the Class B Certificates, would be adversely
affected. In addition, the Class B Certificates could experience losses that
might not have occured if the master servicer had not been removed.
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 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.
INTRODUCTION
The Home Equity Loan Asset-Backed Certificates, Series 1998-OFS4 (the
"Certificates") will represent the entire beneficial interest in Ocwen Home
Equity Loan Trust 1998-OFS4 (the "Trust"). The Trust will be formed, and the
Certificates will be issued, pursuant to the Pooling and Servicing Agreement
(the "Agreement"), dated as of December 1, 1998 (the "Cut-off Date"), among Bear
Stearns Asset Backed Securities, Inc., as depositor (the "Depositor"), LMAC,
Inc., as seller (the "Seller"), Ocwen Financial Services, Inc., as master
servicer (in such capacity, the "Master Servicer"), Ocwen Federal Bank FSB, as
special servicer and sub-servicer (in such capacity, the "Special Servicer"),
and Norwest Bank Minnesota, National Association, as trustee (the "Trustee").
Only the Class A and Class B Certificates (collectively, the "Offered
Certificates") are offered hereby.
The mortgage loans to be delivered on December 30, 1998 (the "Closing
Date") will consist of mortgage loans in existence on December 1, 1998 (the
"Statistic Calculation Mortgage Loans") and additional mortgage loans originated
or acquired between the Cut-off Date and the Closing Date (collectively with the
Statistic Calculation Mortgage Loans, the "Initial Mortgage Loans"). All of the
Initial Mortgage Loans will have been acquired or originated by Ocwen Financial
Services, Inc. (in such capacity, the "Originator"). The Seller, a wholly-owned
finance subsidiary of the Originator, will acquire the Initial Mortgage Loans
from the Originator on the Closing Date. In turn, the Seller will sell the
Initial Mortgage Loans to the Depositor pursuant to a Mortgage Loan Purchase
Agreement, dated as of December 1, 1998 (the "Purchase Agreement"), between the
Seller and the Depositor.
S-10
On the Closing Date, a portion of the proceeds from the sale of the Offered
Certificates will be deposited into two segregated trust accounts maintained
with the Trustee (the "Pre-Funding Account" and the "Capitalized Interest
Account," respectively). Funds on deposit in the Pre-Funding Account will be
used to purchase not more than approximately $87,250,000 (the "Maximum Funding
Amount") of subsequent mortgage loans ("Subsequent Mortgage Loans," and together
with the Initial Mortgage Loans, the "Mortgage Loans") from the Seller. All
Subsequent Mortgage Loans will have been originated or acquired by the
Originator in the ordinary course of its business. Funds on deposit in the
Capitalized Interest Account will be used to cover shortfalls in interest
collections attributable to the pre-funding mechanism.
The Mortgage Loans will consist of Mortgage Loans that have interest rates
("Loan Rates") that are fixed for the lives of such loans ("Fixed Rate Mortgage
Loans") and Mortgage Loans that have Loan Rates which adjust periodically,
including loans which have Loan Rates that are fixed for a period of time and
thereafter adjust ("Adjustable Rate Mortgage Loans"). The Statistic Calculation
Mortgage Loans that are Fixed Rate Mortgage Loans are sometimes referred to as
"Statistic Calculation Fixed Rate Mortgage Loans," and the Statistic Calculation
Mortgage Loans that are Adjustable Rate Mortgage Loans are sometimes referred to
as "Statistic Calculation Adjustable Rate Mortgage Loans."
The Class A Certificates will have the benefit of an irrevocable and
unconditional financial guaranty insurance policy (the "Policy") issued by
Financial Security Assurance Inc. (the "Certificate Insurer"). THE CLASS B
CERTIFICATES ARE NOT COVERED BY THE POLICY.
S-11
THE MORTGAGE POOL
GENERAL
The Mortgage Loans in the Trust (the "Mortgage Pool") will consist of Fixed
Rate Mortgage Loans and Adjustable Rate Mortgage Loans. The statistical
information presented in this Prospectus Supplement describes the Statistic
Calculation Mortgage Loans in the Mortgage Pool and is based on the
characteristics of such Mortgage Loans. Unless otherwise set forth herein,
percentages set forth with respect to the Statistic Calculation Mortgage Loans
are measured by the respective aggregate principal balances thereof as of the
Cut-off Date after deduction of scheduled payments due on or before the Cut-off
Date, whether or not received.
The Mortgage Pool consists of 2,055 Statistic Calculation Mortgage Loans
with an aggregate principal balance outstanding as of the Cut-off Date of
$236,218,310.98 (the "Cut-off Date Principal Balance"). The Mortgage Loans will
have remaining terms to maturity of not more than 360 months (including both
fully amortizing and Balloon Loans). As of November 30, 1998, approximately
3.81% of the Statistic Calculation Mortgage Loans were at least 30 but not more
than 59 days delinquent.
All of the Mortgage Loans are secured by first and second mortgages or
deeds of trust or other similar security instruments creating first and second
liens on one- to four-family residential properties consisting of detached or
semi-detached one- to four-family dwelling units, individual condominium units,
townhouses and manufactured housing units (the "Mortgaged Properties").
Approximately 2.15% of the Statistic Calculation Mortgage Loans have an
amortization term that exceeds the original term to maturity of such Mortgage
Loans ("Balloon Loans"), leaving a substantial payment (a "Balloon Payment") due
on the maturity date.
Approximately 77.39% of the Statistic Calculation Mortgage Loans provide
for payment by the mortgagor of a prepayment charge in limited circumstances on
certain prepayments. Generally, each such Mortgage Loan provides for payment of
a prepayment charge on certain partial prepayments and all prepayments in full
made within one year, two years, three years, four years or five years from
origination of the Fixed Rate Mortgage Loans and within six months, one year,
two years, three years, four years or five years from origination of the
Adjustable Rate Mortgage Loans. The amount of the prepayment charge is as
provided in the related Mortgage Note but is generally equal to six months'
interest on any amounts prepaid in excess of 20% of the then outstanding
principal balance of the related Mortgage Loan in any 12 month period.
All of the Statistic Calculation Adjustable Rate Mortgage Loans provide for
semi-annual adjustment to the Loan Rate thereon and for corresponding
adjustments to the scheduled monthly payment amount due thereon, in each case on
each adjustment date applicable thereto (each such date, an "Adjustment Date");
provided that the first adjustment (the "Initial Adjustment Date") for certain
of such Mortgage Loans will occur after an initial period of two years ("2/28
Loans"), three years ("3/27 Loans"), and five years ("5/25 Loans") (each such
Mortgage Loan described in this proviso, a "Delayed First Adjustment Mortgage
Loan"). On each Adjustment Date for each Adjustable Rate Mortgage Loan, the Loan
Rate thereon will be adjusted to equal the sum, rounded to the nearest multiple
of 0.125%, of the Index (as described below) and a fixed percentage amount (the
"Gross Margin"); provided, however, that the Loan Rate on each such Mortgage
Loan generally will not increase or decrease by more than a fixed percentage on
the Initial Adjustment Date (the "Initial Periodic Rate Cap") or by more than
1.00% on any subsequent Adjustment Date (the "Periodic Rate Cap") and will not
exceed a specified maximum Loan Rate (the "Maximum Loan Rate") or be less than a
specified minimum Loan Rate (the "Minimum Loan Rate"). The Statistic Calculation
Mortgage Loans that are Delayed First Adjustment Mortgage Loans have a weighted
average Initial Periodic Rate Cap of approximately 2.075% per annum. Effective
with the first monthly payment due on each Adjustable Rate Mortgage Loan after
each related Adjustment Date, the monthly payment amount will be adjusted to an
amount that will amortize fully the outstanding principal balance of the related
Mortgage Loan over its remaining term and pay interest at the Loan Rate as so
adjusted. Due to the application of the Periodic Rate Caps and the Maximum Loan
Rates, the Loan Rate on each such Mortgage Loan, as adjusted on any related
Adjustment Date, may be less than the sum of the Index and the related Gross
Margin, rounded as described herein. See "--The Index" herein. None of the
Adjustable Rate Mortgage Loans permits the related mortgagor to convert the
adjustable Loan Rate thereon to a fixed Loan Rate.
S-12
STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS--CHARACTERISTICS
The sum of the columns below may not equal the total indicated due to
rounding. In addition, unless otherwise set forth herein, all percentages with
respect to the Statistic Calculation Fixed Rate Mortgage Loans are measured by
the respective aggregate principal balances thereof as of the Cut-off Date.
PRINCIPAL BALANCES OF THE STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS AS OF
THE CUT-OFF DATE
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------ -------- ----------------- -----------------
up to 25,000.00........ 24 $ 468,586.97 0.55%
25,000.01 to 50,000.00...... 168 6,577,724.07 7.68
50,000.01 to 75,000.00...... 175 10,809,739.73 12.62
75,000.01 to 100,000.00...... 100 8,695,879.43 10.15
100,000.01 to 125,000.00...... 84 9,298,793.22 10.85
125,000.01 to 150,000.00...... 47 6,467,485.75 7.55
150,000.01 to 175,000.00...... 44 7,053,939.24 8.23
175,000.01 to 200,000.00...... 20 3,726,367.13 4.35
200,000.01 to 250,000.00...... 34 7,530,332.25 8.79
250,000.01 to 300,000.00...... 13 3,480,173.77 4.06
300,000.01 to 350,000.00...... 9 2,896,182.56 3.38
350,000.01 to 400,000.00...... 5 1,877,559.68 2.19
400,000.01 to 450,000.00...... 3 1,304,200.63 1.52
450,000.01 to 500,000.00...... 3 1,461,034.81 1.71
500,000.01 to 550,000.00...... 1 509,773.90 0.60
550,000.01 to 600,000.00...... 9 5,229,763.24 6.10
600,000.01 to 650,000.00...... 7 4,453,749.55 5.20
950,000.01 or above........... 2 3,823,597.26 4.46
------ --------------- -------
Total.................... 748 $ 85,664,883.19 100.00%
------ --------------- -------
------ --------------- -------
RANGE OF ORIGINAL TERMS TO MATURITY OF THE STATISTIC CALCULATION FIXED RATE
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF ORIGINAL TERMS (MONTHS) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
61 to 120........................................................ 1 $ 13,888.47 0.02%
121 to 180........................................................ 111 10,019,730.05 11.70
181 to 240........................................................ 4 92,928.01 0.11
301 to 360........................................................ 632 75,538,336.66 88.18
------ --------------- -------
Total........................................................ 748 $ 85,664,883.19 100.00%
------ --------------- -------
------ --------------- -------
RANGE OF REMAINING AMORTIZATION TERMS OF THE STATISTIC CALCULATION FIXED RATE
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF REMAINING AMORTIZATION TERMS (MONTHS) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
61 to 120........................................................ 1 $ 13,888.47 0.02%
121 to 180........................................................ 67 4,950,265.95 5.78
181 to 240........................................................ 4 92,928.01 0.11
301 to 360........................................................ 676 80,607,800.76 94.10
------ --------------- -------
Total........................................................ 748 $ 85,664,883.19 100.00%
------ --------------- -------
------ --------------- -------
S-13
PROPERTY TYPES OF THE STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
Single Family..................................................... 590 $ 68,626,140.17 80.11%
Duplex............................................................ 52 5,469,557.97 6.38
Quadraplex........................................................ 23 3,506,785.74 4.09
Condo............................................................. 40 2,860,609.55 3.34
Triplex........................................................... 20 2,661,900.07 3.11
PUD............................................................... 14 1,753,362.22 2.05
Manufactured...................................................... 7 529,198.14 0.62
2-4 Family........................................................ 2 257,329.33 0.30
------ --------------- -------
Total........................................................ 748 $ 85,664,883.19 100.00%
------ --------------- -------
------ --------------- -------
OCCUPANCY STATUS OF THE STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ ------ --------------- -------
Owner-Occupied.................................................... 602 $ 75,410,063.09 88.03%
Non Owner-Occupied................................................ 146 10,254,820.10 11.97
------ --------------- -------
Total........................................................ 748 $ 85,664,883.19 100.00%
------ --------------- -------
------ --------------- -------
- ------------------
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
RANGE OF LOAN RATES OF THE STATISTIC CALCULATION FIXED RATES MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
6.001 to 7.000.................................................. 16 $ 1,880,229.42 2.19%
7.001 to 8.000.................................................. 59 7,870,600.88 9.19
8.001 to 9.000.................................................. 107 12,256,643.10 14.31
9.001 to 10.000.................................................. 151 18,251,897.19 21.31
10.001 to 11.000.................................................. 172 21,561,575.11 25.17
11.001 to 12.000.................................................. 139 14,297,460.96 16.69
12.001 to 13.000.................................................. 57 6,447,525.58 7.53
13.001 to 14.000.................................................. 18 1,303,028.32 1.52
14.001 to 15.000.................................................. 13 895,588.35 1.05
15.001 to 16.000.................................................. 13 596,932.58 0.70
16.001 to 17.000.................................................. 2 279,784.12 0.33
18.001 to 19.000.................................................. 1 23,617.58 0.03
------ --------------- -------
Total........................................................ 748 $ 85,664,883.19 100.00%
------ --------------- -------
------ --------------- -------
S-14
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE STATISTIC CALCULATION FIXED RATE
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
OUTSTANDING OUTSTANDING
NUMBER AS OF THE AS OF THE
ORIGINAL COMBINED LOAN-TO-VALUE RATIO (%) OF LOANS CUT-OFF DATE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
15.01 to 20.00..................................................... 1 $ 29,957.66 0.03%
25.01 to 30.00..................................................... 3 210,939.49 0.25
30.01 to 35.00..................................................... 3 103,930.82 0.12
35.01 to 40.00..................................................... 6 253,423.93 0.30
40.01 to 45.00..................................................... 8 517,146.79 0.60
45.01 to 50.00..................................................... 10 3,506,180.59 4.09
50.01 to 55.00..................................................... 17 1,170,805.90 1.37
55.01 to 60.00..................................................... 30 3,008,043.21 3.51
60.01 to 65.00..................................................... 55 5,704,236.87 6.66
65.01 to 70.00..................................................... 92 10,481,673.10 12.24
70.01 to 75.00..................................................... 143 16,728,891.31 19.53
75.01 to 80.00..................................................... 210 23,533,095.49 27.47
80.01 to 85.00..................................................... 109 13,387,667.91 15.63
85.01 to 90.00..................................................... 60 6,954,125.95 8.12
90.01 to 95.00..................................................... 1 74,764.17 0.09
---- --------------- -------
Total............................................................ 748 $ 85,664,883.19 100.00%
---- --------------- -------
---- --------------- -------
S-15
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- ------ ----------------- -----------------
Arizona............................................................ 3 $ 199,509.18 0.23%
Arkansas........................................................... 10 1,294,819.06 1.51
California......................................................... 177 30,470,932.15 35.57
Colorado........................................................... 7 533,314.96 0.62
Connecticut........................................................ 5 834,242.82 0.97
District of Columbia............................................... 1 70,868.59 0.08
Florida............................................................ 214 20,214,286.04 23.60
Georgia............................................................ 17 1,564,157.67 1.83
Idaho.............................................................. 4 469,034.62 0.55
Illinois........................................................... 46 3,764,943.96 4.39
Indiana............................................................ 15 651,020.59 0.76
Iowa............................................................... 1 30,317.03 0.04
Kansas............................................................. 2 59,331.25 0.07
Kentucky........................................................... 3 119,105.85 0.14
Louisiana.......................................................... 6 227,610.42 0.27
Maine.............................................................. 1 85,400.00 0.10
Maryland........................................................... 2 61,699.77 0.07
Massachusetts...................................................... 8 598,561.96 0.70
Michigan........................................................... 34 2,430,080.26 2.84
Minnesota.......................................................... 3 370,788.52 0.43
Mississippi........................................................ 2 54,514.18 0.06
Missouri........................................................... 12 558,479.67 0.65
Nebraska........................................................... 3 149,656.18 0.17
New Hampshire...................................................... 4 321,537.85 0.38
New Jersey......................................................... 7 1,243,040.03 1.45
New Mexico......................................................... 2 172,515.77 0.20
New York........................................................... 44 9,054,007.60 10.57
North Carolina..................................................... 4 480,829.11 0.56
North Dakota....................................................... 1 59,977.41 0.07
Ohio............................................................... 23 1,606,025.77 1.87
Oklahoma........................................................... 1 46,282.81 0.05
Oregon............................................................. 8 690,626.46 0.81
Pennsylvania....................................................... 17 1,353,141.12 1.58
Rhode Island....................................................... 2 212,400.00 0.25
Tennessee.......................................................... 15 1,670,334.48 1.95
Texas.............................................................. 3 176,360.88 0.21
Utah............................................................... 4 413,461.45 0.48
Virginia........................................................... 13 927,657.80 1.08
Washington......................................................... 17 2,046,287.33 2.39
Wisconsin.......................................................... 7 377,722.59 0.44
------ --------------- -------
Total......................................................... 748 $ 85,664,883.19 100.00%
------ --------------- -------
------ --------------- -------
S-16
DOCUMENTATION LEVEL OF THE STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
Full Documentation................................................. 537 $ 54,862,357.33 64.04%
Stated Income or No Documentation.................................. 183 26,610,660.44 31.06
Limited or Lite Documentation...................................... 28 4,191,865.42 4.89
---- --------------- -------
Total......................................................... 748 $ 85,664,883.19 100.00%
---- --------------- -------
---- --------------- -------
PREPAYMENT CHARGES(1)
STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PERIOD OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
None............................................................... 111 $ 9,421,317.62 11.00%
1 Year............................................................. 50 8,866,089.72 10.35
2 Years............................................................ 19 1,254,910.61 1.46
3 Years............................................................ 319 39,416,294.97 46.01
4 Years............................................................ 6 382,343.31 0.45
5 Years............................................................ 243 26,323,926.96 30.73
---- --------------- -------
Total......................................................... 748 $ 85,664,883.19 100.00%
---- --------------- -------
---- --------------- -------
- ------------------
(1) Prepayment charges are assessed on any Statistic Calculation Fixed Rate
Mortgage Loan prepaid in full or in part within the specified period.
LOAN TYPE OF THE STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
15 Year Balloon.................................................... 44 $ 5,069,464.10 5.92%
Fully Amortizing................................................... 704 80,595,419.09 94.08
---- --------------- -------
Total......................................................... 748 $ 85,664,883.19 100.00%
---- --------------- -------
---- --------------- -------
LIEN POSITION OF THE STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LIEN POSITION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
First Lien......................................................... 742 $ 85,518,176.74 99.83%
Second Lien........................................................ 6 146,706.45 0.17
---- --------------- -------
Total......................................................... 748 $ 85,664,883.19 100.00%
---- --------------- -------
---- --------------- -------
S-17
CREDIT GRADE OF THE STATISTIC CALCULATION FIXED RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
CREDIT GRADE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
A(1)............................................................... 406 $ 50,330,448.66 58.75%
B.................................................................. 236 25,488,321.78 29.75
C.................................................................. 58 4,706,680.23 5.49
D(2)............................................................... 48 5,139,432.52 6.00
---- --------------- -------
Total......................................................... 748 $ 85,664,883.19 100.00%
---- --------------- -------
---- --------------- -------
- ------------------------
(1) Combines A and A- Grades.
(2) Combines D and D- Grades.
STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE LOANS--CHARACTERISTICS
The sum of the columns below may not equal the total indicated due to
rounding. In addition, unless otherwise set forth herein, all percentages with
respect to the Statistic Calculation Adjustable Rate Mortgage Loans are measured
by the respective aggregate principal balances as of the Cut-off Date.
PRINCIPAL BALANCES OF THE STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE LOANS
AS OF THE CUT-OFF DATE
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCE ($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
up to to 25,000.00.......................................... 29 $ 641,907.04 0.43%
25,000.01 to 50,000.00.......................................... 251 10,013,053.60 6.65
50,000.01 to 75,000.00.......................................... 310 19,175,171.55 12.74
75,000.01 to 100,000.00.......................................... 227 19,593,070.72 13.01
100,000.01 to 125,000.00.......................................... 145 16,117,162.48 10.71
125,000.01 to 150,000.00.......................................... 89 12,125,496.58 8.05
150,000.01 to 175,000.00.......................................... 62 9,996,887.24 6.64
175,000.01 to 200,000.00.......................................... 39 7,309,873.82 4.86
200,000.01 to 250,000.00.......................................... 53 11,771,089.73 7.82
250,000.01 to 300,000.00.......................................... 22 6,042,738.34 4.01
300,000.01 to 350,000.00.......................................... 22 7,166,492.75 4.76
350,000.01 to 400,000.00.......................................... 14 5,328,860.17 3.54
400,000.01 to 450,000.00.......................................... 17 7,227,656.27 4.80
450,000.01 to 500,000.00.......................................... 13 6,217,325.08 4.13
500,000.01 to 550,000.00.......................................... 2 1,044,864.96 0.69
550,000.01 to 600,000.00.......................................... 1 573,194.63 0.38
600,000.01 to 650,000.00.......................................... 5 3,123,755.66 2.07
650,000.01 to 700,000.00.......................................... 1 660,000.00 0.44
700,000.01 to 750,000.00.......................................... 1 719,782.25 0.48
750,000.01 to 800,000.00.......................................... 1 780,000.00 0.52
950,000.01 or above............................................... 3 4,925,044.92 3.27
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
S-18
RANGE OF ORIGINAL TERM TO MATURITY OF THE STATISTIC CALCULATION ADJUSTABLE RATE
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RANGE OF ORIGINAL TERMS (MONTHS) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
181 to 240........................................................ 1 $ 215,897.86 0.14%
301 to 360........................................................ 1,306 150,337,529.93 99.86
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
PROPERTY TYPES OF THE STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
Single Family..................................................... 1,051 $118,630,643.49 78.80%
Duplex............................................................ 104 10,281,502.94 6.83
PUD............................................................... 29 7,324,454.01 4.87
Condo............................................................. 45 5,562,371.36 3.69
Quadraplex........................................................ 38 5,270,178.39 3.50
Triplex........................................................... 21 2,149,946.15 1.43
Manufactured...................................................... 16 1,187,289.63 0.79
2-4 Family........................................................ 3 147,041.82 0.10
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
OCCUPANCY STATUS OF THE STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE LOANS(1)
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
Owner-Occupied.................................................... 1,129 $137,649,197.97 91.43%
Non Owner-Occupied................................................ 178 12,904,229.82 8.57
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
- ------------------
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
S-19
RANGE OF LOAN RATES OF THE STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
6.001 to 7.000.................................................. 1 $ 146,158.82 0.10%
7.001 to 8.000.................................................. 13 1,986,864.77 1.32
8.001 to 9.000.................................................. 80 13,439,096.14 8.93
9.001 to 10.000.................................................. 237 32,642,847.84 21.68
10.001 to 11.000.................................................. 372 41,710,289.86 27.70
11.001 to 12.000.................................................. 323 36,860,042.46 24.48
12.001 to 13.000.................................................. 143 12,207,360.07 8.11
13.001 to 14.000.................................................. 77 6,691,115.65 4.44
14.001 to 15.000.................................................. 57 4,639,400.78 3.08
15.001 to 16.000.................................................. 4 230,251.40 0.15
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
RANGE OF MAXIMUM LOAN RATES OF THE STATISTIC CALCULATION ADJUSTABLE RATE
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM LOAN RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
13.001 to 14.000.................................................. 6 $ 743,593.63 0.49%
14.001 to 15.000.................................................. 34 8,213,459.90 5.46
15.001 to 16.000.................................................. 145 22,132,986.81 14.70
16.001 to 17.000.................................................. 313 38,448,962.66 25.54
17.001 to 18.000.................................................. 385 41,567,062.97 27.61
18.001 to 19.000.................................................. 226 23,052,228.17 15.31
19.001 to 20.000.................................................. 107 9,330,672.52 6.20
20.001 to 21.000.................................................. 66 4,908,059.78 3.26
21.001 to 22.000.................................................. 24 2,097,542.83 1.39
22.001 to 23.000.................................................. 1 58,858.52 0.04
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
S-20
RANGE OF MINIMUM LOAN RATES OF THE STATISTIC CALCULATION ADJUSTABLE RATE
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM LOAN RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
up to 5.000...................................................... 1 $ 44,952.94 0.03%
5.001 to 6.000................................................... 5 556,401.52 0.37
6.001 to 7.000................................................... 5 463,360.56 0.31
7.001 to 8.000................................................... 13 1,986,864.77 1.32
8.001 to 9.000................................................... 85 13,991,148.44 9.29
9.001 to 10.000.................................................. 237 35,021,406.01 23.26
10.001 to 11.000................................................. 371 41,503,126.97 27.57
11.001 to 12.000................................................. 316 34,009,264.06 22.59
12.001 to 13.000................................................. 139 11,710,572.41 7.78
13.001 to 14.000................................................. 74 6,396,677.93 4.25
14.001 to 15.000................................................. 57 4,639,400.78 3.08
15.001 to 16.000................................................. 4 230,251.40 0.15
------ --------------- -------
Total........................................................... 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
RANGE OF GROSS MARGINS OF THE STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE
LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
up to 5.000...................................................... 210 $ 27,090,120.14 17.99%
5.001 to 6.000................................................... 696 85,084,200.45 56.51
6.001 to 7.000................................................... 373 36,132,299.82 24.00
7.001 to 8.000................................................... 22 1,894,983.86 1.26
8.001 to 9.000................................................... 6 351,823.52 0.23
------ --------------- -------
Total........................................................... 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
S-21
NEXT ADJUSTMENT DATE FOR THE STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE
LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE (MONTH/YEAR) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
01/99............................................................. 7 $ 613,701.95 0.41%
02/99............................................................. 12 1,504,345.47 1.00
03/99............................................................. 23 4,490,472.93 2.98
04/99............................................................. 44 5,184,967.43 3.44
05/99............................................................. 17 2,184,512.66 1.45
06/99............................................................. 7 1,435,820.56 0.95
07/99............................................................. 1 17,283.00 0.01
08/99............................................................. 1 34,869.48 0.02
09/99............................................................. 4 222,682.49 0.15
10/99............................................................. 4 296,521.69 0.20
12/99............................................................. 1 207,122.64 0.14
01/00............................................................. 3 451,705.16 0.30
02/00............................................................. 7 1,018,889.67 0.68
03/00............................................................. 8 671,021.65 0.45
04/00............................................................. 7 834,797.15 0.55
05/00............................................................. 21 2,072,241.69 1.38
06/00............................................................. 24 2,694,014.89 1.79
07/00............................................................. 32 4,031,925.63 2.68
08/00............................................................. 80 10,195,961.97 6.77
09/00............................................................. 229 25,391,060.58 16.87
10/00............................................................. 321 35,452,917.99 23.55
11/00............................................................. 284 30,573,795.92 20.31
12/00............................................................. 120 13,978,316.99 9.28
07/01............................................................. 1 140,998.64 0.09
08/01............................................................. 1 109,587.28 0.07
10/01............................................................. 2 461,639.85 0.31
11/01............................................................. 7 1,133,251.52 0.75
12/01............................................................. 37 4,804,346.00 3.19
08/03............................................................. 1 139,904.91 0.09
12/03............................................................. 1 204,750.00 0.14
------ --------------- -------
Total........................................................... 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM OF THE STATISTIC CALCULATION
ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
Two Years/Twenty-Eight Years...................................... 1,149 $128,366,215.38 85.26%
Three Years/Twenty-Seven Years.................................... 48 6,649,823.29 4.42
Five Years/Twenty-Five Years...................................... 2 344,654.91 0.23
Six Months/Various................................................ 108 15,192,734.21 10.09
------ --------------- -------
Total........................................................... 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
S-22
INITIAL PERIODIC RATE ADJUSTMENT CAPS OF THE STATISTIC CALCULATION ADJUSTABLE
RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL CAP (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
1.00.............................................................. 107 $ 15,140,065.75 10.06%
2.00.............................................................. 1,126 125,220,871.71 83.17
3.00.............................................................. 73 10,116,105.12 6.72
6.00.............................................................. 1 76,385.21 0.05
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
ORIGINAL LOAN-TO-VALUE RATIOS OF THE STATISTIC CALCULATION ADJUSTABLE RATE
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
OUTSTANDING OUTSTANDING
NUMBER AS OF THE AS OF THE
ORIGINAL LOAN-TO-VALUE RATIO (%) OF LOANS CUT-OFF DATE CUT-OFF DATE
- ------------------------------------------------------------ -------- --------------------- ---------------------
20.001 to 25.000............................................ 1 $ 34,869.48 0.02%
25.001 to 30.000............................................ 3 214,854.02 0.14
30.001 to 35.000............................................ 3 164,993.83 0.11
35.001 to 40.000............................................ 3 450,607.97 0.30
40.001 to 45.000............................................ 6 376,172.09 0.25
45.001 to 50.000............................................ 11 769,972.60 0.51
50.001 to 55.000............................................ 11 1,210,465.05 0.80
55.001 to 60.000............................................ 31 2,656,530.98 1.76
60.001 to 65.000............................................ 88 11,799,004.24 7.84
65.001 to 70.000............................................ 225 21,757,532.06 14.45
70.001 to 75.000............................................ 315 35,044,884.22 23.28
75.001 to 80.000............................................ 303 35,436,840.88 23.54
80.001 to 85.000............................................ 200 24,283,436.74 16.13
85.001 to 90.000............................................ 107 16,353,263.63 10.86
------ --------------- -------
Total..................................................... 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
S-23
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ ------ ----------------- -----------------
Arizona........................................................... 14 $ 1,290,373.74 0.86%
Arkansas.......................................................... 1 88,854.65 0.06
California........................................................ 236 43,878,634.99 29.14
Colorado.......................................................... 5 603,398.85 0.40
Connecticut....................................................... 20 3,738,879.71 2.48
Delaware.......................................................... 1 70,140.09 0.05
District of Columbia.............................................. 1 89,703.16 0.06
Florida........................................................... 116 11,356,474.32 7.54
Georgia........................................................... 11 918,454.92 0.61
Idaho............................................................. 12 1,968,386.40 1.31
Illinois.......................................................... 180 16,057,345.97 10.67
Indiana........................................................... 30 2,010,497.10 1.34
Iowa.............................................................. 8 604,443.83 0.40
Kansas............................................................ 5 669,921.08 0.44
Kentucky.......................................................... 2 79,275.72 0.05
Louisiana......................................................... 5 280,945.26 0.19
Maine............................................................. 7 693,727.39 0.46
Maryland.......................................................... 10 3,398,627.23 2.26
Massachusetts..................................................... 35 4,049,793.99 2.69
Michigan.......................................................... 145 11,199,876.00 7.44
Minnesota......................................................... 25 2,111,110.92 1.40
Missouri.......................................................... 54 3,061,293.18 2.03
Montana........................................................... 1 285,603.05 0.19
Nebraska.......................................................... 6 402,368.53 0.27
New Hampshire..................................................... 3 303,936.41 0.20
New Jersey........................................................ 25 3,513,498.37 2.33
New Mexico........................................................ 4 451,530.38 0.30
New York.......................................................... 36 6,367,182.38 4.23
North Carolina.................................................... 13 1,674,100.80 1.11
North Dakota...................................................... 1 45,473.77 0.03
Ohio.............................................................. 71 4,500,694.10 2.99
Oregon............................................................ 26 3,778,673.48 2.51
Pennsylvania...................................................... 30 2,164,031.56 1.44
Rhode Island...................................................... 2 254,890.22 0.17
South Carolina.................................................... 9 704,601.22 0.47
South Dakota...................................................... 1 344,102.15 0.23
Tennessee......................................................... 10 704,976.18 0.47
Texas............................................................. 6 995,122.39 0.66
Utah.............................................................. 19 1,964,932.87 1.31
Vermont........................................................... 3 293,378.55 0.19
Virginia.......................................................... 22 2,308,261.14 1.53
Washington........................................................ 69 8,923,604.40 5.93
Wisconsin......................................................... 27 2,352,307.34 1.56
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
S-24
DOCUMENTATION LEVEL OF THE STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
Full Documentation................................................ 899 $ 94,417,453.95 62.71%
Stated Income or No Documentation................................. 353 46,612,471.72 30.96
Limited or Lite Documentation..................................... 55 9,523,502.12 6.33
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
PREPAYMENT CHARGES(1)
STATISTIC CALCULATION ADJUSTABLE RATE MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PERIOD OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
None.............................................................. 400 $ 43,986,780.29 29.22%
6 Months.......................................................... 2 313,369.97 0.21
1 Year............................................................ 40 8,782,318.02 5.83
2 Years........................................................... 660 69,897,314.88 46.43
3 Years........................................................... 178 23,926,415.55 15.89
4 Years........................................................... 4 354,546.25 0.24
5 Years........................................................... 23 3,292,682.83 2.19
------ --------------- -------
Total........................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
- ------------------
(1) Prepayment charges are assessed on any Statistic Calculation Adjustable Rate
Mortgage Loan prepaid in full or in part within the specified period.
DISTRIBUTION BY CREDIT GRADE OF THE STATISTIC CALCULATION ADJUSTABLE RATE
MORTGAGE LOANS
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF HOME OUTSTANDING AS OF OUTSTANDING AS
CREDIT GRADE EQUITY LOANS THE CUT-OFF DATE OF CUT-OFF-DATE
- ---------------------------------------------------------- -------------- ----------------- -----------------
A(1)...................................................... 470 $ 67,106,593.51 44.57%
B......................................................... 416 45,154,950.73 29.99
C......................................................... 173 16,062,795.24 10.67
D(2)...................................................... 248 22,229,088.31 14.76
------ --------------- -------
Total................................................ 1,307 $150,553,427.79 100.00%
------ --------------- -------
------ --------------- -------
- ------------------
(1) Combines A and A- Grades.
(2) Combines D and D- Grades.
S-25
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of the
Loan Rate on each Adjustable Rate Mortgage Loan will be the average of the
interbank offered rates for six-month United States dollar deposits in the
London market as published in The Wall Street Journal and as most recently
available on the date set forth in the related Mortgage Note.
In the event that the Index becomes unavailable or otherwise unpublished,
the Master Servicer will select a comparable alternative index over which it has
no direct control and which is readily verifiable.
UNDERWRITING STANDARDS; REPRESENTATIONS
The Originator's underwriting standards are primarily intended to assess
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. All of the Mortgage Loans
(collectively, the "Ocwen Loans"), were also underwritten with a view toward the
resale thereof in the secondary mortgage market. While the Originator's primary
consideration in underwriting a mortgage loan is the value of the mortgaged
property, the Originator also considers, among other things, a mortgagor's
credit history, repayment ability and debt service-to-income ratio ("Debt
Ratio"), as well as the type and use of the mortgaged property. Second lien
financing of the mortgaged properties may be provided by lenders at any time
(including at origination). The Originator, however, will not itself provide
second lien financing on a mortgaged property. The Ocwen Loans generally bear
higher rates of interest than mortgage loans that are originated in accordance
with Fannie Mae and Freddie Mac standards which is likely to result in rates of
delinquencies and foreclosures that are higher, and that may be substantially
higher, than those experienced by portfolios of mortgage loans underwritten in a
more traditional manner. A majority of the Ocwen Loans provide for the payment
by the mortgagor of a prepayment charge in limited circumstances on certain full
or partial prepayments made within six months, one year, one and one-half years,
two years, three years, four years or five years from the date of origination of
such Mortgage Loan as described under "--General" above. Such charges may be
waived or may be prohibited by state law. The amount of the prepayment charge is
as provided in the related Mortgage Note but is generally equal to six months'
interest on any amounts prepaid in excess of 20% of the then outstanding
principal balance of the related Mortgage Loan in any 12 month period.
As a result of the Originator's underwriting criteria, changes in the
values of Mortgaged Properties may have a greater effect on the Originator's
delinquency, foreclosure and loss experience than on those of lenders whose
mortgage loans are originated in a more traditional manner. No assurance can be
given that the values of such Mortgaged Properties have remained or will remain
at the levels in effect on the dates of origination of the related Mortgage
Loans. A substantial portion of the Mortgage Loans are secured by Mortgaged
Properties in the same states. If the residential real estate markets in such
states should experience an overall decline in property values after the date of
origination of the Mortgage Loans, the rates of delinquencies, foreclosures and
losses on all of the Mortgage Loans may increase over historical levels of
comparable type loans, and may increase substantially.
All originations by the Originator of one- to four-family residential
mortgage loans are based on loan application packages submitted through approved
correspondents and brokers. Such loan application packages, which generally
contain relevant credit, property and underwriting information on the loan
request, are compiled by the applicable correspondent or broker and submitted to
the Originator for approval and purchase. The correspondents and brokers receive
all or a portion of the loan origination fee charged to the borrower at the time
the loan is made. As part of their quality control procedures, the Originator
maintains a file with respect to each correspondent and broker including a copy
of such correspondent's or broker's license and reports of any complaints
received with respect to such correspondent or their brokers.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The Originator requires a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions, or judgments. Properties that are to
secure single-family mortgage loans are appraised or reviewed by qualified
independent appraisers who are approved by the Originator's internal appraisal
department. Such appraisers inspect the interior and/or exterior and appraise
S-26
the subject property and report the property condition. Following each
inspection, the appraiser prepares a report which includes a market value
analysis based on recent sales of comparable homes in the area and, when deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home. All appraisals are required to conform to the Uniform Standards
of Professional Appraisal Practice adopted by the Appraisal Standards Board of
the Appraisal Foundation and must be on forms acceptable to Fannie Mae and
Freddie Mac. Every independent appraisal is reviewed by either the Originator or
by another independent appraiser approved by the Originator before the mortgage
loan is made and to the extent that such review appraisal determines a market
value more than five percent less than the market value determined by the
initial appraisal, such review appraisal is used in place of the initial
appraisal.
The Ocwen Loans were underwritten by the Originator's regular lending
divisions pursuant to the Originator's "Full Documentation," "Lite
Documentation" and "Stated Income Documentation" residential loan programs.
Under each of the programs, the Originator's regular lending divisions review
the loan applicant's source of income, calculate the amount of income from
sources indicated on the loan application or similar documentation, review the
credit history of the applicant, calculate the Debt Ratio to determine the
applicant's ability to repay the loan, review the type and use of the property
being financed and review the property for compliance with the Originator's
standards. In determining the ability of the applicant to repay the loan, the
Originator uses the interest rate of the loan being applied for (the "Qualifying
Rate"). The Originator's underwriting standards are applied in a standardized
procedure which complies with applicable federal and state laws and regulations
and requires their underwriters and/or the in-house appraiser to be satisfied
that the value of the property being financed, as indicated by an appraisal and
a review appraisal, currently supports the outstanding loan balance.
In general, the maximum loan amount for mortgage loans originated under the
regular lending program is $750,000; however, mortgage loans on a case by case
basis may be originated for a higher loan amount. The Originator underwrites one
to four-family loans with Loan-to-Value Ratios at origination of generally up to
90%, depending on, among other things, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and Debt Ratio, as well as the
type and use of the property. Under each class of underwriting criteria, the
maximum combined loan-to-value ratio at origination, including any then existing
second deeds of trust subordinate to the Originator's first deed of trust, is
100%. The Originator, however, will not itself provide second lien financing on
a mortgaged property. Generally, none of the mortgage loans originated or
acquired by the Originator will be covered by a primary mortgage insurance
policy.
The Originator verifies the income of each borrower and the source of funds
under their various programs as follows: under the Full Documentation program,
borrowers are generally required to submit verification of stable income for a
two year period. Under the Lite Documentation program, borrowers are generally
required to submit verification of stable employment for the past six months.
Under the Stated Income Documentation program, the borrowers may be qualified
based upon the monthly income stated on the mortgage application, without
verification. The income stated must be reasonable and customary for the
borrower's line of work and a copy of the business license is required or other
generally acceptable evidence of business conduct. Under all of the programs,
the correspondent, or the Originator if originated by the Originator, generally
performs a telephone verification of the borrower's employment. For
self-employed borrowers the business location and telephone number must be
confirmed through an independent source, such as directory assistance or a
published telephone directory.
The Originator uses the following categories and characteristics as
guidelines to grade the mortgage loans:
"A" RISK. Under the "A" risk category, account ratings cannot be
greater than 30-days past due. A maximum of 0X30-day late payment in the
last 12 months, and 1X30 day late payment in the last 24 months is
acceptable (or 0X30 for mortgage loans originated under the Lite
Documentation and Stated Income Documentation programs). No 60-day late
payments within the last 24 months is acceptable on an existing mortgage
loan. For purposes of determining whether a prospective mortgagor has been
30-days late, the Originator uses a "rolling 30-day period," i.e., the
Originator generally will consider a continuous sequence of 30-day late
payments as a single 30-day late payment. All judgments, garnishments and
liens of record must be paid in full at funding. No bankruptcies may have
occurred during the preceding 24 months and no notice of default may have
occurred in the preceding 36 months. All bankruptcies must have been
S-27
discharged or dismissed. Two years' re-established excellent credit since
discharge or dismissal is required. A maximum Loan-to-Value Ratio of 90%
(or 85% for mortgage loans originated under the Lite Documentation and
Stated Income Documentation programs) is permitted for a mortgage loan on a
single family owner occupied property. A maximum of 85% Loan-to-Value Ratio
is permitted for a mortgage loan on an owner occupied condominium or
two-to-four family residential property originated under the Full
Documentation program. All non-owner occupied loans have a maximum
Loan-to-Value Ratio of 80% (or 75% and 70% for mortgage loans originated
under the Lite Documentation or Stated Income Documentation programs,
respectively). The required Debt Ratio is 45% or less.
"A-" RISK. Under the "A-" risk category, account ratings cannot be
greater than 30-days past due. A maximum of 2X30-day late payments in the
last 12 months is acceptable on a mortgage loan. No 60-day late payments
within the last 24 months is acceptable on an existing mortgage loan. For
purposes of determining whether a prospective mortgagor has been 30-days
late, the Originator uses a "rolling 30-day period," i.e., the Originator
generally will consider a continuous sequence of 30-day late payments as a
single 30-day late payment. An existing mortgage loan is not required to be
current at the time the application is submitted. All judgments,
garnishments and liens of record must be paid in full at funding. When the
Loan-to-Value Ratio is equal to 80% or less, judgments and collections that
do not appear in the public records need not be paid on rate/term
refinances (no cash to borrowers) and purchases only. No bankruptcies may
have occurred in the preceding 12 months. All bankruptcies must have been
discharged or dismissed. No notice of default may have occurred in the
preceding 24 months. One year's re-established credit since discharge or
dismissal is required. A maximum Loan-to-Value Ratio of 90% (or 85% for
mortgage loans originated under the Lite Documentation or Stated Income
Documentation programs) is permitted for a mortgage loan on a single family
owner occupied property. A maximum of 85% Loan-to-Value Ratio is permitted
for a mortgage loan on an owner occupied condominium or two-to-four family
residential property under the Full Documentation program only. Non-owner
occupied loans have a maximum Loan-to-Value Ratio of 80% under the Full
Documentation program or 75% under the Lite Documentation program (or 70%
for mortgage loans originated under the Stated Income program). The maximum
Debt Ratio is 50%.
"B" RISK. Under the "B" risk category, account ratings cannot be
greater than 60-days past due. A maximum of 4X30 or 2X30 and 1X60 day late
payments in the last 12 months is acceptable on a mortgage loan. For
purposes of determining whether a prospective mortgagor has been 30-days
late, the Originator uses a "rolling 30-day period", i.e., the Originator
generally will consider a continuous sequence of 30-day late payments as a
single 30-day late payment. An existing mortgage loan is not required to be
current at the time the application is submitted. All judgments,
garnishments and liens of record must be paid in full at funding. When the
Loan-to-Value Ratio is equal to 80% or less, judgments and collections that
do not appear in the public records need not be paid on rate/term
refinances (no cash to borrowers) and purchases only. No bankruptcies may
have occurred in the preceding 12 months. All bankruptcies must have been
discharged or dismissed. One year's re-established credit since discharge
or dismissal is required. No notice of default may have occurred in the
preceding 24 months. A maximum Loan-to-Value Ratio of 85% (or 80% for
mortgage loans originated under the Lite Documentation and Stated Income
Documentation programs) is permitted for an owner occupied mortgage loan
regardless of the property type. Non-owner occupied loans have a maximum
Loan-to-Value Ratio of 75% under the Full Documentation, 70% under the Lite
Documentation and 65% under the Stated Income Documentation programs. The
maximum Debt Ratio is 55% for Loan-to-Value Ratios equal to or less than
70% and 50% for Loan-to-Value Ratios greater than 70%.
"C" RISK. Under the "C" risk category, account ratings cannot be
greater than 90-days past due. The majority of the credit must not be
currently delinquent. A maximum of 6X30 or 3X30 and 1X60 or 2X30 and 1X90
day late payments in the last 12 months is acceptable. For purposes of
determination whether a prospective mortgagor has been 30-days late, the
Originator uses a "rolling 30-day period," i.e., the Originator generally
will consider a continuous sequence of 30-day late payments as a single
30-day late payment. An existing mortgage loan is not required to be
current at the time the application is submitted. When the Loan-to-Value
Ratio is equal to 80% or less, judgments and collections that do not appear
in the public records need not be paid on rate/term refinances (no cash to
borrowers) and purchases only. A
S-28
mortgagor may be in Chapter 11 or Chapter 13 bankruptcy proceedings
immediately prior to the mortgage loan by the Originator or have been in
bankruptcy proceedings within the preceding one year if the mortgagor has
remained current on existing mortgage loan payments for the preceding 12
months, has emerged from such bankruptcy proceedings prior to or
contemporaneously with the making of such mortgage loan by the Originator
and the Loan-to-Value Ratio of the mortgage loan extended by the Originator
does not exceed 70%. No notice of default may have occurred in the
preceding 12 months. A maximum Loan-to-Value Ratio of 75% is permitted for
an owner occupied mortgage loan regardless of the property type. Non-owner
occupied loans have a maximum Loan-to-Value Ratio of 70% under the Full
Documentation, 65% under the Lite Documentation and 60% under the Stated
Income Documentation programs. The maximum Debt Ratio is 60%.
"D" RISK. Under the "D" risk category, account ratings cannot be
greater than 180-days past due in the last 12 months. A maximum 120 days
past due (or over 120 days with a Loan-to-Value Ratio of 70% or less) in
the last 12 months is acceptable. No notice of sale can be filed on any
notice of default. For purposes of determining whether a prospective
mortgagor has been 30-days late, the Originator uses a "rolling 30-day
period," i.e., the Originator generally will consider a continuous sequence
of 30-day late payments as a single 30-day late payment. An existing
mortgage loan is not required to be current at the time the application is
submitted. Judgments and collections that do not appear in the public
records need not be paid on rate/term refinances (no cash to borrowers) and
purchases only. The mortgagor cannot be currently in bankruptcy on a
purchase but a recent discharge or dismissal is allowed. On refinances the
mortgagor can be currently in a Chapter 11 or Chapter 13 bankruptcy
proceeding. The proceeds can be used to obtain the bankruptcy discharge. A
maximum Loan-to-Value Ratio of 75% is permitted for an owner occupied
mortgage loan regardless of the property type. Non-owner occupied loans
have a maximum Loan-to-Value Ratio of 60% under the Full Documentation, 55%
under the Lite Documentation and 50% under the Stated Income Documentation
programs. The maximum Debt Ratio is 60%.
"D-" RISK. Under the "D-" risk category, account ratings are not
taken into consideration. Notice of sale can be filed on any notice of
default. For purposes of determining whether a prospective mortgagor has
been 30-days late, the Originator uses a "rolling 30-day period," i.e., the
Originator generally will consider a continuous sequence of 30-day late
payments as a single 30-day late payment. An existing mortgage loan is not
required to be current at the time the application is submitted. Judgments
and collections that do not appear in the public records need not be paid
on rate/term refinances (no cash to borrowers) and purchases only. The
mortgagor can be currently in bankruptcy and proceeds can be used to obtain
the bankruptcy discharge. A maximum Loan-to-Value Ratio of 70% is permitted
for an owner occupied mortgage loan regardless of the property type.
Non-owner occupied mortgage loans are allowed at a maximum Loan-to-Value
Ratio of 60% regardless of the documentation program. The maximum Debt
Ratio is 60%.
EXCEPTIONS. As described above the Originator uses the foregoing
categories and characteristics as guidelines only. On a case by case basis
only, the Originator may determine that the prospective mortgagor warrants
a risk upgrade or an exception from certain requirements of a particular
risk category. A one level credit upgrade in "B" and "C" risk grade loans
only may be allowed if the application reflects certain compensating
factors, among others: low Loan-to-Value Ratio, stable employment,
ownership of current residence of 5 or more years and condition of the
property. An exception may also be granted if the applicant has tendered a
minimum down payment of 20% or more, the new loan reduces the applicant's
housing expense by more than 25% and if the mortgage credit history is
rated 0X30 or 1X30 in the last 12 months. In addition, certain of the
Mortgage Loans were graded by the Originator by means of a proprietary
automated risk grading system that may upgrade or downgrade the risk
grading accorded a loan on the basis of certain compensating or
countervailing factors.
The Originator will make representations and warranties with respect to all
of the Mortgage Loans as of the date of transfer to the Trust. The Originator
will be obligated to repurchase Mortgage Loans in respect of which a material
breach of the representations and warranties has occurred (other than those
breaches which have been cured).
S-29
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Statistic Calculation Mortgage Loans in
the Mortgage Pool as constituted at the close of business on the Cut-off Date,
as adjusted for the scheduled principal payments due on or before such date.
Prior to the issuance of the Certificates, Mortgage Loans may be removed from
the Mortgage Pool as a result of incomplete documentation or otherwise if the
Depositor deems such removal necessary or desirable, and may be prepaid at any
time. Additional mortgage loans will be included in the Mortgage Pool prior to
the issuance of the Certificates but such mortgage loans will not materially
alter the characteristics of the Statistic Calculation Mortgage Loans as
described herein. The Depositor believes that the information set forth herein
will be representative of the characteristics of the Initial Mortgage Loans at
the time the Certificates are issued, although the range of Loan Rates and
maturities and certain other characteristics of the Initial Mortgage Loans may
vary.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Seller expects to sell Subsequent Mortgage Loans to the Trust during
the period (the "Funding Period") from the Closing Date until the earliest of
(i) the date on which the amount on deposit in the Pre-Funding Account is less
than $100,000, (ii) the date on which an Event of Default occurs under the
Agreement or (iii) the close of business on February 26, 1999. The purchase
price for such Subsequent Mortgage Loans will equal the outstanding principal
balances thereof as of the related Cut-off Dates and will be paid by withdrawal
of funds on deposit in the Pre-Funding Account. The Subsequent Mortgage Loans
may have characteristics which differ from the Initial Mortgage Loans.
Accordingly, the statistical characteristics of the Mortgage Loans in the Trust
will vary upon the acquisition of Subsequent Mortgage Loans. Following the end
of the Funding Period, the Depositor will file a report on Form 8-K that will
list all of the Mortgage Loans by the same characteristics described herein.
The obligation of the Trust to purchase Subsequent Mortgage Loans on any
date during the Funding Period (each date on which such a purchase occurs is a
"Subsequent Transfer Date") is subject to the following requirements in addition
to other requirements set forth in the Agreement, any of which (except for the
requirements stated in clause (vi) of this paragraph) may be waived or modified
in any respect by the Certificate Insurer: (i) such Subsequent Mortgage Loan may
not be 30 or more days contractually delinquent as of the related Cut-off Date;
(ii) the remaining term to stated maturity of such Subsequent Mortgage Loan will
not exceed 30 years for fully amortizing loans or 15 years for "Balloon Loans";
(iii) no more than 40% of the Mortgage Loans (including the Subsequent Mortgage
Loans) are Fixed Rate Mortgage Loans; (iv) such Subsequent Mortgage Loan will
not have a Loan Rate less than 7.00%; (v) the Principal Balance of each
Subsequent Mortgage Loan will not exceed $1,500,000; and (vi) such Subsequent
Mortgage Loan will otherwise be acceptable to the Certificate Insurer.
S-30
Following the addition of the Subsequent Mortgage Loans to the Trust, the
Mortgage Loans (including the applicable Subsequent Mortgage Loans, if any) will
have the following characteristics:
FIXED RATE MORTGAGE LOANS
Weighted Average Loan Rate.................................... At least 10.00%
Weighted Average Remaining
Term to Stated Maturity..................................... At least 348 months
Weighted Average Original
Combined Loan-to-Value Ratio................................ Not more than 76.00%
Maximum Balloon Loan percentage............................... Not more than 7.00%
Maximum state concentration percentage........................ Not more than 37.00%
Maximum zip code concentration percentage..................... Not more than 2.25%
Maximum non-owner occupied percentage......................... Not more than 12.50%
Maximum second lien percentage................................ Not more than 0.20%
ADJUSTABLE RATE MORTGAGE LOANS
Weighted Average current Loan Rate............................ At least 10.70%
Weighted Average Remaining
Term to Stated Maturity..................................... At least 357 months
Weighted Average Original
Loan-to-Value Ratio......................................... Not more than 78.00%
Maximum state concentration percentage........................ Not more than 32.00%
Maximum zip code concentration percentage..................... Not more than 2.00%
Maximum non-owner occupied percentage......................... Not more than 8.50%
Minimum first lien percentage................................. 100.00%
S-31
THE MASTER SERVICER
Pursuant to the terms of the Agreement, Ocwen Financial Services, Inc. will
act as master servicer. In connection with its duties under the Agreement, Ocwen
Financial Services, Inc. will appoint Ocwen Federal Bank FSB as subservicer.
OCWEN FEDERAL BANK FSB
The information set forth in the following paragraphs has been provided by
Ocwen Federal Bank FSB. None of the Depositor, the Trustee, the Underwriter, the
Certificate Insurer or any of their respective affiliates have made or will make
any representation as to the accuracy or completeness of such information.
Ocwen Federal Bank FSB ("Ocwen"), a federally-chartered savings bank, with
its home office in Fort Lee, New Jersey and its servicing operations and
corporate offices in West Palm Beach, Florida, will serve as the Special
Servicer and the Subservicer for the Mortgage Loans (in such capacities, the
"Special Servicer" and the "Subservicer", respectively). Ocwen is a wholly-owned
subsidiary of Ocwen Financial Corporation, a public financial services holding
company. At September 30, 1998, Ocwen had approximately $2.61 billion in assets,
approximately $2.34 billion in liabilities and approximately $269.4 million in
equity. At September 30, 1998, Ocwen tangible and leveraged capital ratio was
approximately 10.11% and its risk-based capital ratio was approximately 18.00%.
For the nine months ended September 30, 1998, Ocwen income from continuing
operations was approximately $84.5 million.
In its capacity as subservicer, Ocwen will perform the day-to-day servicing
duties on behalf of the Master Servicer. Compensation to the subservicer will be
paid by the Master Servicer from the Servicing Fee.
Pursuant to the terms of the Agreement, when a Mortgage Loan becomes 90
days or more delinquent, the responsibility for servicing such Mortgage Loan
will be transferred to the Special Servicer. The Special Servicer will maintain
responsibility for the servicing of such Mortgage Loan until it is either
brought current or liquidated. As compensation for its services under the
Agreement, the Special Servicer will be entitled to receive the Servicing Fee in
connection with the Mortgage Loans serviced by it (each, a "Specially Serviced
Mortgage Loan"). In addition, the Special Servicer is entitled to a fee in
connection with the liquidation of Specially Serviced Mortgage Loans (the
"Special Servicer Incentive Fee") which will be paid prior to liquidation
proceeds being distributed to Certificateholders and to additional compensation
(the "Special Servicer Fee") with respect to each Specially Serviced Mortgage
Loan. The payment of the Special Servicer Incentive Fee will reduce the
Available Distribution Amount prior to distributions to Certificateholders on
any Distribution Date. Notwithstanding the previous sentence, on any
Distribution Date on which (i) the required overcollateralization level is not
met, (ii) the overcollateralization amount is reduced because of losses or (iii)
any Insured Payments have not been reimbursed, the Special Servicer Incentive
Fee will not be paid until the Offered Certificates have received their current
distributions for that Distribution Date.
The Special Servicer Fee will equal the sum of (a) $166 per Specially
Serviced Mortgage Loan payable immediately upon such Mortgage Loan becoming a
Specially Serviced Mortgage Loan, and (b) upon such Specially Serviced Mortgage
Loan becoming 150 days or more delinquent, $166 per month for the next twelve
months regardless of whether such Specially Serviced Mortgage Loan is cured.
Pursuant to the terms of the Agreement, the Special Servicer Fee will be paid
after distributions are made to the Offered Certificateholders.
The major business of the Special Servicer has been the resolution of
nonperforming single-family, multi-family and commercial mortgage loan
portfolios acquired from the Resolution Trust Corporation, from private
investors, and most recently, from the United States Department of Housing and
Urban Development ("HUD") through HUD's auction of defaulted FHA Loans.
The following table sets forth, for the non-conforming credit mortgage loan
("BCD Mortgage Loan") servicing portfolio serviced by the Special Servicer as of
December 31, 1996 and 1997, and as of September 30, 1998, certain information
relating to the delinquency experience (including loans in foreclosure included
in the Special Servicer's servicing portfolio (which portfolio does not include
mortgage loans that are subserviced by others)) at the end of the indicated
periods. The indicated periods of delinquency are based on the number of days
past due on a contractual basis. No mortgage loan is considered delinquent for
these purposes until it is one
S-32
month past due on a contractual basis. The information contained in the monthly
remittance reports which will be sent to investors will be compiled using the
same methodology as that used to compile the information contained in the table
below.
The following tables set forth, for the BCD Mortgage Loan servicing
portfolio derived from the Special Servicer as of December 31, 1996 and 1997,
and as of September 30, 1998, certain information relating to the foreclosure,
REO and loan loss experience of BCD Mortgage Loans included in the Special
Servicer's servicing portfolio (which portfolio does not include mortgage loans
that are subserviced by others) at the end of the indicated periods.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------------------ --------------------------------------------
PERCENT PERCENT
BY PERCENT BY BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- -------- -------- ------ -------- ---------- -------- ------
Total Portfolio........ 2,834 $305,085 100.00% 100.00% 21,827 $2,318,261 100.00% 100.00%
Period of Delinquency:
30-59 Days........... 107 10,554 3.78% 3.46% 437 41,429 2.00% 1.79%
60-89 Days........... 38 4,321 1.34% 1.42% 171 17,803 0.78% 0.77%
90 Days or more...... 138 17,969 4.87% 5.89% 302 36,878 1.38% 1.59%
Total Delinquent
Loans................ 283 32,844 9.99% 10.77% 910 96,110 4.17% 4.15%
Loans in
Foreclosure(1)....... 136 17,805 4.80% 5.84% 281 34,663 1.29% 1.50%
AS OF SEPTEMBER 30, 1998
--------------------------------------------
PERCENT
BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ---------- -------- ------
Total Portfolio...................................................... 63,740 $5,359,177 100.00% 100.00%
Period of Delinquency:
30-59 Days......................................................... 3,065 225,999 4.81% 4.22%
60-89 Days......................................................... 1,355 100,865 2.13% 1.88%
90 Days or more.................................................... 3,845 317,270 6.03% 5.92%
Total Delinquent Loans(1)............................................ 8,265 644,134 12.97% 12.02%
Loans in Foreclosure(2).............................................. 1,673 166,388 2.62% 3.10%
- ------------------
(1) Includes 3,384 loans totaling $248,395,408 for September 30, 1998 which were
delinquent at the time of transfer to the Special Servicer.
(2) Loans in foreclosure are also included under the heading "Total Delinquent
Loans".
S-33
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------ -------------------- --------------------
BY NO. BY BY NO. BY BY NO. BY
OF DOLLAR OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------ -------- ------ ---------- ------ ----------
Total Portfolio.............................. 2,834 $305,085 21,827 $2,318,261 63,740 $5,359,177
Foreclosed Loans(1).......................... 34 3,329 66 7,387 615 47,596
Foreclosure Ratio(2)......................... 1.20% 1.09% 0.30% 0.32% 0.96% 0.89%
- ------------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by the Special Servicer.
(2) The Foreclosure Ratio is equal to the aggregate principle balance or number
of Foreclosed Loans divided by the aggregate principal balance, or number,
as applicable, or mortgage loans in the Total Portfolio at the end of the
indicated period.
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
AS OF
AS OF AS OF SEPTEMBER 30,
DECEMBER 31, 1996 DECEMBER 31, 1997 1998
----------------- ----------------- --------------
Total Portfolio(1).......................................... $ 305,085 $ 2,318,261 $5,359,177
Net Gains/(Losses)(2)(3).................................... 24 (1,209) (10,776)
Net Gains/(Losses) as a Percentage of Total Portfolio....... 0.01% (0.05)% (0.201)%
- ------------------
(1) "Total Portfolio" on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period.
(2) "Net Gains/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for each respective period. Gains or losses
on liquidated properties are calculated as net sales proceeds less book
value (exclusive of loan purchase premium or discount). Shortfall payoffs
are calculated as the difference between principal payoff amount and unpaid
principal at the time of payoff.
(3) Includes $1,294,883 as of September 30, 1998 of losses attributable to loans
which were delinquent at the time of transfer to the Special Servicer.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Special Servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Special
Servicer's mortgage servicing portfolio only for the periods presented, whereas
the aggregate delinquency experience on the Mortgage Loans comprising the
Mortgage Pool will depend on the results obtained over the life of the Mortgage
Pool. The Special Servicer commenced receiving applications for mortgage loans
under its BCD Mortgage Loan program in December 1994. Accordingly, the Special
Servicer (whether as an originator or acquirer of mortgage loans or as a
servicer of such mortgage loans) does not have significant historical
delinquency, bankruptcy, foreclosure or default experience that may be referred
to for purposes of estimating the future delinquency and loss experience of
Mortgage Loans. There can be no assurance that the Mortgage Loans comprising the
Mortgage Pool will perform consistent with the delinquency or foreclosure
experience described herein. It should be noted that if the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by the Special Servicer. In addition, adverse economic
conditions may affect the timely payment by Mortgagors of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the actual rates
of delinquencies and foreclosures with respect to the Mortgage Pool.
S-34
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 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 the amortization schedules of the Mortgage
Loans 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). The
Mortgage Loans may be prepaid by the Mortgagors at any time.
THE CERTIFICATE RATES
The Certificate Rate (as defined herein) for each Class of Offered
Certificates is subject to the applicable Net Funds Cap (as defined herein).
Each Net Funds Cap on any Distribution Date is determined, in part, by reference
to the weighted average Loan Rate of the Mortgage Loans minus the Expense Fee
Rate (the "Net Loan Rate") in effect at the beginning of the related Due Period.
The "Expense Fee Rate" is 0.6975% per annum for the first 60 Distribution Dates
and 1.1975% per annum thereafter. All of the Loan Rates on the Fixed Rate
Mortgage Loans are fixed for the lives of such Mortgage Loans. If Mortgage Loans
bearing higher Loan Rates were to prepay at rates faster than Mortgage Loans
with lower Loan Rates, the Net Funds Cap would be lower than otherwise would be
the case.
The yield to investors in the Offered Certificates also will be sensitive
to, among other things, the level of One-Month LIBOR (as defined herein) and the
levels of the Index. Substantially all of the Initial Adjustable Rate Mortgage
Loans are Delayed First Adjustment Mortgage Loans which will bear interest at
fixed Loan Rates for 24, 36 or 60 months, after origination of such Mortgage
Loans. Although each of the Adjustable Rate Mortgage Loans bears interest at an
adjustable rate, such rate is subject to a Periodic Rate Cap, a Minimum Mortgage
Rate and a Maximum Mortgage Rate. If the Index increases substantially between
Adjustment Dates, the adjusted Loan Rate on the related Mortgage Loan may not
equal the Index plus the related Gross Margin due to the constraint of such caps
and floors. In such event, the related Loan Rate will be less than would have
been the case in the absence of such caps. In addition, the Loan Rate applicable
to any Adjustment Date will be based on the Index related to the Adjustment
Date. Thus, if the value of the 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 Net Funds Cap. Furthermore,
Mortgage Loans that have not reached their first Adjustment Date are more likely
to be subject to the applicable Periodic Rate Cap on their first Adjustment
Date. See "THE MORTGAGE POOL" herein. Although the Holders of the Offered
Certificates will be entitled to receive the related LIBOR Carryover Amount (as
defined herein) to the extent funds are available therefor as described herein,
and in the priority set forth herein, there is no assurance that sufficient
funds will be available therefor.
Although the Loan Rates on the Adjustable Rate Mortgage Loans are subject
to adjustment, the Loan Rates adjust less frequently than the Certificate Rates
and adjust by reference to the Index. In addition a Delayed First Adjustment
Mortgage Loan may not have a first adjustment date for a period of up to five
years following origination. Changes in One-Month LIBOR may not correlate with
changes in the Index and may not correlate with prevailing interest rates. It is
possible that an increased level of One-Month LIBOR could occur simultaneously
with a lower level of prevailing interest rates, which would be expected to
result in faster prepayments, thereby reducing the weighted average lives of the
Offered Certificates.
CLASS B CERTIFICATES
The Class B Certificates provide credit enhancement for the Class A
Certificates and may absorb losses on the Mortgage Loans. The weighted average
life of, and the yield to maturity on, the Class B Certificates will be
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 the Class B
Certificates, the actual yield to maturity on such Holder's Certificate may be
lower than the yield expected by such Holder based on such assumption. 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
S-35
investor's yield to maturity. Realized Losses on the Mortgage Loans will reduce
the Class Principal Balance (as defined herein) of the Class B Certificates 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 Principal Balance. As a result of such reductions, less
interest will accrue on the Class B Certificates than otherwise would be the
case.
The Available Distribution Amount (as defined herein) includes the net
proceeds in respect of principal received upon liquidation of a Mortgage Loan.
If such net proceeds are less than the unpaid principal balance, the Pool
Principal Balance will decline more than the aggregate Class Principal Balance
of the Offered Certificates, thereby reducing the amount of
overcollateralization. If such difference is not otherwise covered by the
cashflow priorities, the Class B Certificates will bear such loss. In addition,
the Class B Certificates will not be entitled to any principal distributions
prior to the Stepdown Date (as defined herein) or during the continuation of a
Stepup Trigger (as defined herein) (unless the Class A Certificates have been
paid in full). Because of the disproportionate distribution of principal of the
Class A Certificates, depending on the timing of Realized Losses, the Class B
Certificates may bear a disproportionate percentage of the Realized Losses on
the Mortgage Loans.
If the Certificate Insurer makes Insured Payments, a supplemental premium
could be payable to the Certificate Insurer which would reduce the Available
Distribution Amount available to pay the current interest on, and the principal
of, the Class B Certificates. In addition, the Special Servicer is entitled to
the Special Servicer Incentive Fee which is based, in part, on a percentage of
the reduction in the loss on defaulted loans resolved by it. The Special
Serivcer Incentive Fee may reduce the Available Distribution Amount which could
result in shorfalls in amounts available for distribution on the Class B
Certificates.
PREPAYMENTS
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase by the Master Servicer of a delinquent Mortgage Loan and
any optional purchase of the remaining Mortgage Loans in connection with the
termination of the Trust) will result in distributions on the Offered
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of such 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 such rate or the rate of principal prepayments. The
extent to which the yield to maturity of an Offered Certificate may vary from
the anticipated yield will depend upon the degree to which a Certificate is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of such
Mortgage Loans.
The rate of prepayment on the Mortgage Loans cannot be predicted. All of
the Mortgage Loans may be prepaid in whole or in part at any time. A majority of
the Mortgage Loans are subject to prepayment charges under certain circumstances
during a one year, one and one-half year, two year, three year, four year or
five year period from origination, in the case of the Fixed Rate Mortgage Loans
and during a six month, one year, two year, three year, four year or five year
period from origination, in the case of the Adjustable Rate Mortgage Loans, as
specified in the related Mortgage Note. The Trust's prepayment experience may be
affected by a wide variety of factors, including general economic conditions,
interest rates, the availability of alternative financing and homeowner
mobility. In addition, all of the Mortgage Loans contain due-on-sale provisions
and the Master Servicer will be required by the Agreement to enforce such
provisions unless (i) such enforcement is not permitted by applicable law or
(ii) the Master Servicer, in a manner consistent with reasonable commercial
practice, permits the purchaser of the related Mortgaged Property to assume the
Mortgage Loan. The enforcement of a "due-on-sale" provision will have the same
effect as a prepayment of the related Mortgage Loan. To the extent permitted by
applicable law, such assumption will not release the original borrower from its
obligation under any such Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF
LOANS--Due-on-Sale Clauses in Mortgage Loans" in the Prospectus.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the 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 interest rate on a
mortgage loan, 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
S-36
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, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans 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 adjustable rate mortgage loans to "lock
in" a lower fixed interest rate. The existence of the applicable Periodic Rate
Cap, Maximum Loan Rate and Minimum Loan Rate also may affect the likelihood of
prepayments. In addition, the delinquency and loss experience of adjustable rate
mortgage loans may differ from that of fixed rate mortgage loans because the
amount of the monthly payments on the adjustable rate mortgage loans are subject
to adjustment on each Adjustment Date. However, no assurance can be given as to
the level of prepayments that the Mortgage Loans will experience.
The rate of prepayments on the Mortgage Loans is sensitive to the credit
standing of the borrower, which may improve and thereby allow the borrower to
refinance on more favorable terms, or may decline and thereby limit the
borrower's ability to refinance. The rate of prepayments on the Delayed First
Adjustment Mortgage Loans which are in the initial fixed rate period, are
sensitive to prevailing interest rates. The prepayment behavior of such Mortgage
Loans may differ from that of the other Mortgage Loans. As a Delayed First
Adjustment Mortgage Loan approaches its initial Adjustment Date, the borrower
may become more likely to refinance such loan to avoid an increase in the Loan
Rate, even if fixed rate loans are only available at rates that are slightly
lower or higher than the Loan Rate before adjustment.
The average life of the Offered Certificates and, if purchased at other
than par, the yields realized by holders of the Offered Certificates will be
sensitive to levels of payment (including prepayments) on the Mortgage Loans. In
general, the yield on an Offered Certificate that is purchased at a premium from
the outstanding principal amount thereof may be adversely affected by a higher
than anticipated level of prepayments of the Mortgage Loans. Conversely, the
yield on an Offered Certificate that is purchased at a discount from the
outstanding principal amount thereof may be adversely affected by a lower than
anticipated level of prepayments.
In addition to the foregoing factors affecting the weighted average life of
the Offered Certificates, the use of certain excess cashflow to pay principal of
the Offered Certificates then entitled to principal distributions will result in
the acceleration of the Offered Certificates, relative to the amortization of
the Mortgage Loans in early months of the transaction. This acceleration feature
creates overcollateralization which results from the excess of the Pool
Principal Balance of Mortgage Loans over the aggregate Class Principal Balance
of the Offered 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--Final Scheduled Distribution Dates"
herein. The Final Scheduled Distribution Date for the Class A and Class B
Certificates has been set to March 25, 2031. It is expected that the last actual
Distribution Date for each Class of Offered Certificates will occur
significantly earlier than such Final Scheduled Distribution Dates but such
final Distribution Date could occur later than the applicable Final Scheduled
Distribution Date.
MANDATORY PREPAYMENT
In the event that at the end of the Funding Period amounts remain in the
Pre-Funding Account, the Holders of the Class A Certificates will receive an
additional distribution allocable to principal in an amount equal to such
remaining amount. Although there can be no assurance, the Seller anticipates
that there should be no material principal prepayment to the Certificateholders
due to a lack of Subsequent Mortgage Loans.
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 prepayments on the
Mortgage Loans occurring at a
S-37
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 life of the Offered Certificates will
also be affected by the amount and timing of delinquencies and defaults on the
Mortgage Loans and the recoveries, if any, on defaulted 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 such Certificate is repaid. The weighted average life of
any Class of the Offered Certificates will be influenced by, among other
factors, the rate at which principal payments are made on the Mortgage Loans,
including final payments made upon the maturity of Balloon Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption"), 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 such mortgage loans. A 100% Prepayment Assumption assumes a
conditional prepayment rate ("CPR") of 4% per annum of the outstanding principal
balance of such mortgage loans in the first month of the life of the mortgage
loans and (i) with respect to the Fixed Rate Mortgage Loans approximately an
additional 1.9091% (precisely 21/11ths) (expressed as a percentage per annum) in
each month thereafter until the twelfth month and (ii) with respect to the
Adjustable Rate Mortgage Loans, approximately an additional 2.3636% (precisely
26/11ths) (expressed as a percentage 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 conditional prepayment rate of 25% and
30% per annum each month as assumed for the Fixed Rate Mortgage Loans and the
Adjustable Rate Mortgage Loans, respectively. As used in the table below, 100%
Prepayment Assumption assumes a conditional prepayment rate equal to 100% of the
Prepayment Assumption. Correspondingly, 50% Prepayment Assumption assumes
prepayment rates equal to 50% of the Prepayment Assumption, 150% Prepayment
Assumption assumes prepayment rates equal to 150% of the Prepayment Assumption,
and 200% Prepayment Assumption assumes prepayment rates equal to 200% of the
Prepayment Assumption. The Prepayment Assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. The Depositor believes that no existing statistics of which it
is aware provide a reliable basis for holders of Offered Certificates to predict
the amount or the timing of receipt of prepayments on the Mortgage Loans.
STRUCTURING ASSUMPTIONS
For the purpose of the tables below, it is assumed (the "Structuring
Assumptions") that: (i) the Mortgage Loans consist of pools of loans with the
level-pay and balloon amortization characteristics set forth below, (ii) the
Closing Date for the Offered Certificates is December 30, 1998,
(iii) distributions on the Offered Certificates are made on the 25th day of each
month regardless of the day on which the Distribution Date actually occurs,
commencing in January 1999 and are made in accordance with the priorities
described herein, (iv) the scheduled monthly payments of principal and interest
on the Mortgage Loans will be timely delivered on the first day of each month
commencing in January 1999 (with no defaults), (v) the Mortgage Loans'
prepayment rates are a multiple of the Prepayment Assumption, (vi) all
prepayments are prepayments in full received on the last day of each month
commencing in December 1998 and include 30 days' interest thereon, (vii) no
optional termination is exercised (other than with respect to the information
shown opposite Weighted Average Life to Optional Termination), (viii) each Class
of Offered Certificates has the respective Certificate Rate and initial Class
Principal Balance set forth herein, (ix) the Targeted OC Amount decreases in
accordance with its terms with no Stepup Trigger or Stepdown Trigger, (x) all
Mortgage Loans except the Subsequent Mortgage Loans are included in the Trust as
of the Cut-off Date, and payments in respect of the Subsequent Mortgage will be
a part of the Trust on and after January 1, 1999, and (xi) One-Month LIBOR is
5.6175% for the first month and remains constant thereafter at 5.05% and
six-month LIBOR remains constant at 5.1103%.
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ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL
MONTHS INITIAL AMORTIZATION
COUPON/ PRINCIPAL CURRENT TO NEXT GROSS LIFETIME LIFETIME PERIODIC PERIODIC TERM TO
AMORTIZATION BALANCE LOAN ADJUSTMENT MARGIN CAP FLOOR CAP CAP MATURITY
TYPE DELIVERY ($) RATE (%) DATE (%) (%) (%) (%) (%) (IN MONTHS)
- ------------- ------------- -------------- ---------- ---------- -------- --------- -------- -------- --------- ----------
Fixed........ Initial 5,240,388.20 8.923 180
Fixed........ Initial 85,210,459.88 10.233 360
Fixed
Balloon.... Initial 7,641,247.77 10.085 360
Fixed........ Subsequent 1,285,248.89 8.923 180
Fixed........ Subsequent 20,898,575.55 10.233 360
Fixed
Balloon.... Subsequent 1,874,079.71 10.085 360
Adjustable... Initial 136,255,550.79 10.849 22 5.6800 17.353 10.811 2.033 1.000 360
Adjustable... Initial 12,315,822.90 10.893 36 5.8920 17.407 10.892 2.930 1.000 360
Adjustable... Initial 15,538,722.02 10.570 4 5.6680 16.383 10.182 1.020 1.000 360
Adjustable... Subsequent 52,091,007.43 10.849 22 5.6800 17.353 10.811 2.033 1.000 360
Adjustable... Subsequent 4,708,385.23 10.893 36 5.8920 17.407 10.892 2.930 1.000 360
Adjustable... Subsequent 5,940,511.63 10.570 4 5.6680 16.383 10.182 1.020 1.000 360
REMAINING
REMAINING TERM TO
COUPON/ AMORTIZATION STATED
AMORTIZATION TERM MATURITY
TYPE (IN MONTHS) (IN MONTHS)
- ------------- ----------- -----------
Fixed........ 178 178
Fixed........ 358 358
Fixed
Balloon.... 357 177
Fixed........ 178 178
Fixed........ 358 358
Fixed
Balloon.... 357 177
Adjustable... 358 358
Adjustable... 360 360
Adjustable... 355 355
Adjustable... 358 358
Adjustable... 360 360
Adjustable... 355 355
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 that would be outstanding after each of the dates shown
at various percentages of the Prepayment Assumption 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
such 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.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION**
CLASS A
-------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
- -------------------------------------------------------------------------- ----- ---- ---- ---- ----
Initial Percentage........................................................ 100 100 100 100 100
December 1999............................................................. 97 87 76 66 54
December 2000............................................................. 96 73 52 34 19
December 2001............................................................. 96 61 37 21 10
December 2002............................................................. 95 51 26 12 5
December 2003............................................................. 94 43 19 7 2
December 2004............................................................. 93 36 13 4 1
December 2005............................................................. 92 31 9 2 0
December 2006............................................................. 91 26 7 1 0
December 2007............................................................. 89 22 5 * 0
December 2008............................................................. 88 19 3 * 0
December 2009............................................................. 86 16 2 0 0
December 2010............................................................. 85 13 2 0 0
December 2011............................................................. 82 11 1 0 0
December 2012............................................................. 80 9 * 0 0
December 2013............................................................. 75 8 * 0 0
December 2014............................................................. 73 6 0 0 0
December 2015............................................................. 70 5 0 0 0
December 2016............................................................. 67 4 0 0 0
December 2017............................................................. 64 4 0 0 0
December 2018............................................................. 60 3 0 0 0
December 2019............................................................. 56 2 0 0 0
December 2020............................................................. 52 2 0 0 0
December 2021............................................................. 46 1 0 0 0
December 2022............................................................. 41 1 0 0 0
December 2023............................................................. 36 * 0 0 0
December 2024............................................................. 30 * 0 0 0
December 2025............................................................. 23 0 0 0 0
December 2026............................................................. 16 0 0 0 0
December 2027............................................................. 8 0 0 0 0
December 2028............................................................. 0 0 0 0 0
Weighted Average Life to Maturity (years)(1).............................. 20.37 5.88 3.05 1.99 1.42
Weighted Average Life to Optional Termination (years)(1).................. 20.32 5.49 2.81 1.84 1.32
- ------------------
* Greater than zero but less than 1.
** Rounded to the nearest whole percentage.
(1) The weighted average life of a Certificate of any class is determined by
(i) 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, (ii) adding the results,
and (iii) dividing the sum by the original principal balance of the
Certificates.
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PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION*
CLASS B
-------------------------------------
DISTRIBUTION DATE 0% 50% 100% 150% 200%
- -------------------------------------------------------------------------- ----- ---- ---- ---- ----
Initial Percentage........................................................ 100 100 100 100 100
December 1999............................................................. 100 100 100 100 100
December 2000............................................................. 100 100 100 100 100
December 2001............................................................. 100 100 81 45 23
December 2002............................................................. 100 100 58 27 5
December 2003............................................................. 100 95 41 12 0
December 2004............................................................. 100 81 30 3 0
December 2005............................................................. 100 69 21 0 0
December 2006............................................................. 100 58 12 0 0
December 2007............................................................. 100 49 6 0 0
December 2008............................................................. 100 42 1 0 0
December 2009............................................................. 100 35 0 0 0
December 2010............................................................. 100 30 0 0 0
December 2011............................................................. 100 25 0 0 0
December 2012............................................................. 100 20 0 0 0
December 2013............................................................. 100 15 0 0 0
December 2014............................................................. 100 11 0 0 0
December 2015............................................................. 100 7 0 0 0
December 2016............................................................. 100 4 0 0 0
December 2017............................................................. 100 2 0 0 0
December 2018............................................................. 100 0 0 0 0
December 2019............................................................. 100 0 0 0 0
December 2020............................................................. 100 0 0 0 0
December 2021............................................................. 100 0 0 0 0
December 2022............................................................. 92 0 0 0 0
December 2023............................................................. 80 0 0 0 0
December 2024............................................................. 67 0 0 0 0
December 2025............................................................. 52 0 0 0 0
December 2026............................................................. 35 0 0 0 0
December 2027............................................................. 15 0 0 0 0
December 2028............................................................. 0 0 0 0 0
December 2029............................................................. 0 0 0 0 0
----- ---- ---- ---- ----
Weighted Average Life to Maturity (years)(1).............................. 26.92 9.96 5.02 3.38 2.86
Weighted Average Life to Optional Termination (years)(1).................. 26.87 9.54 4.77 3.24 2.75
- ------------------
* Rounded to the nearest whole percentage.
(1) The weighted average life of a Certificate of any class is determined by
(i) 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, (ii) adding the results,
and (iii) dividing the sum by the original principal balance of the
Certificates.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The property of the Trust will consist of, to the extent provided in the
Agreement: (i) the Mortgage Loans; (ii) payments received after the related
Cut-off Date, other than scheduled payments on the Mortgage Loans due on or
before the related Cut-off Date; (iii) Mortgaged Properties relating to the
Mortgage Loans that are acquired by foreclosure or deed in lieu of foreclosure
together with all collections thereon and proceeds thereof; (iv) the Collection
Account, the account into which Insured Payments are paid under the Policy and
the Distribution Account and such assets deposited therein from time to time and
any investment proceeds thereof; and (v) the Capitalized Interest Account and
the Pre-Funding Account and funds on deposit therein. The Trustee also will hold
the Policy for the benefit of the Class A Certificates.
The Offered Certificates will initially be represented by one or more
global certificates registered in the name of the nominee of the Depository
Trust Company ("DTC"), except as provided below. The Depositor has been informed
by DTC that DTC's nominee will be Cede & Co. ("Cede"). No person acquiring a
beneficial ownership interest in the Offered Certificates (each, a "Certificate
Owner") will be entitled to receive a certificate representing such person's
interest, except as set forth below under "--Book-Entry Certificates." Unless
and until Definitive Certificates are issued under the limited circumstances
described herein, all references to actions by Certificateholders with respect
to the Offered Certificates shall refer to actions taken by DTC upon
instructions from its Participants (as defined below), and all references herein
to distributions, notices, reports and statements to Certificateholders with
respect to the Offered Certificates shall refer to distributions, notices,
reports and statements to DTC or Cede, as the registered holder of the Offered
Certificates, for distribution to Certificate Owners in accordance with DTC
procedures. See "--Book Entry Certificates" herein.
All distributions to holders of the Offered Certificates, other than the
final distribution on the Offered Certificates, will be made by or on behalf of
the Trustee to the persons in whose names such Offered Certificates are
registered at the close of business on each "Record Date", which will be the
last business day of the month preceding the month in which the related
Distribution Date occurs. Such distributions will be made either (i) by check
mailed to the address of each such Certificateholder (initially, Cede) as it
appears in the certificate register or (ii) upon written request to the Trustee
at least five business days prior to the relevant Record Date by any holder of
Offered Certificates having an aggregate initial Class Principal Balance that is
in excess of $5,000,000 by wire transfer in immediately available funds to the
account of such Certificateholder specified in the request. The final
distribution on the Offered Certificates will be made in like manner, but only
upon presentment and surrender of such Offered Certificates at the corporate
trust office of the Trustee or such other location specified in the notice to
Certificateholders of such final distribution.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the Trust, other than the Pre-Funding
Account and the Capitalized Interest Account, created by the Agreement will
include multiple segregated asset pools, each of which will be treated as a
separate REMIC and creating a tiered REMIC structure. The Offered Certificates
will be designated as regular interests in a REMIC.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Certificate Owners will hold their Offered Certificates through
DTC in the United States, or Cedel Bank, societe anonyme ("Cedel") or the
Euroclear System ("Euroclear") (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Certificates will be issued in one or more certificates
which equal the aggregate principal balance of the Offered Certificates and will
initially be registered in the name of Cede. 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.
("Citibank") will act as depositary for Cedel and The Chase Manhattan Bank
("Chase") will act as depositary for Euroclear (in such capacities, individually
the
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"Relevant Depositary" and together, the "European Depositaries"). Investors may
hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $100,000 and in
multiples of $1 in excess thereof. Except as described below, no person
acquiring a Book-Entry Certificate (each, a "beneficial owner") will be entitled
to receive a physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Offered Certificates will
be Cede, 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.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedel or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Offered Certificates from the Trustee through DTC and DTC
participants. While the Offered Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Offered Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not Participants may
transfer ownership of Offered Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Offered Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Offered Certificates
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 Certificate 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
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedel or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
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
S-43
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.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
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.
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
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator 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 the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
S-44
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
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 FEDERAL INCOME TAX
CONSEQUENCES--Federal Income Tax Consequences to Foreign Investors" and
"--Backup Withholding" herein. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, 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 Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder 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 Offered Certificates which
conflict with actions taken with respect to other Offered Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default (as
defined herein), beneficial owners having Percentage Interests aggregating not
less than 51% of the aggregate Class Principal Balance of the Book-Entry
Certificates advise the Trustee and DTC through the Financial Intermediaries and
the DTC participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Class A Certificates 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.
S-45
Neither the Depositor, the Seller, the Master Servicer, the Certificate
Insurer nor the Trustee will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Certificates held by Cede, as nominee for DTC, or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
PRIORITY OF DISTRIBUTIONS
On each Distribution Date, the Trustee shall (i) withdraw the Available
Distribution Amount from the Distribution Account and pay (a) to the Trustee,
the Trustee Fee and (b) to the Certificate Insurer, the Premium, and
(ii) transfer the amounts on deposit in the Insured Payments Account to the
Distribution Account. On each Distribution Date, the Trustee shall make the
following disbursements from the amounts in the Distribution Account, in each
case to the extent of the amounts remaining; provided that amounts from the
Insured Payments Account may be used only to make distributions pursuant to
clauses 1 and 5 below:
1. To the Class A Certificates, the sum of (a) the Class Monthly
Interest Amount, (b) Supplemental Interest Payments and (c) any
undistributed amounts from previous Distribution Dates for which
no Insured Payment has been made.
2. To the Certificate Insurer, the Premium Supplement, if any.
3. To the Class B Certificates, the related Class Monthly Interest
Amount.
4. To the Certificate Insurer, reimbursement for any prior draws on
the Policy (other than in respect of Supplemental Interest
Payments) plus interest thereon as set forth in the Insurance
Agreement.
5. To the Class A Certificates, the amount up to the amount necessary
to reduce the Class Principal Balance thereof to the Class A
Optimal Balance for such Distribution Date.
6. To the Certificate Insurer, any other amounts owing under the
Insurance Agreement.
7. To the Class B Certificates, the amount up to the amount necessary
to reduce the Class Principal Balance thereof to the Class B
Optimal Balance for such Distribution Date.
8. To the Class B Certificates, the related Unpaid Interest Shortfall
Amount, if any.
9. To the Class B Certificates, any related Allocable Loss Amounts
not previously paid.
10. To the Special Servicer, the accrued but unpaid Special Servicer
Fee and, if not previously deducted from the Available
Distribution Amount, the Special Servicer Incentive Fee.
11. To the Certificate Insurer, any Supplemental Interest Payments
which were not paid to it on or prior to such Distribution Date
under the cap agreement, together with any such amounts that were
not reimbursed on prior Distribution Dates and interest thereon as
set forth in the Insurance Agreement.
12. Concurrently, to the Class A and Class B Certificates, the amount
of Basis Risk Shortfall for such Class.
13. To the Class X Certificates, the amount, if any, required under
the Agreement.
14. To the Residual Certificates, any remaining funds.
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CERTAIN DEFINITIONS
For purposes of the priorities discussed above, the following terms have
the meanings set forth below.
Allocable Loss Amount: As to the Class B Certificates and any Distribution
Date the excess, if any, of the aggregate Class Principal Balance of the Offered
Certificates after all distributions on such Distribution Date over the Pool
Principal Balance as of the last day of the related Due Period.
Available Distribution Amount: As to any Distribution Date an amount equal
to the sum, net of amounts reimbursable therefrom to the Master Servicer, of
(i) the aggregate amount of monthly payments on the Mortgage Loans due during
the related Due Period and received by the Master Servicer on or prior to the
related Determination Date, after deduction of the Servicing Fee, the Trustee
Fee and the Premium payable with respect to the Policy, (ii) certain unscheduled
payments in respect of the Mortgage Loans, including prepayments, insurance
proceeds, liquidation proceeds and proceeds from repurchases of and
substitutions for such Mortgage Loans occurring during the related Collection
Period or Prepayment Period, as applicable, after deduction of the Special
Servicer Incentive Fee, if applicable, (iii) all Monthly Advances with respect
to the Mortgage Loans received by the Trustee for such Distribution Date,
(iv) for Distribution Dates during, and, if necessary, the Distribution Date
immediately following, the Funding Period, amounts transferred from the
Capitalized Interest Account and (v) any amounts transferred to the Distribution
Account from the Pre-Funding Account at the end of the Funding Period.
Basis Risk Shortfall: As to the Class A Certificates and any Distribution
Date, the excess of the related LIBOR Carryover Amount over the cumulative
amount of Supplemental Interest Payments. As to the Class B Certificates and any
Distribution Date, the related LIBOR Carryover Amount.
Class A Optimal Balance: As to any Distribution Date prior to the Stepdown
Date if the Lockout Trigger is satisfied, the excess of (x) the sum of (i) the
Pool Principal Balance as of the last day of the related Due Period and
(ii) the amount on deposit in the Pre-Funding Account as of the last day of the
preceding month over (y) the sum of (i) 5.00% of the Maximum Collateral Amount
and (ii) the Targeted OC Amount for such Distribution Date. As to any
Distribution Date on or after the Stepdown Date if the Lockout Trigger is
satisfied, the excess of the Pool Principal Balance as of the last day of the
related Due Period over the lesser of (x) the sum of (i) 10.00% of the Pool
Principal Balance as of the last day of the related Due Period and (ii) the
greater of (A) the Targeted OC Amount and (B) the OC Floor and (y) the sum of
(i) 10.00% of the Pool Principal Balance as of the last day of the related Due
Period and (ii) the Targeted OC Amount. If the Lockout Trigger is not
satisfied, the excess of (x) the Pool Principal Balance as of the last day of
the related Due Period over (y) the sum of (i) the Class Principal Balance of
the Class B Certificates and (ii) the greater of (A) the Targeted OC Amount and
(B) the OC Floor.
Class B Optimal Balance: As to any Distribution Date prior to the Stepdown
Date, the initial Class Principal Balance of the Class B Certificates. As to any
Distribution Date on or after the Stepdown Date or if the Class Principal
Balance of the Class A Certificates has been reduced to zero, the excess of the
Pool Principal Balance as of the last day of the related Due Period over the sum
of (i) the Class Principal Balance of the Class A Certificates after
distributions of principal thereof on such Distribution Date and (ii) the
greater of (A) the Targeted OC Amount and (B) the OC Floor.
Class Interest Distribution: As to any Class of Offered Certificates and
Distribution Date, the sum of the related Class Monthly Interest Amount and the
related Unpaid Interest Shortfall Amount, if any.
Class Monthly Interest Amount: As to any Class of Offered Certificates and
Distribution Date, interest accrued during the related Interest Period at the
applicable Certificate Rate on the related Class Principal Balance immediately
prior to such Distribution Date minus such Class's pro rata portion of Relief
Act Shortfalls for the related Due Period.
Class Principal Balance: As to any Class of Offered Certificates and any
date of determination, the original principal amount of such Class on the
Closing Date minus the aggregate distributions applied in reduction of such
original principal amount prior to such date of determination and, in the case
of the Class B Certificates, minus all Allocable Loss Amounts allocated to the
Class B Certificates prior to such date of determination.
Collection Period: As to any Distribution Date, the calendar month
preceding the month of such Distribution Date.
Cumulative Losses: As to any Distribution Date, the aggregate amount of
losses on the Mortgage Loans through the related Collection Period.
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Determination Date: As to any Distribution Date, the 18th day of the month
of such Distribution Date or, if such 18th day is not a business day, the
preceding business day.
Due Period: As to any Distribution Date, the period from the second day of
the calendar month preceding the month of such Distribution Date through the
first day of the month of such Distribution Date.
Interest Period: For any Distribution Date the period from the prior
Distribution Date (or in the case of the first Distribution Date, from the
Closing Date) through the day preceding the current Distribution Date,
calculated on the basis of a 360-day year and the actual number of days elapsed.
LIBOR Carryover Amount: As to any Class of Offered Certificates and any
Distribution Date, the sum of (i) the excess, if any, of the related Class
Monthly Interest Amount calculated on the basis of One-Month LIBOR plus the
applicable Certificate Margin over the related Class Monthly Interest Amount for
such Distribution Date calculated on the basis of the Net Funds Cap, (ii) any
LIBOR Carryover Amount remaining unpaid from prior Distribution Dates and
(iii) 30 days interest on the amount in clause (ii) calculated on the basis of
One-Month LIBOR plus the applicable Certificate Margin. For purposes of this
definition, any Supplemental Interest Payments will reduce the amount in
clause (ii) of the preceding sentence.
Lockout Trigger: The Lockout Trigger is satisfied for any Distribution
Date if the Sixty Day Delinquencies for the related Collection Period are less
than or equal to 15%.
Maximum Collateral Amount: $349,000,000.
OC Floor: An amount equal to 0.50% of the Maximum Collateral Amount.
Premium: The monthly fee payable to the Certificate Insurer for the Policy
as set forth in the Agreement.
Premium Supplement: The fee payable to the Certificate Insurer, which will
not exceed an amount equal to the regular Premium, in the event a draw is made
on the Policy and the Certificate Insurer, consistent with its standard
practices, creates a reserve in connection with such draw.
Principal Balance: As to any Mortgage Loan (other than a Liquidated
Mortgage Loan) as of any date of determination, the principal balance thereof as
of the applicable Cut-off Date, reduced by all scheduled payments due on or
before such date whether or not received. The Principal Balance of a Liquidated
Mortgage Loan after the Due Period in which such Mortgage Loan becomes a
Liquidated Mortgage Loan shall be zero.
Pool Principal Balance: As of any date of determination, the aggregate of
the Principal Balances of the Mortgage Loans as of such date.
Relief Act Shortfalls: As to any Due Period, the aggregate reductions in
the interest collected on the Mortgage Loans as a result of the application of
the Relief Act.
Relief Act: The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
Sixty Day Delinquencies: As of the last day of any Collection Period, the
percentage equivalent of a fraction, the numerator of which equals the aggregate
Principal Balances of all Mortgage Loans that are 60 or more days delinquent on
a contractual basis, in foreclosure or converted to REO Properties as of such
last day of such Collection Period, and the denominator of which is the
aggregate Principal Balance of the Mortgage Loans as of the last day of such
Collection Period.
Stepdown Date: The earlier to occur of (x) the Distribution Date on which
the Class Principal Balance of the Class A Certificates is reduced to zero and
(y) later to occur of (i) the Distribution Date in June 2001 and (ii) the
Distribution Date on which the Pool Principal Balance is less than or equal to
$174,500,000.
Stepdown Trigger: The existence of any of the following conditions:
1. Sixty Day Delinquencies equal at least 10.00% but less than 12.00%.
2. Cumulative Losses equal or exceed the levels indicated below but
are less than the applicable levels, for the Stepup Trigger:
By Month
30 (is greater than or equal to) 1.50%
42 (is greater than or equal to) 2.00%
54 (is greater than or equal to) 2.40%
66+ (is greater than or equal to) 2.75%
3. Rolling twelve month losses equal at least 1.00% but less than
1.75%.
Stepup Trigger: The existence of any of the following conditions:
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1. Sixty Day Delinquencies equal at least 12.00%.
2. Cumulative Losses equal or exceed the levels indicated by the
months indicated:
By Month
12 0.75%
24 1.25%
36 1.90%
48 2.40%
60+ 3.00%
3. Rolling twelve month losses equal or exceed 1.40%.
Subordination Deficit: As to any Distribution Date, the excess, if any, of
(x) the Class Principal Balance of the Class A Certificates after giving effect
to the distribution of principal thereof on such Distribution Date over (y) the
sum of (i) the Pool Principal Balance as of the the last day of the related Due
Period and (ii) the amount on deposit in the Pre-Funding Account as of the last
day of the preceding month.
Targeted OC Amount: As of any Distribution Date, (A) prior to the Stepdown
Date, (i) if no Stepup Trigger is in effect, 2.25% of the Maximum Collateral
Amount, or (ii) if a Stepup Trigger is in effect, 100% of the Pool Principal
Balance as of the last day of the related Due Period; and (B) on and after the
Stepdown Date, (i) if a Stepdown Trigger is not in effect, 4.50% of the Pool
Principal Balance, as of the last day of the related Due Period (ii) if a
Stepdown Trigger but not a Stepup Trigger is in effect, the amount calculated
pursuant to clause (A), and (c) if a Stepup Trigger is in effect, 100% of the
Pool Principal Balance as of the last day of the related Due Period; provided,
however, that if the period from the later of the Stepdown Date and the most
recent date on which the Stepdown Trigger was not in effect is less than six
months, then the amount set forth in clause (B)(i) shall be calculated based on
the amount in clause (A)(i) decreased by an amount equal to the product of
(x) the amount set forth in (A)(i) minus the amount set forth in
(B)(i) (without giving effect to this proviso) and (y) a fraction, the numerator
of which is the number of Distribution Dates since the later of the Stepdown
Date and the most recent date on which the Stepdown Trigger was not in effect
(but not more than six) and the denominator of which is six.
Unpaid Interest Shortfall Amount: As to any Class of Certificates and any
Distribution Date, an amount equal to the sum of (i) the excess of the related
Class Monthly Interest Amount for the preceding Distribution Date and any
outstanding Unpaid Interest Shortfall Amount with respect to such Class on such
preceding Distribution Date, over the amount in respect of interest that is
actually distributed to the Holders of such Class on such preceding Distribution
Date plus (ii) one month's interest on such excess, to the extent permitted by
law, at the related Certificate Rate.
CERTIFICATE RATE
The "Certificate Rate" on any Distribution Date with respect to the
Class A or Class B Certificates will be equal to a per annum rate equal to the
lesser of (A) the related Formula Rate and (B) the Net Funds Cap. Interest in
respect of any Distribution Date will accrue during the related Interest Period
on the basis of a 360-day year and the actual number of days elapsed.
The "Formula Rate" for each Class of Offered Certificates will equal the
sum of One-Month LIBOR plus the applicable margin (the "Certificate Margin") set
forth below:
CERTIFICATE CERTIFICATE
CLASS MARGIN(1) MARGIN(2)
- ------ ----------- -----------
A 0.68% 1.36%
B 3.00% 3.50%
- ------------------
(1) Prior to the Clean-up Call Date
(2) On or after the Clean-up Call Date
The "Net Funds Cap" for any Distribution Date will equal the difference
between (i) the average of the Loan Rates of the Mortgage Loans as of the first
day of the month preceding the month of such Distribution Date (or in the case
of the first Distribution Date, the Closing Date), weighted on the basis of the
related Principal Balances as of such date and (ii) the sum of (a) the Servicing
Fee Rate, (b) the Trustee Fee Rate, (c) the Premium Rate and (d) the Minimum
Spread (collectively, "Aggregate Expense Rate"). The sum of the Servicing Fee
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Rate, the Trustee Fee Rate and the Premium Rate will be approximately 0.6975%
per annum. The "Minimum Spread" is equal to 0.00% for the first 60 Distribution
Dates and 0.50% thereafter. For the first Distribution Date, One-Month LIBOR is
5.6175%.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Distribution Date, One-Month LIBOR shall be
established by the Trustee and will equal the rate for one month United States
dollar deposits quoted on Telerate Page 3750 as of 11:00 A.M., London time, on
the second LIBOR Business Day prior to the first day of the related Interest
Period (or the second LIBOR Business Day prior to the Closing Date, in the case
of the first Distribution Date) (each, a "LIBOR Determination Date"). "Telerate
Page 3750" means the display designated as page 3750 on the Telerate Service (or
such other page as may replace page 3750 on that service for the purpose of
displaying London interbank offered rates of major banks). If such rate does not
appear on such page (or such other page as may replace that page on that
service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be reasonably selected by the
Trustee after consultation with the Master Servicer), the rate will be the
Reference Bank Rate. The "Reference Bank Rate" will be determined on the basis
of the rates at which deposits in U.S. Dollars are offered by the reference
banks (which shall be three major banks that are engaged in transactions in the
London interbank market, selected by the Trustee after consultation with the
Master Servicer) as of 11:00 A.M., London time, on the day that is two LIBOR
Business Days prior to the immediately preceding Distribution Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the Class Principal Balance of the Offered Certificates.
The Trustee will request the principal London office of each of the reference
banks to provide a quotation of its rate. If at least two such quotations are
provided, the rate will be the arithmetic mean of the quotations. If on such
date fewer than two quotations are provided as requested, the rate will be the
arithmetic mean of the rates quoted by one or more major banks in New York City,
selected by the Trustee after consultation with the Master Servicer, as of
11:00 A.M., New York City time, on such date for loans in U.S. Dollars to
leading European banks for a period of one month in amounts approximately equal
to the Class Principal Balance of the Offered Certificates. If no such
quotations can be obtained, the rate will be LIBOR for the prior Distribution
Date. "LIBOR Business Day" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the State of New York or in the
city of London, England are required or authorized by law to be closed.
SUPPLEMENTAL INTEREST PAYMENTS
The Class A Certificates may be entitled to receive Supplemental Interest
Payments from the Certificate Insurer. "Supplemental Interest Payments" on any
Distribution Date will equal the product of (a) the excess, if any, of
(x) One-Month LIBOR on the related LIBOR Determination Date over (y) 7.00% and
(b) the lesser of (i) the aggregate Principal Balances of the Fixed Rate
Mortgage Loans as of the first day of the related Due Period and (ii) the
aggregate Principal Balances of the Fixed Rate Mortgage Loans as of the first
day of the related Due Period assuming the Fixed Rate Mortgage Loans prepay at a
constant prepayment rate of 10%. Any Supplemental Interest Payments will reduce
the amount, if any, of the LIBOR Carryover Amount otherwise owing on the
Class A Certificates. THE CLASS B CERTIFICATES ARE NOT ENTITLED TO ANY
SUPPLEMENTAL INTEREST PAYMENTS.
FINANCIAL GUARANTY INSURANCE 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 Depositor.
Simultaneously with the issuance of the Class A Certificates, the
Certificate Insurer will deliver the Policy to the Trustee for the benefit of
the holders of the Class A Certificates. Under the Policy, the Certificate
Insurer will irrevocably and unconditionally guarantee payment on each
Distribution Date to the Trustee for the benefit of the holders of the Class A
Certificates the full and complete payment of Insured Payments with respect to
the Class A Certificates, calculated in accordance with the original terms of
the Class A Certificates when issued and without regard to any amendment or
modification of the Class A Certificates or the Agreement except amendments or
modifications to which the Certificate Insurer has given its prior written
consent. "Insured Payments" shall mean with respect to the Class A Certificates
as of any Distribution Date (i) any shortfall in amounts available in the
Distribution Account (as defined in the Agreement) to pay the Class Interest
Distribution for the related Interest Period, (ii) the Supplemental Interest
Payments, if any, (iii) the Subordination
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Deficit and (iv) without duplication of the amount specified in clause (iii),
the Class Principal Balance of the Class A Certificates to the extent unpaid on
the final Distribution Date or earlier termination of the Trust pursuant to the
terms of the Agreement. The Policy does not cover Relief Act Shortfalls or Basis
Risk Shortfalls.
Payment of claims under the Policy in respect of Insured Payments 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 (a) 12:00 noon, New
York City time, on the second Business Day following Receipt of such notice for
payment, and (b) 12:00 noon, New York City time, on the relevant Distribution
Date.
The Certificate Insurer shall be entitled to pay any amount under the
Policy in respect of Insured Payments, including any acceleration payment,
whether or not any notice and certificate shall have been received by the
Certificate Insurer as provided above, provided, however, that by acceptance of
the Policy the Trustee agrees to provide upon request to the Certificate Insurer
a notice and certificate in respect of any such payments made by the Certificate
Insurer. The Certificate Insurer shall be entitled to pay principal under the
Policy on an accelerated basis if the Certificate Insurer shall so select in its
sole discretion, at any time or from time to time, in whole or in part, at an
earlier Distribution Date than provided in the definition of "Insured Payments,"
if such principal would have been payable under the Agreement were funds
sufficient to make such payment available to the Trustee for such purpose.
Insured Payments insured by the Policy shall not include interest, in respect of
principal paid under the Policy on an accelerated basis, accruing from after the
date of such payment of principal.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Certificate Insurer
will pay such amount out of funds of the Certificate Insurer 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 (i) the fourth Business Day following Receipt by the
Certificate Insurer from the Trustee of (A) a certified copy of the order of the
court or other governmental body which exercised jurisdiction to the effect that
a holder of Class A Certificates is required to return principal or interest
distributed with respect to a Class A Certificate during the Term of the Policy
because such distributions were avoidable preferences under applicable
bankruptcy law (the "Order"), (B) a certificate of such holder of Class A
Certificates that the Order has been entered and is not subject to any stay, and
(C) an assignment duly executed and delivered by such holder of Class A
Certificates, in such form as is reasonably required by the Certificate Insurer
and provided to such holder of Class A Certificates by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of such
holder of Class A Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (ii) 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 such
date of Receipt, the Certificate Insurer shall have Received written notice from
the Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such 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 holder of Class A Certificates directly (unless a
holder of Class A Certificates has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order,
in which case such payment shall be disbursed to the Trustee for distribution to
such Certificateholder upon proof of such payment reasonably satisfactory to the
Certificate Insurer). In connection with the foregoing, the Certificate Insurer
shall have the rights provided pursuant to the Agreement.
The terms "Receipt" and "Received", with respect to the Policy, mean actual
delivery to the Certificate Insurer and to its fiscal agent appointed by the
Certificate Insurer at its option, if any, prior to 12:00 P.M., New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 12:00 P.M., 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
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 (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of New York, New
York, the State of New York or in the city 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 to make
Insured Payments shall be discharged to the extent funds are transferred to the
Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
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"Term of the Policy" means the period from and including the date of
issuance of the Policy to and including the date on which the Class Principal
Balance of the Class A Certificates is zero, plus such additional period, to the
extent specified in the Policy, during which any payment on the Class A
Certificates could be avoided in whole or in part as a preference payment.
The Certificate Insurer shall be subrogated to the rights of the holders of
the Class A Certificates to receive payments of principal and interest, as
applicable, with respect to distributions on the Class A Certificates to the
extent of any payment by the Certificate Insurer under the Policy. To the extent
the Certificate Insurer makes Insured Payments, either directly or indirectly
(as by paying through the Trustee), to the holders of the Class A Certificates,
the Certificate Insurer will be subrogated to the rights of the holders of the
Class A Certificates, as applicable, with respect to such Insured Payment and
shall be deemed to the extent of the payments so made to be a registered holder
of Class A Certificates for purposes of payment.
The Policy is governed by the laws of the State of New York. The Policy is
not covered by the Property/Casualty Insurance Security Fund specified in
Article 76 of the New York Insurance Law.
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
holder of Class A Certificates, 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 such 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, or by the merger, consolidation or
dissolution of the Depositor. The Policy may not be cancelled or revoked prior
to payment in full of the Class A Certificates.
Pursuant to the terms of the Agreement, unless an Insurer Default exists,
the Certificate Insurer will be entitled to exercise certain rights of the
holders of the Class A Certificates, without the consent of such
Certificateholders, and the holders of the Class A Certificates may exercise
such rights only with the prior written consent of the Certificate Insurer. See
"POOLING AND SERVICING AGREEMENT--Voting Rights" and "--Certain Matters
Regarding the Certificate Insurer" herein.
The Depositor, the Seller, the Master Servicer and the Certificate Insurer
will enter into an Insurance and Indemnity Agreement (the "Insurance Agreement")
pursuant to which the Seller and the Master Servicer will agree to reimburse,
with interest, the Certificate Insurer for amounts paid pursuant to claims under
the Policy. The Seller and the Master Servicer 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. Except to the extent provided therein,
amounts owing under the Insurance Agreement will be payable solely from the
Trust. An event of default by the Seller or the Master Servicer under the
Insurance Agreement will constitute an Event of Default by the Master Servicer
under the Agreement and allow the Certificate Insurer, among other things, to
direct the Trustee to terminate the Master Servicer. An "event of default" by
the Seller or the Master Servicer under the Insurance Agreement includes (i) a
failure by the Seller or the Master Servicer to pay when due any amount owed
under the Insurance Agreement or certain other documents, (ii) the untruth or
incorrectness in any material respect of any representation or warranty of the
Seller in the Agreement, the Insurance Agreement or certain other documents,
(iii) a failure by the Seller or the Master Servicer to perform or to observe
any covenant or agreement in the Insurance Agreement, the Agreement or certain
other documents, (iv) a failure by either the Seller or the Master Servicer to
pay its debts in general or the occurrence of certain events of insolvency or
bankruptcy with respect to the Seller or the Master Servicer, (v) the occurrence
of an Event of Default by the Master Servicer or the Seller under the Agreement
or under certain other documents and (vi) the failure of the Mortgage Loans to
meet certain loss and delinquency tests set forth in the Insurance Agreement.
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Under the Pooling and Servicing Agreement, the Master Servicer is appointed
for an initial term of three months which the Certificate Insurer has agreed
will be renewed for successive three-month terms unless an Event of Default
under the Pooling and Servicing Agreement or the Insurance occurs or a trigger
event under the Insurance Agreement exists (which event includes payment by the
Certificate Insurer of a claim (other than in respect of Supplemental Interest
Payments) under the Policy or the failure to meet certain delinquency and loss
tests).
MONTHLY ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of all payments of principal and interest, net of the Servicing Fee
Rate, that were due during the related Due Period on the related Mortgage Loans,
other than Balloon Payments, and that were delinquent on the related
Determination Date, plus certain amounts representing assumed payments not
covered by any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure (any such advance, a "Monthly
Advance").
Monthly Advances are required to be made only to the extent they are deemed
by the Master Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such Monthly
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. Monthly Advances with respect to any
Mortgage Loan will be included in the amount available to be distributed on the
Offered Certificates. The Master Servicer will not be required to make any
Monthly Advances with respect to reductions in the amount of the monthly
payments on the Mortgage Loans due to bankruptcy proceedings or the application
of the Relief Act.
All Monthly Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Monthly Advance was made. In addition, any Monthly
Advances previously made in respect of any Mortgage Loan that are deemed by the
Master Servicer to be nonrecoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the Master Servicer out of
any funds in the Collection Account prior to the distributions on the
Certificates. In the event the Master Servicer fails in its obligation to make
any such advance, the Trustee will be obligated to make any such advance, to the
extent required in the Agreement.
ALLOCATION OF REALIZED LOSSES
The Available Distribution Amount includes the net liquidation proceeds in
respect of principal received upon liquidation of a Liquidated Mortgage Loan. If
such net liquidation proceeds are less than the unpaid principal balance, the
Pool Principal Balance will decline more than the aggregate Class Principal
Balance of the Offered Certificates. If such difference is not covered by the
overcollateralization amount or the application of excess interest, the Class B
Certificates will bear such loss.
If, following the distributions on a Distribution Date, the aggregate Class
Principal Balance of the Offered Certificates exceeds the Pool Principal
Balance, i.e., the Certificates are undercollateralized, the Class Principal
Balance of the Class B Certificates will be reduced by the amount of such
excess. Any such reduction will constitute an Allocable Loss Amount for the
Class B Certificates. Although an Allocable Loss Amount will not accrue
interest, such amount may be paid on a future Distribution Date to the extent
funds are available therefor as provided above under "--Priority of
Distributions."
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POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement. A form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following summaries
together with the information herein 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 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 Agreement. Wherever
particular sections or defined terms of the Agreement are referred to, such
sections or defined terms are hereby incorporated herein by reference.
ASSIGNMENT OF THE 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
Notes, Mortgages and other related documents (collectively, the "Related
Documents"), including all scheduled payments with respect to each such Mortgage
Loan due after the applicable Cut-off Date. The Trustee, concurrently with such
transfer, will deliver the Certificates to the Depositor. Each Initial Mortgage
Loan transferred to the Trust will be identified on a schedule (the "Mortgage
Loan Schedule") delivered to the Trustee pursuant to the Agreement. Such
schedule will include information such as the Principal Balance of each Mortgage
Loan as of the applicable Cut-off Date, its Loan Rate as well as other
information.
The Agreement will require that, within the time period specified therein,
the Seller will deliver or cause to be delivered to the Trustee (or a custodian,
as the Trustee's agent for such purpose) the Mortgage Loans endorsed to the
Trustee on behalf of the Certificateholders and the Related Documents. In lieu
of delivery of original mortgages, if such original is not available, the Seller
may deliver or cause to be delivered true and correct copies thereof which have
been certified as to authenticity by the appropriate county recording office
where such mortgage is recorded.
Within 90 days of the Closing Date, with respect to the Initial Mortgage
Loans and within 90 days of each Subsequent Transfer Date with respect to the
Subsequent Mortgage Loans, 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 such defect is not
cured within 90 days following notification thereof to the Seller by the
Trustee, the Seller will be obligated to either (i) substitute for such Mortgage
Loan an Eligible Substitute Mortgage Loan; however, such substitution is
permitted only within two years of the Closing Date and may not be made unless
an opinion of counsel is provided to the effect that such substitution will not
disqualify the Trust as a REMIC or result in a prohibited transaction tax under
the Code or (ii) purchase such Mortgage Loan at a price (the "Purchase Price")
equal to the outstanding Principal Balance of such Mortgage Loan as of the date
of purchase, plus all accrued and unpaid interest thereon, computed at the Loan
Rate, plus the amount of any unreimbursed Servicing Advances and Monthly
Advances 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 such obligation arises. The obligation of the Seller to repurchase or
substitute for 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.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan Rate,
with respect to a Fixed Rate Mortgage Loan, not less than the Loan Rate of the
Defective Mortgage Loan and not more than 1% in excess of the Loan Rate of such
Defective Mortgage Loan; (iii) have a mortgage of the same level of priority as
the mortgage relating to the Defective Mortgage Loan;
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(iv) have a remaining term to maturity not more than six months earlier and not
later than the remaining term to maturity of the Defective Mortgage Loan; (v) be
an Adjustable Rate Mortgage Loan if the Defective Mortgage Loan is an Adjustable
Rate Mortgage Loan and have a Gross Margin, Periodic Rate Cap, Minimum Loan Rate
and Maximum Loan Rate no less than those of the Defective Mortgage Loan and a
next Adjustment Date not more than two months after the next Adjustment Date for
the Defective Mortgage Loan; (vi) comply with each representation and warranty
as to the Mortgage Loans set forth in the Agreement (deemed to be made as of the
date of substitution); and (vii) satisfy certain other conditions specified in
the Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., the Cut-off Date Principal
Balance and the Loan Rate). In addition, the Seller will represent and warrant,
on the Closing Date, that, among other things: (i) at the time of transfer to
the Depositor, the Seller has transferred or assigned all of its right, title
and interest in each Initial Mortgage Loan and the Related Documents, free of
any lien; and (ii) each Initial Mortgage Loan complied, at the time of
origination, in all material respects with applicable state and federal laws.
The Seller will make comparable representations with respect to the Subsequent
Mortgage Loans. Upon discovery of a breach of any such representation and
warranty which materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer in the related Mortgage Loan and
Related Documents, the Seller will have a period of 60 days after 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 (i) substitute for such Defective
Mortgage Loan an Eligible Substitute Mortgage Loan or (ii) purchase such
Defective Mortgage Loan from the Trust. The same procedure and limitations that
are set forth above for the substitution or purchase of Defective Mortgage Loans
as a result of deficient documentation relating thereto will apply to the
substitution or purchase of a Defective Mortgage Loan as a result of a breach of
a representation or warranty in the Agreement that materially and adversely
affects the interests of the Certificateholders or the Certificate Insurer.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans".
Pursuant to the Agreement, the Master Servicer and Subservicer will service
and administer the Mortgage Loans as more fully set forth herein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer will establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the holders
of the Certificates. The Collection Account will be an Eligible Account (as
defined herein). Upon receipt by the Master Servicer of amounts in respect of
the Mortgage Loans (excluding amounts representing the Servicing Fee,
reimbursement for Monthly Advances and Servicing Advances and insurance proceeds
to be applied to the restoration or repair of a Mortgaged Property or similar
items), the Master Servicer will deposit such amounts in the Collection Account.
Amounts so deposited may be invested in Eligible Investments (as described in
the Agreement) maturing no later than one Business Day prior to the date on
which the amount on deposit therein is required to be deposited in the
Distribution Account or on such Distribution Date if approved by the Rating
Agencies and the Certificate Insurer. The Trustee will establish an account (the
"Distribution Account") into which will be deposited amounts withdrawn from the
Collection Account for distribution to Certificateholders on a Distribution
Date. The Distribution Account will be an Eligible Account. Amounts on deposit
therein may be invested in Eligible Investments maturing on or before the
Business Day prior to the related Distribution Date unless such Eligible
Investments are invested in investments managed or advised by the Trustee or an
affiliate thereof, in which case such Eligible Investments may mature on the
related Distribution Date.
An "Eligible Account" is a segregated account that is (i) an account or
accounts maintained with a federal or state chartered depository institution or
trust company the short-term unsecured debt obligations of which (or, in the
case of a depository institution or trust company that is the principal
subsidiary of a holding company, the short-term unsecured debt obligations of
such holding company) are rated P-1 by Moody's and A-1 by S&P (or comparable
ratings if Moody's and S&P are not the Rating Agencies) at the time any amounts
are held on deposit therein, (ii) an account or accounts the deposits in which
are fully insured by the Federal Deposit Insurance Corporation (to the limits
established by such corporation), the uninsured deposits in which account are
otherwise secured such that, as evidenced by an opinion of counsel delivered to
the Trustee, the Certificate Insurer and to each Rating Agency, the
Certificateholders will have a claim with respect to the funds in such account
or a
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perfected first priority security interest against such collateral (which shall
be limited to Eligible Investments) securing such funds that is superior to
claims of any other depositors or creditors of the depository institution with
which such account is maintained, (iii) a trust account or accounts maintained
with the trust department of a federal or state chartered depository institution
or trust company acting in its fidiciary capacity or (iv) otherwise acceptable
to each Rating Agency without reduction or withdrawal of their then current
ratings of the Certificates and the Certificate Insurer as evidenced by a letter
from each Rating Agency and the Certificate Insurer to the Trustee. Eligible
Investments are specified in the Agreement and are limited to investments which
meet the criteria of the Rating Agencies from time to time as being consistent
with their then current ratings of the Certificates.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, cash will be deposited in the Capitalized Interest
Account, which account will be in the name of and maintained by the Trustee and
will be part of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon, will be used by the Trustee to
fund, on the Distribution Dates during and immediately following the Funding
Period, the amount of interest accruing at the weighted average Certificate Rate
of the Offered Certificates on the amount on deposit in the Pre-Funding Account.
Any amounts remaining in the Capitalized Interest Account and not needed for
such purpose will be paid to the Seller and will not thereafter be available for
distribution to the Holders of the Offered Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested in
Eligible Investments. The Capitalized Interest Account will not be an asset of
any REMIC.
PRE-FUNDING ACCOUNT
On the Closing Date, the Maximum Funding Amount will be deposited into the
Pre-Funding Account. See "DESCRIPTION OF THE MORTGAGE LOANS--Conveyance of
Subsequent Mortgage Loans." Amounts in the Pre-Funding Account may be used only
(i) to acquire Subsequent Mortgage Loans, and (ii) to make accelerated payments
of principal on the Certificates. During the Funding Period amounts will, from
time to time, be withdrawn from the Pre-Funding Account to purchase Subsequent
Mortgage Loans in accordance with the Agreement. Any amounts remaining at the
end of the Funding Period will be distributed as a principal prepayment to the
Class A Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in Eligible
Investments. Any investment earnings on funds in the Pre-Funding Account will be
transferred to the Capitalized Interest Account. The Pre-Funding Account will
not be an asset of any REMIC.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association organized and existing under the laws of the United States, will be
named Trustee pursuant to the Agreement. The Trustee will initially serve as
custodian for the Mortgage Loans and Related Documents.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to accrued interest at the Trustee
Fee Rate specified in the Agreement. The Agreement will provide that the Trustee
and any director, officer, employee or agent of the Trustee will be indemnified
by the Trust and will be held harmless against any loss, liability or expense
(not including expenses, disbursements and advances incurred or made by the
Trustee, including the compensation and the expenses and disbursements of its
agents and counsel, in the ordinary course of the Trustee's performance in
accordance with the provisions of the Agreement) incurred by the Trustee arising
out of or in connection with the acceptance or administration of its obligations
and duties under the Agreement, other than any loss, liability or expense
(i) that constitutes a specific liability of Trustee under the Agreement or
(ii) incurred by reason of willful misfeasance, bad faith or negligence in the
performance of the Trustee's duties under the Agreement or as a result of a
breach, or by reason of reckless disregard, of the Trustee's obligations and
duties under the Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation (the "Servicing Fee") to be paid to the Master
Servicer in respect of its servicing activities for the Certificates will be
equal to accrued interest at the Servicing Fee Rate of 0.50% per annum with
respect to each Mortgage Loan on the Principal Balance of each Mortgage Loan. As
additional servicing compensation, the Master Servicer is entitled to retain all
assumption fees and late payment charges, to
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the extent collected from mortgagors, together with any interest or other income
earned on funds held in the Collection Account and any escrow accounts. The
Master Servicer is obligated to pay certain insurance premiums and certain
ongoing expenses associated with the Mortgage Pool and incurred by the Master
Servicer in connection with its responsibilities under the Agreement and is
entitled to reimbursement therefor as provided in the Agreement.
When a borrower prepays a Mortgage Loan between Due Dates, the borrower is
required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Except with respect to the month of the Cut-off Date,
principal prepayments by borrowers received by the Master Servicer from the
first day through the fifteenth day of a calendar month will be distributed to
Certificateholders on the Distribution Date in the same month in which such
prepayments are received and, accordingly, no shortfall in the amount of
interest to be distributed to Certificateholders with respect to the prepaid
Mortgage Loans results. Conversely, principal prepayments by borrowers received
by the Master Servicer from the sixteenth day (or, in the case of the first
Distribution Date, from the Cut-off Date) through the last day of a calendar
month will be distributed to Certificateholders on the Distribution Date in the
month following the month of receipt and, accordingly, a shortfall in the amount
of interest to be distributed to Certificateholders with respect to such prepaid
Mortgage Loans would result. The Master Servicer is obligated to offset any
prepayment interest shortfall on any Distribution Date (payments made by the
Master Servicer in satisfaction of such obligation, "Compensating Interest") to
the extent of one-half of its aggregate servicing compensation for such
Distribution Date.
REMOVAL OF THE MASTER SERVICER AND/OR SPECIAL SERVICER
"Events of Default" will consist of: (i) (A) any failure by the Master
Servicer or the Special Servicer (in this section, each, a "Servicer") to make
any required Monthly Advance or (B) any other failure of the related Servicer to
deposit in the Collection Account or Distribution Account any deposit required
to be made under the Agreement, which failure continues unremedied for one
business day after written notice shall have been given to the related Servicer;
(ii) any failure by the related Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Agreement
which, in each case, materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer and continues unremedied for 30
days after actual knowledge or the giving of written notice of such failure to
the related Servicer by the Trustee, or to the related Servicer and the Trustee
by the Certificate Insurer or Certificateholders evidencing an aggregate,
undivided interest in the Trust of Percentage Interests of at least 25%; (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings relating to the related Servicer and certain
actions by the related Servicer indicating insolvency, reorganization or
inability to pay its obligations (an "Insolvency Event") and (iv) so long as the
Seller is an affiliate of the Master Servicer or the Special Servicer, any
failure of the Seller to repurchase or substitute any Mortgage Loan as required
by the Agreement.
In addition, under a financing agreement between an affiliate of the
Depositor and the Master Servicer, the Depositor, with the prior consent of the
Certificate Insurer, will have the right upon a default thereunder to direct the
Trustee to terminate all of the rights of the Master Servicer and the Special
Servicer under the Agreement and to cause the servicing to be transferred to a
successor reasonably acceptable to the Certificate Insurer and the Trustee so
long as such transfer will not result in the withdrawal or downgrading of the
then-current ratings assigned to the Offered Certificates by any Rating Agency.
Defaults under the financing agreement will include failure to comply with
certain financial covenants, failure to post sufficient additional collateral in
certain events or material adverse changes in the reuslts of operations or
financial condition of the Master Servicer.
RIGHTS UPON AN EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Trustee,
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust (with the consent of the Certificate Insurer)
or the Certificate Insurer may terminate all of the rights and obligations of
the related Servicer under the Agreement and in and to the Mortgage Loans,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the related Servicer under the Agreement and will be entitled to
similar compensation arrangements. In the event that the Trustee would be
obligated to succeed the related Servicer but is unwilling or unable so to act,
it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution or other mortgage loan or
home equity loan servicer with all licenses and permits required to perform its
obligations under the Agreement and having a net worth of at least $50,000,000
and
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acceptable to the Certificate Insurer to act as successor to the related
Servicer under the Agreement. Pending such appointment, the Trustee will be
obligated to act in such capacity unless prohibited by law. Such successor will
be entitled to receive the same compensation that the related Servicer would
otherwise have received (or such lesser compensation as the Trustee and such
successor may agree). A receiver or conservator for the related Servicer may be
empowered to prevent the termination and replacement of the Servicer if the only
Event of Default that has occurred is an Insolvency Event.
VOTING RIGHTS
With respect to any date of determination, the percentage of all the Voting
Rights allocated among holders of the Offered Certificates and of the Class X
and Class R Certificates shall be with respect to the Offered Certificates the
fraction, expressed as a percentage, the numerator of which is the aggregate
Class Principal Balance of all the Offered Certificates then outstanding and the
denominator of which is the aggregate Principal Balance of the Mortgage Loans
then outstanding and with respect to the Class X and Class R Certificates 100%
minus the percentage allocated to the Offered Certificates. The Voting Rights
allocated to each Class of Offered Certificates shall be allocated among all
holders of each such class in proportion to the outstanding Class Principal
Balance of such Certificates. Unless an Insurer Default exists, the Certificate
Insurer will be entitled to exercise certain voting and other rights of the
holders of the Class A Certificates. See "--Certain Matters Regarding the
Certificate Insurer" below.
CERTAIN MATTERS REGARDING THE CERTIFICATE INSURER
Under the Agreement, on each Distribution Date, the Trustee is required to
pay to the Certificate Insurer an amount equal to the product of the rate at
which the premium with respect to the Policy accrues (the "Premium Rate") on the
Class Principal Balance of the Class A Certificates as of the preceding
Distribution Date. Under the Agreement, the Trustee will establish a segregated
Eligible Account (the "Insured Payments Account") into which any Insured
Payments will be deposited.
Pursuant to the terms of the Agreement, unless there exists a continuance
of any failure by the Certificate Insurer to make a required payment under the
Policy or there exists a proceeding in bankruptcy by or against the Certificate
Insurer (other than, with respect to clause (i)(b) below) (either such
condition, an "Insurer Default"), the Certificate Insurer will be entitled to
exercise, among others, the following rights of the holders of the Class A
Certificates, without the consent of such holders, and the holders of the
Class A Certificates may exercise such rights only with the prior written
consent of the Certificate Insurer: (i) the right to direct the Trustee to
terminate the rights and obligations of the Master Servicer under the Agreement
(a) in the event of a default by the Master Servicer or (b) under certain
conditions if any, specified in the Insurance Agreement; (ii) the right to
consent to or direct any waivers of defaults by the Master Servicer; (iii) the
right to remove the Trustee pursuant to the Agreement; and (iv) the right to
institute proceedings against the Master Servicer in the event of default by the
Master Servicer and refusal of the Trustee to institute such proceedings. In
addition, unless an Insurer Default exists, the Certificate Insurer will have
the right to direct all matters relating to any proceeding seeking the avoidance
as a preferential transfer under applicable bankruptcy, insolvency, receivership
or similar law of any distribution made with respect to the Class A
Certificates, and, unless an Insurer Default exists, the Certificate Insurer's
consent will be required prior to, among other things, (i) the removal of the
Trustee, (ii) the appointment of any successor Trustee or Master Servicer or
(iii) any amendment to the Agreement.
TERMINATION
The majority holder of the Residual Certificates (or if such holder does
not exercise such option, the Master Servicer or the Certificate Insurer) will
have the right to purchase all remaining Mortgage Loans and any properties
acquired in respect thereof and thereby effect early retirement of the
Certificates on any Distribution Date following the Collection Period during
which the aggregate principal balance of the Mortgage Loans and such properties
at the time of purchase is 10% or less of the aggregate principal balance of the
Maximum Collateral Amount. In the event the majority holder of the Residual
Certificates, the Master Servicer or the Certificate Insurer exercises such
option, the purchase price payable in connection therewith generally will be
equal to par plus accrued interest for each Mortgage Loan at the related Loan
Rate to but not including the first day of the month in which such repurchase
price is distributed, together with any amounts due to the Master Servicer and
Special Servicer for servicing compensation at the related Servicing Fee Rate
and Special Servicing Fee Rate, as applicable. In the event the holder of the
Residual Certificates, the Master Servicer or the Certificate
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Insurer exercises such option, the portion of the purchase price for the
Mortgage Loans allocable to the Offered Certificates will be, to the extent of
available funds, (i) 100% of the then outstanding Class Principal Balance
thereof, plus (ii) one month's interest on the then outstanding Class Principal
Balance thereof at the then applicable Certificate Rate, plus (iii) any
previously accrued but unpaid interest thereon. No such termination shall be
permitted without the prior written consent of the Certificate Insurer if it
would result in a draw under the Policy. In no event will the trust created by
the Agreement continue beyond the expiration of 21 years from the death of the
survivor of the persons named in the Agreement. See "DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or Termination" in the Prospectus.
THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement. No representation is made by the
Depositor or the Underwriter as to the accuracy and completeness of such
information.
GENERAL
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 and Puerto Rico.
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. In general, financial guaranty
insurance consists of the issuance of 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 Certificate Insurer. The
Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
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 consist largely of 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"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
MediaOne Capital Corporation, The Tokio Marine and Fire Insurance Co., Ltd. and
EXEL Limited. No shareholder of Holdings is obligated to pay any debt 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
Pursuant to 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 quota share treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by the
Certificate Insurer as a risk management device and to comply with certain
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 insurance financial strength is rated "Aaa" by
Moody's. The Certificate Insurer's insurer financial strength is rated "AAA" by
each of Standard & Poor's and Standard & Poor's (Australia) Pty. Ltd. The
Certificate Insurer's claims paying ability is rated "AAA" by Fitch IBCA, Inc.
and Japan Rating and Investment Information, Inc. Such ratings reflect only the
views of the respective rating agencies, are not
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recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies. See "RATINGS" herein.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate
Insurer and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of September 30, 1998 (as well as such capitalization
as adjusted to give effect to certain transactions entered into during November
1998).
SEPTEMBER 30, 1998
-----------------------------
ACTUAL AS ADJUSTED (1)
---------- ---------------
(UNAUDITED)
(IN THOUSANDS)
-----------------------------
Deferred Premium Revenue (net of prepaid reinsurance premiums)............ $ 480,089 $ 480,089
---------- -----------
Surplus Notes............................................................. 50,000 130,000
---------- -----------
Minority interest......................................................... -- 20,000
---------- -----------
Shareholder's Equity:
Common Stock............................................................ 15,000 15,000
Additional Paid-In Capital.............................................. 614,787 684,787
Accumulated Other Comprehensive Income (net of deferred income taxes)... 41,923 41,923
Accumulated Earnings.................................................... 326,145 326,145
---------- -----------
Total Shareholder's Equity................................................ 997,855 1,067,855
---------- -----------
Total Deferred Premium Revenue, Surplus Notes, Minority Interest and
Shareholder's Equity.................................................... $1,527.944 $ 1,697,944
---------- -----------
---------- -----------
- ------------------
(1) Adjusted to give effect to the November 1998 (a) purchase by Holdings of $80
million of surplus notes from the Certificate Insurer in connection with the
formation of a new indirect Bermuda subsidiary of the Certificate Insurer,
initially capitalized with $100 million, including a $20 million minority
interest owned by EXEL Limited, and (b) contribution by Holdings to the
capital of the Certificate Insurer, of approximately $70 million,
representing a portion of the proceeds from the sale by Holdings of $100
million of 6.950% Senior Quarterly Income Debt Securities due 2098.
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of Financial Security and Subsidiaries, and
the notes thereto, incorporated by reference herein. 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
In addition to the documents described under "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE" in the Prospectus, the consolidated financial
statements of the Certificate Insurer and subsidiaries included in or as
exhibits to the following documents which have been filed with the Securities
and Exchange Commission by Holdings, are hereby incorporated by reference in
this Prospectus Supplement, which together with the Prospectus, forms a part of
the Depositor's Registration Statement: (a) the Annual Report on Form 10-K for
the year ended December 31, 1997 and (b) the Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
All financial statements of the Certificate Insurer and subsidiaries
included in 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 to the termination of the offering of
the Class A 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.
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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 each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risks") and the
volume of transactions ("aggregate risks") that may be underwritten by each such
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.
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DESCRIPTION OF THE PURCHASE AGREEMENT
The Initial Mortgage Loans to be transferred to the Trust by the Depositor
will be purchased by the Depositor from the Seller pursuant to the Purchase
Agreement. Under the Purchase Agreement, the Seller will agree to transfer the
Initial Mortgage Loans to the Depositor. Pursuant to the Agreement, the Initial
Mortgage Loans will be immediately transferred by the Depositor to the Trust,
and the Depositor will assign its rights in, to and under the Purchase
Agreement, to the Trust.
In the Purchase Agreement, the Seller will make representations and
warranties similar to those representations and warranties made by the Seller in
the Agreement. In the event of a breach of any such representations and
warranties which has a material adverse effect on the interests of the
Certificateholders or the Certificate Insurer, the Seller will repurchase or
substitute for the Mortgage Loans as described herein under "THE POOLING AND
SERVICING AGREEMENT--Assignment of the Mortgage Loans".
The Seller has also agreed to indemnify the Depositor and the Trust from
and against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Purchase Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Initial Mortgage Loans and
funding the deposits to the Pre-Funding Account and the Capitalized Interest
Account.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
Elections will be made to treat the assets of the Trust Fund, exclusive of
the Pre-Funding Account, the Capitalized Interest Account, the rights to
payments in respect of Basis Risk Shortfalls, and the Policy as it relates to
the payment of Supplemental Interest Payments, as multiple separate real estate
mortgage investment conduits ("REMICs") for federal income tax purposes. The
Class A Certificates, Class B Certificates and Class X Certificates will
represent beneficial ownership interests in the Class A, Class B and Class X
"regular interests" in the Master REMIC (such regular interests individually,
the "Class A Regular Interest," "Class B Regular Interest" or the "Class X
Regular Interest," as applicable, and together, the "Master REMIC Regular
Interests"), The Class A Certificates and Class B Certificates will, in
addition, represent beneficial interests in the right to receive payments in
respect of Basis Risk Shortfall and, in the case of the Class A Certificates,
the Supplemental Interest Amount under the Policy. The Residual Certificates
will represent the sole class of "residual interest" in each REMIC created
pursuant to the Agreement. Upon the issuance of the Certificates, Stroock &
Stroock & Lavan LLP, special tax counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the Agreement, each REMIC created pursuant to the Agreement will qualify as a
REMIC under Sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"). In addition, in the opinion of Stroock & Stroock & Lavan
LLP, the Class A and Class B Certificateholders will be treated as holding their
rights to payments in respect of Basis Risk Shortfalls and the Policy as it
relates to the payment of Supplemental Interest Payments through an arrangement
with the Trustee that qualifies as a grantor trust under Subpart E, Part I of
Subchapter J, Chapter I of the Code.
The following discussion does not deal with the federal income tax
consequences that may be relevant to investors with special circumstances such
as tax-exempt investors or foreign investors. All investors should consult their
own tax advisors regarding the federal, state, local or foreign income tax
consequences of the purchase, ownership and disposition of the Offered
Certificates.
TAXATION OF REGULAR INTERESTS
Class A and Class B Certificateholders generally will be treated for
federal income tax purposes as having purchased an undivided interest in the
corresponding Class A or Class B Regular Interest and as having their respective
rights to payments in respect of Basis Risk Shortfalls, and in the case of the
Class A Certificateholders, their rights to Supplemental Interest Payments under
the Policy. A Class A or Class B Certificateholder must allocate its purchase
price based on the fair market value of the corresponding Class A or Class B
Regular
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Interests, its rights with respect to payments of Basic Risk Shortfalls and, in
the case of Class A Certificateholders, its rights to Supplemental Interest
Payments under the Policy. No representation is made as to the relative fair
market values of such assets. An allocation of more than a de minimis amount of
the purchase price to assets other than the portion of the Certificates
constituting a REMIC regular interest could cause such REMIC regular interest to
be treated as issued with original issue discount. Such treatment could require
inclusion of income attributable to original issue discount by such Class A or
Class B Certificateholder under a constant yield method, taking into account
prepayments, and possibly in advance of the receipt of cash corresponding to
such income.
Upon the sale, exchange, redemption or retirement of a Class A or Class B
Certificate by a Class A or Class B Certificateholder, the amount realized must
be allocated between the undivided interest in the Class A or Class B Regular
Interests and the respective rights to receive payments in respect of Basis Risk
Shortfalls and/or Supplemental Interest Payments, as the case may be,
represented by such Class A or Class B Certificate, based on the interests'
relative fair market values at the time of the disposition. The selling
Certificateholder will be required to recognize gain or loss equal to the
difference between the amount realized on the sale, exchange, redemption, or
retirement allocable to the Certificateholder's interest in the Regular
Interests and such selling Certificateholder's adjusted basis therein. Except as
provided below, any such gain or loss will be capital gain or loss, provided
that the Class A or Class B Certificate is held as a "capital asset" (generally,
property held for investment) within the meaning of Section 1221 of the Code.
Gain from the sale or other disposition of an interest in a Class A or Class B
Regular Interest associated with a Class A or Class B Certificate that might
otherwise be a capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of (i) the amount that would
have been includible in such holder's income with respect to the Class A or
Class B Regular Interest had income accrued thereon at a rate equal to 110% of
the applicable federal rate as defined in Section 1274(d) of the Code determined
as of the date of purchase of the related Class A or Class B Certificate, over
(ii) the amount actually includible in such holder's income. The portion of the
amount realized on a sale, redemption or retirement of a Class A or Class B
Certificate that is allocable to such Certificateholder's rights to receive
payments in respect of Basis Risk Shortfalls and/or Supplemental Interest
Payments, as the case may be, will be treated as a termination payment (as
described below under "--Taxation of Rights to Basis Risk Shortfall and
Supplemental Interest Payments").
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class A or Class B Certificates should be aware that the OID Regulations do
not adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A or Class B Certificates. In addition, there is
considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable
rate. Because of the uncertainty concerning the application of
Section 1272(a)(6) of the Code to such Certificates and because the rules of the
OID Regulations relating to debt instruments having an adjustable rate of
interest are limited in their application in ways that could preclude their
application to such Certificates even in the absence of Section 1272(a)(6) of
the Code, the IRS could assert that the Class A or Class B Regular Interests
should be treated as issued with original issue discount or should be governed
by the rules applicable to debt instruments having contingent payments or by
some other method not yet set forth in regulations. Prospective purchasers of
the Class A or Class B Certificates are advised to consult their tax advisors
concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue discount
with respect to the Class A or Class B Regular Interests if such regular
interests are required to be treated as issued with original issue discount
generally would be to report all income with respect to such Regular Interests
as original issue discount for each period, computing such original issue
discount (i) by assuming that the value of the applicable Index will remain
constant for purposes of determining the original yield to maturity of, and
projecting future distributions on such regular interests, thereby treating such
regular interests as fixed rate instruments to which the original issue discount
computation rules described in the Prospectus can be applied, and (ii) by
accounting for any positive or negative variation in the actual value of the
applicable Index in any period from its assumed value as a current adjustment to
original issue discount with respect to such period. See "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS--REMICs--Taxation of Owners of Debt Securities--Interest and
Acquisition Discount" in the Prospectus.
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The Class A or Class B Regular Interests may be treated for federal income
tax purposes as having been issued at a premium. Whether any holder of a
Class A or Class B Regular Interests will be treated as holding a REMIC regular
interest with amortizable bond premium will depend on such Certificateholder's
purchase price and the distributions remaining to be made on such regular
interests at the time of its acquisition by such Certificateholder. Holders of
the Class A and Class B Regular Interests should consult their own tax advisors
regarding the possibility of making an election to amortize such premium. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--REMICs--Taxation of Debt
Securities--Premium" in the Prospectus.
STATUS OF CLASS A AND CLASS B CERTIFICATES
The Class A and Class B Regular Interests will be treated as assets
described in Section 7701(a)(19)(C) of the Code and as "real estate assets"
under Section 856(c)(4)(A) of the Code, generally in the same proportion that
the assets in the Trust Fund would be so treated. In addition, interest on the
Class A and Class B Regular Interests will be treated as "interest on
obligations secured by mortgages on real property" under Section 856(c) of the
Code generally to the extent that the Class A or Class B Regular Interests are
treated as "real estate assets" under Section 856(c) of the Code. Investors are
cautioned, however, that since the Class A and Class B Certificates comprise
rights in addition to the rights under the Class A or Class B Regular Interests,
the Class A and Class B Certificates will not in their entirety constitute
assets described in Section 7701(a)(19) of the Code or real estate assets
described in Section 856(c) of the Code, and income earned on the Class A or
Class B Certificates will qualify as "interest on obligations secured by
mortgages on real property" under Section 856(c) of the Code only to the extent
that the income reflects the income so qualifying earned by the Class A or
Class B Regular Interests. The Class A and Class B Certificates will not be
treated as "qualified mortgages" under Section 860G(a)(3) of the Code in their
entirety and may not be appropriate investments for other REMICs. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the REMIC and its
Holders--General" in the Prospectus.
TAXATION OF RIGHTS TO BASIS RISK SHORTFALL AND SUPPLEMENTAL INTEREST PAYMENTS
General. The Trust will treat the Class A and Class B Certificateholders
for federal income tax purposes as having entered into notional principal
contracts under which they have acquired the rights to payments in respect of
Basis Risk Shortfalls and/or Supplemental Interest Payments, as the case may be,
on the date they purchase their Certificate. The IRS has issued final
regulations under Section 446 of the Code relating to notional principal
contracts (the "Swap Regulations"). Basis Risk Shortfalls will be paid in whole
or in part from amounts otherwise due the Class X Certificates and Supplemental
Interest Payments will be paid by the Certificate Insurer.
Cap Premium. In general, the Class A and Class B Certificateholders must
allocate the price they pay for the Class A or Class B Certificates between
their REMIC interests, the rights to receive payments in respect of Basis Risk
Shortfalls, and/or Supplemental Interest Payments, as the case may be, on the
basis of the fair market value of each. Any amount allocated to, the rights to
receive payments in respect of Basis Risk Shortfalls, and/or Supplemental
Interest Payments, as the case may be, will be treated as cap premium (the "Cap
Premium"). A Class A or Class B Certificateholder will be required to amortize
the Cap Premium under a level payment method as if the Cap Premium represented
the present value of a series of equal payments made over the life of the right
to receive payments in respect of Basis Risk Shortfalls or Supplemental Interest
Payments, as the case may be (adjusted to take into account decreases in
notional principal amount), discounted at a rate equal to the rate used to
determine the amount of the Cap Premium (or some other reasonable rate).
Prospective purchasers of Class A or Class B Certificates should consult their
own tax advisors regarding the appropriate method of amortizing any Cap Premium.
The Swap Regulations have "reserved" on the treatment of caps that are
significantly in the money. It is not known whether any Cap Premium will be
treated in part as a loan under final regulations.
Periodic Payments. Under the Swap Regulations, (i) all taxpayers must
recognize periodic payments with respect to a notional principal contract under
the accrual method of accounting, and (ii) any periodic payments received under
such agreements must be netted against payments, if any, deemed made as a result
of the Cap Premiums over the recipient's taxable year, rather than accounted for
on a gross basis. Net income or deduction with respect to net payments under a
notional principal contract for a taxable year should constitute ordinary income
or ordinary deduction.
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Termination Payments. Any amount of proceeds from the sale, redemption or
retirement of a Class A or Class B Certificate that is considered to be
allocated to rights to receive payments in respect of Basis Risk Shortfalls, or
Supplemental Interest Payments would be considered a "termination payment" under
the Swap Regulations.
A Class A or Class B Certificateholder will have gain or loss from
termination of a notional principal contract based on the difference between any
termination payment it receives or is deemed to have received and the
unamortized portion of any Cap Premium paid (or deemed paid) by such
Certificateholder with respect to such notional principal contract.
Gain or loss realized upon the termination of a notional principal contract
will generally be treated as capital gain or loss. Moreover, in the case of a
bank or thrift institution, Section 582(c) of the Code would likely not apply to
treat such gain or loss as ordinary.
PROHIBITED TRANSACTIONS
It is not anticipated that the Trust Fund will engage in any transactions
that would subject it to the prohibited transactions tax as defined in
Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on the Trust Fund, such tax will be borne (i) by the Trustee, if
the Trustee has breached its obligations with respect to REMIC compliance under
the Agreement, (ii) the Master Servicer, if the Master Servicer has breached its
obligations with respect to REMIC compliance under the Agreement, and
(iii) otherwise by the Trust Fund, with a resulting reduction in amounts that
might otherwise be distributable to holders of the Class A or Class B
Certificates. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the
REMICs--Prohibited Transactions and Contributions Tax" in the Prospectus.
INFORMATION RETURNS
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee or the Master Servicer. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS--Administrative Matters" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Class A or Class B Certificates, see "CERTAIN FEDERAL INCOME
TAX CONSIDERATIONS" in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences. All investors should consult their own tax advisors regarding the
Federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Certificates.
ERISA CONSIDERATIONS
Any pension or other employee benefit plan (a "Plan") fiduciary which
proposes to cause a Plan to acquire any of the Offered Certificates should
consult with its counsel with respect to the potential consequences under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
Code, of the Plan's acquisition and ownership of such Certificates. See "ERISA
CONSIDERATIONS" in the Prospectus.
The U.S. Department of Labor has granted to Bear Stearns & Co. Inc. ("Bear
Stearns") Prohibited Transaction Exemption 90-30 (the "Exemption") which exempts
from the application of the prohibited transaction rules transactions relating
to (1) the acquisition, sale and holding by Plans of certain certificates
representing an undivided interest in certain asset-backed pass-through trusts,
with respect to which Bear Stearns 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 such asset-backed pass-through
trusts, provided that the general conditions and certain other conditions set
forth in the Exemption are satisfied. The Exemption will apply to the
acquisition, holding and resale of the Class A Certificates by a Plan provided
that certain conditions (certain 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 Class A Certificates by a Plan is on terms
(including the price for such 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 rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's, Moody's, or Duff &
Phelps Credit Rating Co.;
(4) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Class A Certificates represents not
more than reasonable compensation for underwriting such 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 such Mortgage Loans; the sum of all payments made to and retained
by the Master Servicer represent not more than reasonable compensation for
the Master Servicer's services under the Agreement and reimbursement of the
Master Servicer's reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of the Underwriter, the Seller,
the Master Servicer, the Certificate 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 (the "Restricted Group"); and
(6) The Plan investing in the Class A 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.
The Underwriter believes that the Exemption will apply to the acquisition
and holding of the Class A Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
The Exemption does not apply to Plans sponsored by the Depositor, the
Underwriters, the Trustee, the Master 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 such
Trust or any affiliate of such parties (the "Restricted Group"). No exemption is
provided from the restrictions of ERISA for the acquisition or holding of
Class A Certificates on behalf of an "Excluded Plan" by any person who is a
fiduciary with respect to the assets of such Excluded Plan. For purposes of the
Class A Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. In addition, no Plan's investment in any Class A Certificates
may exceed 25% of all of the Certificates of such Class outstanding at the time
of the Plan's acquisition and after the Plan's acquisition of such Class A
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 the Class A
Certificates, and at least 50% of the aggregate interest in the Trust, must be
acquired by persons independent of the Restricted Group.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Offered Certificates, the
amendment generally allows a portion of the Mortgage Loans ("Loans") supporting
payments to Certificateholders and having a principal amount equal to no more
than 25% of the total principal amount of the Certificates to be transferred
within a 90-day or three-month period following the Closing Date ("Pre-Funding
Period"), instead of requiring that all such Loans be either identified or
transferred on or before the Closing Date, provided that the following
conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Certificates being offered ("Pre-Funding
Limit") must not exceed twenty-five percent (25%).
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(2) All Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original
Loans used to create the Trust, which terms and conditions have been
approved by the Rating Agency.
(3) The transfer of such Additional Loans to the Trust during the
Pre-Funding Period must not result in the Certificates receiving a lower
credit rating from the Rating Agency upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the initial
issuance of the Certificates 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 Loans 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
Loans which were transferred to the Trust on the Closing Date.
(5) Either: (i) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is
independent of the Seller; or (ii) an independent accountant retained by
the Seller must provide the Seller with a letter (with copies provided to
the Rating Agencies, the Underwriters and the Trustee) stating whether or
not the characteristics of the Additional Loans conform to the
characteristics described in the Prospectus, Prospectus Supplement, Private
Placement Memorandum ("Offering Documents") 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 Loans which were
transferred 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
amount on deposit in the Pre-Funding Account is reduced below the minimum
level specified in the Pooling Agreement or an event of default occurs
under the Pooling Agreement.
(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 Rating Agency and (i) are
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 of the three highest generic rating
categories by the Rating Agency ("Permitted Investments").
(8) The Offering Documents 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 Pooling and Servicing Agreement must describe the Permitted
Investments for the Pre-Funding Account and Capitalized Interest Account
and, if not disclosed in the Offering Documents, the terms and conditions
for eligibility of the Additional Loans.
BECAUSE THE CHARACTERISTICS OF THE CLASS B CERTIFICATES MAY NOT MEET THE
REQUIREMENTS OF THE EXEMPTION OR ANY OTHER ISSUED EXEMPTION UNDER ERISA, THE
PURCHASE AND HOLDING OF THE CLASS B CERTIFICATES BY A PLAN OR BY INDIVIDUAL
RETIREMENT ACCOUNTS OR OTHER PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY
RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAX OR CIVIL
PENALTIES. CONSEQUENTLY, TRANSFERS OF THE CLASS B CERTIFICATES WILL NOT BE
REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE RECEIVES: (I) A REPRESENTATION FROM
THE TRANSFEREE OF SUCH CERTIFICATE, ACCEPTABLE TO AND IN FORM AND SUBSTANCE
SATISFACTORY TO THE TRUSTEE, TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN
EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT
SUBJECT TO SECTION 4975 OF THE CODE, NOR A PERSON ACTING ON BEHALF OF ANY PLAN
OR ARRANGEMENT NOR USING THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO EFFECT
SUCH TRANSFER; (II) IF THE PURCHASER IS AN INSURANCE COMPANY, A REPRESENTATION
THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING SUCH CERTIFICATES
WITH FUNDS CONTAINED IN AN "INSURANCE COMPANY GENERAL ACCOUNT" (AS SUCH TERM IS
DEFINED IN SECTION V(E) OF PROHIBITED TRANSACTION CLASS EXEMPTION 95-60 ("PTCE
95-60")) AND THAT THE PURCHASE AND HOLDING OF SUCH CERTIFICATES ARE COVERED
UNDER PTCE 95-60; OR (III) AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE
THAT THE PURCHASE OR HOLDING OF SUCH CERTIFICATE BY A PLAN, ANY PERSON ACTING ON
BEHALF OF A PLAN OR USING SUCH 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
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AND THE CODE AND WILL NOT BE SUBJECT THE TRUSTEE TO ANY OBLIGATION IN ADDITION
TO THOSE UNDERTAKEN IN THE AGREEMENT. SUCH REPRESENTATION AS DESCRIBED ABOVE
SHALL BE DEEMED TO HAVE BEEN MADE TO THE TRUSTEE BY THE TRANSFEREE'S ACCEPTANCE
OF A CLASS B CERTIFICATE IN BOOK-ENTRY FORM. IN THE EVENT THAT SUCH
REPRESENTATION IS VIOLATED, OR ANY ATTEMPT TO TRANSFER TO A PLAN OR PERSON
ACTING ON BEHALF OF A PLAN OR USING SUCH PLAN'S ASSETS IS ATTEMPTED WITHOUT SUCH
OPINION OF COUNSEL, SUCH ATTEMPTED TRANSFER OR ACQUISITION SHALL BE VOID AND OF
NO EFFECT.
Any Plan fiduciary considering whether to purchase any Offered Certificates
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such 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 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.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
The Depositor makes no representations as to the proper characterization of
the Offered Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Offered Certificates. Accordingly, all institutions
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Offered Certificates constitute legal investments under SMMEA or is
subject to investment, capital or other restrictions. See "LEGAL INVESTMENT" in
the Prospectus.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1997 and 1996 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, 1997, incorporated by
reference in this Prospectus Supplement, have been incorporated herein 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 by Stroock & Stroock & Lavan LLP, New York, New
York and for the Underwriter by Stroock & Stroock & Lavan LLP, New York, New
York. Certain legal matters will be passed upon for the Seller by Morrison &
Foerster LLP, New York, New York.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated December 22, 1998 (the "Underwriting Agreement"), among the
Depositor and Bear, Stearns & Co. Inc. (the "Underwriter"), the Depositor has
agreed to sell to the Underwriter and the Underwriter has agreed to purchase
from the Depositor the Offered Certificates. The Offered Certificates are
offered subject to prior sale, when, as and if issued by the Trust and accepted
by the Underwriter and subject to its right to reject orders in whole or in
part.
The Offered Certificates will be offered by the Underwriter from time to
time in negotiated transactions or otherwise, at varying prices to be determined
at the time of sale. Proceeds to the Depositor, including accrued interest, are
expected to be approximately 99.5% of the aggregate principal balance of the
Offered Certificates, before deducting expenses payable by the Depositor in
connection with the Offered Certificates, estimated to be $625,000. In
connection with the purchase and sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
S-68
Immediately prior to the sale of the Mortgage Loans to the Trust, a portion
of the Initial Mortgage Loans were subject to financing provided by affiliates
of the Underwriter. The Seller will apply a portion of the proceeds it receives
from the sale of the Offered Certificates to repay such financing.
The Depositor has been advised by the Underwriter that it presently intends
to make a market in the Offered Certificates; however, it 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 the Offered Certificates will
develop.
The Depositor is an affiliate of Bear, Stearns & Co. Inc.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
RATINGS
The Offered Certificates will be rated by Standard & Poor's, a division of
the McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service, Inc.
("Moody's") and Fitch IBCA, Inc. ("Fitch") (each 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 NA
Class B NA Baa3 BBB-
The ratings assigned by S&P 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. S&P's 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. S&P's ratings on such certificates do
not, however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The ratings assigned by Moody's 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. Moody's 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 the mortgage pool is adequate to make the
payments required by such certificates. Moody's ratings on such certificates do
not, however, constitute a statement regarding frequency of prepayments of the
mortgage loans.
The ratings assigned by Fitch to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which such certificateholders are entitled. Fitch's rating opinions address the
structural and legal aspects associated with the certificates, including the
nature of the underlying mortgage loans. Fitch's ratings on pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments and consequently any adverse effect the timing of such
prepayments could have on an investor's anticipated yield.
The ratings assigned to the Class A Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Class A Certificates may result in a reduction
of one or more of the ratings assigned to the Class A Certificates.
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. Each securities rating should be evaluated independently of
similar ratings on different securities. The ratings do not address the
likelihood of the payment of any Basis Risk Shortfall.
There can be no assurance as to whether any other rating agency will rate
the Offered Certificates or, if it does, what rating would be assigned by such
other rating agency. The rating assigned by such other rating agency to the
Offered Certificates of any Class could be lower than the respective ratings
assigned by the applicable Rating Agency.
S-69
INDEX OF PRINCIPAL TERMS
PAGE
----
Adjustable Rate Mortgage Loans..............................................S-11
Adjustment Date.............................................................S-12
Agreement...................................................................S-10
Allocable Loss Amounts......................................................S-47
Available Distribution Amount...............................................S-47
Balloon Loans...............................................................S-12
Basis Risk Shortfall........................................................S-47
Book-Entry Certificates.....................................................S-42
Capitalized Interest Account................................................S-11
Cede........................................................................S-42
Cedel.......................................................................S-42
Certificate Insurer.........................................................S-11
Certificate Owners..........................................................S-42
Certificate Rate............................................................S-49
Certificate Rate Margin.....................................................S-49
Certificates................................................................S-10
Class A Certificates.......................................................cover
Class A Optimal Balance.....................................................S-47
Class B Certificates.......................................................cover
Class B Optimal Balance.....................................................S-47
Class Interest Distribution.................................................S-47
Class Monthly Interest Amount...............................................S-47
Class Principal Balance.....................................................S-47
Closing Date................................................................S-10
Code........................................................................S-62
Collection Account..........................................................S-55
Collection Period...........................................................S-47
Compensating Interest.......................................................S-57
Cumulative Losses...........................................................S-47
Cut-off Date................................................................S-10
Cut-off Date Principal Balance..............................................S-12
Defective Mortgage Loans....................................................S-55
Definitive Certificate......................................................S-43
Delayed First Adjustment Mortgage Loan......................................S-12
Depositor...................................................................S-10
Determination Date..........................................................S-47
Distribution Account........................................................S-55
Distribution Date............................................................S-3
DTC.........................................................................S-42
Due Period..................................................................S-48
Eligible Account............................................................S-55
Eligible Substitute Mortgage Loan...........................................S-54
ERISA.......................................................................S-65
Euroclear...................................................................S-42
Euroclear Participants......................................................S-64
Event of Default............................................................S-57
Exemption...................................................................S-65
Fixed Rate Mortgage Loans...................................................S-11
Funding Period..............................................................S-30
Gross Margin................................................................S-12
Index.......................................................................S-26
Initial Adjustment Date.....................................................S-12
Initial Mortgage Loans......................................................S-10
S-70
PAGE
----
Initial Periodic Rate Cap...................................................S-12
Insurance Agreement.........................................................S-52
Insured Payments............................................................S-50
Insured Payments Account....................................................S-58
Interest Period.............................................................S-48
LIBOR Business Day..........................................................S-50
LIBOR Carryover Amount......................................................S-48
LIBOR Determination Date....................................................S-50
Loan Rates..................................................................S-11
Master Servicer.............................................................S-11
Maximum Collateral Amount...................................................S-48
Maximum Funding Amount......................................................S-11
Maximum Loan Rate...........................................................S-12
Minimum Loan Rate...........................................................S-12
Monthly Advance.............................................................S-53
Moody's......................................................................S-6
Mortgaged Properties........................................................S-12
Mortgage Loans..............................................................S-11
Mortgage Loan Schedule......................................................S-57
Net Funds Cap...............................................................S-49
OC Floor....................................................................S-48
Ocwen Loans.................................................................S-26
Offered Certificates........................................................S-10
One-Month LIBOR.............................................................S-50
Originator..................................................................S-10
Periodic Rate Cap...........................................................S-12
Policy......................................................................S-11
Pool Principal Balance......................................................S-48
Pre-Funding Account.........................................................S-11
Premium Supplement..........................................................S-48
Prepayment Assumption.......................................................S-38
Prepayment Period...........................................................S-11
Principal Balance...........................................................S-48
Principal Distribution Amount...............................................S-69
Purchase Agreement..........................................................S-10
Purchase Price..............................................................S-54
Receipt.....................................................................S-51
Received....................................................................S-51
Reference Bank Rate.........................................................S-57
Related Documents...........................................................S-54
Relief Act..................................................................S-48
Relief Act Shortfalls.......................................................S-48
REMIC........................................................................S-6
Seller......................................................................S-10
Servicing Fee...............................................................S-56
Sixty Day Delinquencies.....................................................S-48
SMMEA.......................................................................S-68
Specially Serviced Mortgage Loan............................................S-32
Special Servicer............................................................S-10
Special Servicer Fee........................................................S-32
Special Servicer Incentive Fee..............................................S-32
S&P..........................................................................S-6
Statistic Calculation Adjustable Rate Mortgage Loans........................S-11
Statisitic Calculation Fixed Rate Mortgage Loans............................S-11
Statistic Calculation Mortgage Loans........................................S-10
S-71
PAGE
----
Stepdown Date...............................................................S-48
Stepdown Trigger............................................................S-48
Stepup Trigger..............................................................S-48
Subordinate Deficit.........................................................S-49
Subsequent Mortgage Loans...................................................S-11
Supplemental Interest Payments..............................................S-50
Targeted OC Amount..........................................................S-49
Telerate Page 3750..........................................................S-50
Trust.......................................................................S-10
Trustee.....................................................................S-10
Underwriter.................................................................S-68
Unpaid Interest Shortfall Amount............................................S-49
S-72
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset Backed Certificates, Series 1998-OFS4 (the "Global Securities") will
be available only in book-entry form. Investors in the Global Securities may
hold such Global Securities through any of DTC, Cedel or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel 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 Mortgage Loan Asset Backed
Certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Mortgage 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 Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Mortgage
Loan Asset Backed Certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel 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 either the actual number of days
in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day
A-I-1
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 Cedel 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 Cedel or Euroclear cash debt will be valued instead
as of the actual settlement date.
Cedel 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 Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel 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, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel 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 Cedel 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 Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel 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 Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel 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 Cedel 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 Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel 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 Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
A-I-2
(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 Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). 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-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income
(Form 4224). 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 4224 (Exemption from Withholding of Tax
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). 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). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States, 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), (iii) an estate the income of which is includible in
gross income for United States tax purposes, regardless of its source, or
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in 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 so treated also shall be
considered U.S. Persons. 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 or with the application of Treasury regulations relating to
tax documentation requirements that are generally effective with respect to
payments made after December 31, 1999. Investors are advised to consult their
own tax advisors for specific tax advice concerning their holding and disposing
of the Global Securities.
A-I-3
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PROSPECTUS
BEAR STEARNS ASSET BACKED SECURITIES, INC.
(DEPOSITOR)
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") may offer from
time to time under this Prospectus and related Prospectus Supplements the
Asset-Backed Notes (the "Notes") and the Asset-Backed Certificates (the
"Certificates" and, together with the Notes, the "Securities") which may be sold
from time to time in one or more series (each, a "Series").
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a "Trust Fund") by the Depositor pursuant to a Pooling and Service
Agreement or a Trust Agreement, as described herein. As specified in the related
Prospectus Supplement, the Notes of a Series will be issued and secured pursuant
to an Indenture and will represent indebtedness of the related Trust Fund. The
Trust Fund for a Series of Securities will include assets purchased from the
seller or sellers specified in the related Prospectus Supplement (the "Seller")
composed of (a) Primary Assets, which may include one or more pools of (i)
closed-end home equity loans (the "Mortgage Loans"), secured by mortgages on
one- to four-family residential or mixed-use properties, (ii) home improvement
installment sales contracts and installment loan agreements (the "Home
Improvement Contracts") which are either unsecured or secured by mortgages on
one- to four-family residential or mixed-use properties, or by purchase money
security interests in the home improvements financed thereby (the "Home
Improvements") and (iii) securities backed or secured by Mortgage Loans and/or
Home Improvement Contracts, (b) all monies due thereunder net, if and as
provided in the related Prospectus Supplement, of certain amounts payable to the
servicer of the Mortgage Loans and/or Home Improvement Contracts (collectively,
the "Loans"), which servicer may also be the Seller, specified in the related
Prospectus Supplement (the "Servicer"), (c) if specified in the related
Prospectus Supplement, funds on deposit in one or more pre-funding amounts
and/or capitalized interest accounts and (d) reserve funds, letters of credit,
surety bonds, insurance policies or other forms of credit support as described
herein and in the related Prospectus Supplement. The amount initially deposited
in a pre-funding account for a Series of Securities will not exceed fifty
percent of the aggregate principal amount of such series of Securities.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
(cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A
SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER, THE
TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS
OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR
ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF
SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH
IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
------------------------
SEE "RISK FACTORS" ON PAGE 15 FOR CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING
THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Bear, Stearns & Co. Inc. and the other underwriters
set forth in the related Prospectus Supplement, if any, subject to prior sale,
to withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Bear, Stearns & Co. Inc. and the other
underwriters, if any, and certain further conditions. Retain this Prospectus for
future reference. This Prospectus may not be used to consummate sales of the
Securities offered hereby unless accompanied by a Prospectus Supplement.
------------------------
BEAR, STEARNS & CO. INC.
SEPTEMBER 24, 1998
(Continued from previous page)
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans or Underlying Loans relating to the Private
Securities, as applicable. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" herein.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) additional information with respect to the plan of
distribution of such Securities; and (x) whether a REMIC election will be made
with respect to some or all of the Trust Fund for such Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of "Holders" shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See "THE AGREEMENTS--Reports to
Holders" herein.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission 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 Commission.
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 Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Office located as follows, Midwest
Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and Northeast
Regional Office, Seven World Trade Center, New York, New York 10048.
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended. The Depositor intends to cause each Trust Fund to suspend filing
such reports if and when such reports are no longer required under said Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Depositor
at 245 Park Avenue, New York, New York 10167.
2
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "GLOSSARY OF TERMS" herein.
Securities Offered........................ Asset-Backed Certificates (the "Certificates") and Asset-Backed Notes
(the "Notes"). Certificates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or Trust Agreement.
Each Certificate of a Series will evidence an interest in the Trust
Fund for such Series, or in an Asset Group specified in the related
Prospectus Supplement. Notes are issuable from time to time in Series
pursuant to an Indenture. Each Series of Securities will consist of
one or more Classes, one or more of which may be Classes of Compound
Interest Securities, Planned Amortization Class ("PAC") Securities,
Variable Interest Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities, Participating Securities,
Senior Securities or Subordinate Securities. Each Class may differ
in, among other things, the amounts allocated to and the priority of
principal and interest payments, Final Scheduled Distribution Dates,
Distribution Dates and interest rates. The Securities of each Class
will be issued in fully registered form in the denominations
specified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Securities or certain Classes
of such Securities offered thereby may be available in book-entry
form only.
Depositor................................. Bear Stearns Asset Backed Securities, Inc. (the "Depositor") was
incorporated in the State of Delaware in June 1995, and is a wholly-
owned, special purpose subsidiary of The Bear Stearns Companies Inc.
None of The Bear Stearns Companies Inc. nor any other affiliate of
the Depositor, the Servicer, the Trustee or the Seller has guaranteed
or is otherwise obligated with respect to the Securities of any
Series. See "THE DEPOSITOR."
Interest Payments......................... Interest payments on the Securities of a Series entitled by their
terms to receive interest will be made on each Distribution Date, to
the extent set forth in, and at the applicable rate specified in (or
determined in the manner set forth in), the related Prospectus
Supplement. The interest rate on Securities of a Series may be
variable or change with changes in the rates of interest on the
related Loans or Underlying Loans relating to the Private Securities,
as applicable and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Interest Only Securities may be
assigned a "Notional Amount" set forth in the related Prospectus
Supplement which is used solely for convenience in expressing the
calculation of interest and for certain other purposes and does not
represent the right to receive any distributions allocable to
principal. Principal Only Securities may not be entitled to receive
any interest payments or may be entitled to receive only nominal
interest payments. Interest payable on the Securities of a Series on
a Distribution Date will include all interest accrued during the
3
period specified in the related Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES--Payments of Interest."
Principal Payments........................ All payments of principal of a Series of Securities will be made in
an aggregate amount determined as set forth in the related Prospectus
Supplement and will be paid at the times and will be allocated among
the Classes of such Series in the order and amounts, and will be
applied either on a pro rata or a random lot basis among all
Securities of any such Class, all as specified in the related
Prospectus Supplement.
Final Scheduled Distribution Date of the
Securities.............................. The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than which principal thereof will be fully
paid and with respect to each Class of Certificates is the date after
which no Certificates of such Class are expected to remain
outstanding, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus
Supplement. The Final Scheduled Distribution Date of a Class may
equal the maturity date of the Primary Asset in the related Trust
Fund which has the latest stated maturity or will be determined as
described herein and in the related Prospectus Supplement.
The actual final Distribution Date of the Securities of a Series will
depend primarily upon the rate of payment (including prepayments,
liquidations due to default, the receipt of proceeds from casualty
insurance policies and repurchases) of the Loans or Underlying Loans
relating to the Private Securities, as applicable, in the related
Trust Fund. Unless otherwise specified in the related Prospectus
Supplement, the actual final Distribution Date of any Security is
likely to occur earlier and may occur substantially earlier or may
occur later than its Final Scheduled Distribution Date as a result of
the application of prepayments to the reduction of the principal
balances of the Securities and as a result of defaults on the Primary
Assets. The rate of payments on the Loans or Underlying Loans
relating to the Private Securities, as applicable, in the Trust Fund
for a Series will depend on a variety of factors, including certain
characteristics of such Loans or Underlying Loans, as applicable, and
the prevailing level of interest rates from time to time, as well as
on a variety of economic, demographic, tax, legal, social and other
factors. No assurance can be given as to the actual prepayment
experience with respect to a Series. See "RISK FACTORS--Yield May
Vary" and "DESCRIPTION OF THE SECURITIES--Weighted Average Life of
the Securities" herein.
Optional Termination...................... One or more Classes of Securities of any Series may be redeemed or
repurchased in whole or in part, at the Depositor's or the Servicer's
option, at such time and under the circumstances specified in the
related Prospectus Supplement, at the price set forth therein. If so
specified in the related Prospectus Supplement for a Series of
Securities, the Depositor, the Servicer, or such other entity that is
specified in the related Prospectus Supplement, may, at its option,
cause an early termination of the related Trust Fund by repurchasing
all of the Primary Assets remaining in the Trust Fund on or after a
specified date, or on or after such time as the aggregate principal
balance of the Securities of the Series or the Primary Assets
relating
4
to such Series, as specified in the related Prospectus Supplement, is
less than the amount or percentage specified in the related
Prospectus Supplement. See "DESCRIPTION OF THE SECURITIES--Optional
Redemption, Purchase or Termination."
In addition, the Prospectus Supplement may provide other
circumstances under which Holders of Securities of a Series could be
fully paid significantly earlier than would otherwise be the case if
payments or distributions were solely based on the activity of the
related Primary Assets.
The Trust Fund............................ The Trust Fund for a Series of Securities will consist of one or more
of the assets described below, as described in the related Prospectus
Supplement.
A. Primary Assets................... The Primary Assets for a Series may consist of any combination of the
following assets, to the extent and as specified in the related
Prospectus Supplement. The Primary Assets will be purchased from the
Seller or may be purchased by the Depositor in the open market or in
privately negotiated transactions, including transactions with
entities affiliated with the Depositor.
(1) Loans.......................... Primary Assets for a Series will consist, in whole or in part, of
Loans. Some Loans may be delinquent or non-performing as specified in
the related Prospectus Supplement. Loans may be originated by or
acquired from an affiliate of the Depositor and an affiliate of the
Depositor may be an obligor with respect to any such Loan. The Loans
will be conventional contracts or contracts insured by the Federal
Housing Administration ("FHA") or partially guaranteed by the
Veterans Administration ("VA"). See "The Trust Funds--The Loans" for
a discussion of such guarantees. To the extent provided in the
related Prospectus Supplement, additional Loans may be periodically
added to the Trust Fund, or may be removed from time to time if
certain asset value tests are met, as described in the related
Prospectus Supplement.
The "Loans" for a Series will consist of (i) closed-end home equity
loans (the "Mortgage Loans") and (ii) home improvement installment
sales contracts and installment loan agreements (the "Home
Improvement Contracts"). The Mortgage Loans and the Home Improvement
Contracts are collectively referred to herein as the "Loans." Loans
may, as specified in the related Prospectus Supplement, have various
payment characteristics, including balloon or other irregular payment
features, and may accrue interest at a fixed rate or an adjustable
rate. As specified in the related Prospectus Supplement, the Mortgage
Loans will and the Home Improvement Contracts may be secured by
mortgages and deeds of trust or other similar security instruments
creating a lien on a Mortgaged Property, which may be subordinated to
one or more senior liens on the Mortgaged Property, as described in
the related Prospectus Supplement. As specified in the related
Prospectus Supplement, Home Improvement Contracts may be unsecured or
secured by purchase money security interests in the Home Improvements
financed thereby. The Mortgaged Properties and the Home Improvements
are collectively referred to herein as the "Properties." The related
Prospectus Supplement will describe
5
certain characteristics of the Loans for a Series, including, without
limitation, and to the extent relevant: (a) the aggregate unpaid
principal balance of the Loans (or the aggregate unpaid principal
balance included in the Trust Fund for the related Series); (b) the
range and weighted average Loan Rate on the Loans and in the case of
adjustable rate Loans, the range and weighted average of the Current
Loan Rates and the Lifetime Rate Caps, if any; (c) the range and the
average outstanding principal balance of the Loans; (d) the weighted
average original and remaining term-to-stated maturity of the Loans
and the range of original and remaining terms-to-stated maturity, if
applicable; (e) the range and Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of the Loans, computed in the
manner described in the related Prospectus Supplement; (f) the
percentage (by principal balance as of the Cut-off Date) of Loans
that accrue interest at adjustable or fixed interest rates; (g) any
enhancement relating to the Loans; (h) the percentage (by principal
balance as of the Cut-off Date) of Loans that are secured by
Mortgaged Properties, Home Improvements or are unsecured; (i) the
geographic distribution of any Mortgaged Properties securing the
Loans; (j) the use and type of each Mortgaged Property securing a
Loan; (k) the lien priority of the Loans; and (l) the delinquency
status and year of origination of the Loans.
(2) Private Securities............. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include (a) pass-through certificates
representing beneficial interests in loans of the type that would
otherwise be eligible to be Loans (the "Underlying Loans") or
(b) collateralized obligations secured by Underlying Loans. Such
pass-through certificates or collateralized obligations will have
previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction
not involving any public offering from a person who is not an
affiliate of the issuer of such securities at the time of sale (nor
an affiliate thereof at any time during the three preceding months);
provided a period of three years has elapsed since the later of the
date the securities were acquired from the issuer or an affiliate
thereof. Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or instrumentality
thereof, they need not be, and the Private Securities themselves will
not be so insured or guaranteed. See "THE TRUST FUNDS--Private
Securities." Unless otherwise specified in the Prospectus Supplement
relating to a Series of Securities, payments on the Private
Securities will be distributed directly to the Trustee as registered
owner of such Private Securities. The related Prospectus Supplement
for a Series will specify (such disclosure may be on an approximate
basis, as described above and will be as of the date specified in the
related Prospectus Supplement) to the extent relevant and to the
extent such information is reasonably available to the Depositor and
the Depositor reasonably believes such information to be reliable:
(i) the aggregate approximate principal amount and type of any
Private Securities to be included in the Trust Fund for such Series;
(ii) certain characteristics of the Underlying Loans including
(A) the payment features of such Underlying Loans
6
(i.e., whether they are fixed rate or adjustable rate and whether
they provide for fixed level payments, negative amortization or other
payment features), (B) the approximate aggregate principal amount of
such Underlying Loans which are insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees
with respect to such Underlying Loans, (D) the minimum and maximum
stated maturities of such Underlying Loans at origination, (E) the
lien priority of such Underlying Loans, and (F) the delinquency
status and year of origination of such Underlying Loans; (iii) the
maximum original term-to-stated maturity of the Private Securities;
(iv) the weighted average term-to-stated maturity of the Private
Securities; (v) the pass-through or certificate rate or ranges
thereof for the Private Securities; (vi) the sponsor or depositor of
the Private Securities (the "PS Sponsor"), the servicer of the
Private Securities (the "PS Servicer") and the trustee of the Private
Securities (the "PS Trustee"); (vii) certain characteristics of
enhancement, if any, such as reserve funds, insurance policies,
letters of credit or guarantees, relating to the Loans underlying the
Private Securities, or to such Private Securities themselves;
(viii) the terms on which the Underlying Loans may, or are required
to, be repurchased prior to stated maturity; and (ix) the terms on
which substitute Underlying Loans may be delivered to replace those
initially deposited with the PS Trustee. See "THE TRUST
FUNDS--Additional Information" herein.
B. Collection and Distribution
Accounts......................... Unless otherwise provided in the related Prospectus Supplement, all
payments on or with respect to the Primary Assets for a Series will
be remitted directly to an account (the "Collection Account") to be
established for such Series with the Trustee or the Servicer, in the
name of the Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall be required to apply a
portion of the amount in the Collection Account, together with
reinvestment earnings from eligible investments specified in the
related Prospectus Supplement, to the payment of certain amounts
payable to the Servicer under the related Agreement and any other
person specified in the Prospectus Supplement, and to deposit a
portion of the amount in the Collection Account into a separate
account (the "Distribution Account") to be established for such
Series, each in the manner and at the times established in the
related Prospectus Supplement. All amounts deposited in such
Distribution Account will be available, unless otherwise specified in
the related Prospectus Supplement, for (i) application to the payment
of principal of and interest on such Series of Securities on the next
Distribution Date, (ii) the making of adequate provision for future
payments on certain Classes of Securities and (iii) any other purpose
specified in the related Prospectus Supplement. After applying the
funds in the Collection Account as described above, any funds
remaining in the Collection Account may be paid over to the Servicer,
the Depositor, any provider of Enhancement with respect to such
Series (an "Enhancer") or any other person entitled thereto in the
manner and at the times established in the related Prospectus
Supplement.
7
C. Pre-Funding and Capitalized
Interest Accounts................ If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding
Account") established and maintained with the Trustee for the related
Series. If so specified, on the closing date for such Series, a
portion of the proceeds of the sale of the Securities of such Series
(such amount, the "Pre-Funded Amount") will be deposited in the
Pre-Funding Account and may be used to purchase additional Primary
Assets during the period of time, not to exceed six months, specified
in the related Prospectus Supplement (the "Pre-Funding Period"). The
Primary Assets to be so purchased will be required to have certain
characteristics specified in the related Prospectus Supplement. If
any Pre-Funded Amount remains on deposit in the Pre-Funding Account
at the end of the Pre-Funding Period, such amount will be applied in
the manner specified in the related Prospectus Supplement to prepay
the Notes and/or the Certificates of the applicable Series. The
amount initially deposited in a pre-funding account for a Series of
Securities will not exceed fifty percent of the aggregate principal
amount of such Series of Securities.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established
and maintained with the Trustee for the related Series. On the
closing date for such Series, a portion of the proceeds of the sale
of the Securities of such Series will be deposited in the Capitalized
Interest Account and used to fund the excess, if any, of (x) the sum
of (i) the amount of interest accrued on the Securities of such
Series and (ii) if specified in the related Prospectus Supplement,
certain fees or expenses during the Pre-Funding Period such as
trustee fees and credit enhancement fees, over (y) the amount of
interest available therefor from the Primary Assets in the Trust
Fund. Any amounts on deposit in the Capitalized Interest Account at
the end of the Pre-Funding Period that are not necessary for such
purposes will be distributed to the person specified in the related
Prospectus Supplement.
Enhancement............................... If stated in the Prospectus Supplement relating to a Series, the
Depositor will obtain an irrevocable letter of credit, surety bond,
certificate insurance policy, insurance policy or other form of
credit support (collectively, "Enhancement") in favor of the Trustee
on behalf of the Holders of such Series and any other person
specified in such Prospectus Supplement from an institution
acceptable to the rating agency or agencies identified in the related
Prospectus Supplement as rating such Series of Securities
(collectively, the "Rating Agency") for the purposes specified in
such Prospectus Supplement. The Enhancement will support the payments
on the Securities and may be used for other purposes, to the extent
and under the conditions specified in such Prospectus Supplement. See
"ENHANCEMENT." Enhancement for a Series may include one or more of
the following types of Enhancement, or such other type of Enhancement
specified in the related Prospectus Supplement.
A. Subordinate Securities........... If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of one or more Classes of Subordinate Securities.
8
The rights of Holders of such Subordinate Securities to receive
distributions on any Distribution Date will be subordinate in right
and priority to the rights of holders of Senior Securities of the
Series, but only to the extent described in the related Prospectus
Supplement.
B. Insurance........................ If stated in the related Prospectus Supplement, Enhancement for a
Series may consist of special hazard insurance policies, bankruptcy
bonds and other types of insurance supporting payments on the
Securities.
C. Reserve Funds.................... If stated in the Prospectus Supplement, the Depositor may deposit
cash, a letter or letters of credit, short-term investments, or other
instruments acceptable to the Rating Agency in one or more reserve
funds to be established in the name of the Trustee (each a "Reserve
Fund"), which will be used, as specified in such Prospectus
Supplement, by the Trustee to make required payments of principal of
or interest on the Securities of such Series, to make adequate
provision for future payments on such Securities or for any other
purpose specified in the Agreement, with respect to such Series, to
the extent that funds are not otherwise available. In the alternative
or in addition to such deposit, a Reserve Fund for a Series may be
funded through application of all or a portion of the excess cash
flow from the Primary Assets for such Series, to the extent described
in the related Prospectus Supplement.
D. Minimum Principal Payment
Agreement........................ If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a minimum principal payment
agreement (the "Minimum Principal Payment Agreement") with an entity
meeting the criteria of the Rating Agency, pursuant to which such
entity will provide funds in the event that aggregate principal
payments on the Primary Assets for such Series are not sufficient to
make certain payments, as provided in the related Prospectus
Supplement. See "ENHANCEMENT--Minimum Principal Payment Agreement."
E. Deposit Agreement................ If stated in the Prospectus Supplement, the Depositor and the Trustee
will enter into a guaranteed investment contract or an investment
agreement (the "Deposit Agreement") pursuant to which all or a
portion of amounts held in the Collection Account, the Distribution
Account or in any Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The Trustee will be entitled
to withdraw amounts so invested, plus interest at a rate equal to the
Assumed Reinvestment Rate, in the manner specified in the Prospectus
Supplement. See "ENHANCEMENT--Deposit Agreement."
Servicing................................. The Servicer will be responsible for servicing, managing and making
collections on the Loans for a Series. In addition, the Servicer, if
so specified in the related Prospectus Supplement, will act as
custodian and will be responsible for maintaining custody of the
Loans and related documentation on behalf of the Trustee. Advances
with respect to delinquent payments of principal or interest on a
Loan will be made by the Servicer only to the extent described in the
related Prospectus Supplement. Such advances will
9
be intended to provide liquidity only and, unless otherwise specified
in the related Prospectus Supplement, reimbursable to the Servicer
from scheduled payments of principal and interest, late collections,
or from the proceeds of liquidation of the related Loans or from
other recoveries relating to such Loans (including any insurance
proceeds or payments from other credit support). In performing these
functions, the Servicer will exercise the same degree of skill and
care that it customarily exercises with respect to similar
receivables or Loans owned or serviced by it. Under certain limited
circumstances, the Servicer may resign or be removed, in which event
either the Trustee or a third-party servicer will be appointed as
successor servicer. The Servicer will receive a periodic fee as
servicing compensation (the "Servicing Fee") and may, as specified
herein and in the related Prospectus Supplement, receive certain
additional compensation. See "SERVICING OF LOANS--Servicing
Compensation and Payment of Expenses" herein.
Federal Income Tax Considerations
A. Debt Securities and REMIC
Residual Securities.............. If (i) an election is made to treat all or a portion of a Trust Fund
for
a Series as a "real estate mortgage investment conduit" (a "REMIC")
or (ii) so provided in the related Prospectus Supplement, a Series of
Securities will include one or more Classes of taxable debt
obligations under the Internal Revenue Code of 1986, as amended (the
"Code"). Stated interest with respect to such Classes of Securities
will be reported by a Holder in accordance with the Holder's method
of accounting except that, in the case of Securities constituting
"regular interests" in a REMIC ("Regular Interests"), such interest
will be required to be reported on the accrual method regardless of a
Holder's usual method of accounting. Securities that are Compound
Interest Securities, Zero Coupon Securities or Interest Only
Securities will, and certain other Classes of Securities may, be
issued with original issue discount that is not de minimis. In such
cases, the Holder will be required to include original issue discount
in gross income as it accrues, which may be prior to the receipt of
cash attributable to such income. If a Security is issued at a
premium, the Holder may be entitled to make an election to amortize
such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities may be treated
as REMIC "residual interests" ("Residual Interest"). A Holder of a
Residual Interest will be required to include in its income its pro
rata share of the taxable income of the REMIC. In certain
circumstances, the Holder of a Residual Interest may have REMIC
taxable income or tax liability attributable to REMIC taxable income
for a particular period in excess of cash distributions for such
period or have an after-tax return that is less than the after-tax
return on comparable debt instruments. In addition, a portion (or, in
some cases, all) of the income from a Residual Interest (i) may not
be subject to offset by losses from other activities or investments,
(ii) for a Holder that is subject to tax under the Code on unrelated
business taxable income, may be treated as unrelated business taxable
income and (iii) for a foreign holder, may not qualify for exemption
from or reduction of withholding. In addition,
10
(i) Residual Interests are subject to transfer restrictions and (ii)
certain transfers of Residual Interests will not be recognized for
federal income tax purposes. Further, individual holders are subject
to limitations on the deductibility of expenses of the REMIC. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS."
B. Non-REMIC Pass-Through
Securities....................... If so specified in the related Prospectus Supplement, the Trust Fund
for a Series will be treated as a grantor trust and will not be
classified as an association taxable as a corporation for federal
income tax purposes and Holders of Securities of such Series
("Pass-Through Securities") will be treated as owning directly rights
to receive certain payments of interest or principal, or both on the
Primary Assets held in the Trust Fund for such Series. All income
with respect to a Stripped Security (as defined herein) will be
accounted for as original issue discount and, unless otherwise
specified in the related Prospectus Supplement, will be reported by
the Trustee on an accrual basis, which may be prior to the receipt of
cash associated with such income.
C. Owner Trust Securities........... If so specified in the Prospectus Supplement, the Trust Fund will be
treated as a partnership for purposes of federal and state income
tax. Each Noteholder, by the acceptance of a Note of a given Series,
will agree to treat such Note as indebtedness, and each
Certificateholder, by the acceptance of a Certificate of a given
Series, will agree to treat the related Trust as a partnership in
which such Certificateholder is a partner for federal income and
state tax purposes. Alternative characterizations of such Trust and
such Certificates are possible, but would not result in materially
adverse tax consequences to Certificateholders. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS."
ERISA Considerations...................... A fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Code should
carefully review with its own legal advisors whether the purchase or
holding of Securities will constitute a prohibited transaction or
cause the assets of the Trust Fund to be considered "plan assets,"
thereby subjecting operation of the Trust Fund to the prohibited
transaction rules and fiduciary investment standards of ERISA, unless
some exception or exemption is applicable.
Legal Investment.......................... Unless otherwise specified in the related Prospectus Supplement,
Securities of each Series offered by this Prospectus and the related
Prospectus Supplement will not constitute "mortgage related
securities" under the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to
determine whether and to what extent the Securities constitute legal
investments for them. See "LEGAL INVESTMENT."
Use of Proceeds........................... The Depositor will use the net proceeds from the sale of each Series
for one or more of the following purposes: (i) to purchase the
related Primary Assets, (ii) to repay indebtedness which has been
incurred to obtain funds to acquire such Primary Assets, (iii) to
establish any Reserve Funds described in the related Prospectus
Supplement and
11
(iv) to pay costs of structuring and issuing such Securities,
including the costs of obtaining Enhancement, if any. If so specified
in the related Prospectus Supplement, the purchase of the Primary
Assets for a Series will be effected by an exchange of Securities
with the Seller of such Primary Assets. See "USE OF PROCEEDS."
Ratings................................... It will be a requirement for issuance of any Series that the
Securities offered by this Prospectus and the related Prospectus
Supplement be rated by at least one Rating Agency in one of its four
highest applicable rating categories. The rating or ratings
applicable to Securities of each Series offered hereby and by the
related Prospectus Supplement will be as set forth in the related
Prospectus Supplement. A securities rating should be evaluated
independently of similar ratings on different types of securities. A
securities rating is not a recommendation to buy, hold or sell
securities and does not address the effect that the rate of
prepayments on Loans or Underlying Loans relating to Private
Securities, as applicable, for
a Series may have on the yield to investors in the Securities
of such Series. See "RISK FACTORS--Ratings Are Not Recommendations."
12
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
NO SECONDARY MARKET
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Holders with liquidity of
investment or will continue for the life of the Securities of such Series. The
Underwriter(s) specified in the related Prospectus Supplement expects to make a
secondary market in the Securities, but has no obligation to do so.
PRIMARY ASSETS ARE ONLY SOURCE OF REPAYMENT
The Depositor does not have, nor is it expected to have, any significant
assets. The Securities of a Series will be payable solely from the assets of the
Trust Fund for such Securities. There will be no recourse to the Depositor or
any other person for any default on the Notes or any failure to receive
distributions on the Certificates. Further, unless otherwise stated in the
related Prospectus Supplement, at the times set forth in the related Prospectus
Supplement, certain Primary Assets and/or any balance remaining in the
Collection Account or Distribution Account immediately after making all payments
due on the Securities of such Series and other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Servicer, the Enhancer or any other person entitled thereto and will no
longer be available for making payments to Holders. Consequently, Holders of
Securities of each Series must rely solely upon payments with respect to the
Primary Assets and the other assets constituting the Trust Fund for a Series of
Securities, including, if applicable, any amounts available pursuant to any
Enhancement for such Series, for the payment of principal of and interest on the
Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to Holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See "THE AGREEMENTS--Assignment of Primary Assets" herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
LIMITED PROTECTION AGAINST LOSSES
Although any Enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such Enhancement will be limited, as set forth in the related
Prospectus Supplement, and will decline and could be depleted under certain
circumstances prior to the payment in full of the related Series of Securities,
and as a result Holders may suffer losses. See "ENHANCEMENT."
13
YIELD MAY VARY
The yield to maturity experienced by a Holder of Securities may be affected
by the rate of payment of principal of the Loans or Underlying Loans relating to
the Private Securities, as applicable. The timing of principal payments of the
Securities of a Series will be affected by a number of factors, including the
following: (i) the extent of prepayments of the Loans or Underlying Loans
relating to the Private Securities, as applicable, which prepayments may be
influenced by a variety of factors; (ii) the manner of allocating principal
payments among the Classes of Securities of a Series as specified in the related
Prospectus Supplement; and (iii) the exercise by the party entitled thereto of
any right of optional termination. See "DESCRIPTION OF THE SECURITIES--Weighted
Average Life of Securities." Prepayments may also result from repurchases of
Loans or Underlying Loans, as applicable, due to material breaches of the
Seller's or the Depositor's warranties.
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 during the calendar month
prior to a Distribution Date, the effective yield to Holders 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 Holders will be less than the
indicated coupon rate. See "DESCRIPTION OF THE SECURITIES--Payments of
Interest."
PROPERTY VALUES MAY BE INSUFFICIENT
If the Mortgages in a Trust Fund are primarily junior liens subordinate to
the rights of the mortgagee under the related senior mortgage or mortgages, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the Property securing a junior mortgage unless it forecloses
subject to the senior mortgages, in which case it must either pay the entire
amount due on the senior mortgages to the senior mortgagees at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgages in the event the mortgagor is in default thereunder. The Trust Fund
will not have any source of funds to satisfy the senior mortgages or make
payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loan, together with
any senior financing on the Properties, would equal or exceed the value of the
Properties. Among the factors that could adversely affect the value of the
Properties are an overall decline in the residential real estate market in the
areas in which the Properties are located or a decline in the general condition
of the Properties as a result of failure of borrowers to maintain adequately the
Properties or of natural disasters that are not necessarily covered by
insurance, such as earthquakes and floods. Any such decline could extinguish the
value of a junior interest in a Property before having any effect on the related
senior interest therein. If such a decline occurs, the actual rates of
delinquencies, foreclosure and losses on the junior Loans could be higher than
those currently experienced in the mortgage lending industry in general.
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT
If a Trust Fund includes a Pre-Funding Account and the principal balance of
additional Loans delivered to the Trust Fund during the Pre-Funding Period is
less than the original Pre-Funded Amount, the Holders of the Securities of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Securities. Since
prevailing interest rates are subject to fluctuation, there can be no issuance
that investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yields on the related Securities. It is possible that the yield on
any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
The ability of a Trust Fund to invest in subsequent Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Trust Fund. The ability of the Seller to originate or acquire such Loans will be
affected by a variety of social and economic factors, including the prevailing
level of market interest rates, unemployment levels and consumer perceptions of
general economic conditions.
14
Although subsequent Loans must satisfy the characteristics described in the
related Prospectus Supplement, such Loans may have been originated more recently
than the Loans originally transferred to the Trust Fund and may be of a lesser
credit quality. As a result, the addition of subsequent Loans may adversely
affect the performance of the related Securities.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of clean-
up. In several states, such a lien has priority over the lien of an existing
mortgage or owner's interest against such property. In addition, under the laws
of some states and under the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 ("CERCLA"), 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 such liability on foreclosure
of the Mortgaged Property.
CONSUMER PROTECTION LAWS MAY AFFECT LOANS
Applicable state laws generally regulate interest rates and other charges
and require certain 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 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
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 owner of the Loan to damages and administrative
enforcement.
The Loans are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. See "CERTAIN LEGAL ASPECTS OF THE LOANS."
CONTRACTS WILL NOT BE STAMPED
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
15
otherwise marked to reflect their assignment to the Trust Fund. 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."
RATINGS ARE NOT RECOMMENDATIONS
It will be a condition to the issuance of a Series of Securities that they
be rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on, among other things, the adequacy of the value of the Primary Assets and any
Enhancement with respect to such Series. 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. There is also no
assurance that any such rating will remain in effect for any given period of
time or may not be lowered or withdrawn entirely by the Rating Agency 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 Primary Assets,
such rating might also be lowered or withdrawn, among other reasons, because of
an adverse change in the financial or other condition of an Enhancer or a change
in the rating of such Enhancer's long term debt.
DESCRIPTION OF THE SECURITIES
GENERAL
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. The Certificates will also be issued in
Series pursuant to separate agreements (each, 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 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.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinate Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the
16
Holder requesting payment by wire transfer) in certain circumstances described
in the related Prospectus Supplement and (b) final payments of principal in
retirement of each Security will be made only upon presentation and surrender of
such Security at the office of the Trustee specified in the Prospectus
Supplement. Notice of the final payment on a Security will be mailed to the
Holder of such Security before the Distribution Date on which the final
principal payment on any Security is expected to be made to the holder of such
Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account. If provided in the related Prospectus
Supplement, such amounts may be net of certain amounts payable to the related
Servicer and any other person specified in the Prospectus Supplement. Such
amounts thereafter will be deposited into the Distribution Account and will be
available to make payments on the Securities of such Series on the next
Distribution Date. See "THE TRUST FUNDS--Collection and Distribution Accounts."
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly scheduled payments on
the Primary Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the then
principal balance of the Primary Assets. Unless otherwise specified in the
related Prospectus Supplement, the initial Asset Value of the Primary Assets
will be at least equal to the principal amount of the Notes of the related
Series at the date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360 day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the Loans
or Underlying Loans relating to the Private Securities, as applicable included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Principal Only Securities may not be
entitled to receive any interest distributions or may be entitled to receive
only nominal interest distributions. Any interest on Zero Coupon Securities that
is not paid on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
17
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than which the principal thereof will be fully paid and
with respect to each Class of a Series of Certificates will be the date on which
the entire aggregate principal balance of such Class is expected to be reduced
to zero, in each case calculated on the basis of the assumptions applicable to
such Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Primary Assets will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date.
Furthermore, with respect to a Series of Certificates, unless otherwise
specified in the related Prospectus Supplement, as a result of delinquencies,
defaults and liquidations of the Primary Assets in the Trust Fund, the actual
final Distribution Date of any Certificate may occur later than its Final
Scheduled Distribution Date. No assurance can be given as to the actual
prepayment experience with respect to a Series. See "Weighted Average Life of
the Securities" below.
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a "Special
Redemption Date") if, as a consequence of prepayments on the Loans or Underlying
Loans, as applicable, relating to such Securities or low yields then available
for reinvestment the entity specified in the related Prospectus Supplement
determines, based on assumptions specified in the applicable Agreement that the
amount available for the payment of interest that will have accrued on such
Securities (the "Available Interest Amount") through the designated interest
accrual date specified in the related Prospectus Supplement is less than the
amount of interest that will have accrued on such Securities to such date. In
such event and as further described in the related Prospectus Supplement, the
Trustee will redeem a principal amount of outstanding Securities of such Series
as will cause the Available Interest Amount to equal the amount of interest that
will have accrued through such designated interest accrual date for such Series
of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement is less than the amount or percentage specified in the related
Prospectus Supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, in the
event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to constitute a "qualified liquidation"
under Section 860F of the Code.
18
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the Trust Fund for a Series is paid, which may be in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund are made at rates corresponding to various percentages
of the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or Underlying
Loans relating to the Private Securities, as applicable, included in the related
Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Loans or
Underlying Loans either from time to time or over the lives of such Loans or
Underlying Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans or
Underlying Loans relating to the Private Securities, as applicable, for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
19
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Loans relating to a Series will
be serviced by the Servicer, which may be the Seller, specified in the related
Prospectus Supplement, pursuant to a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a "Servicing
Agreement") between the Trust Fund and Servicer, with respect to a Series of
Notes.
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 specified in the related Prospectus Supplement.
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 the related Primary 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 Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of closed-end home equity loans (the "Mortgage Loans") secured by
mortgages primarily on Single Family Properties which may be subordinated to
other mortgages on the same Mortgaged Property. The Mortgage Loans 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.
Unless otherwise described in the related Prospectus Supplement, the full
principal amount of a Mortgage Loan is advanced at origination of the loan and
generally is repayable in equal (or substantially equal) installments of an
amount sufficient to fully amortize such loan at its stated maturity. As more
fully described in the related Prospectus Supplement, interest on each Mortgage
Loan is calculated on the basis of the outstanding
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principal balance of such loan multiplied by the Loan Rate thereon and further
multiplied by a fraction, the numerator of which is the number of days in the
period elapsed since the preceding payment of interest was made and the
denominator is the number of days in the annual period for which interest
accrues on such loan. Unless otherwise described in the related Prospectus
Supplement the original terms to stated maturity of Mortgage Loans will not
exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one- to
four-family residential housing, including Condominium Units and Cooperative
Dwellings) and mixed-use property. Mixed-use properties will consist of
structures of no more than three stories, which include one to four residential
dwelling units and space used for retail, professional or other commercial uses.
Such uses, which will not involve more than 50% of the space in the structure,
may include doctor, dentist or law offices, real estate agencies, boutiques,
newsstands, convenience stores or other similar types of uses intended to cater
to individual customers as specified in the related Prospectus Supplement. The
properties may be located in suburban or metropolitan districts. Any such
non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. Each
Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Mortgage Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement, the sole
basis for a representation that a given percentage of the Mortgage Loans are
secured by Single Family Property that is owner-occupied will be either (i) the
making of a representation by the Mortgagor at origination of the Mortgage Loan
either that the underlying Mortgaged Property will be used by the Mortgagor for
a period of at least six months every year or that the Mortgagor intends to use
the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing address
as reflected in the Servicer's records. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist,
in whole or part, of home improvement installment sales contracts and
installment loan agreements (the "Home Improvement Contracts") originated by a
home improvement contractor 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 Mortgaged
Property or by purchase money security interests in the Home Improvements
financed thereby. Unless otherwise specified in the applicable 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.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the "Home Improvements") securing the Home Improvement Contracts
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 will be computed in the manner described in the related Prospectus
Supplement.
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Additional Information. The selection criteria which will apply with
respect to the Loans, including, but not limited to, the Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as applicable, original terms to maturity and
delinquency information, will be specified in the related Prospectus Supplement.
The Loans for a Series may include Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The Loans will be conventional contracts or contracts insured by the
Federal Housing Administration ("FHA") or partially guaranteed by the Veterans
Administration ("VA"). 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 1937, as amended. Such Loans will be insured under various
FHA programs. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. Loans insured by the FHA generally require
a minimum down payment of approximately 5% of the original principal amount of
the loan. No FHA-insured Loans relating to a Series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development ("HUD") 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 HUD or upon assignment of the defaulted Loan to HUD. With respect to
a defaulted FHA-insured Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Servicer is expected to make an effort 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 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 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 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 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
debenture interest rate. The Servicer of each FHA-insured 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.
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
Servicer for certain costs and expenses and to deduct certain amounts received
or retained by the Servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
conveyance to HUD, the 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 mortgagor's first uncorrected failure to
perform any obligation to make any payment due under the Loan 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"). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
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veteran) to obtain a mortgage loan guaranty 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.
The maximum guaranty 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. The
liability on the guaranty 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 guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to the guaranty, 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 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
guaranty is submitted after liquidation of the Mortgaged Property.
The amount payable under the guaranty 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 guaranty will be equal to the unpaid principal amount of the loan,
interest accrued on the unpaid balance 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
Mortgaged Property. The amount payable under the guaranty may in no event exceed
the amount of the original guaranty.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant: (a) the aggregate
unpaid principal balance of the Loans; (b) the range and weighted average Loan
Rate on the Loans, and, in the case of adjustable rate Loans, the range and
weighted average of the current Loan Rates and the Lifetime Rate Caps, if any;
(c) the range and average outstanding principal balance of the Loans; (d) the
weighted average original and remaining term-to-stated maturity of the Loans and
the range of original and remaining terms-to-stated maturity, if applicable;
(e) the range and weighted average of Combined Loan-to-Value Ratios or
Loan-to-Value Ratios for the Loans, as applicable; (f) the percentage (by
outstanding principal balance as of the Cut-off Date) of Loans that accrue
interest at adjustable or fixed interest rates; (g) any special hazard insurance
policy or bankruptcy bond or other enhancement relating to the Loans; (h) the
percentage (by principal balance as of the Cut-off Date) of Loans that are
secured by Mortgaged Properties, Home Improvements or are unsecured; (i) the
geographic distribution of any Mortgaged Properties securing the Loans; (j) the
percentage of Loans (by principal balance as of the Cut-off Date) that are
secured by Single Family Properties, shares relating to Cooperative Dwellings,
Condominium Units, investment property and vacation or second homes; (k) the
lien priority of the Loans; and (l) the delinquency status and year of
origination of the Loans. The related Prospectus Supplement will also specify
any other limitations on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within
15 days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
will have previously been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided a period of three years
elapsed since the later of the date the securities were acquired from the issuer
or an affiliate thereof. Although individual Underlying Loans
23
may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and Private Securities themselves
will not be so insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS Agreement").
The seller/servicer of the Underlying Loans will have entered into the
PS Agreement with the trustee under such PS Agreement (the "PS Trustee"). The
PS Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the
PS Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a
financial institution or other entity engaged generally in the business of
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 loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private 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 Securities by the PS Trustee or the
PS Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase
the Underlying Loans after a certain date or under other circumstances specified
in the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the
PS Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets include Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable: (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment features of such Underlying Loans
(i.e., whether they are fixed rate or adjustable rate and whether they provide
for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origination, (E) the lien priority of
such Underlying Loans, and (F) the delinquency status and year of origination of
such Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Loans underlying the
Private Securities or to such Private Securities themselves; (viii) the terms on
which Underlying Loans may, or
24
are required to, be purchased prior to their stated maturity or the stated
maturity of the Private Securities; and (ix) the terms on which Underlying Loans
may be substituted for those originally underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Securities of such Series (such amount, the "Pre-Funded Amount")
will be deposited in the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the "Pre-Funding Period"). The Primary Assets to be so
purchased will be required to have certain characteristics specified in the
related Prospectus Supplement. If any Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the Pre-Funding Period, such amount will
be applied in the manner specified in the related Prospectus Supplement to
prepay the Notes and/or the Certificates of the applicable Series.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be distributed
to the person specified in the related Prospectus Supplement.
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ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, "Enhancement") in favor of the
Trustee on behalf of the Holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Loans in the related Trust Fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default, but will not cover the portion of the
principal balance of any Loan that is required to be covered by any primary
mortgage insurance policy. The amount and terms of any such coverage will be set
forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such Property or
(ii) upon transfer of such 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 Servicer with respect to
such Property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such Property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
insurance policies typically do not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the mortgaged property is in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under any pool insurance policy. Therefore, so
long as such pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain
26
expenses will not affect the total insurance proceeds paid to Holders of the
Securities, but will affect the relative amounts of coverage remaining under the
special hazard insurance policy and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then-outstanding principal balance of such Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL ASPECTS OF
LOANS." If so provided in the related Prospectus Supplement, the Depositor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of 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 bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Loans in the Trust Fund for such
Series. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the "Reserve Funds") cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Servicing Agreement or Pooling and Servicing Agreement, as the case
may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion,
(i) waive any assumption fee, late payment charge, or other charge in connection
with a Loan and (ii) to the extent provided in the related Agreement arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
("Escrow Accounts") with respect to Loans in which payments by obligors to pay
taxes, assessments, mortgage and hazard insurance premiums, and other comparable
items will be deposited. Loans may not require such payments under the loan
related documents, in which case the Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to obligors amounts determined to be
overages, to pay interest to obligors on balances in the Escrow Account to the
extent required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained
(i) at a depository institution, the long-term unsecured debt obligations of
which at the time of any deposit therein are rated by each Rating Agency rating
the Securities of such Series at levels satisfactory to each Rating Agency or
(ii) in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
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(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
("Liquidation Proceeds"), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the Servicing
Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Loans
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Property) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Loan, together with accrued and unpaid
interest thereon to the Due Date for such Loan next succeeding the date of
its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Loan prior to the deposit of
such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
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In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Loans. If specified in the related Prospectus Supplement, the Servicer will
be obligated to make Advances, and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance policies, or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
Distribution Account, as the case may be, or from a specified Reserve Fund as
applicable, to the extent specified in the related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Loan to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Loans. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Property
caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Because the standard hazard insurance policies relating to the Loans
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, 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. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Property securing a Loan is located in a flood area identified by HUD
pursuant to the Flood Disaster Protection Act of 1973, as amended, the Servicer
will be required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard insurance policies covering Properties securing Loans
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
the improvements on any Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Properties will fluctuate in value over
time, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damage to
the affected Property.
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Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted Loan and that has been acquired upon
foreclosure, deed in lieu of foreclosure, or repossession, a standard hazard
insurance policy in an amount that is at least equal to the maximum insurable
value of such REO Property. No earthquake or other additional insurance will be
required of any obligor or will be maintained on REO Property acquired in
respect of a defaulted Loan, other than pursuant to such applicable laws and
regulations as shall at any time be in force and shall require such additional
insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Servicer will be required, in the event
that there has been a loss that would have been covered by such policy absent
such deductible clause, to deposit in the Collection Account the amount not
otherwise payable under the blanket policy because of the application of such
deductible clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices and procedures as it deems necessary or advisable and as
are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Loan available to
the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer will
be required to liquidate any Property acquired through foreclosure within two
years after the acquisition of the beneficial ownership of such Property. While
the holder of a Property acquired through foreclosure can often maximize its
recovery by providing financing to a new purchaser, the Trust Fund, if
applicable, will have no ability to do so and neither the Servicer nor the
Depositor will be required to do so.
The Servicer may arrange with the obligor on a defaulted Loan a
modification of such Loan (a "Modification") to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Loan under the applicable "due-on-sale"
clause, if any, unless it reasonably believes that such clause is not
enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in
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connection with an assumption will be retained by the Servicer as additional
servicing compensation. The terms of a Loan may not be changed in connection
with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
"Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of Property in connection with
defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, including, without limitation, the payment of the fees and expenses
of the Trustee and independent accountants, payment of insurance policy premiums
and the cost of credit support, if any, and payment of expenses incurred in
preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related Loan
(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of such expenses to the extent expenses are covered
under related insurance policies or from excess Liquidation Proceeds. If claims
are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Loan which would be distributable to Holders. In addition, the
Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Loan, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Loans by the Servicer and that, on the basis of such examination, such
firm is of the opinion that the servicing has been conducted in compliance with
such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement throughout
the preceding calendar year.
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CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
If an Event of Default occurs under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under "THE AGREEMENTS--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement" herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the Servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
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THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus Supplement
a custodian on behalf of the Trustee (the "Custodian"), the Mortgage Note
endorsed without recourse to the order of the Trustee or in blank, the original
Mortgage with evidence of recording indicated thereon (except for any Mortgage
not returned from the public recording office, in which case a copy of such
Mortgage will be delivered, together with a certificate that the original of
such Mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
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 (or the Custodian) 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 Trust. 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."
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, the Depositor will, at the time of issuance of the
Securities, cause assignments to the Trustee of the Mortgages relating to the
Loans for a Series to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the related Loans. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the "Loan Schedule"). Such Loan Schedule will specify with
respect to each Loan: the original principal amount and unpaid principal balance
as of the Cut-off Date; the current interest rate; the current Scheduled Payment
of principal and interest; the maturity date, if any, of the related Mortgage
Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and
the current index.
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Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private 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 Security. See "THE
TRUST FUNDS--Private Securities" herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"Certificate Schedule"), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information contained in
the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Private Securities, the
Depositor had good title thereto, and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Private Securities; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such Private
Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement, provided, however, the purchase price shall not be limited in (i)
above to the Trust Fund's federal income tax basis if the repurchase at a price
equal to the outstanding principal balance of such Primary Asset will not result
in any prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the "Deleted Primary
Asset") and substitute in its place one or more other Primary Assets (each, a
"Qualifying Substitute Primary Asset") provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such 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.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
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 Primary Asset (the amount of any shortfall to be deposited to the
Collection Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the
35
Trustee of such breach, and if such breach is of a nature that materially and
adversely affects the value of such Primary Asset, the Depositor or such entity
is obligated to repurchase the affected Primary Asset or, if provided in the
related Prospectus Supplement, provide a Qualifying Substitute Primary Asset
therefor, subject to the same conditions and limitations on purchases and
substitutions as described above.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or Seller of such Primary Assets. See
"SPECIAL CONSIDERATIONS--Limited Assets."
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Loans. See "SERVICING OF LOANS--Evidence as to
Compliance" herein.
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward
36
such reports only to the entity or its nominee which is the registered holder of
the global certificate which evidences such book-entry securities. Beneficial
owners will receive such reports from the participants and indirect participants
of the applicable book-entry system in accordance with the practices and
procedures of such entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account to enable the Trustee to distribute
to Holders of such Series any required payment, which failure continues
unremedied for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by the
Trustee for such Series, or to the Servicer and the Trustee by the Holders of
such Series evidencing not less than 25% of the aggregate voting rights of the
Securities for such Series, (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
applicable Agreement which continues unremedied for the number of days specified
in the related Prospectus Supplement after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Securities of such Series evidencing not less than 51% of
the aggregate voting rights of the Securities for such Series may terminate all
of the rights and obligations of the Servicer as servicer under the applicable
Agreement (other than its right to recovery of other expenses and amounts
advanced pursuant to the terms of such Agreement which rights the Servicer will
retain under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Agreement
and will be entitled to reasonable servicing compensation not to exceed the
applicable servicing fee, together with other servicing compensation in the form
of assumption fees, late payment charges or otherwise as provided in such
Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. The Trustee may decline to follow any such direction if the
Trustee determines that the action or proceeding so directed may not lawfully be
taken or would involve it in personal liability or be unjustly prejudicial to
the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) 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 sixty (60) days after notice thereof is given in
37
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 sixty (60) 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 are Zero
Coupon Securities, 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 a
majority in aggregate outstanding amount 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 other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount 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 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless 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 will 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
38
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.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents will have any or all of the rights, powers, duties and obligations of the
Trustee conferred on them by such appointment; provided that the Trustee will
continue to be responsible for its duties and obligations under the Agreement.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Depositor. 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.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the Trustee with respect to such
Series, without notice to or consent of the Holders (i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein, (iii) to add to the duties of the Depositor, the Trust Fund
or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under
39
such Agreement or related Enhancement, (v) to add or amend any provisions of
such Agreement as required by a Rating Agency in order to maintain or improve
the rating of the Securities (it being understood that none of the Depositor,
the Seller, the Servicer or Trustee is obligated to maintain or improve such
rating), or (vi) to comply with any requirements imposed by the Code; provided
that any such amendment except pursuant to clause (vi) above will not adversely
affect in any material respect the interests of any Holders of such Series, as
evidenced by an opinion of counsel. Any such amendment except pursuant to clause
(vi) of the preceding sentence shall be deemed not to adversely affect in any
material respect the interests of any Holder if the Trustee receives written
confirmation from each Rating Agency rating such Securities that such amendment
will not cause such Rating Agency to reduce the then current rating thereof.
Unless otherwise specified in the Prospectus Supplement, the Agreement for each
Series may also be amended by the Trustee, the Servicer, if applicable, and the
Depositor with respect to such Series with the consent of the Holders possessing
not less than 66 2/3% of the aggregate outstanding principal amount of the
Securities of such Series or, if only certain Classes of such Series are
affected by such amendment, 66 2/3% of the aggregate outstanding principal
amount of the Securities of each Class of such Series affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of such Agreement or modifying in any manner the rights of
Holders of such Series; provided, however, that no such amendment may
(a) reduce the amount or delay the timing of payments on any Security without
the consent of the Holder of such Security; or (b) reduce the aforesaid
percentage of the aggregate outstanding principal amount of Securities of each
Class, the Holders of which are required to consent to any such amendment
without the consent of the Holders of 100% of the aggregate outstanding
principal amount of each Class of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Securities will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such
40
Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the aggregate Principal Balance of such
Primary Assets, plus accrued interest thereon at the applicable net rates on the
Primary Assets through the last day of the month of such repurchase and (b) the
aggregate fair market value of such Primary Assets plus the fair market value of
any property acquired in respect of a Primary Asset and remaining in the Trust
Fund. The exercise of such right will effect early retirement of the Securities
of such Series, but such entity's right to so purchase is subject to the
aggregate Principal Balance of the Primary Assets at the time of repurchase
being less than a fixed percentage, to be set forth in the related Prospectus
Supplement, of the aggregate Principal Balance of the Primary Assets as of the
Cut-off Date. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of certain persons identified therein. For each Series, the Servicer or the
Trustee, as applicable, will give written notice of termination of the Agreement
to each Holder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency specified in the notice of
termination. If so provided in the related Prospectus Supplement for a Series,
the Depositor or another entity may effect an optional termination of the Trust
Fund under the circumstances described in such Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES--Optional Redemption, Purchase or Termination"
herein.
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 Final 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.
41
CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated.
MORTGAGES
The Loans for a Series will, and certain Home Improvement Contracts for a
Series may, be secured by either mortgages or deeds of trust or deeds to secure
debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this section as "mortgage loans"), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by such instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police powers
and may also be subject to other liens pursuant to the laws of the jurisdiction
in which the Mortgaged Property is located. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties: the trustor, who is the borrower/property owner; the
beneficiary, who is the lender; and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expenses incurred
42
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. 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 specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property, recorded and sent
to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus 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 a 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 burdens of ownership,
including obtaining hazard insurance, paying taxes 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.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption 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.
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JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), as mortgagee under a junior mortgage, are subordinate to those of the
mortgagee under the senior mortgage, including the prior rights of the senior
mortgagee to receive hazard insurance and condemnation proceeds and to cause the
property securing the mortgage 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.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. 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 laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a
44
deficiency judgment. For example, with respect to federal bankruptcy law, the
filing of a petition acts as a stay against the enforcement of remedies for
collection of a debt. Moreover, a court with federal bankruptcy jurisdiction may
permit a debtor through a Chapter 13 Bankruptcy Code rehabilitative plan to cure
a monetary default with respect to a loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original loan
payment schedule even though the lender accelerated the loan and the lender has
taken all steps to realize upon his security (provided no sale of the property
has yet occurred) prior to the filing of the debtor's Chapter 13 petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the "Garn-St. Germain Act") preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to certain exceptions. 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, 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.
45
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 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.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision (the
"OTS") prohibit the imposition of a prepayment penalty or equivalent fee for or
in connection with the acceleration of a loan by exercise of a due-on-sale
clause. A mortgagee to whom a prepayment in full has been tendered may be
compelled to give either a release of the mortgage or an instrument assigning
the existing mortgage. The absence of a restraint on prepayment, particularly
with respect to mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirements of such mortgage loans.
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. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The OTS, 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. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
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.
46
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, under the UCC, 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
it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement 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 judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
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
judgement.
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 requirements applicable to the origination
and lending
47
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 SALES CONTRACTS
The Loans may also consist of installment sales contracts. Under an
installment sales contract ("Installment Sales 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 Sales 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 Sales
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 Sales
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 Sales 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 Sales 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 Sales 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 Sales 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 Sales 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 Sales
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.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the
48
duration of military service and (iii) may have the maturity of such obligations
incurred prior to military service extended, the payments lowered and the
payment schedule readjusted for a period of time after the completion of
military service. However, the benefits of (i), (ii), or (iii) above are subject
to challenge by creditors and if, in the opinion of the court, the ability of a
person to comply with such obligations is not materially impaired by military
service, the court may apply equitable principles accordingly. If a borrower's
obligation to repay amounts otherwise due on a Loan included in a Trust Fund for
a Series is relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of
1940, none of the Trust Fund, the Servicer, the Depositor nor the Trustee will
be required to advance such amounts, and any loss in respect thereof may reduce
the amounts available to be paid to the Holders of the Securities of such
Series. Unless otherwise specified in the related Prospectus Supplement, any
shortfalls in interest collections on Loans or Underlying Loans relating to the
Private Securities, as applicable, included in a Trust Fund for a Series
resulting from application of the Soldiers' and Sailors' Civil Relief Act of
1940 will be allocated to each Class of Securities of such Series that is
entitled to receive interest in respect of such Loans or Underlying Loans in
proportion to the interest that each such Class of Securities would have
otherwise been entitled to receive in respect of such Loans or Underlying Loans
had such interest shortfall not occurred.
49
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware in June 1995, and
is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The Depositor's
principal executive offices are located at 245 Park Avenue, New York, New York
10167. Its telephone number is (212) 272-4095.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ("Depositor Securities") collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass-through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
loans secured by certain first or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary is based on the opinion of Stroock & Stroock &
Lavan LLP, special counsel to the Depositor ("Federal Tax Counsel") as to the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Securities. 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, nor with certain types of investors subject
to special treatment under the federal income tax laws. 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, but much of the discussion is applicable to other investors as well.
Prospective investors are advised to consult their own tax advisers concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the Securities.
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 a change could apply retroactively.
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 real estate mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986,
50
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; or (iv) an
election is made to treat the Trust Fund relating to a particular Series of
Certificates as a partnership or a division of a single holder of all of the
equity Securities of a Series.
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.
TAXATION OF DEBT SECURITIES
Status of Regular Interest Securities as Real Property Loans. The regular
interests in a REMIC ("Regular Interest Securities") will be "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets. For purposes of this rule, if at
least 95 percent of the REMIC's assets are qualifying assets, then 100 percent
of the Regular Interest Securities will be qualifying assets. Similarly, income
on the Regular Interest Securities will be treated as "interest on obligations
secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code, subject to the limitations of the preceding
two sentences. In addition to Loans, the REMIC's assets will include payments on
Loans held pending distribution to holders of Regular Interest Securities,
amounts in reserve accounts (if any), other credit enhancements (if any) and
possibly buydown funds ("Buydown Funds"). The Loans generally will be qualifying
assets under both of the foregoing sections of the Code. However, Loans that are
not secured by residential real property or real property used primarily for
church purposes may not constitute qualifying assets under Section
7701(a)(19)(c)(v) of the Code. In addition, to the extent that the principal
amount of a Loan exceeds the value of the property securing the Loan, it is
unclear and Federal Tax Counsel is unable to opine whether the Loans will be
qualifying assets. The regulations under Sections 860A through 860G of the Code
(the "REMIC Regulations") treat credit enhancements as part of the mortgage or
pool of mortgages to which they relate, and therefore credit enhancements
generally should be qualifying assets. Regulations issued in conjunction with
the REMIC Regulations provide that amounts paid on Loans and held pending
distribution to holders of Regular Interest Securities ("cash flow investments")
will be treated as qualifying assets. It is unclear whether reserve funds or
Buydown Funds would also constitute qualifying assets under any of those
provisions.
Interest and Acquisition Discount. Securities representing 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."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities 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 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994, as amended 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 difference between the stated
redemption price at maturity of a Debt Security and its issue price. 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
51
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, interest payments will not qualify as qualified
stated interest unless the interest payments are "unconditionally payable." The
OID Regulations state that interest is unconditionally payable if reasonable
legal remedies exist to compel timely payment, or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment (other
than a late payment that occurs within a reasonable grace period) or nonpayment
of interest a remote contingency, as defined in the OID Regulations. It is
unclear whether the terms and conditions of the Loans underlying the Debt
Securities or the terms and conditions of the Debt Securities are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
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.
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
adjusted issue price is the sum of its issue price plus prior accruals of 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
52
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 OID 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 OID 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 the applicable Prospectus Supplement
specifies otherwise, 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. 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-Only Debt Securities. The Trust Fund intends to report income
from interest-only classes of Debt Securities to the Internal Revenue Service
and to holders of interest-only Debt Securities based on the assumption that the
stated redemption price at maturity is equal to the sum of all payments
determined under the applicable prepayment assumption. As a result, such
interest-only Debt Securities Certificates will be treated as having original
issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are subject
to special rules. A Variable Rate Debt Security will qualify as a "variable rate
debt instrument" if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified de minimis amount, (ii) it provides for stated interest, paid or
compounded at least annually, at (a) one or more qualified floating rates,
(b) a single fixed rate and one or more qualified floating rates, (c) a single
objective rate or (d) a single fixed rate and a single objective rate that is a
qualified inverse floating rate and (iii) it does not provide for any principal
payments that are contingent, as defined in the OID Regulations, except as
provided in (i), above. Because the OID Regulations relating to contingent
payment debt instruments do not apply to REMIC regular interests, principal
payments on the REMIC Regular Certificates should not be considered contingent
for this purpose.
53
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Security will be
treated as a single qualified floating rate (a "Presumed Single Qualified
Floating Rate"). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Security's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate but which is subject to one or
more restrictions such as a cap or floor, will not be a qualified floating rate
for purposes of the OID Regulations unless the restriction is fixed throughout
the term of the Variable Rate Debt Security or the restriction will not
significantly affect the yield of the Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. An interest rate on a REMIC Regular
Certificate that is the weighted average of the interest rates on some or all of
the qualified mortgages held by the REMIC should constitute an objective rate.
Despite the foregoing, a variable rate of interest on a Variable Rate Debt
Security will not constitute an objective rate if it is reasonably expected that
the average value of such rate during the first half of the Variable Rate Debt
Security's term will be either significantly less than or significantly greater
than the average value of the rate during the final half of the Variable Rate
Debt Security's term. Further, an objective rate does not include a rate that is
based on information that is within the control of the issuer (or a party
related to the issuer) or that is unique to the circumstances of the issuer (or
a party related to the issuer). An objective rate will qualify as a "qualified
inverse floating rate" if such rate is equal to a fixed rate minus a qualified
floating rate and variations in the rate can reasonably be expected to inversely
reflect contemporaneous variations in the qualified floating rate. The OID
Regulations also provide that if a Variable Rate Debt Security provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a "Presumed Single Variable Rate").
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), original issue discount is computed as
described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually will constitute
qualified stated interest, (ii) by assuming that the variable rate on the Single
Variable Debt Security is a fixed rate equal to: (a) in the case of a Single
Variable Rate Debt Security with a qualified floating rate or a qualified
inverse floating rate, the value of, as of the issue date, of the qualified
floating rate or the qualified inverse floating rate or (b) in the case of a
Single Variable Rate Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii),
above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") that qualifies as
a "variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue
54
discount and qualified stated interest on the Multiple Variable Rate Debt
Security. The OID Regulations generally require that such a Multiple Variable
Rate Debt Security be converted into an "equivalent" fixed rate debt instrument
by substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate Debt Security with a
fixed rate equal to the value of the qualified floating rate or qualified
inverse floating rate, as the case may be, as of the Multiple Variable Rate Debt
Security's issue date. Any objective rate (other than a qualified inverse
floating rate) provided for under the terms of the Multiple Variable Rate Debt
Security is converted into a fixed rate that reflects the yield that is
reasonably expected for the Multiple Variable Rate Debt Security. In the case of
a Multiple Variable Rate Debt Security that qualifies as a "variable rate debt
instrument" and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Debt Security
provides for a qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating rate that replaces the
fixed rate must be such that the fair market value of the Multiple Variable Rate
Debt Security as of the Multiple Variable Rate Debt Security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse floating
rate, the Multiple Variable Rate Debt Security is then converted into an
"equivalent" fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above. A Holder of the Multiple Variable Rate Debt Security
will account for such original issue discount and qualified stated interest as
if the Holder held the "equivalent" fixed rate debt instrument. Each accrual
period appropriate adjustments will be made to the amount of qualified stated
interest or original issue discount assumed to have been accrued or paid with
respect to the "equivalent" fixed rate debt instrument in the event that such
amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if such Debt
Security were treated as a contingent payment debt obligation since the OID
Regulations relating to contingent payment debt obligations do not apply to
REMIC regular interests.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 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,
55
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. 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. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, 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 Internal Revenue Service. Purchasers
who pay a premium for the Securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
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 Federal 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, (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 Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government saturates, "loans secured by an interest in real property," and
other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(6)(B), 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 Code Section 856(c)(3)(B) (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 (i) or (ii) above, then a Security will
qualify for the tax treatment described in (i) or (ii) in the proportion that
such REMIC assets are qualifying assets.
56
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, 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. For taxable years beginning after December 31,
1997, in the case of a partnership that has 100 or more partners and elects to
be treated as an "electing large partnership," 70 percent of such partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2 percent floor that would otherwise be applicable to individual
partners. 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 stated in the applicable Prospectus Supplement,
the expenses of the REMIC will be allocated to Holders of the related Residual
Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, 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.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be held to treat designated portions of the related Trust
Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such Series of Securities, Federal Tax Counsel will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Certificates issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. 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
57
that year, do not exceed two percent of such Holder's adjusted gross income. For
taxable years beginning after December 31, 1997, in the case of a partnership
that has 100 or more partners and elects to be treated as an "electing large
partnership," 70 percent of such partnership's miscellaneous itemized deductions
will be disallowed, although the remaining deductions will generally be allowed
at the partnership level and will not be subject to the 2 percent floor that
would otherwise be applicable to individual partners.
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). Such 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.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security 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.
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
58
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. 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. 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. 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. 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 Code Section 511, 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) 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."
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 Date 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 Security 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 Security), 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.
59
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year,
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to have these provisions apply only with respect to tax years
beginning after August 20, 1996.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Interest Security will be treated as an excess inclusion
if the Residual Interest Securities in the aggregate are considered not to have
"significant value." The Treasury Department has not yet provided regulations in
this respect.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest 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 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 acing 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.
For taxable years beginning after December 31, 1997, all partners of certain
electing partnerships having 100 or more partners ("electing large
partnerships") will be treated as disqualified organizations for purposes of the
tax imposed on pass-through entities if such electing large partnerships hold
residual interests in a REMIC. However, the electing large partnership would be
entitled to exclude the excess inclusion income from gross income for purposes
of determining the taxable income of the partners.
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 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 Security 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."
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Mark to Market Rules. Prospective purchasers of a Residual Interest
Security should be aware of Internal Revenue Service regulations (the "Mark to
Market Regulations") relating to the requirement that a securities dealer
mark-to-market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The Mark
to Market Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" Residual Interest Security is not treated as a
security and thus may not be marked to market. In addition, a dealer is not
required to identify such Residual Interest Security as held for investment. In
general, a Residual Interest Security has negative value if, as of the date a
taxpayer acquires the Residual Interest Security, the present value of the tax
liabilities associated with holding the Residual Interest Security exceeds the
sum of (i) the present value of the expected future distributions on the
Residual Interest Security, and (ii) the present value of the anticipated tax
savings associated with holding the Residual Interest Security as the REMIC
generates losses. The amounts and present values of the anticipated tax
liabilities, expected future distributions and anticipated tax savings are all
to be determined using (i) the prepayment and reinvestment assumptions adopted
under Section 1272(a)(6), or that would have been adopted had the REMIC's
regular interests been issued with OID, (ii) any required or permitted clean up
calls, or required qualified liquidation provided for in the REMIC's
organizational documents and (iii) a discount rate equal to the "applicable
Federal rate" (as specified in Section 1274(d)(1)) that would apply to a debt
instrument issued on the date of acquisition of the Residual Interest Security.
Furthermore, the Temporary Mark to Market Regulations provide the IRS with the
authority to treat any Residual Interest Security having substantially the same
economic effect as a "negative value" residual interest as a "negative value"
residual interest.
The Mark-to-Market Regulations provide that any REMIC Residual Interest
acquired after January 3, 1995 cannot be marked to market, regardless of the
value of such REMIC residual interest. However, holders of positive value REMIC
Residual Interests acquired on or prior to January 3, 1995 may continue to mark
such residual interests to market for the entire economic life of such
interests.
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 specified in the related Prospectus Supplement if a REMIC or
partnership election is not made and the Trust Fund is not treated as a division
of a sole owner in the opinion of Federal 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 Chapter 1 of Subtitle
A 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.
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
Fees")), 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
61
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 deducible
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. For taxable years beginning after December 31, 1997, in the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent floor that would otherwise be applicable to individual partners.
Discount or Premium on Pass-Through Securities. 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 applicable 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 Security, 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 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
62
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.
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 Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the Securities are
subject to the contingent payment provisions of the Proposed Regulations; or
(iii) each Stripped Security the payments on which consist primarily or solely
of a specified portion of the interest payments on Loans 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. To the extent the Trust Fund's assets are
qualifying assets, 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)(6)(B) 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 attributable to the
Securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" with 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.
63
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, 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. 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 (i) 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 Residual Interest 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.
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 Holder who is not a United States person, as defined below,
("Nonresidents"), 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, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. 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. 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. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
whose income is includable in gross income for United States federal income
taxation regardless of its source, and (iv) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's
64
administration. For years beginning before January 1, 1997, the term "United
States person" shall include a trust whose income in includible in gross income
for United States federal income taxation regardless of source, in lieu of
trusts described in (iv) above, unless the trust elects to have its United
States status determined under the criteria set forth in (iv) above for tax year
ending after August 20, 1996. Recently issued Treasury regulations (the "Final
Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1998, 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 certain presumptions
regarding the status of Holders when payments to the Holders cannot be reliably
associated with appropriate documentation provided to the payor. All Holders
should consult their tax advisers regarding the application of the Final
Withholding Regulations.
Interest and OID of Holders who are Nonresidents 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.
Payments to Holders of Residual Interest Securities who are Nonresidents
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Nonresidents 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 "--Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion that a Trust Fund for which a
partnership election is made will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes assuming
that no action will be taken that is inconsistent with the treatment of the
Trust as a partnership (such as an election to treat the Trust as a corporation
for federal income tax purposes ("Corporation Election")). If, however, the
Trust has a single owner for federal income tax purposes, it will be treated as
a division of its owner and as such will be disregarded as an entity separate
from its owner for federal income tax purposes, assuming that no Corporation
Election is made. This opinion will be based on the assumption that the terms of
the Trust Agreement and related documents will be complied with, and on
counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) 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, 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
65
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. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Depositor 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, 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.
Sale or Other Disposition. 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. Interest payments made (or accrued) to a Noteholder who
is a Holder other than a United States Person, as defined below, (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
66
(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.
For these purposes, the term "United States person" means (i) a citizen or
resident of the United States, (ii) a corporation or partnership (including an
entity treated as a corporation or partnership for U.S. federal income tax
purposes) created or organized in or under the laws of the United States or any
State thereof or the District of Columbia (unless, in the case of a partnership,
Treasury regulations are adopted that provide otherwise), (iii) an estate whose
income is includable in gross income for United States federal income taxation
regardless of its source, and (iv) a trust for which one or more United States
persons have the authority to control all substantial decisions and for which a
court of the United States can exercise primary supervision over the trust's
administration. In addition, certain trusts that would otherwise not qualify as
U.S. Persons under the foregoing definition can elect to be treated as U.S.
Persons. Recently adopted Treasury regulations make certain modifications to the
withholding, backup withholding, and information reporting rules described in
the prospectus. These new regulations attempt to unify certification
requirements and modify reliance standards and are generally effective for
payments made after December 31, 1998. Prospective investors are urged to
consult their own tax advisors regarding the affect these regulations may have
on their particular circumstances.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-Resident may claim exemption
from United States federal income tax withholding. All Non-Residents 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, 1998.
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 Federal 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 taxable as a corporation with the adverse consequences described above
(and the taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Notes recharacterized as equity).
Alternatively, and most likely in the view of Federal Tax Counsel, 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.
67
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Depositor 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 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. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, 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.
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). Except as disclosed in the related
Prospectus Supplement, 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,
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, 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.
A Certificateholder that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will realize from a Certificate "unrelated business taxable income" as a result
of the "Debt Financed Income" rules under the Code.
68
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 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, 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. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to contribute its assets to a new partnership in exchange for
partnership interests therein, and then dissolve and distribute the new
partnership interests to the partners. The Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Trust Fund may be subject to certain tax
penalties and may incur additional expenses if it is required to comply with
those requirements. Furthermore, the Trust Fund might not be able to comply due
to lack of data.
Disposition of Certificates. Generally, 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 Loans 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.
69
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 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 Fund 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-1 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 Exchange Act 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 foreign
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 a Certificateholder which is a foreign person
70
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 Holders which are
foreign persons that are taxable as corporations and 39.6% for all other Holders
which are foreign persons. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust Fund to
change its withholding procedures. In determining a Holder's 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 Certificateholder which is a foreign person 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 Certificateholder which is a foreign person must obtain a taxpayer
identification number from the IRS and submit that number to the Trust Fund on
Form W-8 in order to assure appropriate crediting of the taxes withheld. A
Certificateholder which is a foreign person 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. As a result, Certificateholders
which are foreign persons will be subject to United States federal income tax
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable treaty. In such case, a Certificateholder which is a foreign
person 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.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-Resident may claim exemption
from United States federal income tax withholding. All Non-Residents 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, 1998.
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.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
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.
71
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and plans and other arrangements subject to Section 4975 of the Code and
on persons who are parties in interest or disqualified persons ("parties in
interest") with respect to such plans or arrangements. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under
Section 501(a) of the Code is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
A fiduciary of an employee benefit plan subject to Title I of ERISA should
consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in the Securities. Accordingly, among other factors, such
fiduciary should consider (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the diversification requirements of Section 404 of ERISA;
(iii) whether the investment is in accordance with the documents and instruments
governing the plan and (iv) whether the investment is prudent, considering the
nature of the investment, the overall investment policy of the Plan and the
composition of the Plan's portfolio. Fiduciaries of such plans also should
consider ERISA's prohibition on improper delegation of control over, or
responsibility for, plan assets.
In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as of certain plans or other retirement arrangements not subject
to ERISA but subject to Section 4975 of the Code (such as individual retirement
accounts and Keogh plans covering only a sole proprietor or partners) and any
entity, including an insurance company general account, whose underlying assets
include plan assets by reason of such a plan investing in such entity,
(collectively, "Plans(s)"), should consult with their legal counsel to determine
whether an investment in the Securities will cause the assets of the Trust Fund
to be considered plan assets pursuant to the plan asset regulations set forth at
29 CFR 2510.3-101 (the "Regulation"), thereby subjecting the Plan to the
prohibited transaction rules with respect to the Trust Fund and subjecting the
Trustee and any entities providing services with respect to the operation of the
Trust to the fiduciary standards of ERISA, or will cause the excise tax
provisions of Section 4975 of the Code to apply to the Trust Fund unless a
statutory or regulatory exception or an administrative exemption granted by the
Department of Labor ("DOL") applies to the purchase, sale, transfer or holding
of the Securities.
The Regulation contains rules for determining what constitutes the assets
of a Plan. The Regulation provides that, as a general rule, the underlying
assets and properties of corporations, partnerships, trusts and certain other
entities in which a Plan makes an investment in an "equity interest" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the Regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Primary Assets and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the operation of the Trust Fund may be parties in interest with
respect to Plans that invest in the Trust, and subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA and of Section 4975 of the Code,
with respect to transactions involving such assets unless such transactions are
subject to a statutory or regulatory exception or an administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and has no substantial equity features.
Generally, a profits interest in a partnership, an undivided ownership interest
in property and a beneficial ownership interest in a trust are deemed to be
"equity interests" under the Regulation. If Notes of a particular Series were
deemed to be indebtedness under applicable local law without any substantial
equity features, an investing Plan's assets would include such Notes, but not,
by reason of such purchase, the underlying assets of the Trust Fund. However,
without regard to whether the Notes are treated as an equity interest for such
purposes, the purchase, holding or transfer of Notes by or on behalf of a Plan
could be a prohibited transaction if the Depositor or the Trustee or any of
their respective affiliates is, or becomes, a party in interest or disqualified
person with respect to such Plan.
72
Another such exception applies if the class of equity interests in question
is: (i) "widely held" (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under
Section 12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition, the Regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund is held by investors other than benefit plan investors (which is
defined as including both Plans and government plans), the investing Plan's
assets will not include any of the underlying assets of the Depositor or the
Trust Fund.
An exemption may also be available for the purchase, holding and transfer
of the Securities. The Department of Labor granted to Bear, Stearns & Co. Inc.,
an administrative exemption, Prohibited Transaction Exemption 90-30 (Application
No. D-8207, 55 Fed. Reg. 21461) (1990) (the "Exemption"), from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Plans of securities representing interests
in asset-backed pass-through trusts that consist of certain receivables, loans
and other obligations that meet the conditions and requirements of the
Exemption, wherever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The obligations covered by the Exemption include
obligations such as the Primary Assets (other than Private Securities which are
not insured or guaranteed by the United States or an agency or instrumentality
thereof, or Home Improvement Contracts that are unsecured). If the Trust Fund
consists solely of assets covered by the Exemption, the Exemption will apply to
the acquisition, holding and transfer of the Securities by a Plan, provided that
certain conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) The acquisition of the Securities by a Plan is 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;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the trust;
(iii) The Securities acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Inc.
("D&P") or Fitch IBCA, Inc. ("Fitch") (each, a "Rating Agency");
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to
the trust represents not more than the fair market value of such
obligations. The sum of all payments made to and retained by the servicer
represents not more than reasonable compensation for the servicer's
services under the related servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities 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. The Depositor assumes that
only Plans which are accredited investors under the federal securities laws
will be permitted to purchase the Securities.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest generic rating categories of Standard & Poor's,
Moody's, D&P or Fitch for at least one year prior to the Plan's acquisition
of securities; and
73
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group;
(ii) such fiduciary (or its affiliate) is an obligor with respect to five
(5) percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in Securities does not exceed twenty-five
(25) percent of all of the Securities outstanding after the acquisition; and
(iv) no more than twenty-five (25) percent of the assets of any Plan for which
the person serves as fiduciary are invested in securities representing an
interest in one or more trusts containing assets sold or serviced by the same
entity. The Exemption does not apply to Plans sponsored by the Depositor, the
underwriters of the Securities, the Trustee, the Servicer, any obligor with
respect to obligations included in a Trust Fund constituting more than five
(5) percent of the aggregate unamortized principal balance of the assets in a
Trust Fund, or any affiliate of such parties (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption which extends exemptive relief to certain mortgage-backed
securities transactions using pre-funding accounts for trusts issuing
pass-through Securities. With respect to the Securities, the amendment generally
allows a portion of the mortgages ("Loans") supporting payments to
Securityholders and having a principal amount equal to no more than 25% of the
total principal amount of the Securities 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 Loans 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 ("Pre-Funding
Limit") must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original
Loans used to create the Trust, which terms and conditions have been
approved by a Rating Agency.
(3) The transfer of such Additional Loans to the Trust during the
Pre-Funding Period must not result in the Securities receiving a lower
credit rating from a 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 Loans 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
Loans which were transferred to the Trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Loans are substantially similar to the original Loans which were
transferred to the Trust: (i) the characteristics of the Additional Loans
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 Rating Agency rating the Securities, the Underwriter and
the Trustee) stating whether or not the characteristics of the Additional
Loans conform to the characteristics described in the Prospectus and
Prospectus Supplement ("Offering Documents") and/or Pooling and Servicing
Agreement or Sale and Servicing Agreement. In preparing such letter, the
independent accountant must use the same type of procedures as were
applicable to the Loans which were transferred 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
amount on deposit in the Pre-Funding Account is reduced below the minimum
level specified in the Agreement or an event of default occurs under the
Agreement.
74
(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 certain permitted investments ("Permitted Investments").
(8) The Offering Documents 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 Securityholders as repayments of
principal.
(9) The Pooling and Servicing Agreement must describe the Permitted
Investments for the Pre-Funding Account and Capitalized Interest Account
and, if not disclosed in the Offering Documents, the terms and conditions
for eligibility of the Additional Loans.
In the event that the Exemption is not applicable, some other prohibited
transaction class exemption issued by the DOL, including PTCE 96-23 (relating to
investments by in-house asset managers), PTCE 95-60 (relating to insurance
company general accounts), PTCE 91-38 (relating to bank collective funds), PTCE
90-1 (relating to insurance company pooled separate accounts) and PTCE 84-14
(relating to investments by qualified plan asset managers) may apply, depending
on the circumstances.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
Exemption to the purchase and holding of the Securities and the potential
consequences in their specific circumstances, prior to making an investment in
the Securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure 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.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Bear, Stearns &
Co. Inc. ("Bear Stearns") or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Bear Stearns
in any offering will comply with Schedule E to the By-Laws of the National
Association of Securities Dealers, Inc. The Prospectus Supplement relating to
each Series of Securities will set forth the specific terms of the offering of
such Series of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series. Bear Stearns is an affiliate of the Depositor.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Depositor by Stroock & Stroock & Lavan LLP, New York, New York.
75
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a "Supplemental Glossary" in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
"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.
"Appraised Value" means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan or sales price of such property at such time.
"Asset Group" means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any fund
or account for the Series.
"Available Distribution Amount" means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Certificate" means the Asset-Backed Certificates.
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual
76
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
"Cooperative Dwelling" means an individual housing unit in a building owned
by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the related
Due Date.
"Deposit Agreement" means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
"Depositor" means Bear Stearns Asset Backed Securities, Inc.
"Disqualified Organization" means the United States, any State or political
subdivision thereof, any possession of the United States, 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 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
"Distribution Date" means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
77
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Enhancement" means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
"Enhancer" means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"Holder" means the person or entity in whose name a Security is registered.
"Home Improvements" means the home improvements financed by a Home
Improvement Contract.
"Home Improvement Contract" means any home improvement installment sales
contracts and installment loan agreement which may be unsecured or secured by
purchase money security interest in the Home Improvement financed thereby.
"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
"Liquidation Proceeds" means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"Loans" mean Mortgage Loans and/or Home Improvement Contracts,
collectively. A Loan refers to a specific Mortgage Loan or Home Improvement
Contract, as the context requires.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
78
"Minimum Rate" means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Modification" means a change in any term of a Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgage Loan" means a closed-end home equity loan secured by a Mortgaged
Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Participating Securities" means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
"Pass-Through Security" means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
"Pay Through Security" means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the underlying
Primary Assets.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer (if such
Series relates to Loans) and the Trustee.
"Primary Assets" means the Private Securities and/or Loans, as the case may
be, which are included in the Trust Fund for such Series. A Primary Asset refers
to a specific Private Security or Loan, as the case may be.
"Principal Balance" means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
"Principal Only Securities" means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
"Private Security" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
"Property" means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
"PS Agreement" means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
"PS Servicer" means the servicer of the Underlying Loans.
79
"PS Sponsor" means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
"PS Trustee" means the trustee designated under a PS Agreement.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
"Securities" means the Notes or the Certificates.
"Seller" means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series relating to Loans, the Person if
any, designated in the related Prospectus Supplement to service Loans for that
Series, or the successors or assigns of such Person.
"Single Family Property" means property securing a Loan consisting of one
to four-family attached or detached residential housing, including Cooperative
Dwellings.
"Stripped Securities" means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be
80
allocated losses and shortfalls prior to the allocation thereof to other Classes
of Securities, to the extent and under the circumstances specified in the
related Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Enhancement and all other property and interest held
by or pledged to the Trustee pursuant to the related Agreement for such Series.
"UCC" means the Uniform Commercial Code.
"Underlying Loans" means loans of the type eligible to be Loans underlying
or securing Private Securities.
"Variable Interest Security" means a Security on which interest accrues at
a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
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[OCWEN LOGO]
OCWEN HOME EQUITY LOAN TRUST 1998-OFS4
$349,000,000
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 1998-OFS4
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PROSPECTUS SUPPLEMENT
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BEAR, STEARNS & CO. INC.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Home Equity Loan Asset-Backed Certificates,
Series 1998-OFS4 in any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Home Equity Loan Asset-Backed Certificates,
Series 1998-OFS4 and with respect to their unsold allotments or subscriptions.
In addition, all dealers selling the Home Equity Loan Asset-Backed Certificates,
Series 1998-OFS4 will be required to deliver a prospectus supplement and
prospectus until March 22, 1999.
DECEMBER 22, 1998
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