Pursuant to Rule 424(b)(5)
File No. 333-9532
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 10, 1999)
$141,629,000
UNITED NATIONAL HOME LOAN OWNER TRUST 1999-1
HOME LOAN ASSET-BACKED NOTES
UNITED NATIONAL BANK
SELLER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
ADVANTA MORTGAGE CORP. USA
SERVICER
Initial Proceeds
Class of Principal Note Price to Underwriting to the
Notes Balance(1) Rate Public(2) Discount Depositor(2)(3)
- ---------------- ------------ -------- --------------- ------------ ---------------
Class A Notes $112,893,000 6.91%(4) 99.99546% 0.2250% 99.77046%
Class M-1 Notes $ 14,368,000 6.91%(4) 94.18433% 0.3000% 93.88433%
Class M-2 Notes $ 14,368,000 6.91%(4) 86.62447% 0.4000% 86.22447%
Total $141,629,000 $138,866,483.04 $354,585.25 $138,511,897.79
- ------------------
(1) This amount is subject to a variance of 5%.
(2) Plus accrued interest from the Cut-Off Date.
(3) Before deducting expenses, estimated to be approximately $375,000.
(4) After the first payment date on which an optional redemption may be
exercised, the Note Rate will increase by 0.50% if not so exercised.
The notes represent non-recourse obligations of the Trust only and do not
represent an interest in or obligations of Bear Stearns Asset Backed
Securities, Inc., United National Bank, the Servicer, the Co-Owner Trustee,
the Indenture Trustee, the Owner Trustee or any of their affiliates.
This prospectus supplement may be used to offer and sell the notes only
if accompanied by the prospectus.
The Trust
o is a Delaware business trust formed pursuant to a
trust agreement among Bear Stearns Asset Backed
Securities, Inc., Wilmington Trust Company and U.S.
Bank National Association.
o will issue three classes of notes, which are
offered hereby.
o will issue six classes of certificates, which are
not offered hereby.
The Notes
o are principally secured by the assets of the Trust,
which consist of home loans that have fixed rates
of interest.
o are not insured or guaranteed by any governmental
agency or any other entity.
Credit Enhancement
o Certain classes of securities will be subordinated
to other classes of securities and provide credit
support for such classes of securities.
Review the information in "Risk Factors" beginning on page S-7 in this
prospectus supplement and on page 15 in the prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these notes or passed upon the
adequacy or accuracy of this prospectus supplement and accompanying prospectus.
Any representation to the contrary is a criminal offense.
------------------------------
BEAR, STEARNS & CO. INC. COAST PARTNERS SECURITIES, INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MARCH 10, 1999
For 90 days following the date of this prospectus supplement, all dealers
selling the notes will deliver a prospectus supplement and prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions.
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 notes in any state where the offer is not
permitted.
We do not claim that the information in this prospectus supplement and the
accompanying prospectus is accurate as of any date other than the dates stated
on their respective covers.
TABLE OF CONTENTS
PAGE
-----
PROSPECTUS SUPPLEMENT
Summary.................................................................................................... S-3
Risk Factors............................................................................................... S-7
Use of Proceeds............................................................................................ S-14
Description of the Trust................................................................................... S-14
The Home Loan Pool......................................................................................... S-15
The Seller................................................................................................. S-22
The Servicer............................................................................................... S-24
Description of Credit Enhancement.......................................................................... S-26
Description of the Securities.............................................................................. S-26
Description of the Transfer and Servicing Agreements....................................................... S-33
Prepayment and Yield Considerations........................................................................ S-37
Certain Federal Income Tax Consequences.................................................................... S-44
ERISA Considerations....................................................................................... S-47
Underwriting............................................................................................... S-48
Legal Investment Matters................................................................................... S-48
Ratings.................................................................................................... S-49
Legal Opinions............................................................................................. S-49
Index of Terms............................................................................................. S-50
PROSPECTUS
Prospectus Supplement...................................................................................... 3
Reports to Holders......................................................................................... 3
Available Information...................................................................................... 3
Incorporation of Certain Documents by Reference............................................................ 4
Summary of Terms........................................................................................... 5
Risk Factors............................................................................................... 15
Description of the Securities.............................................................................. 21
The Trust Funds............................................................................................ 24
Enhancement................................................................................................ 31
Servicing of Loans......................................................................................... 33
The Agreements............................................................................................. 38
Certain Legal Aspects of the Loans......................................................................... 45
The Depositor.............................................................................................. 54
Use of Proceeds............................................................................................ 55
Certain Federal Income Tax Considerations.................................................................. 55
State Tax Considerations................................................................................... 73
FASIT Securities........................................................................................... 73
ERISA Considerations....................................................................................... 76
Legal Matters.............................................................................................. 81
Financial Information...................................................................................... 81
Rating..................................................................................................... 81
Legal Investment........................................................................................... 82
Plan of Distribution....................................................................................... 82
Glossary of Terms.......................................................................................... 83
S-2
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. Please read this entire prospectus supplement and the
accompanying prospectus for additional information about the notes.
UNITED NATIONAL HOME LOAN OWNER TRUST 1999-1
HOME LOAN ASSET-BACKED NOTES
EXPECTED
ORIGINAL MATURITY RATINGS (S&P/
CLASS NOTE RATE PRINCIPAL BALANCE(1) DATE(2) MOODY'S/FITCH)
- ---------------- --------- -------------------- -------------- --------------
Class A Notes 6.91 %(3) $112,893,000 March 25, 2025 AAA/Aaa/AAA
Class M-1 Notes 6.91 %(3) $ 14,368,000 March 25, 2025 AA/Aa2/AA
Class M-2 Notes 6.91 %(3) $ 14,368,000 March 25, 2025 A/A2/A
--------------------------
(1) This amount is subject to a variance of 5%.
(2) We expect the actual maturity date for the securities will be
significantly earlier than the maturity date stated herein.
(3) After the first payment date on which an optional redemption may be
exercised, the note rate will increase by 0.50% per annum if the
option is not so exercised.
THE SELLER
o United National Bank, a national banking association
o United National Bank maintains its principal office at 514 Market Street,
Parkersburg, WV. Its telephone number is (304) 424-8800.
THE SERVICER
o Advanta Mortgage Corp. USA
o The Servicer will receive a monthly fee from payments on the home loans equal
to 0.75% per annum on the principal balance of each home loan.
TRUST
o United National Home Loan Owner Trust 1999-1
DEPOSITOR
o Bear Stearns Asset Backed Securities, Inc.
INDENTURE TRUSTEE/CO-OWNER TRUSTEE
o U.S. Bank National Association
OWNER TRUSTEE
o Wilmington Trust Company, acting not in its individual capacity but solely as
owner trustee
CUT-OFF DATE
o For each home loan, the close of business on February 28, 1999.
CLOSING DATE
o On or about March 26, 1999
PAYMENT DATES
o The 25th day of each month, or if such day is not a business day, the next
business day. The first payment date is April 26, 1999.
ACCRUAL PERIOD
o The calendar month preceding the month of a payment date.
REGISTRATION OF NOTES
The trust will issue the notes in book-entry form. You will hold your interests
through a depository in the United States. While the notes are book-entry, they
will be registered in the name of the depository, or in the name of the
depository's nominee.
Transfers within the depository will be made in accordance with the usual rules
and operating procedures of its system. The limited circumstances under which
definitive notes will replace the book-entry notes are described in this
prospectus supplement.
S-3
We refer you to "Risk Factors--Consequences on Liquidity and Payment Delay
Because of Owning Book-Entry Notes," and "Description of the Securities" in this
prospectus supplement for additional information.
ASSETS OF THE TRUST
The trust's assets include:
o a pool of home loans that have fixed rates of interest, secured primarily by
junior mortgages, deeds of trust, or other security instruments primarily on
one- to four-family residential properties and the related loan files;
o payments of interest due on the home loans after the cut-off date and
principal payments on the home loans received after the cut-off date; and
o amounts on deposit in certain accounts described in this prospectus
supplement.
THE HOME LOANS
1. Home Loan Statistics:
On the closing date, the Trust will acquire a pool of home loans that have
fixed rates of interest (the "home loans"). The home loans will have the
following characteristics as of the close of business on February 28, 1999:
o number of home loans: 5,539
o aggregate principal balance: $205,259,057
o average principal balance of home loans: $37,057 (approximate)
o principal balances of home loans range: $4,486 to $84,893
o mortgaged property location: 48 states
o interest rates range: 11.00% to 17.99%
o weighted average interest rate: 13.27% (approximate)
o loan age range: 4 to 12 months
o weighted average loan age: 6 months (approximate)
o combined loan-to-value ratio range: 18.00% to 131.00% (approximate)
o weighted average combined loan-to-value ratio: 113.64% (approximate)
2. Characteristics of Home Loans:
o The home loans will consist of loans for which the related net proceeds were
used to finance (i) property improvements, (ii) debt consolidation, or
(iii) a combination of property improvements, debt consolidation, cash-out,
credit insurance premiums, origination costs or other consumer purposes.
o A majority of the home loans will be secured by liens on mortgaged properties
in which the borrowers have little or no equity (i.e., the related combined
loan-to-value ratios approach or exceed 100%).
o The home loans provide for scheduled payments that will be, if timely paid,
sufficient to amortize fully the principal balance of the related home loan on
or before its maturity date.
o Interest on the home loans will accrue on an "actuarial interest" method.
We refer you to "The Home Loan Pool" in this prospectus supplement for
additional information.
MONTHLY EXPENSE ADVANCES
The Servicer may make cash advances on behalf of the Trust to cover customary
property protection expenses. There is no required advancing of delinquent
principal or interest by the Servicer or any other party.
We refer you to "Description of the Transfer and Servicing
Agreements--Servicing" in this prospectus supplement for additional information.
THE NOTES
1. General
o Each month, the Indenture Trustee will calculate the amount of principal and
interest you are owed.
o If you own a note on the last day of the calendar month prior to the related
payment date, you will be entitled to receive payments on the related payment
date.
2. Interest Payments: Interest on the notes will accrue during the calendar
month prior to the applicable payment date. The Indenture Trustee will
calculate interest based on a 360-day year
S-4
of twelve 30-day months. On each payment date, you will be entitled to the
following amounts:
o interest at the related note rate that accrued during the related accrual
period on your note balance; and
o any interest that was due on a prior payment date that was not paid. In
addition, interest will accrue and be payable on the amount of interest which
was previously due and not paid to the extent permitted by applicable law.
3. Principal Payments: Noteholders will be entitled to the principal collected
during the prior due period on the home loans to the extent and in the order
of priority set forth under "Description of the Transfer and Servicing
Agreements--Priority of Payments."
For a period of at least three years from the Closing Date, all principal
received on the home loans will be payable solely to the Class A Notes, until
the principal balance of such notes equals zero.
We refer you to "Description of the Securities--Payments" in this prospectus
supplement for additional information.
THE CERTIFICATES
o The Certificates are not being offered pursuant to this prospectus supplement.
o The Class A-IO Certificates have an initial notional balance of $205,259,057.
The Class A-IO Certificates will not receive any distributions of principal.
The interest rate applicable to the Class A-IO Certificates is determined as
set forth in "Descriptions of Securities--Payments of Interest" in this
prospectus supplement.
o The Class B-1 Certificates have an original principal balance of $24,631,000
and an interest rate of 6.91% per annum.
o The Class B-2 Certificates have an original principal balance of $6,158,000
and an interest rate of 6.91% per annum.
o The Class B-3 Certificates have an original principal balance of $4,105,000
and an interest rate of 6.91% per annum.
o The Class B-4 Certificates have an original principal balance of $28,737,000
and an interest rate of 6.91% per annum.
o The Residual Interest Certificate has no principal balance and shall not bear
interest.
The information presented for the certificates is provided solely to assist your
understanding of the notes.
CREDIT ENHANCEMENT
Limited Subordination of Subordinated Securities. Losses on the home loans will
be allocable to the most subordinate class of securities outstanding.
OPTIONAL REDEMPTION
The Residual Interest Certificateholder, at its option, may effect an early
redemption of the notes and purchase of the certificates on any payment date
after the aggregate principal balance of the home loans is reduced to any amount
less than or equal to 5% of the aggregate principal balance of the home loans as
of the cut-off date. If the Residual Interest Certificateholder fails to
exercise such option for 30 days or more, the Servicer, at its option, will have
the right to do so on the same terms as the Residual Interest Certificateholder.
After the first payment date on which an optional redemption may be exercised,
the interest rate of each class of securities with a principal balance will be
increased by 0.50% per annum if such option is not so exercised.
We refer you to "Description of the Securities--Optional Redemption" in this
prospectus supplement for additional information.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o Tax counsel is of the opinion that the notes will be treated as debt
instruments.
o You must agree to treat your note as indebtedness for federal, state and local
income and franchise tax purposes.
We refer you to "Certain Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus for additional information.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), can limit investments by certain
pension and other employee benefit plans.
S-5
Pension and other employee benefit plans should be able to purchase investments
like the notes so long as they are treated as debt under applicable state law
and have no "substantial equity features." Any plan fiduciary considering
whether to purchase the notes on behalf of a plan should consult with its
counsel regarding the applicability of the provisions of ERISA and the Internal
Revenue Code and the availability of any exemptions.
We refer you to "ERISA Considerations" in this prospectus supplement and the
accompanying prospectus for additional information.
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage related
securities" to include only securities backed by first mortgages, and not second
mortgages. Because the pool of home loans consists primarily of junior
mortgages, the notes will not be "mortgage related securities" under that
definition.
We refer you to "Legal Investment Matters" in this prospectus supplement and
"Legal Investment" in the accompanying prospectus for additional information.
NOTE RATINGS
o The Trust will not issue the notes unless the notes receive the ratings set
forth on the table at the beginning of this summary.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by any rating agency.
We refer you to "Ratings" and "Risk Factors--Ratings of the Notes" in this
prospectus supplement for additional information.
S-6
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the notes. You should also carefully consider the information set
forth under "Risk Factors" in the accompanying prospectus.
CONSEQUENCES ON LIQUIDITY AND PAYMENT DELAY BECAUSE OF OWNING BOOK-ENTRY NOTES
o Limit on Liquidity of Notes. Issuance of the notes in book-entry form may
reduce the liquidity of such notes in the secondary trading market since
investors may be unwilling to purchase notes for which they cannot obtain
physical notes.
o Limit on Ability to Transfer or Pledge. Since transactions in the
book-entry notes can be effected only through DTC, participating organizations,
indirect participants and certain banks, your ability to transfer or pledge a
book-entry note to persons or entities that do not participate in the DTC system
or otherwise to take actions in respect of such notes may be limited due to lack
of a physical note representing the book-entry notes.
o Delays in Payments. You may experience some delay in the receipt of
payments on the book-entry notes since the payments will be forwarded by the
Indenture Trustee to DTC for DTC to credit the accounts of its participants
which will thereafter credit them to your account either directly or indirectly
through indirect participants, as applicable.
We refer you to "--Book-Entry Registration" and "Description of the
Securities--Book-Entry Notes" in this prospectus supplement.
LIMITED RESALE
Bear, Stearns & Co. Inc. intends to make a market for resale in the notes
but has no obligation to do so. There is no assurance that such a market will
develop or, if it develops, that it will continue. Consequently, you may not be
able to sell your notes readily or at prices that will enable you to realize
your desired yield. The market values of the notes are likely to fluctuate;
these fluctuations may be significant and could result in significant losses to
you.
The secondary markets for mortgage-backed and asset-backed securities have
experienced periods of illiquidity and can be expected to do so in the future.
Illiquidity can have a severely adverse effect on the prices of securities that
are especially sensitive to prepayment, credit or interest rate risk, or that
have been structured to meet the investment requirements of limited categories
of investors.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
HOME LOAN BALANCE
Substantial delays could be encountered in connection with the liquidation
of delinquent home loans. Further, liquidation expenses such as legal fees, real
estate taxes and maintenance and preservation expenses may reduce the portion of
liquidation proceeds payable to you. If a mortgaged property fails to provide
adequate security for the home loan, you will incur a loss on your investment if
the credit enhancement described in this prospectus supplement is insufficient
to cover the loss.
We refer you to "Certain Legal Aspects of the Loans--Foreclosure on
Mortgages" in the accompanying prospectus.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your notes will be directly related to the rate of
principal payments on the home loans. Please consider the following:
o Borrowers may fully or partially prepay their home loan at any time.
Approximately 64.95% of the home loans require the payment of prepayment
penalties which may reduce the likelihood of prepayments on such home loans.
o A substantial majority of the home loans contain due-on-sale provisions.
Due-on-sale provisions require the borrower to fully pay the home loan when the
mortgaged property is sold. Generally, the Servicer will enforce the due-on-sale
provision unless prohibited by applicable law. We refer you to "Certain Legal
Aspects of the Loans--Due-on-Sale Clauses in Mortgage Loans" in the accompanying
prospectus.
S-7
o The rate of principal payments on the home loans is influenced by a
variety of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility.
o Home loans generally are not viewed by borrowers as permanent financing.
Accordingly, the home loans may experience a higher rate of prepayment than
purchase money first lien mortgage loans.
o We cannot predict the rate at which borrowers will repay their home
loans, nor are we aware of any publicly available studies or statistics on the
rate of prepayment of home loans similar to the home loans in this pool.
o If you purchased your note at a premium and you receive your principal
faster than expected, your yield to maturity will be lower than you anticipated.
If you purchased your note at a discount and you receive your principal slower
than expected, your yield to maturity will be lower than you anticipated.
o The Seller may be required to repurchase home loans from the Trust as a
result of certain breaches of representations and warranties or certain defects
in the home loan files that have not been cured. These repurchases will have the
same effect on your yield as a prepayment of the home loans.
o In most circumstances, liquidations of defaulted home loans will have the
same effect on your yield as a prepayment of the home loans. See "--Home Loan
Default Risks" in this prospectus supplement for a discussion of the default
risks presented by the home loans.
o If the notes are redeemed, you have no assurance that similar investments
offering comparable yields will be available.
We refer you to "Prepayment and Yield Considerations" in this prospectus
supplement.
LIEN PRIORITY COULD RESULT IN PAYMENT DELAY AND LOSS
Substantially all of the home loans are secured by mortgages which are
junior in priority. Home loans that are secured by junior mortgages will receive
proceeds from a sale of the related mortgaged property only after any senior
mortgage loans and prior statutory liens have been paid. If the remaining
proceeds are insufficient to satisfy the home loan in the Trust and the other
forms of credit enhancement are insufficient to cover the loss, then:
o there will be a delay in payments to you while a deficiency judgment (if
any) against the borrower is sought; and
o you may incur a loss if a deficiency judgment cannot be obtained or is
not realized upon.
We refer you to "Certain Legal Aspects of the Loans" in the accompanying
prospectus.
POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement will be provided by the subordination of the Class B-4
Certificates, the Class B-3 Certificates, the Class B-2 Certificates, the
Class B-1 Certificates, the Class M-2 Notes, and the Class M-1 Notes,
respectively, to each class of securities having a higher payment priority to
such class. The securities are not insured by any financial guaranty insurance
policy. If the home loans experience higher rates of delinquencies, defaults or
losses than initially anticipated, there can be no assurance that the amounts
available from the applicable credit enhancement will be adequate to cover the
delays or shortfalls in payments that result from such higher delinquencies,
defaults or losses. If the amounts available from the available credit
enhancement are inadequate, noteholders will bear the risk of any resulting
delays in payment or losses.
As a result of delinquencies on the home loans, the amount of interest
received on the home loans during any due period may be less than the amount of
interest payable on the securities on the related payment date. The Servicer
will not advance delinquent payments of principal and interest.
The holders of the Certificates will not be required to refund any amounts
previously distributed to such holders pursuant to the transfer and servicing
agreements, regardless of whether there are sufficient funds on a subsequent
payment date to pay all amounts then payable to Noteholders.
S-8
HOME LOAN DEFAULT RISKS
Noteholders are protected by the available forms of credit enhancement
against the risk of loss realized on the home loans. However, in the event that
the credit enhancement is inadequate to provide protection to the noteholders,
any losses on the home loans would be borne by such holders. The risks presented
by the home loans include the following:
o Early Default: Defaults on home loans are generally expected to occur
more frequently in the early years of the terms of home loans. The
weighted average number of months since origination of the home loans as
of the cut-off date is approximately 6 months, which is not a
sufficiently long period of time to develop reliable performance data
regarding the home loans. Delinquencies may increase as the home loans
become more seasoned.
o High LTV Ratios: Most of the home loans are secured by liens on the
mortgaged properties in which the borrowers have little or no equity.
Approximately 88.61% of the home loans have original combined
loan-to-value ratios in excess of 100%. Home loans with high original
combined loan-to-value ratios will be more sensitive to declining
property values than would those with lower original combined
loan-to-value ratios and therefore may experience a higher incidence of
default. In addition, with respect to home loans with original combined
loan-to-value ratios near or in excess of 100%, if the related borrowers
sell their homes, such borrowers may be unable to repay the home loans in
full from the sale proceeds of the financed properties and other funds
available. Accordingly, such home loans likely may experience higher
rates of delinquencies, defaults and losses. With respect to home loans
the proceeds of which were used in whole or in part for debt
consolidation, the related borrower may incur further consumer debt. This
reloading of debt could impair the ability of such borrowers to repay the
home loans.
o Junior Liens: Substantially all of the home loans are secured by liens
junior to one or more senior liens on the related mortgaged properties.
In general, a junior lienholder may not foreclose on the related
mortgaged property unless it forecloses subject to the senior lien(s), in
which case it must either pay the entire amount due under the senior
mortgage or agree to make payments under the senior mortgage if the
borrower is in default thereunder. As a result, in general, the Servicer
does not expect to foreclose on home loans secured by junior liens. We
refer you to "Certain Legal Aspects of the Loans-Junior Mortgages; Rights
of Senior Mortgages" in the accompanying prospectus.
o Limitation on Repurchase of Defective Home Loans by the Seller: No
assurance can be given that, at any particular time, the Seller will be
capable, financially or otherwise, of repurchasing home loans as a result
of certain breaches of representations and warranties or certain defects
in the home loan files that have not been cured. If the Seller is not
able or otherwise does not make these repurchases, the Indenture Trustee
will use reasonable efforts to enforce the obligations of the Seller to
repurchase the defective home loan. However, there is no assurance that
any recoveries will be adequate to fully cover amounts owing on such home
loan.
ADDITIONAL FACTORS AFFECTING DELINQUENCIES, DEFAULTS AND LOSSES ON THE HOME
LOANS
o No Servicer Delinquency Advances. In the event of a delinquency or a
default on a home loan, neither the Servicer, any subservicer, nor any other
person will have any obligation to advance scheduled monthly payments of
principal and interest with respect to such home loan. As a result, the amount
of principal and interest received on the home loans during any particular due
period may be less than the amount of principal and interest payable on the
securities on the related payment date. See "Description of the Transfer and
Servicing Agreements--Servicing" in this prospectus supplement.
o Acquisitions from Third Parties. A substantial portion of the home loans
will have been acquired by the Seller through purchases from various
originators. See "The Seller--Purchase of Home Loans" in this prospectus
supplement. A substantial majority of such home loans will have been
re-underwritten and reviewed for compliance with the underwriting guidelines of
The First National Bank of Keystone ("Keystone"). See "The Seller--Underwriting
Criteria" in this prospectus supplement. The Seller may have acquired certain
home loans from an originator that, at the time of origination, was not an
approved FHA lender or an approved FNMA or FHLMC seller/servicer, and therefore
did not have an internal quality
S-9
control program substantially similar to the FNMA or FHLMC required quality
control programs. Such home loans may be subject to a higher incidence of
delinquency or default.
o Dependence on Servicer for Servicing Home Loans. Upon the Servicer's
failure to remedy a servicer event of default under the sale and servicing
agreement, a majority of the holders of the then outstanding amount of the
notes, the Trust, or the Indenture Trustee may remove the Servicer and appoint a
successor servicer. Absent such a replacement, noteholders will be dependent
upon the Servicer to adequately and timely perform its servicing obligations and
remit to the Indenture Trustee payments of principal and interest received on
the home loans. The manner in which the Servicer performs its servicing
obligations will affect the amount and timing of principal and interest payments
received on the home loans. Such principal and interest payments and other
recoveries in respect of the home loans are the sole source of funds for the
payments due to Noteholders. See "The Servicer--Servicing Experience" in this
prospectus supplement.
o Non-recordation of Assignments. The Seller will not be required to record
assignments of the Mortgages to the Indenture Trustee in the real property
records of California and Arizona. The Seller will retain record title to such
Mortgages on behalf of the Indenture Trustee and the securityholders. See
"Description of the Transfer and Servicing Agreements--Sale and Assignment of
the Home Loans" herein.
Although the recordation of the assignments of the mortgages in favor of
the Indenture Trustee is not necessary to effect, among the parties, a transfer
of the home loans to the Indenture Trustee, if the Seller were to sell, assign,
satisfy or discharge any home loan prior to recording the related assignment in
favor of the Indenture Trustee, the other parties to such sale, assignment,
satisfaction or discharge may have rights superior to those of the Indenture
Trustee. In some states, in the absence of such recordation of the assignments
of the mortgages, the transfer to the Indenture Trustee of the home loans may
not be effective against certain creditors or purchasers from the Seller or a
receiver of the Seller. If such other parties, creditors or purchasers have
rights to the home loans that are superior to those of the Indenture Trustee,
the Trust could lose the right to future payments of principal and interest from
such home loans and, accordingly, noteholders could suffer a loss of principal
and interest to the extent that such loss is not otherwise covered by the
applicable credit enhancement.
PAYMENTS TO AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF UNITED
The sale of the home loans from United National Bank, a national banking
association ("United") to the Depositor will be treated by United, the Depositor
and the Trust for financial accounting purposes as a sale of the home loans. If
United were to become insolvent, the Federal Deposit Insurance Corporation
("FDIC"), which would be appointed as receiver or conservator for United, may
argue that the transaction between United and the Depositor is a pledge of home
loans as security for a borrowing rather than a sale. Such an attempt, even if
unsuccessful, could result in delays and possible reductions in payments to you.
United is subject to examination, regulation and supervision by the Office
of the Comptroller of the Currency and the FDIC. These agencies have broad
regulatory powers to prevent or remedy unsafe or unsound practices or other
violations of applicable regulations, agreements or policies by persons they
regulate. Such agencies may issue a cease-and-desist order or require
affirmative action to correct any condition resulting from any violation or
unsafe or unsound practice, including requiring a person to make restitution or
provide reimbursement, to dispose of any loan or asset involved, to rescind
agreements or contracts and to take any other action that they determine to be
appropriate. United believes that the transactions contemplated by this
prospectus supplement and the accompanying prospectus will not constitute unsafe
or unsound practices and do not violate any applicable regulation, agreement or
policy.
LACK OF PERFECTED SECURITY INTEREST IN THE HOME LOANS
Keystone or Keystone Mortgage Corp., Inc., as applicable, has delivered or
will deliver to United the assignments (from Keystone to United) of its
interests in each mortgage in recordable form relating to the home loans within
thirty days of the closing date. The Indenture Trustee will deliver all such
assignments for recordation.
United has delivered or will deliver to the custodian the mortgage notes,
the mortgages and any assumption or modification agreements relating to the home
loans on or before the closing date and will deliver or cause to be delivered
the assignments of each mortgage in recordable form relating to the home
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loans within ninety days of the closing date; however, assignments of the
mortgages to the Indenture Trustee will not be recorded in California and
Arizona. Prior to delivery and recording, the interest of the Indenture Trustee
in the mortgages, the mortgage notes and any proceeds from the home loans may be
subject to the claims of creditors or to sale to a third party, as well as to a
receiver or conservator appointed in the event of the insolvency of United.
In certain states in which the mortgaged properties are located, failure to
record the assignments of the related mortgages to the Indenture Trustee will
have the result of making the sale of the home loans potentially ineffective
against:
o any creditors of United who may have been fraudulently or inadvertently
induced to rely on the home loans as assets of United, or
o any purchaser of a home loan who had no notice of the prior conveyance to
the Trust if such purchaser perfects his interest in the home loan by taking
possession of the related documents or other evidence of indebtedness or
otherwise.
In either such event, the Trust would be an unsecured creditor of United.
ABILITY OF THE SERVICER TO HONOR ITS FINANCIAL OBLIGATION IS INFLUENCED BY THE
FINANCIAL CONDITION OF THE SERVICER'S PARENT COMPANY.
The financial obligations of the Servicer, as they relate to the Trust,
primarily consist of the obligations of the Servicer pursuant to the sale and
servicing agreement. To the extent that the Servicer's ability to perform such
obligations is adversely affected by the financial condition of the Servicer's
parent company, the Home Loans may experience an increased level of
delinquencies and losses. We refer you to "The Servicer--Recent Developments
related to the Advanta Parent" in this prospectus supplement.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION.
United has limited historical delinquency and default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Home Loans underwritten pursuant to the underwriting standards
described herein. In particular, because United has only recently begun
acquiring home loans similar to the Home Loans, it does not yet have any
meaningful historical delinquency and default experience with respect to the
Home Loans. In addition, the Servicer does not have any meaningful historical
performance data available for distribution with respect to its aggregate
portfolio of Home Loans similar to the home loans which are serviced for others
because such home loans were underwritten pursuant to a variety of underwriting
guidelines of many different originators and aggregating loss and delinquency
experience with respect to such home loans would not provide meaningful
statistics for comparison to the Home Loans. However, the Servicer does maintain
loss and delinquency information with respect to each portfolio it services for
others.
Significant uncertainty exists regarding likely delinquency, default and
loss experience over time and in differing economic and interest rate
environments. Because loans such as the home loans have characteristics that
combine characteristics similar to unsecured consumer debt and secured consumer
debt, the delinquency, default and loss experience of the Home Loans is unlikely
to be comparable to either of such types of consumer debt and is unlikely to
reflect a blending or averaging of such experience. Accordingly, investors do
not have, and will not have for an indeterminate amount of time, information
available to them to assess with any degree of confidence the likely
delinquency, default and loss experience of the home loans. Prospective
investors should make their investment determinations based on the Home Loan
underwriting criteria, the applicable credit enhancement described herein, the
characteristics of the Home Loans and other information provided herein.
UNDERWRITING GUIDELINES.
Pursuant to the re-underwriting guidelines of Keystone, the assessment of
the creditworthiness of the borrower is the primary consideration in
re-underwriting a home loan. The evaluation of the adequacy of the value of the
related mortgaged property, together with the amount of all liens senior to the
lien of a home loan (i.e., the related "combined loan-to-value ratio") is given
less consideration, and in certain cases no
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consideration, in re-underwriting the home loans. See "The Seller--Underwriting
Criteria". The credit quality of some of the borrowers under the Loans is lower
than that of borrowers under mortgage loans conforming to the Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC") underwriting guidelines for first-lien, single family mortgage loans.
Consequently, the home loans are likely to experience higher rates of
delinquencies, defaults and losses (which rates could be substantially higher)
than those that would be experienced by loans underwritten in conformity with
the FNMA or FHLMC underwriting guidelines for first-lien, single family mortgage
loans. Also, the losses sustained from defaulted home loans are likely to be
more severe (and will frequently be total losses) because the costs incurred in
the collection and liquidation of defaulted home loans in relation to the
smaller principal balances thereof are proportionately higher than for
first-lien, single family mortgage loans, and because a substantial number of
the home loans are secured by junior liens on mortgaged properties in which the
borrowers had little or no equity at the time of origination of such home loans.
Although the creditworthiness of the borrower is the primary consideration
in the re-underwriting of the home loans, no assurance can be given that the
creditworthiness of such borrower will not deteriorate as a result of future
economic and social factors, which deterioration may result in a delinquency or
default by such borrower on the related home loan. Furthermore, because the
adequacy of the value of the related mortgaged property, if any, is given less
or no consideration in re-underwriting a home loan, no assurance can be given
that any proceeds will be recovered from the foreclosure or liquidation of the
mortgaged property, if any, for a defaulted home loan.
INTEREST PAYMENTS ON THE HOME LOANS MAY BE REDUCED
o Prepayments of Principal May Reduce Interest Payments. If a borrower
prepays a home loan, the borrower is charged interest only up to the date of the
prepayment, instead of a full month. If the credit enhancements are insufficient
to cover the loss, you may incur a loss.
o Interest Shortfalls Are Not Covered by the Servicer. The Soldiers' and
Sailors' Civil Relief Act of 1940 permits certain modifications to the payment
terms for mortgage loans, including a reduction in the amount of interest paid
by the borrower, under certain circumstances. The Servicer will not pay for any
interest shortfalls created by the Soldiers' and Sailors' Civil Relief Act of
1940.
RATINGS OF THE NOTES
o On the closing date the rating agencies will rate the notes as set forth
in "Ratings" in this prospectus supplement. A rating is not a recommendation to
purchase, hold or sell notes, and it does not comment as to market price or
suitability for a particular investor. The ratings of the notes address the
likelihood of the payment of principal and interest on the notes pursuant to
their terms. There is no assurance that a rating will remain for any given
period of time or that a rating agency will not lower or withdraw its rating if
in its judgment circumstances in the future so warrant.
RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION
The mortgaged properties relating to the home loans are located in 48
states. However, 22.35% of the mortgaged properties (each by aggregate principal
balance as of the close of business on the cut-off date are located in
California. If California experiences in the future weaker economic conditions
or greater rates of decline in real estate values than the United States
generally, then the home loans may experience higher rates of delinquencies,
defaults and foreclosures than would otherwise be the case. Natural disasters
affecting regions of the United States from time to time may result in
prepayments of home loans or in losses. Mortgaged properties located in
California may be more susceptible to certain types of hazards, such as
wildfires and mudslides, and certain types of special hazards not covered by
insurance, such as earthquakes, than properties located in other parts of the
country.
NOTEHOLDERS COULD BE ADVERSELY AFFECTED IN THE ABSENCE OF YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their operations, the
Servicer, the Indenture Trustee and the Owner Trustee are faced with the task of
preparing for the year 2000. The year 2000 issue is the result of prior computer
programs being written using two digits, rather than four digits, to define the
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applicable year. Any of the Servicer's, the Indenture Trustee's and the Owner
Trustee's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. Major computer
system failure or miscalculations may occur as a result. The Servicer, the
Indenture Trustee and the Owner Trustee are each presently engaged in various
procedures to ensure that its respective computer systems and software will be
year 2000 compliant.
However, if the Servicer, the Indenture Trustee or the Owner Trustee or any
of their respective suppliers, customers, brokers or agents do not successfully
and timely achieve year 2000 compliance, the performance of obligations of the
Servicer, the Indenture Trustee or the Owner Trustee, as applicable, could be
materially adversely affected. This could result in delays in processing
payments on the home loans and cause a related delay in payments to you.
RISK OF DTC YEAR 2000 COMPLIANCE
DTC has informed its participants that DTC management is aware that some
computer applications, systems, and the like for processing data ("Systems")
that are dependent upon calendar dates, including dates before, on, and after
January 1, 2000, may encounter "year 2000 problems." DTC has informed its
participants and other members of the financial community (the "Industry") that
it has developed and is implementing a program so that its Systems, as the same
relate to the timely payment of distributions (including principal and interest
payments) to securityholders, book-entry deliveries, and settlement of trades
within DTC, continue to function appropriately. This program includes technical
assessments and a redemption plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including, but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to:
(i) impress upon them the importance of such services being year 2000 compliant;
and (ii) determine the extent of their efforts for year 2000 remediation (and,
as appropriate, testing) of their service. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for information purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
FORWARD-LOOKING INFORMATION
Certain of the information contained in this prospectus supplement
constitutes "forward-looking statements." These statements may include
projections of average life and the maturity date of the notes. Such statements
are intended to convey our projections or expectations as of the date of this
prospectus supplement. Such statements are inherently subject to a variety of
risks, uncertainties and other factors that may cause the actual results and
performance of the notes and the Trust to be materially different from any
future results or performance expressed or implied by such forward-looking
statements. Such factors include general economic and business conditions,
political and/or social conditions, interest rate changes, prepayments amounts,
loss and delinquency history, servicing performance, and the law and government
regulatory initiatives.
We will not update or revise any forward-looking statement to reflect
changes in our expectations or changes in the conditions or circumstances on
which such statements were originally based.
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USE OF PROCEEDS
The proceeds from the sale of the Notes, net of certain expenses, will be
used by the Trust to purchase the Home Loans from the Depositor. The Depositor
will use such proceeds from the sale of the Home Loans to the Trust for the
purchase of the Home Loans from the Seller. The Seller in turn will use all or a
substantial portion of such proceeds from the sale of the Home Loans for general
corporate purposes.
DESCRIPTION OF THE TRUST
GENERAL
The Trust, United National Home Loan Owner Trust 1999-1, will be a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this Prospectus Supplement. After
its formation, the Trust will not engage in any activity other than (i)
acquiring, holding and managing the Home Loans and the other assets of the Trust
and proceeds therefrom, (ii) issuing the Securities, (iii) making payments on
the Securities, and (iv) engaging in related activities.
On the Closing Date, the Trust will purchase home loans (the "Home Loans")
having an aggregate principal balance of approximately $205,259,057 (the
"Original Pool Principal Balance") as of the Cut-Off Date from the Depositor
pursuant to a Sale and Servicing Agreement to be dated as of March 1, 1999, the
"Sale and Servicing Agreement"), among the Trust, the Depositor, the Seller, the
Servicer, the Co-Owner Trustee, the Custodian and the Indenture Trustee. The
Depositor will purchase the Home Loans from the Seller on the Closing Date
pursuant to a Home Loan Purchase Agreement dated as of March 1, 1999 (the "Home
Loan Purchase Agreement") by and between the Seller and the Depositor.
The assets of the Trust will consist primarily of Home Loans, which will be
secured by Mortgages. See "The Home Loan Pool" herein. The assets of the Trust
will also include (i) payments of accrued interest and principal collected in
respect of the Home Loans received after the Cut-Off Date; (ii) amounts on
deposit in the Collection Account (excluding investment income thereon), Note
Payment Account and Certificate Distribution Account; (iii) the related Home
Loan Files and credit files; and (iv) certain other ancillary or incidental
funds, rights and properties related to the foregoing. On the Closing Date, the
Trust will include the unpaid principal balance of each Home Loan as of the
Cut-Off Date (the "Cut-Off Date Principal Balance"). The "Principal Balance" of
a Home Loan on any day is equal to its Cut-Off Date Principal Balance, minus all
principal reductions credited against the principal balance of such Home Loan
since such Cut-Off Date; provided, however, that the Principal Balance of a
Liquidated Home Loan will be zero. With respect to any date, the "Pool Principal
Balance" will be equal to the aggregate Principal Balance of the Home Loans as
of such date.
The Servicer will be required to service the Home Loans pursuant to the
Sale and Servicing Agreement (collectively, with the Indenture, the
Administration Agreement (as defined herein), the Home Loan Purchase Agreement
and the Trust Agreement, the "Transfer and Servicing Agreements") and will be
compensated for such services as described under "Description of the Transfer
and Servicing Agreements--Servicing" herein.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as Owner Trustee, at the address set forth below
under "--The Owner Trustee and Co-Owner Trustee."
THE OWNER TRUSTEE AND CO-OWNER TRUSTEE
Wilmington Trust Company will act not in its individual capacity but solely
as the Owner Trustee under the Trust Agreement. Wilmington Trust Company is a
Delaware banking corporation and its principal offices are located at Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890.
Certain functions of the Owner Trustee under the Trust Agreement and the
Sale and Servicing Agreement will be performed by U.S. Bank National
Association, in its capacity as Co-Owner Trustee, including maintaining the
Certificate Distribution Account and making distributions therefrom.
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U.S. Bank National Association will also perform certain additional
administrative functions on behalf of the Trust pursuant to the terms of an
administration agreement dated as of March 1, 1999 (the "Administration
Agreement") among the Trust, U.S. Bank National Association and United, as
co-administrator (the "Co-Administrator"). U.S. Bank National Association will
also perform custodial functions as Custodian (in such capacity, the
"Custodian") on behalf of the Trust pursuant to the terms of the Sale and
Servicing Agreement.
THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of the Home Loans conveyed to the Trust.
The Home Loans will consist of loans for which the related net proceeds were
used to finance (i) property improvements, (ii) debt consolidation, or (iii) a
combination of property improvements, debt consolidation, cash-out, credit
insurance premiums, origination costs or other consumer purposes. Substantially
all of the Mortgages for the Home Loans will be junior in priority to one or
more senior liens on the related Mortgaged Properties, which will consist
primarily of owner occupied single family residences. Substantially all of the
Home Loans will be secured by liens on Mortgaged Properties in which the
borrowers have little or no equity (i.e., the related combined loan-to-value
ratios approach or exceed 100%).
"Combined loan-to-value ratio" means, with respect to any Home Loan, the
fraction, expressed as a percentage, the numerator of which is the principal
balance of such Home Loan at origination plus, in the case of a junior lien Home
Loan, the aggregate outstanding principal balance of the related senior lien
loans on the date of origination of such Home Loan, and the denominator of which
is the appraised or stated value of the related Mortgaged Property at the time
of origination of such Home Loan (determined as described herein under "The
Seller--Underwriting Criteria").
For a description of the underwriting criteria applicable to the Home
Loans, see "The Seller--Underwriting Criteria" herein. All of the Home Loans
were acquired by the Seller and, pursuant to the Home Loan Purchase Agreement,
sold by the Seller to the Depositor and, pursuant to the Sale and Servicing
Agreement, sold by the Depositor to the Trust. Pursuant to the Indenture, the
Trust will pledge and assign the Home Loans to the Indenture Trustee for the
benefit of the Noteholders. The Trust will be entitled to all payments of
interest and principal and all proceeds received in respect of the Home Loans on
or after the Cut-Off Date.
PAYMENTS ON THE HOME LOANS
The Home Loans provide for a schedule of payments that will be, if timely
paid, sufficient to amortize fully the principal balance of the related Home
Loan on or before its maturity date. The scheduled monthly payment dates of the
Home Loans vary. Each Home Loan bears interest at a fixed rate (the "Home Loan
Rate"). Interest on the Home Loans will accrue on an "actuarial interest"
method. No Home Loan provides for deferred interest or negative amortization.
The "actuarial interest" method provides that interest is charged and
payments are due as of a scheduled day each month that is fixed at the time of
origination, and payments received after a grace period following such scheduled
day are subject to late charges. A scheduled payment on such a Home Loan
received either earlier or later than the scheduled due date thereof will not
affect the amortization schedule or the relative application of such payment to
principal and interest in respect of such Home Loan.
Certain of the borrowers are covered by credit life insurance policies and
involuntary unemployment insurance policies, which provide for payment in full
of the outstanding principal balance of the related Home Loans in the event of
the accidental death or disability of the borrower, or for payment of the
applicable monthly payment (up to $500 per month), in the case of employment
interruption. The credit life insurance policies and involuntary unemployment
insurance policies generally have terms of five years. If a borrower covered by
any such policy elects to cancel the policy, the amount of the premium refund
payable in connection with such cancellation will be applied as a principal
payment on the related Home Loan. Any
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proceeds received by the Trust in respect of such insurance policies will affect
the rate of prepayments on the Home Loans. See "Prepayment and Yield
Considerations" herein.
CHARACTERISTICS OF THE HOME LOANS
Set forth below is certain statistical information regarding
characteristics of the Home Loans expected to be included in the Home Loan Pool
as of the date of this Prospectus Supplement. Prior to the Closing Date, the
Seller may remove any of the Home Loans intended for inclusion in the Home Loan
Pool, substitute comparable loans therefor, or add comparable loans thereto;
provided, however, that the aggregate Principal Balance of Home Loans so
removed, replaced or added will not exceed 5% of the Pool Principal Balance. As
a result, the statistical information presented below regarding the
characteristics of the Home Loans expected to be included in the Home Loan Pool
may vary in certain respects from comparable information based on the actual
composition of the Home Loan Pool at the Closing Date. A schedule of the Home
Loans included in the Home Loan Pool as of the Closing Date will be attached to
the Sale and Servicing Agreement.
The Home Loans expected to be included in the Home Loan Pool will consist
of approximately 5,539 loans having a Pool Principal Balance of approximately
$205,259,057. Approximately 0.60% of the Home Loans by Cut-Off Date Principal
Balance were 30-59 days delinquent in payment as of the Cut-Off Date.
Approximately 0.36% of the Home Loans by Cut-Off Date Principal Balance were
60 days or more delinquent in payment as of the Cut-Off Date.
Except as provided in the second preceding paragraph, the Home Loans are
expected to have the approximate characteristics as of the Cut-Off Date set
forth in the tables beginning on the following page. The sums of the amounts and
percentages in the following tables may not equal the totals shown due to
rounding.
Wherever reference is made in this Prospectus Supplement to a percentage of
the Home Loans, such percentage is determined (unless otherwise specified) on
the basis of the Original Pool Principal Balance.
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HOME LOAN RATES
PERCENT OF
AGGREGATE TOTAL
RANGE OF HOME NUMBER OF PRINCIPAL BY AGGREGATE
LOAN RATES (%) HOME LOANS BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------------ ---------- ------------- -----------------
10.51 to 11.00.................................................... 3 $ 95,647 0.05%
11.01 to 11.50.................................................... 335 13,362,828 6.51
11.51 to 12.00.................................................... 940 37,409,677 18.23
12.01 to 12.50.................................................... 439 17,030,339 8.30
12.51 to 13.00.................................................... 1,172 45,597,688 22.21
13.01 to 13.50.................................................... 366 13,184,925 6.42
13.51 to 14.00.................................................... 1,214 43,402,264 21.15
14.01 to 14.50.................................................... 208 6,747,562 3.29
14.51 to 15.00.................................................... 541 18,293,519 8.91
15.01 to 15.50.................................................... 109 3,570,820 1.74
15.51 to 16.00.................................................... 162 5,132,522 2.50
16.01 to 16.50.................................................... 25 732,412 0.36
16.51 to 17.00.................................................... 20 552,497 0.27
17.01 to 17.50.................................................... 2 57,569 0.03
17.51 to 18.00.................................................... 3 88,788 0.04
------ ------------- -------
Total........................................................... 5,539 $ 205,259,057 100.00%
------ ------------- -------
------ ------------- -------
The weighted average Home Loan Rate of the Home Loans as of the Cut-Off
Date was approximately 13.27% per annum.
CURRENT PRINCIPAL BALANCES
PERCENT OF
AGGREGATE TOTAL
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL BY AGGREGATE
PRINCIPAL BALANCES ($) HOME LOANS BALANCE PRINCIPAL BALANCE
- ------------------------------------------------------------------- ---------- ------------ -----------------
Up to 10,000.00.................................................... 16 $ 147,455 0.07%
10,000.01 to 20,000.00............................................. 493 8,352,335 4.07
20,000.01 to 30,000.00............................................. 1,366 35,645,485 17.37
30,000.01 to 40,000.00............................................. 1,838 65,322,611 31.82
40,000.01 to 50,000.00............................................. 1,007 46,099,569 22.46
50,000.01 to 60,000.00............................................. 592 33,583,632 16.36
60,000.01 to 70,000.00............................................. 129 8,458,756 4.12
70,000.01 to 80,000.00............................................. 66 4,939,692 2.41
80,000.01 to 90,000.00............................................. 32 2,709,522 1.32
------ ------------ -------
Total............................................................ 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
The average principal balance of the Home Loans as of the Cut-Off Date was
approximately $37,057.
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ORIGINAL LOAN PRINCIPAL BALANCES
AGGREGATE PERCENT OF TOTAL
RANGE OF CUT-OFF DATE NUMBER OF PRINCIPAL BY AGGREGATE
PRINCIPAL BALANCES ($) HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
Up to 10,000.00............................................ 13 $ 125,680 0.06%
10,000.01 to 20,000.00........................................... 485 8,210,934 4.0
20,000.01 to 30,000.00........................................... 1,367 35,565,503 17.33
30,000.01 to 40,000.00........................................... 1,835 65,117,625 31.72
40,000.01 to 50,000.00........................................... 1,015 46,344,108 22.58
50,000.01 to 60,000.00........................................... 595 33,722,776 16.43
60,000.01 to 70,000.00........................................... 130 8,453,861 4.12
70,000.01 to 80,000.00........................................... 66 4,936,437 2.40
80,000.01 to 90,000.00........................................... 33 2,782,132 1.36
------ ------------ -------
Total....................................................... 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
The average principal balance of the Home Loans at origination was
approximately $37,392.
REMAINING TERMS TO MATURITY
AGGREGATE PERCENT OF TOTAL
RANGE OF REMAINING NUMBER OF PRINCIPAL BY AGGREGATE
TERM TO MATURITY (MONTHS) HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
0 to 48....................................................... 2 $ 62,591 0.03%
49 to 60....................................................... 34 636,243 0.31
61 to 120....................................................... 342 9,125,755 4.45
121 to 180....................................................... 1,356 45,605,008 22.22
181 to 240....................................................... 1,556 56,990,260 27.77
241 to 300....................................................... 2,249 92,839,200 45.23
------ ------------ -------
Total....................................................... 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
The weighted average remaining term to maturity of the Home Loans as of the
Cut-Off Date was approximately 242 months.
ORIGINAL TERM TO MATURITY
AGGREGATE PERCENT OF TOTAL
RANGE OF MONTHS NUMBER OF PRINCIPAL BY AGGREGATE
SINCE ORIGINATION HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
0 to 60....................................................... 36 $ 698,834 0.34%
61 to 120....................................................... 342 9,125,755 4.45
121 to 180....................................................... 1,356 45,605,008 22.22
181 to 240....................................................... 1,556 56,990,260 27.77
241 to 300....................................................... 2,249 92,839,200 45.23
------ ------------ -------
Total....................................................... 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
The weighted original term to maturity of the Home Loans as of the Cut-Off
Date was approximately 248 months.
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GEOGRAPHIC CONCENTRATION
PERCENTAGE OF TOTAL
NUMBER OF AGGREGATE BY AGGREGATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------------- ---------- ----------------- -------------------
Alabama....................................................... 156 $ 5,643,278 2.75%
Alaska........................................................ 30 1,176,170 0.57
Arizona....................................................... 326 11,338,999 5.52
Arkansas...................................................... 41 1,393,781 0.68
California.................................................... 1,162 45,875,135 22.35
Colorado...................................................... 179 6,634,003 3.23
Connecticut................................................... 80 2,948,243 1.44
Delaware...................................................... 7 294,321 0.14
Florida....................................................... 688 25,353,074 12.35
Georgia....................................................... 160 6,111,120 2.98
Idaho......................................................... 53 1,992,050 0.97
Illinois...................................................... 202 6,923,881 3.37
Indiana....................................................... 141 5,377,437 2.62
Iowa.......................................................... 28 1,023,926 0.50
Kansas........................................................ 64 2,330,104 1.14
Kentucky...................................................... 89 3,274,834 1.60
Louisiana..................................................... 86 3,309,736 1.61
Maine......................................................... 22 809,211 0.39
Maryland...................................................... 16 747,999 0.36
Massachusetts................................................. 88 2,948,177 1.44
Michigan...................................................... 107 3,755,601 1.83
Minnesota..................................................... 159 6,109,338 2.98
Mississippi................................................... 20 798,790 0.39
Missouri...................................................... 43 1,402,898 0.68
Montana....................................................... 8 313,068 0.15
Nebraska...................................................... 64 2,490,540 1.21
Nevada........................................................ 147 5,454,853 2.66
New Hampshire................................................. 11 450,092 0.22
New Jersey.................................................... 19 728,560 0.35
New Mexico.................................................... 88 3,557,827 1.73
New York...................................................... 53 2,057,854 1.00
North Carolina................................................ 85 3,021,279 1.47
North Dakota.................................................. 21 758,992 0.37
Ohio.......................................................... 91 2,490,562 1.21
Oklahoma...................................................... 140 5,030,232 2.45
Oregon........................................................ 136 5,223,960 2.55
Pennsylvania.................................................. 197 6,802,115 3.31
Rhode Island.................................................. 3 157,323 0.08
South Carolina................................................ 45 1,661,395 0.81
South Dakota.................................................. 24 964,333 0.47
Tennessee..................................................... 10 347,223 0.17
Texas......................................................... 44 1,514,511 0.74
Utah.......................................................... 63 2,209,415 1.08
Virginia...................................................... 72 2,420,058 1.18
Washington.................................................... 162 6,021,774 2.93
West Virginia................................................. 3 87,252 0.04
Wisconsin..................................................... 92 3,388,555 1.65
Wyoming....................................................... 14 535,174 0.26
------ ------------- -------
Total....................................................... 5,539 $ 205,259,057 100.00%
------ ------------- -------
------ ------------- -------
S-19
CREDIT SCORES*
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
CREDIT SCORES HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
620 to 639....................................................... 15 $ 456,485 0.22%
640 to 659....................................................... 1,091 35,307,805 17.20
660 to 679....................................................... 1,493 56,548,806 27.55
680 to 699....................................................... 1,246 47,620,919 23.20
700 to 719....................................................... 905 35,168,653 17.13
720 to 739....................................................... 468 17,826,113 8.68
740 to 759....................................................... 187 7,063,191 3.44
760 to 779....................................................... 98 3,844,055 1.87
780 to 799....................................................... 32 1,239,658 0.60
Greater or equal to 800.......................................... 4 183,371 0.09
------ ------------ -------
Total....................................................... 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
- ------------------
* Determined prior to origination of the related Home Loan.
The weighted average Credit Score of the Home Loans as of the Cut-Off Date
was approximately 687.
DEBT-TO-INCOME RATIOS
AGGREGATE PERCENT OF TOTAL
RANGE OF NUMBER OF PRINCIPAL BY AGGREGATE
DEBT-TO-INCOME RATIOS(%) HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
5.01 to 10.00................................................... 4 $ 120,915 0.06%
10.01 to 15.00................................................... 9 303,939 0.15
15.01 to 20.00................................................... 95 3,281,211 1.60
20.01 to 25.00................................................... 363 12,335,214 6.01
25.01 to 30.00................................................... 732 25,865,439 12.60
30.01 to 35.00................................................... 1,205 42,801,588 20.85
35.01 to 40.00................................................... 1,499 55,016,467 26.80
40.01 to 45.00................................................... 1,421 56,257,450 27.41
45.01 to 50.00................................................... 205 9,066,543 4.42
50.01 to 55.00................................................... 5 175,334 0.09
55.01 to 60.00................................................... 1 34,956 0.02
------ ------------ -------
Total....................................................... 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
The weighted average debt-to-income ratio of the Home Loans as of the
Cut-Off Date was approximately 36.32%.
S-20
COMBINED LOAN-TO-VALUE RATIOS
AGGREGATE PERCENT OF TOTAL
RANGE OF COMBINED NUMBER OF PRINCIPAL BY AGGREGATE
LOAN-TO-VALUE RATIOS(%) HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
15.01 to 20.00................................................. 2 $ 25,296 0.01%
25.01 to 30.00................................................. 1 16,501 0.01
30.01 to 35.00................................................. 1 15,223 0.01
35.01 to 40.00................................................. 3 69,223 0.03
40.01 to 45.00................................................. 4 166,742 0.08
45.01 to 50.00................................................. 1 49,524 0.02
50.01 to 55.00................................................. 5 213,643 0.10
55.01 to 60.00................................................. 7 199,087 0.10
60.01 to 65.00................................................. 7 185,881 0.09
65.01 to 70.00................................................. 9 294,010 0.14
70.01 to 75.00................................................. 12 388,115 0.19
75.01 to 80.00................................................. 38 1,334,647 0.65
80.01 to 85.00................................................. 54 1,739,311 0.85
85.01 to 90.00................................................. 92 2,793,656 1.36
90.01 to 95.00................................................. 167 5,772,864 2.81
95.01 to 100.00................................................. 298 10,111,949 4.93
100.01 to 105.00................................................. 505 17,404,824 8.48
105.01 to 110.00................................................. 797 27,051,991 13.18
110.01 to 115.00................................................. 767 27,276,656 13.29
115.01 to 120.00................................................. 1,016 38,649,205 18.83
120.01 to 125.00................................................. 1,734 70,784,149 34.49
125.01 to 130.00................................................. 17 649,043 0.32
Greater than 130.00.............................................. 2 67,517 0.03
------ ------------ -------
Total.......................................................... 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
MORTGAGED PROPERTY TYPES
AGGREGATE PERCENT OF TOTAL
NUMBER OF PRINCIPAL BY AGGREGATE
PROPERTY TYPE HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
Single Family.................................................... 5,250 $195,670,800 95.33%
Condominium...................................................... 223 7,283,524 3.55
Multifamily...................................................... 30 984,002 0.48
Manufactured housing............................................. 21 778,419 0.38
Two Families..................................................... 15 542,312 0.26
------ ------------ -------
Total.......................................................... 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
LIEN POSITION
AGGREGATE PERCENT OF TOTAL
NUMBER OF PRINCIPAL BY AGGREGATE
LIEN POSITION HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
First Lien....................................................... 29 $ 1,039,001 0.51%
Second Lien...................................................... 5,493 203,511,206 99.15
Third Lien....................................................... 17 708,849 0.35
------ ------------ -------
Total.......................................................... 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
OCCUPANCY TYPE
AGGREGATE PERCENT OF TOTAL
NUMBER OF PRINCIPAL BY AGGREGATE
OCCUPANCY TYPE HOME LOANS BALANCE PRINCIPAL BALANCE
- ----------------------------------------------------------------- ---------- ------------ -----------------
Owner Occupied................................................... 5,538 $205,239,140 99.99%
Non-Owner Occupied............................................... 1 19,917 0.01
------ ------------ -------
Total.......................................................... 5,539 $205,259,057 100.00%
------ ------------ -------
------ ------------ -------
S-21
THE SELLER
GENERAL
United National Bank ("United") is a national banking association with its
principal offices at Parkersburg, Wood County, West Virginia (telephone:
304-428-8800). Organized on March 17, 1839, United provides traditional banking
services emphasizing consumer finance, residential mortgage and home equity
lending, and business lending. Currently, United has 55 branches located in Ohio
and West Virginia. United is regulated by the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation ("FDIC"). Deposits at
United are insured by the FDIC up to applicable limits, and United is a member
of Federal Home Loan Banks of Atlanta and Pittsburgh.
The parent of United is United Bankshares (the "Parent"), which was formed
on May 1, 1984 for the primary purpose of becoming the holding company parent of
United. As of December 31, 1998, the Parent had stockholders' equity of
$421.5 million. The Parent is regulated by the Board of Governors of the Federal
Reserve System.
For the years ended December 31, 1998 and 1997, United originated or
purchased $1.9 billion and $1.1 billion of residential mortgage loans secured by
first and second liens, respectively. At December 31, 1998, United had total
assets of approximately $4.6 billion and deposits of $3.5 billion.
PURCHASE OF HOME LOANS
United purchased the Home Loans from originators which had been contacted
by The First National Bank of Keystone, a national banking association with its
principal offices located in Keystone, West Virginia ("Keystone"). In connection
with United's purchase of the Home Loans, Keystone, through its subsidiary,
Keystone Mortgage Corp., Inc., a West Virginia corporation ("KMC"),
re-underwrote the Home Loans in accordance with the re-underwriting guidelines
for Keystone's Equiflex Loan program.
UNDERWRITING CRITERIA
General. An Equiflex Loan is an uninsured, home improvement and debt
consolidation loan. Owners of Equiflex Loans bear the full risk of loss on each
loan. A portion of the proceeds of an Equiflex Loan may be used to finance
actions or items that substantially protect or improve the basic livability or
utility of a single family, owner-occupied property, including improvements
which are permanently affixed to the real property. Equiflex Loans also may
finance other home improvements.
The property securing an Equiflex Loan must be the primary residence of the
borrower. The borrower must have at least a 50% interest in fee simple title to
the real property securing the loan. The mortgage, deed of trust or other
security instrument relating to an Equiflex Loan must have a recorded lien
position of no less than second unless the related borrower has a credit score
(as defined below) of no less than 700, in which case the lien may be in third
position. Equiflex Loans secured by third liens require title insurance and a
full appraisal of the mortgaged property. A title search is conducted on all
property securing an Equiflex Loan.
The initial principal balances of Equiflex Loans generally range from
$10,000 to $60,000 per loan regardless of the actual cost of the improvement.
The remaining proceeds may be used by the borrower for debt consolidation and,
in certain instances, for the purchase of credit life insurance.
Equiflex Loans have fixed interest rates and provide for equal installment
payments due on a monthly basis. Interest on Equiflex Loans accrues from the
date the proceeds of the loan are disbursed to the borrower. Interest is
calculated according to the actuarial method. The terms of the Equiflex Loans
may require the payment of a penalty if any such loan is prepaid in whole or in
part. Generally, the term of an Equiflex Loan is at least 6 months but not
greater than 25 years.
Origination. Keystone's Equiflex Loan program requires that each
originator use prudent lending standards in originating such loans and satisfy
the underwriting requirements of the Equiflex Loan program. The Equiflex Loans
are direct loans, whereby the borrower makes an application directly to an
originator
S-22
without any assistance from a dealer. Such application must be executed by the
borrower and any co-maker or co-signer. The originator then reviews the loan
application to determine whether the borrower or any co-maker is solvent, is an
acceptable credit risk and possesses income which is adequate to meet both the
periodic payments on the loan, as well as the borrower's other housing and
recurring expenses.
In connection with such analysis, each originator examines the credit score
assigned in a borrower's credit report. Credit scores assigned in a borrower's
credit history and utilized by the originators are based on several similar, but
not identical methodologies. Generally, a borrower under the Equiflex Loan
program must have a credit score of at least 640 (or 620, generally, if
purchased prior to March 1, 1998) or, if less than 40% of the proceeds are used
to finance improvements on the borrower's home, at least 670. A credit score
represents a numerical weighting of a borrower's credit characteristics that
permits lenders to determine the risk a borrower presents and the likelihood
that a loan will be repaid. Such characteristics include: number of credit
lines, payment history, past delinquencies, severity of delinquencies, level of
indebtedness, types of credit, and length of credit history. For purposes of
risk analysis and pricing in the secondary mortgage market, credit scores are
translated into letter designations of "A" through "D", with "A" representing
the highest rating. A credit score of 650 or higher is generally assumed to
indicate an "A" borrower.
Re-underwriting by Keystone. Each Equiflex Loan is re-underwritten by
Keystone to ensure that the loan meets the requirements of the Equiflex Loan
program. In connection therewith, Keystone reviews the contents of each credit
file, reevaluates the borrower's credit application, and verifies each credit
score assigned in the borrower's credit report. Generally, United will not
purchase an Equiflex Loan that does not have a credit score of at least 640 (or
620, generally, if purchased prior to March 1, 1998) or otherwise meets the
expense-to-income ratios of the Equiflex Loan program unless the personal
circumstances of the borrower and documents in the related credit file
demonstrate the existence of compensating factors concerning the borrower's
creditworthiness which support the purchase of such loan.
Exceptions to Keystone's underwriting guidelines may be made by a senior
officer of Keystone. The factors considered when determining if an exception to
the general underwriting standards should be made include quality and value of
the property, how long the borrower has owned the property, amounts of
disposable income, length and type of employment, credit history, current and
pending debt obligations, payment habits, status of past and other existing
mortgages and special circumstances that merit variation from the underwriting
guidelines.
REPURCHASE OR SUBSTITUTION OF HOME LOANS
The Trust will have the option after the Closing Date to deposit monies
into the Collection Account and release from the lien of the Indenture any Home
Loan incident to foreclosure or default thereof. The Seller will be obligated
either to repurchase any Defective Home Loan or to remove such Defective Home
Loan and substitute a Qualified Substitute Home Loan (as defined below). Any
such purchase or repurchase of any Home Loan (rather than the replacement
thereof through substitution) will result in accelerated principal payments on
the Securities.
The Seller is required (i) within 60 days after discovery or notice thereof
to cure in all material respects any breach of the representations or warranties
made with respect to a Home Loan (a "Defective Home Loan") or (ii) on or before
the Determination Date next succeeding the end of such 60-day period, to
repurchase such Defective Home Loan, at a price (the "Purchase Price") equal to
the Principal Balance of such Defective Home Loan as of the date of repurchase,
plus all accrued and unpaid interest on such Defective Home Loan to and
including the Due Date in the most recent Due Period computed at the applicable
Home Loan Rate. In lieu of repurchasing a Defective Home Loan, the Seller may
replace such Defective Home Loan with one or more Qualified Substitute Home
Loans. If the aggregate outstanding principal balance of the Qualified
Substitute Home Loan(s) is less than the outstanding principal balance of the
Defective Home Loan(s), the Seller will also deposit in the Collection Account
an amount (a "Substitution Adjustment") equal to such shortfall, which will
result in a prepayment of principal on the Securities then entitled to receive
principal in the amount of such shortfall. As used herein, a "Qualified
Substitute Home Loan" is a home loan that (i) has an interest rate that differs
from the Home Loan Rate for the Defective Home Loan it replaces (each, a
"Deleted Home Loan") by no more than one percentage point, (ii) matures not more
than one year later than and not more than one year earlier than that of the
Deleted Home Loan, (iii) has a principal balance (after application of all
payments received on or prior to the date of
S-23
such substitution) equal to or less than the Principal Balance of the Deleted
Home Loan as of such date, (iv) has a lien priority no lower than the Deleted
Home Loan, (v) complies as of the date of substitution with each representation
and warranty set forth in the Home Loan Purchase Agreement with respect to the
Home Loans, and (vi) has a borrower with a comparable credit grade
classification to that of the borrower under the Deleted Home Loan; provided,
that with respect to a substitution of multiple loans, items (i), (ii),
(iii) and (vi) above may be considered on an aggregate or weighted average
basis.
No assurance can be given that, at any particular time, the Seller will be
capable, financially or otherwise, of repurchasing Defective Home Loans or
substituting Qualified Substitute Home Loans for Defective Home Loans in the
manner described above. If the Seller repurchases, or is obligated to
repurchase, Defective Home Loans from any additional series of asset backed
securities, the financial ability of the Seller to repurchase Defective Home
Loans from the Trust may be adversely affected. In addition, other events
relating to the Seller and its mortgage lending and consumer finance operations
can occur that would adversely affect the financial ability of the Seller to
repurchase Defective Home Loans from the Trust, including without limitation the
sale or other disposition of all or any significant portion of its assets. If
the Servicer or the Indenture Trustee is unable to collect all amounts due to
the Trust in respect of such Defective Home Loan, the resulting loss will be
borne by Noteholders to the extent that such loss is not otherwise covered by
amounts available from the applicable credit enhancement. See "Risk Factors--
Potential Inadequacy of Credit Enhancement" herein.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF UNITED
The Seller has no historical delinquency and default experience that may be
referred to for purposes of estimating the future delinquency and loss
experience of the Home Loans underwritten pursuant to Keystone's Equiflex Loan
Program described herein. The Seller began acquiring home loans comparable to
the Home Loans on March 3, 1998. Accordingly, there is insufficient historical
delinquency, bankruptcy, foreclosure or default experience that may be referred
to for purposes of estimating the future delinquency and loss experience of home
loans similar to the Home Loans. See "Risk Factors--Limited Historical
Delinquency, Loss and Payment Information" herein.
CO-ADMINISTRATOR DUTIES
United, as Co-Administrator, will also perform certain administrative
functions on behalf of the Trust pursuant to the Administration Agreement.
THE SERVICER
GENERAL
The Servicer will service the Home Loans in accordance with the terms set
forth in the Sale and Servicing Agreement and will be entitled to the Servicing
Fee and to certain additional servicing compensation. The Servicer may perform
any of its obligations under the Sale and Servicing Agreement through one or
more subservicers. Notwithstanding any such subservicing arrangement, the
Servicer will remain liable for its servicing duties and obligations under the
Sale and Servicing Agreement as if the Servicer alone were servicing the Home
Loans. The information set forth in this section has been provided by the
Servicer, and neither the Depositor nor the Seller makes any representation as
to the accuracy or completeness of such information.
THE SERVICER
Advanta Mortgage Corp. USA, the Servicer, is a subsidiary of Advanta Corp.,
a Delaware corporation ("Advanta Parent"), a publicly-traded company with its
principal executive offices located in Spring House, Pennsylvania with assets as
of December 31, 1998, in excess of $3.7 billion. Advanta Parent, through its
subsidiaries (including the Servicer), managed assets (including mortgage loans)
in excess of $12.3 billion as of December 31, 1998.
As of December 31, 1998, the Servicer and its subsidiaries were servicing
approximately 111,700 mortgage loans in its own portfolio, representing an
aggregate outstanding principal balance of approximately $7.7 billion, and
approximately 124,000 mortgage loans in the third-party servicing portfolio
representing an aggregate outstanding principal balance of approximately
$8.3 billion.
S-24
RECENT DEVELOPMENTS RELATED TO ADVANTA PARENT
On January 25, 1999 Advanta Parent reported that on Friday, January 22,
1999, Fleet Financial Group, Inc. and certain of its affiliates ("Fleet") filed
a complaint (the "Complaint") against Advanta Parent and certain other
affiliates relating to the transaction with Fleet which closed on February 20,
1998 in which Advanta Parent contributed most of its consumer credit card
business to a limited liability company owned by Fleet (the "Fleet
Transaction"). The complaint centers around post-closing adjustments and other
matters relating to the Fleet Transaction.
Advanta Parent believes that the lawsuit is without merit and, on
February 16, 1999, Advanta Parent filed its answer and counterclaims in which it
denies all of the substantive allegations in the Complaint and seeks damages
from Fleet. Advanta Parent does not expect this suit to have any material
adverse financial impact on its business.
This Prospectus Supplement contains forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. The most significant among these risks
and uncertainties is the uncertainty of the legal process. Additional risks that
may affect Advanta Parent's performance are detailed in Advanta Parent's filings
with the Securities and Exchange Commission, including its most recent Annual
Report on Form 10-K and its Quarterly Reports on Form 10-Q.
The ability of Advanta Parent's subsidiaries to honor their financial and
other obligations is to some extent influenced by the financial condition of
Advanta Parent. Such obligations, insofar as they relate to the Trust, primarily
consist of the obligations of the Servicer pursuant to the Sale and Servicing
Agreement. To the extent that the Servicer's ability to perform such obligations
is adversely affected by the financial condition of Advanta Parent, the Home
Loans may experience an increased level of delinquencies and losses.
Servicer Events of Default. "Servicer Events of Default" will consist of,
subject to applicable cure periods, without limitation: (i) any failure of the
Servicer to deposit in the Collection Account any amount required to be
deposited under the Sale and Servicing Agreement, which failure continues
unremedied for two Business Days; (iii) any failure by the Servicer duly to
observe or perform in any material respect any other of its covenants or
agreements in the Sale and Servicing Agreement, which failure continues
unremedied for a period of 30 days after notice; (iii) the cumulative loss
experience with respect to the Home Loans exceeds certain levels as specified in
the Sale and Servicing Agreement; and (iv) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings relating to the Servicer and certain actions by the Servicer
indicating insolvency, reorganization or inability to pay its obligations or the
Servicer shall dissolve or liquidate, in whole or part, in any material respect.
If a Servicer Event of Default occurs, the Indenture Trustee may, and at
the direction of (i) the holders of a majority of the then outstanding amount of
the Notes, or (ii) the Trust with the consent of the holders of a majority of
the then outstanding amount of the Notes shall, remove the Servicer. The
Servicer may resign, only in accordance with the terms of the Sale and Servicing
Agreement. No removal or resignation shall become effective until the Indenture
Trustee or a successor servicer acceptable to the Indenture Trustee shall have
assumed the Servicer's responsibilities and obligations in accordance therewith.
The Servicer may not assign its obligations under the Sale and Servicing
Agreement, in whole or in part, unless it shall have first obtained the written
consent of the Indenture Trustee, which consent shall not be unreasonably
withheld; provided, that any assignee must meet the eligibility requirements for
a successor Servicer set forth in the Sale and Servicing Agreement.
Delinquency and Loss Experience of the Servicer
Advanta has been servicing home loans similar to the Home Loans since
June 1996. Advanta does not have available for distribution loss and delinquency
information with respect to its aggregate portfolio of home loans similar to the
Home Loans which are serviced for others because such home loans were
underwritten pursuant to a variety of underwriting guidelines of many different
originators and aggregating loss and delinquency experience with respect to such
home loans would not provide meaningful statistics for comparison to the Home
Loans. However, the Servicer does maintain loss and delinquency information with
respect to each portfolio it services for others. See "Risk Factors--Limited
Historical Delinquency, Loss and Prepayment Information" herein.
S-25
DESCRIPTION OF CREDIT ENHANCEMENT
SUBORDINATION AND ALLOCATION OF LOSSES
On each Payment Date, payments of interest on the Securities will be made,
first to the Class A Notes and the Class A-IO Certificates pro rata (based on
the amount of interest payable thereon on such Payment Date), second to the
Class M-1 Notes, third to the Class M-2 Notes, fourth to the Class B-1
Certificates, fifth to the Class B-2 Certificates, sixth to the Class B-3
Certificates and seventh to the Class B-4 Certificates. No interest will be paid
to a Security until all required interest payments have been made to each
Security with a higher order of priority. On each Payment Date, payments of
principal on the Securities will be made, first to the Class A Notes, until the
Class Principal Balance thereof is reduced to the Class A Optimal Principal
Balance, second to the Class M-1 Notes, until the Class Principal Balance
thereof is reduced to the Class M-1 Optimal Class Principal Balance, third to
the Class M-2 Notes, until the Class Principal Balance thereof is reduced to the
Class M-2 Optimal Principal Balance, fourth to the Class B-1 Certificates, until
the Class Principal Balance thereof is reduced to the Class B-1 Optimal
Principal Balance, fifth to the Class B-2 Certificates, until the Class
Principal Balance thereof is reduced to the Class B-2 Optimal Principal Balance,
sixth to the Class B-3 Certificates, until the Class Principal Balance thereof
is reduced to the Class B-3 Optimal Principal Balance, and seventh to the
Class B-4 Certificates, until the Class Principal Balance thereof is reduced to
the Class B-4 Optimal Principal Balance.
The rights of the holder of the Residual Interest Certificate to receive
distributions on any Payment Date will be subordinate to such rights of the
other Securityholders. The subordination described above is intended to enhance
the likelihood of the regular receipt of interest and principal due to the
holders of the Notes and to afford such holders protection against losses on the
Home Loans. See "RISK FACTORS--Potential Inadequacy of Credit Enhancement"
herein.
On each Payment Date, the "Allocable Loss Amount" will be equal to the
excess, if any, of (a) the aggregate of the outstanding principal balances of
the Securities (after giving effect to all payments on such Payment Date) over
(b) the Pool Principal Balance as of the end of the preceding Due Period. On
each Payment Date, any Allocable Loss Amount will be applied in reduction of the
Class Principal Balance of, first the Class B-4 Certificates, until the Class
Principal Balance thereof is reduced to zero, second the Class B-3 Certificates,
until the Class Principal Balance thereof is reduced to zero, third the
Class B-2 Certificates, until the Class Principal Balance thereof is reduced to
zero, fourth the Class B-1 Certificates, until the Class Principal Balance
thereof is reduced to zero, fifth the Class M-2 Notes, until the Class Principal
Balance thereof is reduced to zero, and sixth the Class M-1 Notes, until the
Class Principal Balance thereof is reduced to zero. No Allocable Loss Amounts
will be allocated to the Class A Notes.
On each Payment Date, a Class of Securities which previously had Allocable
Loss Amounts allocated to it will be entitled to receive any Deferred Amounts
available on such Payment Date, up to the amount of any unreimbursed allocation
of Allocable Loss Amounts, in the following order of priority, first to the
Class M-1 Notes, second to the Class M-2 Notes, third to the Class B-1
Certificates, fourth to the Class B-2 Certificates, fifth to the Class B-3
Certificates and sixth to the Class B-4 Certificates.
"Deferred Amounts" for any Payment Date will equal any amounts remaining
after giving effect to the distributions in clauses (i) through (xvi) under
"Description of the Transfer and Servicing Agreements--Priority of
Distributions" herein.
DESCRIPTION OF THE SECURITIES
GENERAL
The Trust will issue the Class A Notes, the Class M-1 Notes and the Class
M-2 Notes (together, the "Notes") pursuant to the Indenture. The Trust will also
issue the Class A-IO Certificates, the Class B-1 Certificates, the Class B-2
Certificates, the Class B-3 Certificates, the Class B-4 Certificates and the
Residual Interest Certificates (together, the "Certificates" and together with
the Notes, the "Securities") pursuant to the Trust Agreement dated as of
March 1, 1999 (the "Trust Agreement") among the Depositor, the Owner Trustee and
the Co-Owner Trustee. The Notes will be secured by the assets of the Trust
pursuant to the
S-26
Indenture. The Certificates will represent the ownership interest in the Trust.
The Certificates are not being offered hereby.
On each Payment Date, the Indenture Trustee or its designee and the Owner
Trustee or its designee will pay to the persons in whose names the Securities
are registered on the last Business Day of the month immediately preceding the
month of the related Payment Date (the "Record Date") the portion of the
aggregate payment to be made to each Securityholder as described below. A
"Certificateholder" is a holder of record of any Class of Certificates as of the
related Record Date. A "Noteholder" is a holder of record of any Class of Notes
as of the related Record Date. A "Securityholder" is either a Certificateholder
and/or a Noteholder. Payments on the Notes will be made to Beneficial Owners
only through DTC and its Participants (except under certain limited
circumstances).
BOOK-ENTRY AND DEFINITIVE NOTES
The Notes will be issued in the form of beneficial interests in one or more
restricted global certificates (the "Book-Entry Notes"), deposited with a
custodian for The Depository Trust Company ("DTC" and, together with any
successor depository selected by the Depositor, the "Depository"). The Notes
will not be issued in bearer form. Beneficial interests in the Notes may be held
in denominations of $25,000 or any integral multiples of $1 in excess thereof.
The registered holders of the Notes are sometimes referred to in this section as
"Noteholders" and the owners of beneficial interests in the Book-Entry Notes as
"Note Owners".
BOOK-ENTRY NOTES. The Notes will be represented initially by one or more
Book-Entry Notes and will be deposited with DTC or its custodian and registered
in the name of Cede & Co., as nominee of DTC. DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participating organizations ("Participants") and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Owners of beneficial interests in Book-Entry Notes that are not
Participants or Indirect Participants of DTC who desire to purchase, sell or
otherwise transfer ownership of, or other interests in, Notes may do so only
through Participants and Indirect Participants. In addition, Note Owners will
receive all distributions of principal of and interest on the Notes through
Participants, as described below. It is anticipated that the only "Noteholder"
of record of the Book-Entry Notes will be Cede & Co., as nominee of DTC. Note
Owners will not be recognized by the Indenture Trustee as Noteholders, as such
term is used in the Indenture, and Note Owners will be permitted to exercise the
rights of Noteholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Notes among Participants on whose behalf it acts with respect to the
Book-Entry Notes. Participants and Indirect Participants with which Note Owners
have accounts with respect to the Notes similarly are required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Note Owners. Accordingly, although Note Owners will not hold
physical certificates for Notes represented by the Book-Entry Notes, the Rules
provide a mechanism by which Note Owners will receive payments and will be able
to transfer their interests in such Notes.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a holder to
pledge Book-Entry Notes to persons or entities that do not participate in the
DTC system, or to otherwise act with respect to such Book-Entry Notes, may be
limited due to the lack of a physical certificate.
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DTC has advised the Trust that, unless and until Physical Notes are issued
in registered form, it will take any action permitted to be taken by a
Noteholder under the Indenture only at the direction of one or more Participants
to whose accounts with DTC the Book-Entry Notes are credited. DTC may take
conflicting actions with respect to other undivided interests to the extent that
such actions are taken on behalf of Participants whose holdings include such
undivided interests.
Except as required by law, none of the Depositor, the Trust, the Owner
Trustee, the Seller, the Servicer, the Co-Owner Trustee or the Indenture Trustee
will have any liability for any aspect of the records relating to or
distributions made on account of beneficial ownership interests in the
Book-Entry Notes held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
DEFINITIVE NOTES. Physical Notes will be issued in registered form to
Noteholders, or their nominees, rather than to DTC, only if (i) DTC advises the
Indenture Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as nominee and depository with respect to such
Notes and the Indenture Trustee is unable to locate a qualified successor;
(ii) the Trust, at its sole option and with the consent of the Indenture
Trustee, elects to terminate the book-entry system through DTC or (iii) after
the occurrence of any Indenture Event of Default, DTC, at the direction of
Noteholders having a majority in interest of the Notes, advises the Indenture
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) to the exclusion of any physical securities being issued to
Noteholders is no longer in the best interest of Noteholders. Upon issuance in
registered form of physical Notes, such Notes will be transferable directly (and
not exclusively on a book-entry basis), and registered holders will deal
directly with the Indenture Trustee with respect to transfers, notices and
distributions.
The holder of any Definitive Note may exchange the same in whole or in part
(in an original principal amount equal to $25,000 or any integral multiple of $1
in excess thereof) for other Definitive Notes or, if such holder is entitled to
hold an interest in Book-Entry Notes (subject to the rules and procedures of
DTC), for a beneficial interest in Book-Entry Notes by surrendering such
Definitive Note to the Indenture Trustee (and completing the form of transfer on
the reverse thereof) together with any certificate or other required
documentation. No service charge will be imposed for any registration of
transfer or exchange, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
PAYMENTS
For the definitions of certain of the defined terms used in the following
subsection, see "--Related Definitions" below.
AVAILABLE COLLECTION AMOUNT. Payments on the Securities on each Payment
Date will be made from the Available Collection Amount. The Available Collection
Amount will be calculated on the second Business Day prior to each Payment Date
(each such day, a "Determination Date"). The Indenture Trustee will withdraw
from the Collection Account for deposit in the Note Payment Account and the
Certificate Distribution Account the Available Collection Amount on the Business
Day prior to each Payment Date. With respect to each Payment Date, the
"Available Collection Amount" is the sum of (i) all amounts received in respect
of the Home Loans or paid by the Trust or the Seller (exclusive of amounts not
required to be deposited in or permitted to be withdrawn from the Collection
Account pursuant to the Sale and Servicing Agreement) during the related Due
Period (and, in the case of amounts required to be paid by the Seller in
connection with the purchase or substitution of a Defective Home Loan or amounts
paid by the Trust for the repurchase of a Home Loan incident to default,
foreclosure or imminent default, deposited in the Collection Account on or
before the related Determination Date), and (ii) with respect to the final
Payment Date, or an early redemption or purchase of the Securities by the
Residual Interest Certificateholder or the Servicer, the Termination Price.
PAYMENTS OF INTEREST. Interest on the Class Principal Balance (or Class
Notional Balance) of each Class of Securities will accrue during each Accrual
Period at the applicable Interest Rate set forth on the cover hereof, in the
case of the Notes, or described herein, in the case of the Certificates, and
will be payable to Securityholders on each Payment Date, commencing in April
1999. The "Accrual Period" for each Class of Securities will be the calendar
month preceding the month in which the related Payment Date occurs. Interest on
each Class of Securities will be calculated on the basis of a 360-day year of
twelve 30-day months.
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The Interest Rate on any Class A-IO Certificate for any Payment Date will
be equal to the excess of (a) the Net Weighted Average Rate for such Payment
Date over (b) 6.91%. The "Class Notional Balance" for the Class A-IO
Certificates and any Payment Date, will equal the Pool Principal Balance as of
the first day of the related Due Period. The "Net Weighted Average Rate" with
respect to any Payment Date will be the per annum rate equal to the weighted
average (by principal balance) of the Home Loan Rates as of the first day of the
related Due Period, as reduced by the Servicing Fee Rate, Owner Trustee fee rate
and the Indenture Trustee fee rate.
Payments of interest on the Securities will be made from the Available
Collection Amount remaining after payment of the fees payable to the Indenture
Trustee, the Owner Trustee and the Co-Owner Trustee (the "Available Funds").
Under certain circumstances the amount available to make interest payments on
any Payment Date could be less than the amount of interest due on all of the
Securities on such date. Any such interest deficiency with respect to any Class
of Securities, along with interest at the Interest Rate for such Class on such
deficiency (if permitted by applicable law), will be paid to holders of each
affected Class of Securities on subsequent Payment Dates to the extent that
sufficient funds are available therefor. The Trust will remain obligated to pay
interest deficiencies on the Securities, which are carried forward until such
deficiencies have been paid. See "--Rights of Noteholders Upon Occurrence of
Event of Default" herein.
PAYMENTS OF PRINCIPAL. Principal payments will be from Available Funds
made on each Payment Date in an amount equal to the Regular Principal Payment
Amount.
PAYMENT PRIORITIES ON THE SECURITIES
See "Description of the Transfer and Servicing Agreements--Priority of
Payments" herein.
RELATED DEFINITIONS
Aggregate Liquidation Losses: With respect to any Payment Date, the
aggregate losses incurred with respect to Liquidated Home Loans from the Cut-off
Date through the last day of the related Due Period, after giving effect to the
receipt of any related Net Liquidation Proceeds.
Business Day: Any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in San Diego, California, Salt Lake City, Utah, New
York City, New York or the city in which the corporate trust office of the
Indenture Trustee is located are authorized or obligated by law or executive
order to be closed.
Certificateholder's Interest Carry-Forward Amount: With respect to any
Payment Date, the excess, if any, of the Certificateholder's Monthly Interest
Distribution Amount for the preceding Payment Date and any Certificateholder's
Interest Carry-Forward Amount remaining outstanding with respect to prior
Payment Dates (including interest on such outstanding amount at the applicable
Interest Rate if permitted by applicable law), over the amount in respect of
interest that was distributed on the Certificates on such preceding Payment
Date.
Certificateholder's Interest Distribution Amount: With respect to any
Payment Date, the sum of the Certificateholder's Monthly Interest Distribution
Amount for such Payment Date and the Certificateholder's Interest Carry-Forward
Amount for such Payment Date; provided, however, that on the Payment Date, if
any, on which the Principal Balance of the Class B-1 Certificates is reduced to
zero through application of the Allocable Loss Amount, the amount of the
Certificateholder's Interest Distribution Amount will be equal to such amount
calculated without giving effect to this proviso, minus the portion, if any, of
the Allocable Loss Amount that otherwise would be applied to any Class of Notes
on such Payment Date in the absence of this proviso.
Certificateholder's Monthly Interest Distribution Amount: With respect to
any Payment Date, the aggregate amount of interest accrued for the related
Accrual Period at the applicable Interest Rate on the Class Principal Balance or
Class Notional Balance, as applicable, of each Class of Certificates immediately
preceding such Payment Date.
Class A Optimal Principal Balance: With respect to any Payment Date prior
to the Stepdown Date, zero; and with respect to any other Payment Date, an
amount equal to 10% of the Pool Principal Balance as of the end of the related
Due Period.
Class B-1 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
B-1 Certificates, provided that on and after the Payment
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Date on which the aggregate Class Principal Balance of the Notes is reduced to
zero, the Class B-1 Optimal Principal Balance for any Payment Date prior to the
Stepdown Date shall be zero; and with respect to any other Payment Date, the
Pool Principal Balance as of the end of the related Due Period minus the sum of
(a) the aggregate of the Class Principal Balances of the Class A Notes, the
Class M-1 Notes and the Class M-2 Notes (after taking into account any payments
made on such Payment Date in reduction thereof) and (b) 38% of the Pool
Principal Balance as of the end of the related Due Period.
Class B-2 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
B-2 Certificates, provided that on and after the Payment Date on which the
aggregate Class Principal Balance of the Notes and the Class B-1 Certificates is
reduced to zero, the Class B-2 Optimal Principal Balance for any Payment Date
prior to the Stepdown Date shall be zero; and with respect to any other Payment
Date, the Pool Principal Balance as of the end of the related Due Period, minus
the sum of (a) the aggregate of the Class Principal Balances of the Notes and
the Class B-1 Certificates (after taking into account any payments made on such
Payment Date in reduction thereof) and (b) (b) 32% of the Pool Principal Balance
as of the end of the related Due Period.
Class B-3 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
B-3 Certificates, provided that on and after the Payment Date on which the
aggregate Class Principal Balance of the Notes, the Class B-1 Certificates and
the Class B-2 Certificates is reduced to zero, the Class B-3 Optimal Principal
Balance for any Payment Date prior to the Stepdown Date shall be zero; and with
respect to any other Payment Date, the Pool Principal Balance as of the end of
the related Due Period, minus the sum of (a) the aggregate of the Class
Principal Balances of the Notes, the Class B-1 Certificates and the Class B-2
Certificates (after taking into account any payments made on such Payment Date
in reduction thereof) and (b) 28% of the Pool Principal Balance as of the end of
the related Due Period.
Class B-4 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
B-4 Certificates, provided that on and after the Payment Date on which the
aggregate Class Principal Balance of the Notes, the Class B-1 Certificates, the
Class B-2 Certificates and the Class B-3 Certificates is reduced to zero, the
Class B-4 Optimal Principal Balance for any Payment Date prior to the Stepdown
Date shall be zero; and with respect to any other Payment Date, the Pool
Principal Balance as of the end of the related Due Period, minus the sum of the
aggregate of the Class Principal Balances of the Notes, the Class B-1
Certificates, the Class B-2 Certificates and the Class B-3 Certificates (after
taking into account any payments made on such Payment Date in reduction
thereof).
Class M-1 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
M-1 Notes, provided that on and after the Payment Date on which the Class
Principal Balance of the Class A Notes is reduced to zero, the Class M-1 Optimal
Principal Balance for any Payment Date prior to the Stepdown Date shall be zero;
and with respect to any other Payment Date, the Pool Principal Balance as of the
end of the related Due Period, minus the sum of (a) the Class Principal Balance
of the Class A Notes (after taking into account any payments made on such
Payment Date in reduction thereof) and (b) 76% of the Pool Principal Balance as
of the end of the related Due Period.
Class M-2 Optimal Principal Balance: With respect to any Payment Date
prior to the Stepdown Date, the original Class Principal Balance of the Class
M-2 Notes, provided that on and after the Payment Date on which the aggregate
Class Principal Balance of the Class A Notes and the Class M-1 Notes is reduced
to zero, the Class M-2 Optimal Principal Balance for any Payment Date prior to
the Stepdown Date shall be zero; and with respect to any other Payment Date, the
Pool Principal Balance as of the end of the related Due Period, minus the sum of
(a) the aggregate of the Class Principal Balances of the Class A Notes and the
Class M-1 Notes (after taking into account any payments made on such Payment
Date in reduction thereof) and (b) 62% of the Pool Principal Balance as of the
end of the related Due Period.
Class Optimal Principal Balance: Either of the Class A Optimal Principal
Balance or the Class M-1 Optimal Principal Balance, as applicable.
Class Principal Balance: For each class of Securities, other than the
Class A-IO Certificates and the Residual Interest Certificate, as of any date of
determination, the balance equal to the Original Class Principal Balance thereof
reduced by (i) all amounts previously paid to the Securityholders of such Class
in reduction of the Class Principal Balance thereof on all previous Payment
Dates and (ii) any Allocable Loss Amounts previously applied thereto.
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Due Period: With respect to each Payment Date, the calendar month
immediately preceding the month in which such Payment Date occurs.
Insurance Proceeds: With respect to any Payment Date and any Home Loan,
the proceeds paid to the Indenture Trustee or the Servicer by any insurer
pursuant to any insurance policy covering a Home Loan, Mortgaged Property or REO
Property or any other insurance policy that relates to a Home Loan, net of any
expenses incurred by the Indenture Trustee or the Servicer in connection with
the collection of such proceeds and not otherwise reimbursed, but excluding any
such proceeds that are to be applied to the restoration or repair of the
Mortgaged Property or released to the borrower in accordance with customary loan
servicing procedures.
Interest Payment Amount: The sum of the Noteholders' Interest Payment
Amount and the Certificateholder's Interest Distribution Amount.
Liquidated Home Loan: A defaulted Home Loan as to which the Servicer has
determined that all recoverable liquidation and insurance proceeds have been
received, which will be deemed to occur upon the earlier of: (a) the liquidation
of the related Mortgaged Property acquired through foreclosure or similar
proceedings, (b) the Servicer's determination in accordance with customary
servicing practices that no further amounts are collectible from the Home Loan
and any related collateral securing such Home Loan, or (c) any portion of a
scheduled monthly payment of principal and interest is in excess of 180 days
past due.
Net Liquidation Proceeds: With respect to any Payment Date, any cash
amounts received in respect of Liquidated Home Loans, whether through trustee's
sale, foreclosure sale, disposition of REO, whole loan sale or otherwise (other
than Insurance Proceeds and Released Mortgaged Property Proceeds), and any other
cash amounts received in connection with the management of the Mortgaged
Properties related to defaulted Home Loans, in each case, net of any
reimbursements to the Servicer made from such amounts for any unreimbursed
Servicing Fees and unreimbursed Servicing Advances (including such Servicing
Advances deemed to be nonrecoverable Servicing Advances) made and any other fees
and expenses paid in connection with the foreclosure, conservation and
liquidation of the related Liquidated Home Loans or Mortgaged Properties.
Noteholders' Interest Carry-Forward Amount: With respect to any Payment
Date, the excess, if any, of the Noteholders' Monthly Interest Payment Amount
for the preceding Payment Date and any Noteholders' Interest Carry-Forward
Amount remaining outstanding with respect to prior Payment Dates (including
interest on such outstanding amount at the applicable Interest Rate if permitted
by applicable law), over the amount in respect of interest that was paid on the
Notes on such preceding Payment Date.
Noteholders' Interest Payment Amount: With respect to any Payment Date,
the sum of the Noteholders' Monthly Interest Payment Amount for such Payment
Date and the Noteholders' Interest Carry-Forward Amount for such Payment Date.
Noteholders' Monthly Interest Payment Amount: With respect to any Payment
Date, the aggregate of interest accrued for the related Accrual Period at the
applicable Interest Rate on the Class Principal Balance of each Class of Notes
immediately preceding such Payment Date.
Original Class Principal Balance: The principal balance for each class of
Security (other than the Class A-IO Certificates and the Residual Interest
Certificates) on the Closing Date.
Regular Payment Amount: With respect to any Payment Date, the lesser of
(a) the Available Funds and (b) the sum of (i) the Interest Payment Amount and
(ii) the Regular Principal Payment Amount.
Regular Principal Payment Amount: With respect to each Payment Date, an
amount equal to the lesser of:
(a) the sum of (i) each scheduled payment of principal collected by
the Servicer in the related Due Period, (ii) all partial and full principal
prepayments applied by the Servicer during such Due Period, (iii) the
principal portion of all Net Liquidation Proceeds, Insurance Proceeds and
Released Mortgaged Property Proceeds received by the Servicer during such
Due Period in respect of any Home Loan, to the extent received on or prior
to the date on which such Home Loan became a Liquidated Home Loan,
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(iv) that portion of the Purchase Price of any repurchased Home Loan
allocable to principal and (v) the principal portion of any Substitution
Adjustments required to be deposited in the Collection Account as of the
related Determination Date; and
(b) the aggregate of the outstanding principal balances of the
Securities immediately prior to such Payment Date.
Released Mortgaged Property Proceeds: With respect to any Payment Date and
any Home Loan, the proceeds received by the Servicer in connection with (a) a
taking of an entire Mortgaged Property by exercise of the power of eminent
domain or condemnation or (b) any release of part of the Mortgaged Property from
the lien of the related Mortgage, whether by partial condemnation, sale or
otherwise, which in either case are not released to the borrower in accordance
with applicable law, accepted servicing practices and the Sale and Servicing
Agreement, less unreimbursed Servicing Fees and Servicing Advances (including
such Servicing Advances deemed to be nonrecoverable with respect to such Home
Loan).
Stepdown Date: The Payment Date occurring on the later of (i) the first
Payment Date after the Payment Date in March 2002 and (ii) the Payment Date on
which the Class A Principal Balance, after giving effect to payments of
principal on such Payment Date, is less than or equal to 10% of the Pool
Principal Balance as of the end of the related Due Period; provided, however, if
the Aggregate Liquidation Losses for such Payment Date exceed 28% of the
Original Pool Principal Balance, then the Stepdown Date will be the Payment Date
on which the Class A Principal Balance, after giving effect to payments of
principal on such Payment Date, is less than or equal to 4% of the Pool
Principal Balance as of the end of the related Due Period.
Termination Price: An amount equal to the sum, as of the related Payment
Date, of (a) the aggregate of the outstanding Class Principal Balances of the
Securities plus all accrued and unpaid interest thereon at the applicable
Interest Rates, (b) any Servicing Compensation due and unpaid, (c) any
unreimbursed Servicing Advances, including such Servicing Advances deemed to be
nonrecoverable, (d) any unreimbursed Deferred Amounts owed to a Class of Notes
and (e) the Indenture Trustee, the Co-Owner Trustee and Owner Trustee fees due
and unpaid.
OPTIONAL REDEMPTION
The Residual Interest Certificateholder may (and, if the Residual Interest
Certificateholder does not exercise such option for 30 days or more, then the
Servicer may) effect an early redemption of the Notes and purchase of the
Certificates on any Payment Date on or after which the Pool Principal Balance
declines to 5% or less of the Original Pool Principal Balance by depositing with
the Indenture Trustee an amount equal to the Termination Price (the first such
Payment Date, the "Initial Call Date"). On the first Payment Date after the
Initial Call Date, the Interest Rate of each Class of Securities with a Class
Principal Balance will be increased by 0.50% per annum if the early redemption
is not effected.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
Events of default under the Indenture (each an "Indenture Event of
Default") will include, without limitation (i) default for a period in excess of
five days in the payment of any interest on any Note or default in the payment
of the entire Principal Balance (including any Deferred Amount to the extent
required to be paid under the Indenture) of any Note on the Maturity Date; (ii)
default in the observance or performance of any covenant or agreement of the
Issuer made in the Indenture, or any representation or warranty of the Issuer
made in the Indenture which is was not eliminated or otherwise cured, for a
period of 30 days after notice to the Issuer; and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the Issuer and certain actions by the Issuer
indicating insolvency, reorganization or inability to pay its obligations or if
the Issuer shall dissolve or liquidate, in whole or in part, in any material
respect.
A failure to pay the full amount of the portion of the Noteholders'
Interest Payment Amount within five days of the Payment Date on which such
payment is due (without regard to the amount of Available Funds) will constitute
an Indenture Event of Default. Until the Notes have been declared due and
payable upon an
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Indenture Event of Default, the holders of the Notes may not request the
Indenture Trustee to take any action, other than the application of Available
Funds to principal and interest as provided herein, and may not otherwise take
or cause any action to be taken to enforce the obligation of the Trust to pay
principal and interest on the Notes. Upon the occurrence of a Servicer Event of
Default, the Indenture Trustee may have the right to terminate the Servicer.
Subject to the conditions specified herein under "Description of the
Transfer and Servicing Agreements--Duties of Owner Trustee and Indenture
Trustee", upon the occurrence and continuation of an Indenture Event of Default,
Holders of the Most Senior Class (as defined in the Sale and Servicing
Agreement) of Notes representing more than 66 2/3% of the then outstanding
amount of such Class of Notes may exercise their remedies under the Indenture.
These remedies include (i) the right to declare the principal of each Class of
Notes to be immediately due and payable and (ii) the right to direct the
Indenture Trustee's actions under the Indenture to consent to the sale of the
assets pledged to secure the Notes; provided, however, if the amount payable to
Noteholders from the proceeds of such sale will not be sufficient to discharge
in full all unpaid principal and interest accrued (including any Deferred
Amounts) on the outstanding Notes, such direction shall require the request of
the holders of 100% of the outstanding amount of the Notes.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Home Loan Purchase
Agreement, the Indenture, the Sale and Servicing Agreement, the Administration
Agreement and the Trust Agreement (collectively, the "Transfer and Servicing
Agreements"). Copies of the Transfer and Servicing Agreements will be filed with
the Commission following the issuance of the Securities. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Transfer and Servicing Agreements. The
following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Transfer
and Servicing Agreements set forth under the heading "The Agreements" in the
Prospectus.
SALE AND ASSIGNMENT OF THE HOME LOANS
On the Closing Date, the Seller will sell the Home Loans (excluding, the
right to receive prepayment fees and prepayment penalties which right will be
retained by the Seller) to the Depositor, and the Depositor will sell the Home
Loans (excluding, the right to receive prepayment fees and prepayment penalties
which right will be retained by the Seller) to the Trust. The Trust will,
concurrently with such sale of the Home Loans, deliver or cause to be delivered
the Securities to the Depositor. The Trust will pledge and assign the Home Loans
to the Indenture Trustee in exchange for the Notes. Each Home Loan will be
identified in a schedule appearing as an exhibit to the Sale and Servicing
Agreement.
In addition, the Seller will, as to each Home Loan, deliver or cause to be
delivered to the Custodian the related mortgage note endorsed to the order of
the Indenture Trustee without recourse, any assumption and modification
agreements and the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office), an assignment
of the Mortgage in the name of the Indenture Trustee in recordable form, and any
intervening assignments of the Mortgage (collectively, a "Home Loan File");
provided, however, with respect to a substantial number of the Home Loans, the
assignment from Keystone to United has not been recorded. The Indenture Trustee
will record such assignment within thirty days of the Closing Date. See "Risk
Factors--Lack of Perfected Security Interest on the Home Loans." Assignments of
the Mortgages to the Indenture Trustee will be recorded by the Indenture Trustee
in the real property records for those states in which such recording is deemed
necessary to protect the Trust and the Indenture Trustee's interest in the Home
Loans against the claims of certain creditors of the Seller or subsequent
purchasers. In these circumstances, the Indenture Trustee will deliver such
assignments to the Custodian after recordation. In the event that, with respect
to any Home Loan as to which recordation of the related assignment is required,
the Seller cannot deliver the Mortgage or any assignment with evidence of
recording thereon concurrently with the conveyance thereof under the Sale and
Servicing Agreement because they have not yet been returned by the public
recording office, the Seller will deliver or cause to be
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delivered to the Custodian a certified true photocopy of such Mortgage or
assignment. The Seller will deliver or cause to be delivered to the Custodian
any such Mortgage or assignment with evidence of recording indicated thereon
upon receipt thereof from the public recording office. The Indenture Trustee or
the Custodian will review (or cause to be reviewed) each Home Loan File within
30 days after the conveyance of the related Home Loan to the Trust to ascertain
that all required documents have been executed and received.
SERVICING
In consideration for the performance of the loan servicing functions for
the Home Loans, the Servicer is entitled to a monthly fee (the "Servicing Fee")
equal to 0.75% per annum (the "Servicing Fee Rate") of the Pool Principal
Balance as of the first day of the Due Period immediately preceding the related
Payment Date. The Servicer may retain subservicers to service certain of the
Home Loans. Any such subservicer may be an affiliate of the Servicer. The
Servicer will remain responsible for the servicing of any such Home Loans and
will pay the fees of any subservicer out of its own funds. In addition to the
Servicing Fee, the Servicer is entitled to retain additional servicing
compensation in the form of assumption and other administrative fees, release
fees, insufficient funds charges, late payment charges, investment income on the
amounts in the Collection Account and any other servicing-related penalties and
fees other than prepayment fees or prepayment penalties (collectively, such
additional compensation and Servicing Fee, the "Servicing Compensation").
In the event of a delinquency or default with respect to a Home Loan,
neither the Servicer nor any subservicer will have an obligation to advance
scheduled monthly payments of principal or interest with respect to such Home
Loan. However, the Servicer or any subservicer will make reasonable servicing
advances with respect to the Home Loans (each, a "Servicing Advance") and will
be entitled to reimbursement for Servicing Advances as described herein
(including such Servicing Advances deemed to be nonrecoverable). Servicing
Advances may include costs and expenses advanced for the preservation,
restoration and protection of any Mortgaged Property, including advances to pay
delinquent real estate taxes and insurance. Any Servicing Advances including
nonrecoverable Servicing Advances by the Servicer or any subservicer will be
netted from collections on the Home Loans prior to deposit in the Collection
Account or withdrawn from the Collection Account, as described under
"--Collection Account, Note Payment Account and Certificate Distribution
Account" below.
COLLECTION ACCOUNT, NOTE PAYMENT ACCOUNT AND CERTIFICATE DISTRIBUTION ACCOUNT
The Servicer is required to deposit in an Eligible Account (as defined in
the Sale and Servicing Agreement) (the "Collection Account"), within two
Business Days of receipt, all payments received after the Cut-Off Date on
account of principal and interest on the Home Loans, all Net Liquidation
Proceeds, Insurance Proceeds, Released Mortgaged Property Proceeds, any amounts
payable in connection with the repurchase or substitution of any Home Loan and
any amount required to be deposited in the Collection Account in connection with
the redemption of the Notes and the purchase of the Certificates. The foregoing
requirements for deposit in the Collection Account will be exclusive of payments
on account of principal and interest collected on the Home Loans on or before
the Cut-Off Date. The Servicer will be entitled to net its Servicing
Compensation, Servicing Advances and any unreimbursed Servicing Compensation and
Servicing Advances prior to deposit into the Collection Account or to withdraw
such amounts therefrom. Withdrawals will be made from the Collection Account
only for the purposes specified in the Sale and Servicing Agreement. The
Collection Account may be maintained at any depository institution that
satisfies the requirements set forth in the definition of Eligible Account in
the Sale and Servicing Agreement.
Amounts on deposit in the Collection Account will be invested in Permitted
Investments at the direction of the Servicer. All interest and any other
investment earnings on amounts on deposit in the Collection Account (net of
investment losses) will be payable to the Servicer from the Collection Account
as part of its Servicing Compensation.
Any subservicer will also maintain a collection account for deposit of
payments received with respect to the Home Loans being serviced by such
subservicer. Such subservicer's collection account will be an Eligible Account
and will satisfy requirements that are substantially similar to the requirements
for the Collection Account.
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The Indenture Trustee will establish and maintain an Eligible Account, in
the name of the Indenture Trustee on behalf of the Noteholders, into which
amounts released from the Collection Account for payment to the Noteholders will
be deposited and from which all payments to the Noteholders will be made (the
"Note Payment Account"). The Indenture Trustee will also establish and maintain
an Eligible Account, in the name of the Co-Owner Trustee on behalf of the
Certificateholders, into which amounts released from the Collection Account for
distribution to the Certificateholders will be deposited and from which all
distributions to the Certificateholders will be made (the "Certificate
Distribution Account"). The Note Payment Account and the Certificate
Distribution Account are referred to herein collectively as the "Payment
Accounts".
PRIORITY OF PAYMENTS
On the Business Day prior to each Payment Date, the Indenture Trustee will
withdraw from the Collection Account the Available Collection Amount for deposit
into the Payment Accounts. On each Payment Date, the Indenture Trustee will make
withdrawals from the applicable Payment Account for application of the amounts
specified below in the following order of priority:
(i) to provide for the payment to the Servicer of the Servicing
Compensation and all unpaid Servicing Compensation from prior Due Periods
to the extent not previously retained by the Servicer or withdrawn from the
Collection Account and paid to the Servicer;
(ii) to each of the Indenture Trustee, the Co-Owner Trustee, and the
Owner Trustee fees due and payable on such Payment Date;
(iii) to the holders of the Class A Notes and the Class A-IO
Certificates, pro rata, the portion of the Noteholders' Interest Payment
Amount and Certificateholder's Interest Distribution Amount, respectively,
required to be paid in respect of such Class on such Payment Date;
(iv) to the holders of the Class M-1 Notes, the portion of the
Noteholders' Interest Payment Amount required to be paid in respect of the
Class M-1 Notes on such Payment Date;
(v) to the holders of the Class M-2 Notes, the portion of the
Noteholders' Interest Payment Amount required to be paid in respect of the
Class M-2 Notes on such Payment Date;
(vi) to the holders of the Class B-1 Certificates, the portion of the
Certificateholders' Interest Distribution Amount required to be paid in
respect of the Class B-1 Certificates on such Payment Date;
(vii) to the holders of the Class B-2 Certificates, the portion of the
Certificateholders' Interest Distribution Amount required to be paid in
respect of the Class B-2 Certificates on such Payment Date;
(viii) to the holders of the Class B-3 Certificates, the portion of
the Certificateholders' Interest Distribution Amount required to be paid in
respect of the Class B-3 Certificates on such Payment Date;
(ix) to the holders of the Class B-4 Certificates, the portion of the
Certificateholders' Interest Distribution Amount required to be paid in
respect of the Class B-4 Certificates on such Payment Date;
(x) to the holders of the Class A Notes, the amount necessary to
reduce the Class Principal Balance thereof to the Class A Optimal Principal
Balance;
(xi) to the holders of the Class M-1 Notes, the amount necessary to
reduce the Class Principal Balance thereof to the Class M-1 Optimal
Principal Balance;
(xii) to the holders of the Class M-2 Notes, the amount necessary to
reduce the Class Principal Balance thereof to the Class M-2 Optimal
Principal Balance;
(xiii) to the holders of the Class B-1 Certificates, the amount
necessary to reduce the Class Principal Balance thereof to the Class B-1
Optimal Principal Balance;
(xiv) to the holders of the Class B-2 Certificates, the amount
necessary to reduce the Class Principal Balance thereof to the Class B-2
Optimal Principal Balance;
(xv) to the holders of the Class B-3 Certificates, the amount
necessary to reduce the Class Principal Balance thereof to the Class B-3
Optimal Principal Balance;
(xvi) to the holders of the Class B-4 Certificates, the amount
necessary to reduce the Class Principal Balance thereof to the Class B-4
Optimal Principal Balance;
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(xvii) to the Classes of Securities, if any, which previously accrued
Allocable Loss Amounts, in the following order of priority, first to the
Class M-1 Notes, second to the Class M-2 Notes, third to the Class B-1
Certificates, fourth to the Class B-2 Certificates, fifth to the Class B-3
Certificates and sixth to the Class B-4 Certificates, any Deferred Amounts,
in each case to the extent of any accrued Allocable Loss Amounts in respect
of such Class;
(xviii) to the Co-Administrator, the fees and expenses of the
Co-Administrator; and
(xix) to the holder of the Residual Interest Certificate, the
remainder of the amount on deposit in the Certificate Distribution Account.
Notwithstanding the foregoing, upon the occurrence of certain trigger
events set forth in the Trust Agreement based upon levels of the Aggregate
Liquidation Losses, payments of principal and interest on the Certificates will
be made on a sequential basis.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Securities in their own names or as pledgees. For the
purpose of meeting the legal requirements of certain jurisdictions, the Owner
Trustee and the Indenture Trustee acting jointly (or in some instances, the
Owner Trustee or the Indenture Trustee acting alone) will have the power to
appoint co-trustees or separate trustees of all or any part of the Trust. In the
event of such an appointment, all rights, powers, duties and obligations
conferred or imposed upon the Owner Trustee by the Trust Agreement and upon the
Indenture Trustee by the Indenture will be conferred or imposed upon the Owner
Trustee and the Indenture Trustee, respectively, and in each such case such
separate trustee or co-trustee, jointly, or, in any jurisdiction in which the
Owner Trustee or Indenture Trustee will be incompetent or unqualified to perform
certain acts, singly upon such separate trustee or co-trustee, which will
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Owner Trustee or the Indenture Trustee, as applicable.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Residual Interest Certificateholder will be obligated to appoint
a successor to the Owner Trustee, and the Trust will be obligated to appoint a
successor to the Indenture Trustee. The Securityholders may also remove the
Owner Trustee or the Indenture Trustee if either ceases to be eligible to
continue as such under the Trust Agreement or the Indenture, as the case may be,
becomes legally unable to act or becomes insolvent. In such circumstances, the
Residual Interest Certificateholder or the Trust, as applicable, will be
obligated to appoint a successor Owner Trustee or a successor Indenture Trustee,
as applicable. Any resignation or removal of the Owner Trustee or Indenture
Trustee and appointment of a successor thereto will not become effective until
acceptance of the appointment by such successor.
The Trust Agreement and Indenture will provide that the Owner Trustee and
Indenture Trustee will be entitled to indemnification by the Residual Interest
Certificateholder for, and will be held harmless against, any loss, liability or
expense incurred by the Owner Trustee or Indenture Trustee not resulting from
its own willful misfeasance, bad faith or negligence (other than by reason of a
breach of any of its representations or warranties to be set forth in the Trust
Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Certificates (other than the execution
and authentication thereof), the Notes or any Home Loans or related documents,
and will not be accountable for the use or application by the Seller or the
Servicer of any funds paid to the Seller or the Servicer in respect of the
Securities or the Home Loans, or the investment of any monies by the Servicer of
funds in the Collection Account. So long as no Indenture Event of Default has
occurred and is continuing, the Owner Trustee will be required to perform only
those duties specifically required of it under the Trust Agreement. Generally,
those duties will be limited to the receipt of the various certificates, reports
or other instruments required to be furnished to the Owner Trustee under the
Trust Agreement, in which case it will only be required to examine them to
determine whether they conform to the requirements of the Trust Agreement. The
Owner Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Transfer and Servicing Agreements which failure
constitutes an Indenture Event of Default, unless the Owner Trustee obtains
actual knowledge of such failure.
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The Owner Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Trust Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of the
holders of the Certificates, unless such Certificateholders have offered to the
Owner Trustee reasonable security or indemnity against the costs, expenses and
liabilities that may be incurred therein or thereby. Subject to the rights or
consent of the Noteholders and Indenture Trustee, no Certificateholder will have
any right under the Trust Agreement to institute any proceeding with respect to
the Trust Agreement, unless such holder previously has given to the Owner
Trustee written notice of the occurrence of an Indenture Event of Default and
(i) an Indenture Event of Default arises from the Servicer's failure to remit
payments when due or (ii) the holders of a majority of the outstanding amount of
the Certificates have made a written request upon the Owner Trustee to institute
such proceeding in its own name as the Owner Trustee thereunder and have offered
to the Owner Trustee reasonable indemnity, and the Owner Trustee for 30 days has
neglected or refused to institute any such proceedings.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Certificates, the Notes (other than the
execution and authentication thereof) or any Home Loans or related documents,
and will not be accountable for the use or application by the Seller, the
Servicer or the Owner Trustee of any funds paid to the Seller, the Servicer or
the Owner Trustee in respect of the Securities or the Home Loans, or the
investment of any monies by the Servicer of funds in the Collection Account. So
long as no Event of Default under the Indenture has occurred or is continuing,
the Indenture Trustee will be required to perform only those duties specifically
required of it under the Transfer and Servicing Agreements. The Indenture
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Transfer and Servicing Agreements, which failure
constitutes an Event of Default under the Transfer and Servicing Agreements,
unless the Indenture Trustee obtains actual knowledge of such failure.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Noteholders, unless such Noteholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. No Noteholder will have any right under
the Indenture to institute any proceeding with respect to the Indenture, unless
such Holder previously has given to the Indenture Trustee written notice of the
occurrence of an Indenture Event of Default and (i) the Indenture Event of
Default arises from the Servicer's failure to remit payments when due or
(ii) Noteholders evidencing more than 50% of the outstanding amount of each
Class of Notes, acting together as a single class, have made a written request
upon the Indenture Trustee to institute such proceeding in its own name as the
Indenture Trustee thereunder and have offered to the Indenture Trustee
reasonable indemnity, and the Indenture Trustee for 30 days has neglected or
refused to institute any such proceedings. See "Description of the
Securities--Rights of Noteholders Upon Occurrence of Event of Default" herein.
PREPAYMENT AND YIELD CONSIDERATIONS
No principal payments will be made on a Class of Notes on any Payment Date
until the Class Principal Balance of each Class of Notes having a higher
principal payment priority has been reduced to its related Class Optimal
Principal Balance for such Payment Date. See "Description of the
Securities--Payments" herein. As the rate of payment of principal of the Notes
depends primarily on the rate and timing of payment (including prepayments) of
the principal balance of the Home Loans, final payment of any Class of Notes
could occur significantly earlier than the Maturity Date. Noteholders will bear
the risk of being able to reinvest principal payments on the Notes at yields at
least equal to the yield on their respective Notes. No prediction can be made as
to the rate or timing of prepayments on the Home Loans in either stable or
changing interest rate environments. Any reinvestment risk due to the rate of
prepayment of the Home Loans will be borne entirely by Noteholders.
The subordination of the Certificates to the Notes and of each Class of
Notes having a lower principal payment priority to each Class of Notes having a
higher principal payment priority will provide limited protection to holders of
the Notes against losses on the Home Loans. If the actual rate and amount of
losses experienced on the Home Loans exceed the rate and amount of such losses
anticipated by an investor, the
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yields to maturity (or to redemption, as described under "Description of the
Securities--Optional Redemption" herein) on such subordinate Notes may be lower
than anticipated.
Approximately 64.95% of the Home Loans provide for payment of prepayment
penalties; however, no detailed data is available with respect to the terms of
such prepayment penalties. The rate of prepayment on the Home Loans cannot be
accurately predicted. The prepayment experience of the Trust with respect to the
Home Loans may be affected by a wide variety of factors, including, without
limitation, economic conditions, prevailing interest rate levels, the
availability of alternative financing, homeowner mobility and changes affecting
the deductibility for Federal income tax purposes of interest payments on the
Home Loans. Generally, however, because the Home Loans bear interest at fixed
rates, and the rate of prepayment on fixed rate loans is sensitive to prevailing
interest rates, if prevailing interest rates fall significantly below the
interest rates on the Home Loans, the Home Loans are likely to be subject to
higher prepayment rates than if prevailing rates remain at or above the interest
rates on the Home Loans. Conversely, if prevailing interest rates rise
significantly above the interest rates on the Home Loans, the rate of
prepayments would be likely to decrease. No representations are made as to the
particular factors that will affect the prepayment of the Home Loans, as to the
relative importance of such factors, or as to the percentage of the principal
balance of the Home Loan that will be paid as of any date.
The effective yield to Noteholders will be lower than the yield otherwise
produced by the applicable Interest Rate, because the payment of interest
accrued during the applicable Accrual Period will not be made until the Payment
Date occurring in the month following such Accrual Period. See "Description of
the Securities--Payments" herein. This delay will result in funds being paid to
such Noteholders approximately 24 days after the end of the applicable Accrual
Period, during which 24-day period no interest will accrue on such funds.
The rate of principal payments on the Notes, the aggregate amount of
distributions on the Notes and the yields to maturity of the Notes will be
directly affected by the rate and timing of principal reductions on the Home
Loans. Such principal reductions may be in the form of scheduled amortization
payments or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other disposition. On any Payment Date on or after the Payment Date on which
the Pool Principal Balance declines to 5% or less of the Original Pool Principal
Balance, the Residual Interest Certificateholder or the Servicer may effect a
redemption of the Notes and purchase of the Certificates as described herein
under "Description of the Securities--Optional Redemption."
The "weighted average life" of a Class of Notes refers to the average
amount of time that will elapse from the Closing Date to the date each dollar in
respect of principal of such Class is repaid. The weighted average life of each
Class of Notes will be influenced by, among other factors, the rate at which
principal reductions occur on the Home Loans as described herein. If substantial
principal prepayments on the Home Loans are received as a result of unscheduled
payments, liquidations or repurchases, payments to Noteholders may significantly
shorten the weighted average lives of the Notes. If the Home Loans experience
delinquencies and defaults in the payment of principal, then Noteholders will
experience a delay in the receipt of principal payments attributable to such
delinquencies and defaults, which in certain instances may result in longer
actual average weighted lives of the Notes than would otherwise be the case.
Interest shortfalls on the Home Loans due to principal prepayments in full and
curtailments, and any resulting shortfall in amounts payable on the Notes, will
be covered to the extent of amounts available from the applicable credit
enhancement. See "Risk Factors--Potential Inadequacy of Credit Enhancement"
herein.
The rate and timing of principal payments on the Home Loans will be
influenced by a variety of economic, geographic, social and other factors. These
factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the mortgaged properties,
servicing decisions, homeowner mobility, the existence and enforceability of
"due-on-sale" clauses, seasoning of loans, market interest rates for similar
types of loans and the availability of funds for such loans. Substantially all
of the Home Loans contain due-on-sale provisions and the Servicer intends to
enforce such provisions unless (i) the Servicer, in a manner consistent with its
servicing practices, permits the purchaser of the related Mortgaged Property to
assume the Home Loan, or (ii) such enforcement is not permitted by applicable
law. In certain cases, the Servicer may, in a manner consistent with its
servicing practices, simply release the lien on the existing collateral, leaving
the related Home Loan unsecured. In such event, the Servicer will generally
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require the borrower to make a partial prepayment in reduction of the principal
balance of the Home Loan to the extent that the borrower has received proceeds
from the sale of the prior residence that will not be applied to the purchase of
the new residence.
Payments of principal at a faster rate than anticipated will decrease the
yield on Notes purchased at a premium; payments of principal at a slower rate
than anticipated will decrease the yield on Notes purchased at a discount. The
effect on an investor's yield due to payments of principal occurring at a rate
that is faster (or slower) than the rate anticipated by the investor during any
period following the issuance of the Notes will not be entirely offset by a
subsequent like reduction (or increase) in the rate of payments of principal
during any subsequent period.
The rate of delinquencies and defaults on the Home Loans and of recoveries,
if any, on defaulted Home Loans and foreclosed properties will affect the rate
and timing of principal payments on the Home Loans, and, accordingly, the
weighted average lives of the Notes, and could cause a delay in the payment of
principal to the holders of the Notes. Certain factors may influence
delinquencies and defaults, including origination and underwriting standards,
loan-to-value ratios and delinquency history. In general, defaults on Home Loans
are expected to occur with greater frequency in their early years, although
little data is available with respect to the rate of default on similar types of
Home Loans. The rate of default on Home Loans with high loan-to-value ratios, or
on Home Loans secured by junior liens, may be higher than that of Home Loans
with lower loan-to-value ratios or secured by first liens on comparable
properties. In addition, the rate and timing of prepayments, defaults and
liquidations on the Home Loans will be affected by the general economic
condition of the area in which the related Mortgaged Properties are located or
the related borrower is residing. The risk of delinquencies and losses is
greater and voluntary principal prepayments are less likely in regions where a
weak or deteriorating economy exists, as may be evidenced by, among other
factors, increasing unemployment or falling property values.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
differ in material respects from the Home Loans and such data may not be
reflective of conditions applicable to the Home Loans. No significant historical
prepayment data is generally available with respect to the types of Home Loans
included in the Home Loan Pool or similar types of loans, and there can be no
assurance that the Home Loans will achieve or fail to achieve any particular
rate of principal prepayment. A number of factors suggest that the prepayment
experience of the Home Loan Pool may be significantly different from that of a
pool of conventional first-lien, single family mortgage loans with equivalent
interest rates and maturities. One such factor is that the principal balance of
the average Home Loan is smaller than that of the average conventional
first-lien mortgage loan. A smaller principal balance may be easier for a
borrower to prepay than a larger balance and, therefore, a higher prepayment
rate may result for the Home Loan Pool than for a pool of first-lien mortgage
loans, irrespective of the relative average interest rates and the general
interest rate environment. In addition, in order to refinance a first-lien
mortgage loan, the borrower must generally repay any junior liens. However, a
small principal balance may make refinancing a Home Loan at a lower interest
rate less attractive to the borrower as the perceived impact to the borrower of
lower interest rates on the size of the monthly payment may not be significant.
Other factors that might be expected to affect the prepayment rate of the Home
Loan Pool include the relative creditworthiness of the borrowers, the amounts of
and interest rates on the underlying senior mortgage loans, and the tendency of
borrowers to use real property mortgage loans as long-term financing for home
purchase and junior liens as shorter-term financing for a variety of purposes,
which may include the direct or indirect financing of home improvement,
education expenses, debt consolidation, purchases of consumer durables such as
automobiles, appliances and furnishings and other consumer purposes.
Furthermore, because at origination the majority of the Home Loans had combined
loan-to-value ratios that approached or exceeded 100%, the related borrowers may
have less opportunity to refinance the indebtedness secured by the related
Mortgaged Properties, including the Home Loans, and a lower prepayment rate may
result for the Home Loan Pool than for a pool of mortgage (including first or
junior lien) loans that have combined loan-to-value ratios less than 100%.
However, the availability of credit from an increased number of lenders making
loans similar to the Home Loans may result in faster rates of prepayment of the
Home Loans than would otherwise be the case. In addition, any increase in the
market values of Mortgaged Properties, and the resulting decrease in the
combined loan-to-value ratios of the related Home Loans, may make alternative
sources of financing available to the related borrowers at lower interest rates.
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REINVESTMENT RISK
During periods of falling interest rates, Noteholders may receive an
increased amount of principal payments at a time when such holders may be unable
to reinvest such payments in investments having a yield and rating comparable to
the Notes. Conversely, during periods of rising interest rates, Noteholders are
likely to receive a decreased amount of principal payments at a time when such
holders may have an opportunity to reinvest such payments in investments having
a yield and rating comparable to the Notes.
MATURITY DATE
The Maturity Date of each Class of Notes is March 25, 2025. The Maturity
Date was determined by calculating the final Payment Date with respect to each
such Class on the basis of the Modeling Assumptions and an assumed constant
prepayment rate of 0% of the Prepayment Assumption (as defined herein), and
adding three years thereto. The actual maturity of any Class of Notes may be
significantly earlier than the Maturity Date.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Notes purchased at a price less than par. Generally, greater than
anticipated prepayments of principal will decrease the yield on Notes purchased
at a price greater than par. The effect on an investor's yield due to principal
payments on the Home Loans occurring at a rate that is faster (or slower) than
the rate anticipated by the investor in the period immediately following the
issuance of the Notes will not be entirely offset by a subsequent like reduction
(or increase) in the rate of principal payments. The weighted average lives of
the Notes will also be affected by the amount and timing of delinquencies and
defaults on the Home Loans and the recoveries, if any, on Home Loans and
foreclosed properties.
The following information illustrates the effect of prepayments of the Home
Loans on the weighted average lives of the Notes under certain stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Home Loans. Weighted average life refers to the average
amount of time that will elapse from the date of delivery of a security until
each dollar of principal of such security will be repaid to the investor. The
weighted average lives of the Notes will be influenced by the rate at which
principal of the Home Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions and
repurchases by or on behalf of the Seller).
Prepayments on loans such as the Home 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 loans
for the life of such loans. A 100% Prepayment Assumption assumes a constant
prepayment rate ("CPR") of 0.0% per annum of the outstanding principal balance
of such loans in the first month of the life of the loans and an additional
approximately 1.0714% (expressed as a percentage per annum) in each month
thereafter until the fifteenth month; beginning in the fifteenth month and in
each month thereafter during the life of the loans, a CPR of 15% per annum each
month is assumed. As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the Prepayment Assumption (i.e., no
prepayments), 100% Prepayment Assumption assumes prepayment rates equal to 100%
of the Prepayment Assumption, and so forth. 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 loans, including the Home
Loans. The Seller does not make any representations about the appropriateness of
the Prepayment Assumption or the CPR model.
Modeling Assumptions. For purposes of preparing the tables below, the
actual characteristics of the Home Loans as of the Cut-off Date have been used
and the following assumptions (the "Modeling Assumptions") have been made: (i)
all scheduled payments on the Home Loans are timely received on the first day of
each month, commencing March 1, 1999; (ii) there are no defaults, losses or
delinquencies on the Home Loans; (iii) the Home Loans prepay monthly at the
respective specified constant annual percentages of
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CPR specified in the table; (iv) the Closing Date is March 26, 1999; (v) all
principal prepayments represent prepayments in full of the Home Loans and
include 30 days of interest thereon; (vi) there are no repurchases of or
substitutions for the Home Loans; (vii) no early redemption of the Notes is
effected (except in the case of "Weighted Average Life with Optional
Redemption"); and (viii) cash distributions are received by the Noteholders on
the 25th day of each month, commencing in April, 1999.
The tables on the following pages indicate the percentage of the Original Class
Principal Balance of each Class of Notes that would be outstanding at each of
the dates shown at the specified percentages of the Prepayment Assumption and
the corresponding weighted average life of each Class of Notes. Since these
tables have been prepared based on the Modeling Assumptions (including the
assumptions regarding the characteristics and performance of the Home Loans).
There are discrepancies between the characteristics of the actual Home Loans and
the characteristics of the Home Loans assumed in preparing the tables. Any such
discrepancy may have an effect upon the percentages of Class Principal Balances
outstanding and weighted average lives of the Notes set forth in the tables. In
addition, since the actual Home Loans have characteristics which differ from
those assumed in preparing the tables set forth below, the distributions of
principal on the Notes may be made earlier or later than as indicated in the
tables.
The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each payment of principal thereof by the number of
years from the date of issuance to the related Payment Date, (b) summing the
results and (c) dividing the sum by the aggregate payments of principal referred
to in clause (a) and rounding to one decimal place.
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PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)(2)
CLASS A CLASS M-1
--------------------------------------------------- --------------------------------------------
PAYMENT BALANCE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125%
- --------------------------- ------ ----- ----- ----- ----- ----- ------ ------ ------ ----- -----
Initial Balance............ 100 100 100 100 100 100 100 100 100 100 100
March 2000................. 97 87 82 77 72 67 100 100 100 100 100
March 2001................. 95 72 61 51 41 32 100 100 100 100 100
March 2002................. 91 58 43 29 16 4 100 100 100 100 100
March 2003................. 87 45 26 10 8 4 100 100 100 100 86
March 2004................. 83 32 12 8 6 4 100 100 100 84 68
March 2005................. 78 21 8 6 5 4 100 100 89 69 54
March 2006................. 73 10 7 5 4 3 100 100 76 57 42
March 2007................. 67 8 6 4 3 2 100 89 65 47 33
March 2008................. 60 7 5 3 2 2 100 79 55 38 25
March 2009................. 53 6 4 3 2 1 100 69 46 30 20
March 2010................. 45 6 4 2 1 1 100 61 39 24 15
March 2011................. 37 5 3 2 1 1 100 52 32 19 11
March 2012................. 27 4 2 1 1 * 100 45 26 15 9
March 2013................. 16 3 2 1 1 * 100 37 21 12 6
March 2014................. 9 3 2 1 * * 98 31 17 9 5
March 2015................. 8 2 1 1 * * 90 26 14 7 3
March 2016................. 7 2 1 * * * 81 22 11 5 3
March 2017................. 6 2 1 * * * 71 18 9 4 2
March 2018................. 5 1 1 * * * 59 14 6 3 1
March 2019................. 4 1 * * * * 46 10 4 2 1
March 2020................. 3 1 * * * * 30 6 3 1 *
March 2021................. 1 * * * * * 13 2 1 * *
March 2022................. 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
Without Optional
Termination.............. 10.082 4.293 3.251 2.606 2.171 1.811 19.412 13.144 10.679 8.802 7.382
With Optional
Termination............ 10.080 4.281 3.230 2.578 2.143 1.785 19.383 13.011 10.439 8.492 7.079
PAYMENT BALANCE 150%
- --------------------------- -----
Initial Balance............ 100
March 2000................. 100
March 2001................. 100
March 2002................. 100
March 2003................. 88
March 2004................. 58
March 2005................. 41
March 2006................. 31
March 2007................. 23
March 2008................. 17
March 2009................. 12
March 2010................. 9
March 2011................. 7
March 2012................. 5
March 2013................. 3
March 2014................. 2
March 2015................. 2
March 2016................. 1
March 2017................. 1
March 2018................. 1
March 2019................. *
March 2020................. *
March 2021................. *
March 2022................. 0
Weighted Average Life
Without Optional
Termination.............. 6.549
With Optional
Termination............ 6.264
- ------------------
* Less than 0.5% but greater than 0%
(1) The percentages in this table have been rounded to the nearest whole number.
(2) Based on the assumption that neither the Residual Interest Certificateholder
nor the Servicer exercises its option to redeem the Notes and purchase the
Certificates as described under "Description of the Securities--Optional
Redemption" herein, except in the case of the "Weighted Average Life With
Optional Redemption."
S-42
PERCENTAGE OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION(1)(2)
CLASS M-2
-----------------------------------------------------
PAYMENT BALANCE 0% 50% 75% 100% 125% 150%
- ------------------------------------------------------------------ ------ ------ ------ ----- ----- -----
Initial Balance................................................... 100 100 100 100 100 100
March 2000........................................................ 100 100 100 100 100 100
March 2001........................................................ 100 100 100 100 100 100
March 2002........................................................ 100 100 100 100 100 100
March 2003........................................................ 100 100 100 100 86 72
March 2004........................................................ 100 100 100 84 68 54
March 2005........................................................ 100 100 89 69 54 41
March 2006........................................................ 100 100 76 57 42 31
March 2007........................................................ 100 89 65 47 33 23
March 2008........................................................ 100 79 55 38 25 17
March 2009........................................................ 100 69 46 30 20 12
March 2010........................................................ 100 61 39 24 15 9
March 2011........................................................ 100 52 32 19 11 7
March 2012........................................................ 100 45 26 15 9 5
March 2013........................................................ 100 37 21 12 6 3
March 2014........................................................ 98 31 17 9 5 2
March 2015........................................................ 90 26 14 7 3 2
March 2016........................................................ 81 22 11 5 3 1
March 2017........................................................ 71 18 9 4 2 1
March 2018........................................................ 59 14 6 3 1 1
March 2019........................................................ 46 10 4 2 1 *
March 2020........................................................ 30 6 3 1 * *
March 2021........................................................ 13 2 1 * * *
March 2022........................................................ 0 0 0 0 0 0
Weighted Average Life
Without Optional Termination.................................... 19.412 13.144 10.679 8.802 7.382 6.350
With Optional Termination....................................... 19.383 13.011 10.439 8.492 7.079 6.065
- ------------------
* Less than 0.5% but greater than 0%
(1) The percentages in this table have been rounded to the nearest whole number.
(2) Based on the assumption that neither the Residual Interest Certificateholder
nor the Servicer exercises its option to redeem the Notes and purchase the
Certificates as described under "Description of the Securities--Optional
Redemption" herein, except in the case of the "Weighted Average Life With
Optional Redemption."
S-43
The paydown scenarios for the Notes set forth in the foregoing tables are
subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result, there
can be no assurance that any of the foregoing paydown scenarios and the Modeling
Assumptions on which they were made will prove to resemble the actual
performance of the Home Loans and the Notes, or that the actual weighted average
lives of the Notes will not vary substantially from those set forth in the
foregoing tables, which variations may be shorter or longer, and which
variations may be greater with respect to later years. Furthermore, it is not
expected that the Home Loans will prepay at a constant rate or that all of the
Home Loans will prepay at the same rate. Moreover, the Home Loans actually
included in the Home Loan Pool, the payment experience of such Home Loans and
certain other factors affecting the payments on the Notes will not conform to
the Modeling Assumptions made in preparing the above tables. In fact, the
characteristics and payment experience of the Home Loans will differ in many
respects from such Modeling Assumptions. See "The Home Loan Pool" herein. To the
extent that the Home Loans actually included in the Home Loan Pool have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of certain United States federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including changes in effective dates) or possible differing
interpretations. It deals only with Notes held as capital assets and does not
purport to deal with persons in special tax situations, such as financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, persons holding Notes as a hedge against currency
risks or as a position in a "straddle" for tax purposes, or persons whose
functional currency is not the United States dollar. It also does not deal with
holders other than original purchasers (except where otherwise specifically
noted). Persons considering the purchase of the Notes should consult their own
tax advisors concerning the application of United States federal income tax laws
to their particular situations as well as any consequences of the purchase,
ownership and disposition of the Notes arising under the laws of any other
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States federal income tax purposes (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. income tax purposes) created or
organized in or under the laws of the United States or any state thereof,
including 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 whose income is subject to United States federal income tax regardless of
its source, (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 the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
Treasury regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons under the United States Internal Revenue Code
of 1986, as amended (the "Code") and applicable Treasury regulations thereunder
prior to such date, that elect to continue to be treated as United States
persons under the Code or applicable Treasury regulations thereunder also will
be a U.S. Holder. As used herein, the term "non-U.S. Holder" means a beneficial
owner of a Note that is not a U.S. Holder.
CHARACTERIZATION OF NOTES AS INDEBTEDNESS
In the opinion of Brown & Wood LLP, ("Tax Counsel") for federal income tax
purposes, (i) the Notes will be treated as debt instruments, and (ii) the Trust
will not be treated as an association (or publicly traded partnership) taxable
as a corporation or as a taxable mortgage pool within the meaning of
Section 7701(i) of the Code. The Class M-1 Notes and the Class M-2 Notes will be
treated as having been issued with original issue discount. As a result, holders
of such Notes may be required to recognize income with respect to such Notes in
advance of the receipt of cash attributable to that income. Each Noteholder, by
the acceptance of a Note, will agree to treat the Notes as indebtedness for
federal income tax purposes.
S-44
In general, whether for U.S. federal income tax purposes a transaction
constitutes an equity investment or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Home Loans has been retained by the
Trust or its beneficial owners and has not been transferred to the Noteholders
U.S. HOLDERS
Payments of Interest. Payments of interest on a Note generally will be
taxable to a U.S. Holder as ordinary interest income at the time such payments
are accrued or are received (in accordance with the U.S. Holder's regular method
of tax accounting).
Original Issue Discount. Payments of qualified stated interest on a Note
issued with OID (a "Discount Note") are taxable to a U.S. Holder as ordinary
interest income at the time such payments are accrued or are received (in
accordance with the U.S. Holder's regular method of tax accounting). A U.S.
Holder of a Discount Note must include OID in income as ordinary interest for
United States federal income tax purposes as it accrues under a constant yield
method in advance of receipt of the cash payments attributable to such income,
regardless of such U.S. Holder's regular method of tax accounting.
The OID Regulations do not contain provisions specifically interpreting
Code Section 1272(a)(6) which applies to prepayable securities such as the
Notes. Until the Treasury issues guidance which applies to prepayable securities
such as the Notes, the Indenture Trustee intends to base its OID computation on
Code Section 1272(a)(6) and the OID Regulations as described in the Prospectus.
However, because no regulatory guidance currently exists under Code Section
1272(a)(6), there can be no assurance that such methodology represents the
correct manner of calculating OID.
The yield used to calculate accruals of OID with respect to the Notes with
OID will be the original yield to maturity of such Notes, determined by assuming
that the Home Loans will prepay in accordance with 100% of the Prepayment
Assumption. No representation is made as to the actual rate at which the Home
Loans will prepay. See "Certain Federal Income Tax Consequences" in the
Prospectus for a discussion of the application of the OID rules and for purposes
of calculating OID.
Disposition of a Note. Except as discussed in the Prospectus, upon the
sale, exchange or retirement of a Note, a U.S. Holder generally will recognize
taxable gain or loss equal to the difference between the amount realized on the
sale, exchange or retirement (other than amounts representing accrued and unpaid
interest) and such U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's
adjusted tax basis in a Note generally will equal such U.S. Holder's initial
investment in the Note increased by any OID included in income (and accrued
market discount, if any, if the U.S. Holder has included such market discount in
income) and decreased by the amount of any payments, other than qualified stated
interest payments, received and amortizable bond premium taken with respect to
such Note. Such gain or loss generally will be long-term capital gain or loss if
the Note were held for more than the applicable holding period, except to the
extent of any accrued market discount not previously included in income.
POSSIBLE CLASSIFICATION OF THE TRUST AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS
A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that for purposes of the Code, the
transaction contemplated by the this Prospectus Supplement constitutes an equity
investment in the Home Loans (or an interest therein) to the Noteholders, and
that one or more Classes of the Notes constitute equity interests. If it were
determined that this transaction created an entity classified as a corporation
(including a publicly traded partnership taxable as a corporation), the Trust
would be subject to U.S. federal income tax at corporate income tax rates on the
income it derives from the Home Loans, which would reduce the amounts available
for payments to the Noteholders. Cash payments to the Noteholders whose
interests were characterized as equity interests generally would be treated as
dividends
S-45
for tax purposes to the extent of such corporation's earnings and profits. If
the transaction were treated as creating a partnership, the partnership itself
would not be subject to U.S. federal income tax (unless it were to be
characterized as a publicly traded partnership taxable as a corporation) or a
taxable mortgage pool, described below. Rather, each Certificateholders and each
Noteholder holding an equity interest would be taxed individually on its
respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and deductions
of such Noteholders could differ if the Notes were to constitute partnership
interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or a portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are principally
secured by an interest in real property, (ii) the entity is the obligor under
debt obligations with two or more maturities, and (iii) under the terms of the
entity's debt obligations (or an underlying arrangement), payments on such debt
obligations bear a relationship to the debt instruments held by the entity.
Assuming compliance with all of the provisions of relevant documents, and
based upon representations received from Seller establishing that the Home Loans
transferred to the Trust will not cause the Trust to hold debt instruments more
than 50% of which are principally secured by an interest in real property within
the meaning of the taxable mortgage pool provisions of the Code, Tax Counsel is
of the opinion that the Trust will not be a taxable mortgage pool under
Section 7701(i) of the Code.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement is a taxable mortgage pool, such arrangement would be subject to
U.S. federal corporate income tax on its taxable income generated by ownership
of the Home Loans. Such a tax might reduce amounts available for payments to the
Noteholders. The amount of such a tax would depend upon whether payments to
Noteholders would be deductible as interest expense in computing the taxable
income of such an arrangement as a taxable mortgage pool.
NON-U.S. HOLDERS
In general, a non-U.S. Holder will not be subject to U.S. federal income
taxes on payments of principal, premium (if any) or interest (including OID, if
any) on a Note, unless such non-U.S. Holder is a direct or indirect 10% or
greater shareholder of United or the Trust, a controlled foreign corporation
related to United or the Trust or a bank receiving interest described in section
881(c)(3)(A) of the Code. To qualify for the exemption from taxation, the last
United States payor in the chain of payment prior to payment to a non-U.S.
Holder (the "Withholding Agent") must have received in the year in which a
payment of interest or principal occurs, or in either of the two preceding
calendar years, a statement that (i) is signed by the beneficial owner of the
Note under penalties of perjury, (ii) certifies that such owner is not a U.S.
Holder and (iii) provides the name and address of the beneficial owner. The
statement may be made on an IRS Form W-8 or a substantially similar form, and
the beneficial owner must inform the Withholding Agent of any change in the
information on the statement within 30 days of such change. If a Note is held
through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in such case, the signed statement must be
accompanied by a copy of the IRS Form W-8 or the substitute form provided by the
beneficial owner to the organization or institution.
Generally, a non-U.S. Holder will not be subject to federal income taxes on
any amount which constitutes capital gain upon retirement or disposition of a
Note, provided that (i) such gain is not attributable to an office or other
fixed place of business maintained by the non-U.S. Holder in the United States,
and (ii) in the case of an individual non-U.S. Holder, the non-U.S. Holder is
not present in the U.S. for 183 days or more in the taxable year. Certain other
exceptions may be applicable, and a non-U.S. Holder should consult its tax
advisor in this regard.
S-46
The Notes will not be includible in the estate of a non-U.S. Holder unless
the individual is a direct or indirect 10% or greater shareholder of United or
the Trust or, at the time of such individual's death, payments in respect of the
Notes would have been effectively connected with the conduct by such individual
of a trade or business in the United States.
Final regulations dealing with backup withholding and information reporting
on income paid to a foreign person and related matters (the "New Withholding
Regulations") unify current certification procedures and forms and clarify
reliance standards. The New Withholding Regulations generally will be effective
for payments made after December 31, 1999, subject to certain transition rules.
Prospective non-U.S. Holders of the Notes are strongly urged to consult their
own tax advisor with respect to the New Withholding Regulations.
BACKUP WITHHOLDING
Backup withholding of United States federal income tax at a rate of 31% may
apply to payments made in respect of the Notes to registered owners who are not
"exempt recipients" and who fail to provide certain identifying information
(such as the registered owner's taxpayer identification number) in the required
manner. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients. Payments made in
respect of the Notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption. Compliance with
the identification procedures described in the preceding section would establish
an exemption from backup withholding for those non-U.S. Holders who are not
exempt recipients.
In addition, upon the sale of a Note to (or through) a broker, the broker
must withhold 31% of the entire purchase price, unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or
(ii) the seller provides, in the required manner, certain identifying
information and, in the case of a non-U.S. Holder, certifies that such seller is
a non-U.S. Holder (and certain other conditions are met). Such a sale must also
be reported by the broker to the IRS, unless either (i) the broker determines
that the seller is an exempt recipient or (ii) the seller certifies its non-U.S.
status (and certain other conditions are met). Certification of the registered
owner's non-U.S. status would be made normally on an IRS Form W-8 under
penalties of perjury, although in certain cases it may be possible to submit
other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States federal income tax provided the required
information is furnished to the IRS.
As previously mentioned, the New Withholding Regulations generally will be
effective for payments made after December 31, 1999, subject to certain
transition rules Prospective Noteholders are strongly urged to consult their own
tax advisor with respect to the New Withholding Regulations.
ERISA CONSIDERATIONS
Except as described below, the Notes may be purchased by an employee
benefit plan or an individual retirement account (a "Plan") subject to ERISA or
Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"). A
fiduciary of a Plan must determine that the purchase of a Note is consistent
with its fiduciary duties under ERISA and does not result in a nonexempt
prohibited transaction as defined in Section 406 of ERISA or Section 4975 of the
Code. For additional information regarding treatment of the Notes under ERISA,
See "ERISA Considerations" in the Prospectus.
The Notes may not be purchased with the assets of a Plan if the Seller, the
Servicer, the Indenture Trustee, the Owner Trustee or any of their affiliates
(a) has investment or administrative discretion with respect to such Plan
assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets, for a fee and pursuant to an
agreement or understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be based
on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
S-47
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement
(the "Underwriting Agreement"), the Depositor has agreed to sell to each of the
Underwriters named below (collectively, the "Underwriters"), and each of the
Underwriters has severally agreed to purchase, the principal amount of Notes set
forth opposite its name in the tables below:
PRINCIPAL AMOUNT OF
------------------------------------------
UNDERWRITER CLASS A CLASS M-1 CLASS M-2
- ------------------------------------------------------------------- ------------ ----------- -----------
Bear, Stearns & Co. Inc............................................ $111,893,000 $14,368,000 $14,368,000
Coast Partners Securities, Inc..................................... 1,000,000 0 0
------------ ----------- -----------
Total............................................................ $112,893,000 $14,368,000 $14,368,000
------------ ----------- -----------
------------ ----------- -----------
The Depositor has been advised that the Underwriters propose initially to
offer the Notes to the public at the respective offering prices set forth on the
cover hereof and to certain dealers at such prices less a selling concession not
to exceed the percentage of the Note denomination set forth below, and that the
Underwriters may allow and such dealers may reallow a reallowance discount not
to exceed the percentage of the Note denomination set forth below:
CLASS A CLASS M-1 CLASS M-2
---------- --------- ---------
Concessions...................................................................... 0.140% 0.180% 0.240%
Reallowances..................................................................... 0.105% 0.125% 0.150%
Until the distribution of the Notes is completed, rules of the Commission
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase such Classes of Notes. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the Notes. Such transactions consist of bids of purchase for the
purpose of pegging, fixing or maintaining the price of such Classes of Notes.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Notes. In addition,
neither the Depositor nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Depositor has been advised by Bear, Stearns & Co. Inc. that it
presently intends to make a market in the Notes; 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 Notes will develop or, if it does
develop, that it will continue.
The Depositor is an affiliate of Bear, Stearns & Co. Inc.
The Underwriting Agreement provides that the Depositor and the Seller will
indemnify the Underwriters against certain civil liabilities, including
liabilities under the Act.
LEGAL INVESTMENT MATTERS
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest in "mortgage related securities" may
not be legally authorized to invest in the Notes.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Notes or to purchase Notes
representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and to
what extent the Notes constitute legal investments for such investors.
S-48
RATINGS
It is a condition to the issuance of the Notes that (i) the Class A Notes
be rated "AAA" by each of Fitch IBCA, Inc. ("Fitch") and Standard and Poor's
Ratings Services, a division of The MacGraw-Hill Companies, Inc. ("S&P"), and
"Aaa" by Moody's Investors Service, Inc. ("Moody's", and together with Fitch and
S&P, the "Rating Agencies"), (ii) the Class M-1 Notes be rated "AA" by each of
Fitch and S&P and "Aa2" by Moody's and (iii) the Class M-2 Notes be rated "A" by
each of Fitch and S&P and "A2" by Moody's.
The ratings on the Notes address the likelihood of the receipt by
Noteholders of all payments on the Home Loans to which they are entitled. The
ratings on the Notes also address the structural, legal and issuer-related
aspects associated with the Notes, including the nature of the Home Loans. In
general, the ratings on the Notes address credit risk and not prepayment risk.
The ratings on the Notes do not represent any assessment of the likelihood that
principal prepayments of the Home Loans will be made by borrowers or the degree
to which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the Notes do not
address the possibility that Noteholders might suffer a lower than anticipated
yield in the event of principal payments on the Notes resulting from rapid
prepayments of the Home Loans, or in the event that the Trust is terminated
prior to the Maturity Date of the Notes.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Notes by the Rating Agencies are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to such Notes.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus, certain
legal matters relating to the issuance of the Notes will be passed upon for the
Seller by Kutak Rock, Denver, Colorado and for the Depositor and the
Underwriters by Brown & Wood LLP, New York, New York. Brown & Wood LLP will also
pass on certain federal income tax matters.
S-49
INDEX OF TERMS
PAGE
------------
Accrual Period.................................................................................... S-28
Administration Agreement.......................................................................... S-15
Advanta Parent.................................................................................... S-24
Aggregate Liquidation Losses...................................................................... S-29
Allocable Loss Amount............................................................................. S-26
Available Collection Amount....................................................................... S-28
Available Funds................................................................................... S-29
Book-Entry Notes.................................................................................. S-27
Business Day...................................................................................... S-29
Certificate Distribution Account.................................................................. S-35
Certificateholder's Interest Carry-Forward Amount................................................. S-29
Certificateholder's Interest Distribution Amount.................................................. S-29
Certificateholder's Monthly Interest Distribution Amount.......................................... S-29
Certificateholder................................................................................. S-27
Certificates...................................................................................... S-26
Class A Optimal Principal Balance................................................................. S-29
Class B-1 Optimal Principal Balance............................................................... S-29
Class B-2 Optimal Principal Balance............................................................... S-30
Class B-3 Optimal Principal Balance............................................................... S-30
Class B-4 Optimal Principal Balance............................................................... S-30
Class M-1 Optimal Principal Balance............................................................... S-30
Class M-2 Optimal Principal Balance............................................................... S-30
Class Notional Balance............................................................................ S-29
Class Optimal Principal Balance................................................................... S-30
Class Principal Balance........................................................................... S-30
Co-Administrator.................................................................................. S-15
Code.............................................................................................. S-44, S-47
Collection Account................................................................................ S-34
Combined loan-to-value ratio...................................................................... S-15
Complaint......................................................................................... S-25
CPR............................................................................................... S-40
Custodian......................................................................................... S-15
Cut-Off Date Principal Balance.................................................................... S-14
Defective Home Loan............................................................................... S-23
Deferred Amounts.................................................................................. S-26
Deleted Home Loan................................................................................. S-23
Depository........................................................................................ S-27
Determination Date................................................................................ S-28
DTC............................................................................................... S-27
Due Period........................................................................................ S-31
ERISA............................................................................................. S-5
FDIC.............................................................................................. S-10, S-22
FHLMC............................................................................................. S-12
Fitch............................................................................................. S-49
Fleet Transaction................................................................................. S-25
Fleet............................................................................................. S-25
FNMA.............................................................................................. S-12
Home Loan File.................................................................................... S-33
Home Loan Purchase Agreement...................................................................... S-14
Home Loan Rate.................................................................................... S-15
Home Loans........................................................................................ S-14
S-50
PAGE
------------
Indenture Events of Default....................................................................... S-32
Indirect Participants............................................................................. S-27
Industry.......................................................................................... S-13
Initial Call Date................................................................................. S-34
Insurance Proceeds................................................................................ S-31
Interest Payment Amount........................................................................... S-31
IRS............................................................................................... S-45
Keystone.......................................................................................... S-9, S-22
KMC............................................................................................... S-22
Liquidated Home Loan.............................................................................. S-31
Modeling Assumptions.............................................................................. S-40
Moody's........................................................................................... S-49
Net Liquidation Proceeds.......................................................................... S-31
Net Weighted Average Rate......................................................................... S-29
New Withholding Regulations....................................................................... S-47
non-U.S. Holder................................................................................... S-41
Note Payment Account.............................................................................. S-35
Noteholders' Interest Carry-Forward Amount........................................................ S-31
Noteholders' Interest Payment Amount.............................................................. S-31
Noteholders' Monthly Interest Payment Amount...................................................... S-31
Noteholders....................................................................................... S-27
Noteholder........................................................................................ S-27
Notes............................................................................................. S-26
Original Class Principal Balance.................................................................. S-31
Original Pool Principal Balance................................................................... S-14
Parent............................................................................................ S-22
Participants...................................................................................... S-27
Payment Accounts.................................................................................. S-35
Plan.............................................................................................. S-47
Pool Principal Balance............................................................................ S-14
Prepayment Assumption............................................................................. S-40
prepayment........................................................................................ S-40
Principal Balance................................................................................. S-14
Purchase Price.................................................................................... S-23
Qualified Substitute Home Loan.................................................................... S-23
Rating Agencies................................................................................... S-49
Record Date....................................................................................... S-27
Regular Payment Amount............................................................................ S-31
Regular Principal Payment Amount.................................................................. S-31
Released Mortgage Property Proceeds............................................................... S-32
Rules............................................................................................. S-27
S&P............................................................................................... S-49
Sale and Servicing Agreement...................................................................... S-14
Securities........................................................................................ S-26
Securityholder.................................................................................... S-27
Servicer Events of Default........................................................................ S-25
Servicing Advance................................................................................. S-34
Servicing Compensation............................................................................ S-34
Servicing Fee Rate................................................................................ S-34
Servicing Fee..................................................................................... S-34
SMMEA............................................................................................. S-48
Stepdown Date..................................................................................... S-32
Substitution Adjustment........................................................................... S-23
S-51
PAGE
------------
Systems........................................................................................... S-13
Tax Counsel....................................................................................... S-44
Termination Price................................................................................. S-32
Transfer and Servicing Agreements................................................................. S-14, S-33
Trust Agreement................................................................................... S-26
U.S. Holder....................................................................................... S-44
Underwriters...................................................................................... S-48
Underwriting Agreement............................................................................ S-48
United............................................................................................ S-10, S-22
Withholding Agent................................................................................. S-46
S-52
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
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 Certificates (the "Certificates") and the Asset-Backed Notes (the
"Notes" and, together with the Certificates, 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
Servicing 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 (collectively, the "Seller") composed of (a) Primary Assets, which
may include one or more pools of (i) closed-end and/or revolving home equity
loans (the "Mortgage Loans"), secured generally by subordinate liens 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 generally by
subordinate liens 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
accounts 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.
(cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A GIVEN
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 TRUSTEES, 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" BEGINNING 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.
MARCH 10, 1999
(continued from previous page)
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.
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 upon the rate of payment (including prepayments) with respect
to the Loans or, in the case of Private Securities, Underlying Loans, as
applicable. In such a case, 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.
2
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;
(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 assets included in 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 related Agreements and
will not receive such reports directly with respect to 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 (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended (the "Securities Act"), 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, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. The
Commission also maintains a Web site at http://www.sec.gov from which such
Registration Statement and exhibits may be obtained.
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 "Exchange Act"). The Depositor intends to cause each Trust Fund
to suspend filing such reports if and when such reports are no longer required
under the Exchange 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.
3
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 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 that 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.
4
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/or Asset-Backed
Notes (the "Notes"). Certificates are issuable from time to time in
Series pursuant to a Pooling and Servicing Agreement or Trust
Agreement, as the case may be. 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
Subordinated 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., the Depositor, the Servicer,
any Trustee, the Seller or any affiliate of the foregoing 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
period specified in the related Prospectus Supplement. See
"Description of the Securities--Payments of Interest."
5
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, allocated among the
Classes of such Series in the order and amounts and 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 (i) each Class
of Notes is the date not later than which principal of the Notes will
be fully paid and (ii) 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 that 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, to the extent described in the related Prospectus Supplement,
depend 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 to such Series, as specified in the related Prospectus
Supplement, is
6
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 related 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 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 (the "FHA") or partially guaranteed by the Veterans
Administration (the "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 "Closed-End Loans") and/or revolving home equity loans or
certain balances therein (the "Revolving Credit Line Loans" and,
together with the Closed-End 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." The 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 the related 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
7
Properties and the Home Improvements are collectively referred to
herein as the "Properties."
The related Prospectus Supplement will describe certain
characteristics of the Loans for a Series including, without
limitation and to the extent relevant: (i) the aggregate unpaid
Principal Balance of the Loans (or the aggregate unpaid Principal
Balance included in the Trust Fund for the related Series); (ii) 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; (iii) the range and
the average outstanding Principal Balance of the Loans; (iv) 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; (v) 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;
(vi) the percentage (by Principal Balance as of the Cut-off Date) of
Loans that accrue interest at adjustable or fixed interest rates;
(vii) any enhancement relating to the Loans; (viii) the percentage
(by Principal Balance as of the Cut-off Date) of Loans that are
secured by Mortgaged Properties or Home Improvements, or that are
unsecured; (ix) the geographic distribution of any Mortgaged
Properties securing the Loans; (x) the use and type of each Property
securing a Loan; (xi) the lien priority of the Loans; (xii) the
delinquency status and year of origination of the Loans;
(xiii) whether such Loans are Closed-End Loans and/or Revolving
Credit Line Loans; and (xiv) in the case of Revolving Credit Line
Loans, the general payment and credit line features of such Loans and
other pertinent features thereof.
(2) PRIVATE SECURITIES............... Primary Assets for a Series may consist, in whole or in part, of
Private Securities, which include (i) pass-through certificates
representing beneficial interests in loans of the type that would
otherwise be eligible to be Loans (the "Underlying Loans") or
(ii) collateralized obligations secured by Underlying Loans. Such
pass-through certificates or collateralized obligations will have
previously been (i) offered and distributed to the public pursuant to
an effective registration statement or (ii) 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, that a period of three years has elapsed since the
later of the date such securities were acquired from the related
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 related PS
Trustee as registered owner of such Private Securities.
The related Prospectus Supplement for a Series will specify (on an
approximate basis, as described above, and as of the date specified
8
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 (i.e.,
whether they are Closed-End Loans and/or Revolving Credit Line Loans,
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 that 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 in respect of the Primary Assets for a Series will be
remitted directly to an account (each, a "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 applicable 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 (each, a "Distribution Account") to be established for such
Series, each in the manner and at the times specified in the related
Prospectus Supplement. All amounts deposited into such Distribution
Account(s) 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
9
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 specified in the related Prospectus
Supplement.
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 of the Trust
Fund for the related Series (the "Trustee"). 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 into 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 generally will be
selected on the basis of the same criteria as those used to select
the initial Primary Assets, and the same representations and
warranties will be made with respect thereto. 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
related Closing Date, a portion of the proceeds of the sale of the
Securities of such Series will be deposited into the Capitalized
Interest Account and used to fund the excess, if any, of (i) the sum
of (a) the amount of interest accrued on the Securities of such
Series and (b) 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 (ii) 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 as 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,
insurance policy (each, a "Security Policy") or other form of credit
support (collectively, "Enhancement") in favor of the applicable
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 (each, a
"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."
10
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 Subordinated Securities.
The rights of the related Subordinated Securityholders 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 Agencies in one or more reserve
funds to be established in the name of the applicable Trustee (each,
a "Reserve Fund"), which will be used, as specified in such
Prospectus Supplement, by such 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 Agencies, 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 related Prospectus Supplement, the Depositor and the
applicable Trustee will enter into a guaranteed investment contract
or an investment agreement (the "Deposit Agreement") pursuant to
which all or a portion of the amounts held in the Collection Account,
the Distribution Account(s) or in any Reserve Fund will be invested
with the entity specified in such Prospectus Supplement. Such 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 such 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
11
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 of or
interest on a Loan will be made by the Servicer only to the extent
described in the related Prospectus Supplement. Such advances will be
intended to provide liquidity only and, unless otherwise specified in
the related Prospectus Supplement, will be reimbursable to the
Servicer from scheduled payments of principal and interest, late
collections, the proceeds of liquidation of the related Loans or
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 the related Holder in accordance with such
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 methods
regardless of such 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 related 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, such 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 a REMIC "residual interest" (each, a "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
12
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, (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 will be accounted for as original
issue discount and, unless otherwise specified in the related
Prospectus Supplement, will be reported by the applicable 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 Fund as a partnership
in which such Certificateholder is a partner for federal income and
state tax purposes. Alternative characterizations of such Trust Fund
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 plan or
arrangement subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should carefully review with
its own legal advisors whether the purchase or holding of Securities
could give rise to a transaction prohibited or otherwise
impermissible under ERISA or the Code. Certain Classes of Securities
may not be transferred unless the applicable Trustee and the
Depositor are furnished with a letter of representation or an opinion
of counsel to the effect that such transfer will not result in a
violation of the prohibited transaction provisions of ERISA and the
Code and will not subject the applicable Trustee, the Depositor or
the Servicer to additional obligations. See "Description of the
Securities--General" and "ERISA Considerations."
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
13
securities" under the Secondary Mortgage Market Enhancement Act of
1984, as amended ("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 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 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."
14
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 (the "Underwriters") expect to make a secondary market in
the related Securities, but will have 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 or any failure to receive distributions on the Securities. Further, unless
otherwise stated in the related Prospectus Supplement, at the times set forth in
such Prospectus Supplement, certain Primary Assets and/or any balance remaining
in the Collection Account or Distribution Account(s) immediately after making
all payments due on the Securities of such Series and other payments specified
in Securities 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 under the related Indenture (the "Indenture 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 source of funds from which 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."
Yield May Vary; Subordination. 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 on 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
15
allocating principal payments among the Classes of Securities of a Series as
specified in the related Prospectus Supplement; (iii) the exercise by the party
entitled thereto of any right of optional termination; and (iv) in the case of
Trust Funds comprised of Revolving Credit Line Loans, any provisions in the
related Agreement described in the applicable Prospectus Supplement respecting
any non-amortization, early amortization or scheduled amortization period. 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."
The rights of Subordinated Securityholders to receive distributions to
which they would otherwise be entitled with respect to the Trust Fund will be
subordinate to the rights of the Servicer and the Holders of Senior Securities,
to the extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinated Securities.
Balloon Payments. Certain of the Loans as of the related Cut-off Date may
not be fully amortizing over their terms to maturity, and thus will require
substantial principal payments (i.e., balloon payments) at their stated
maturity. Loans with balloon payments involve a greater degree of risk because
the ability of a borrower to make a balloon payment typically will depend upon
such borrower's ability either to timely refinance the related Loan or to timely
sell the related Property. The ability of a borrower to accomplish either of
these goals will be affected by a number of factors, including the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related Property, the financial condition of the borrower and tax
laws. Losses on such Loans that are not otherwise covered by the credit
enhancement described in the applicable Prospectus Supplement will be borne by
the Holders of one or more Classes of Securities of the related Series.
Property Values May Be Insufficient. If the Mortgage Loans 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.
Risks relating to Certain Geographic Regions where Mortgage Loans may be
Concentrated. Certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency than will be
experienced on mortgage loans generally. The Mortgage Loans underlying certain
Series of Securities may be
16
concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration.
Book-Entry Registration. If Securities are issued in book-entry form, such
registration may reduce the liquidity of such Securities in the secondary
trading market, since investors may be unwilling to purchase Securities for
which they cannot obtain physical certificates. Since transactions in book-entry
Securities can be effected only through the Depository Trust Company ("DTC"),
participating organizations, Financial Intermediaries and certain banks, the
ability of a Holder to pledge a book-entry Security to persons or entities that
do not participate in the DTC system may be limited due to lack of a physical
certificate representing such Securities. Security Owners will not be recognized
as Holders as such term is used in the related Agreement, and Security Owners
will be permitted to exercise the rights of Holders only indirectly through DTC
and its Participants.
In addition, Holders may experience some delay in their receipt of
distributions of principal of and interest on book-entry Securities, since
distributions are required to be forwarded by the applicable Trustee to DTC and
DTC will then be required to credit such distributions to the accounts of
Depository participants, which thereafter will be required to credit them to the
accounts of Holders either directly or indirectly through Financial
Intermediaries.
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 assurance 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.
Although subsequent Loans must satisfy the characteristics described in the
related Prospectus Supplement and generally must be selected on the basis of the
same criteria as those used to select the initial Loans, 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.
Bankruptcy Risks. Federal and state statutory provisions, including the
federal bankruptcy laws and state laws affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon its security. For example, in a proceeding under the federal Bankruptcy
Code, a lender may not foreclose on a mortgaged property without the permission
of the bankruptcy court. The rehabilitation plan proposed by the related debtor
may provide, if the mortgaged property is not the debtor's principal residence
and the court determines that the value of the mortgaged property is less than
the principal balance of the related mortgage loan, for the reduction of the
secured indebtedness to the value of the mortgaged property as of the date of
the commencement of the bankruptcy, rendering the lender a general unsecured
creditor for the difference, and also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. The effect of any such proceedings under the federal
Bankruptcy Code, including but not limited to any automatic stay, could result
in delays in receiving payments on the Loans underlying a Series of Securities
and possible reductions in the aggregate amount of such payments.
Consequences of Owning Original Issue Discount Securities. Debt Securities
that are Compound Interest Securities will be, and certain of the Debt
Securities may be, issued with original issue discount for federal income tax
purposes. A Holder of Debt Securities issued with original issue discount will
be required to include original issue discount in ordinary gross income for
federal income tax purposes as it accrues, in advance of
17
receipt of the cash attributable to such income. Accrued but unpaid interest on
the Debt Securities that are Compound Interest Securities generally will be
treated as having original issue discount for this purpose. See "Certain Federal
Income Tax Considerations--Interest and Acquisition Discount" herein.
REMIC-Related Risks. Holders of Residual Interest Securities will be
required to report on their federal income tax returns as ordinary income their
pro rata share of the taxable income of the REMIC, regardless of the amount or
timing of their receipt of cash payments, as described in "Certain Federal
Income Tax Considerations." Accordingly, under certain circumstances, Holders of
Securities that constitute Residual Interest Securities may have taxable income
and tax liabilities arising from such investment during a taxable year in excess
of the cash received during such period. Individual Holders of Residual Interest
Securities may be limited in their ability to deduct servicing fees and other
expenses of the REMIC. In addition, Residual Interest Securities are subject to
certain restrictions on transfer. Because of the special tax treatment of
Residual Interest Securities, the taxable income arising in a given year on a
Residual Security will not be equal to the taxable income associated with
investment in a corporate bond or stripped instrument having similar cash flow
characteristics and pre-tax yield. Therefore, the after-tax yield on the
Residual Interest Security may be significantly less than that of a corporate
bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Interest Security
should be aware that the IRS recently finalized regulations that provide that a
REMIC Residual Interest Security acquired after January 3, 1995 cannot be
marked-to-market. Prospective purchasers of a REMIC Residual Interest Security
should consult their tax advisors regarding the possible application of such
regulations. See "Certain Federal Income Tax Considerations--Taxation of Holders
of Residual Interest Securities--Mark to Market Rules."
Unsecured Home Improvement and Other Loans. The Trust Fund for any Series
may include Home Improvement Contracts that are not secured by an interest in
real estate or otherwise. The Trust Fund for any Series may also include home
equity contracts that were originated with Loan-to-Value Ratios or Combined
Loan-to-Value Ratios in excess of the value of the related Mortgaged Property
pledged as security therefor. Under such circumstances, the Trust Fund for the
related Series could be treated as a general unsecured creditor as to any
unsecured portion of any such Loan. In the event of a default under a Loan that
is unsecured in whole or in part, the related Trust Fund will have recourse only
against the borrower's assets generally for the unsecured portion of the Loan,
along with all other general unsecured creditors of the borrower. In a
bankruptcy or insolvency proceeding relating to a borrower on any such Loan, the
unsecured obligations of the borrower with respect to such Loan may be
discharged, even though the value of the borrower's assets made available to the
related Trust Fund as a general unsecured creditor is insufficient to pay
amounts due and owning under the related Loan.
Risk of Losses Associated with Adjustable Rate Loans. Adjustable rate
Loans may be underwritten on the basis of an assessment that Mortgagors will
have the ability to make payments in higher amounts after relatively short
periods of time. In some instances, Mortgagors' income may not be sufficient to
enable them to continue to make their loan payments as such payments increase
and thus the likelihood of default will increase.
Potential Liability For Environmental Conditions. Real property pledged as
security to a lender may be subject to certain environmental risks. Federal,
state and local laws and regulations impose a wide range of requirements on
activities that may affect the environment, health and safety. In certain
circumstances, these laws and regulations impose obligations on owners or
operators of residential properties such as those subject to the Loans. The
failure to comply with such laws and regulations may result in fines and
penalties.
In particular, under various federal, state and local laws and regulations,
an owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability could exceed the value of the property and the aggregate assets of the
owner or operator. In addition, persons who transport or dispose of hazardous
substances, or arrange for the transportation, disposal or treatment of
hazardous substances, at off-site locations may also be held liable if there are
releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property.
18
Under the laws of some states, and under CERCLA and the Federal Solid Waste
Disposal Act, there is a possibility that a lender may be held liable as an
"owner" or "operator" for costs of addressing releases or threatened releases of
hazardous substances at a property, or releases of petroleum from an underground
storage tank, under certain circumstances. See "Certain Legal Aspects of the
Loans--Environmental Risks."
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;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience;
and
(iv) for loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional application disclosures, limits changes that may be
made to the loan documents without the borrower's consent and restricts
a lender's ability to declare a default or to suspend or reduce a
borrower's credit limit to certain enumerated events.
The Riegle Act. Certain mortgage loans are subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act"), which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specified statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
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 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 Holders 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 applicable 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 Fund.
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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 Holders 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 Agencies 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 Agencies if in their 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.
20
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as Indenture 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 Subordinated 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 applicable 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 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 applicable
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
applicable Trustee, or a paying agent on behalf of such 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 deposits may be net of certain amounts payable to
the related Servicer and any other person specified in such Prospectus
Supplement. Such amounts thereafter will be deposited into the Distribution
Account(s) 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."
21
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-outstanding 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 Agencies or a rate insured by means of a surety
bond, guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agencies. 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 per annum rate 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.
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 a
Series 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.
22
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 (the "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
applicable 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 equal to or 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.
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
23
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.
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 into the Collection Account or
Distribution Account(s) 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.
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
24
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 "Closed-End Loans") and/or
revolving home equity loans or certain balances therein (the "Revolving Credit
Line Loans" and, together with the Closed-End Loans, the "Mortgage Loans")
secured by mortgages primarily on Single Family Properties that 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.
The full principal amount of a Closed-End 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. Unless otherwise described in the related Prospectus Supplement, the
original terms to stated maturity of Closed-End Loans will not exceed
360 months. Principal amounts on a Revolving Credit Line Loan may be drawn down
(up to a maximum amount as set forth in the related Prospectus Supplement) or
repaid under each Revolving Credit Line Loan from time to time, but may be
subject to a minimum periodic payment. Except to the extent provided in the
related Prospectus Supplement, the Trust Fund will not include any amounts
borrowed under a Revolving Credit Line Loan after the Cut-off Date. As more
fully described in the related Prospectus Supplement, interest on each Revolving
Credit Line Loan, excluding introductory rates offered from time to time during
promotional periods, is computed and payable monthly on the average daily
Principal Balance of such Loan. Under certain circumstances, under either a
Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose an
interest only payment option and is obligated to pay only the amount of interest
that accrues on the loan during the billing cycle. An interest only payment
option may be available for a specified period before the borrower must begin
paying at least the minimum monthly payment of a specified percentage of the
average outstanding balance of the loan.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans have been originated in significant volume only during the past few
years and the Depositor is not aware of any publicly available studies or
statistics on the rate of prepayment of such loans. Generally, home equity loans
are not viewed by borrowers as permanent financing. Accordingly, the Mortgage
Loans may experience a higher rate of prepayment than traditional first mortgage
loans. On the other hand, because home equity loans such as the Revolving Credit
Line Loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments lower than, or similar to,
those of traditional fully-amortizing first mortgages. The prepayment experience
of the related Trust Fund may be affected by a wide variety of factors,
including general economic conditions, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility and the frequency
and amount of any future draws on any Revolving Credit Line Loans. Other factors
that might be expected to affect the prepayment rate of a pool of home equity
mortgage loans or home improvement contracts include the amounts of, and
interest rates on, the underlying first mortgage loans, and the use of first
mortgage loans as long-term financing for home purchase and subordinate mortgage
loans as shorter-term financing for a variety of purposes, including home
improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional fixed-rate mortgage loans. In addition, any future
limitations on the right of borrowers to deduct interest payments on home equity
loans for federal income tax purposes may further increase the rate of
prepayments of the Loans. Moreover, the enforcement of a "due-on-sale" provision
(as described
25
below) will have the same effect as a prepayment of the related Loan. See
"Certain Legal Aspects of the Loans--Due-on-Sale Clauses in Mortgage Loans."
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for such month or, during the interest-only period for certain
Revolving Credit Line Loans and, in more limited circumstances, Closed-End Loans
with respect to which an interest-only payment option has been selected, the
interest and the fees and charges for such month or (ii) make payments as high
as the entire Principal Balance plus accrued interest and the fees and charges
thereon. It is possible that borrowers may fail to make the required periodic
payments. In addition, collections on the Mortgage Loans may vary due to
seasonal purchasing and the payment habits of borrowers.
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 that 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 Loans secured by 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 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 in 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 subordinated 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
26
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.
Additional Information. The selection criteria that 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 (the "FHA") or partially guaranteed by the
Veterans Administration (the "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 or 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.
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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 (the "VA Guaranty"). The Serviceman's Readjustment Act
of 1944, as amended, permits a veteran (or in certain instances, the spouse of a
veteran) to obtain a mortgage loan 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 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 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 or Home Improvements or that 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; (l) the delinquency status and year of origination of the Loans;
(m) whether such Loans are Closed-End Loans and/or Revolving Credit Line Loans;
and (n) in the case of Revolving Credit Line Loans, the general payments and
credit line terms of such Loans and other pertinent features thereof. 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 that 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
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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 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, cash collateral accounts, Security 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 Closed-End Loans and/or Revolving Credit Line Loans,
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, Security
Policies or
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guarantees relating to such Loans underlying the Private Securities or to such
Private Securities themselves; (viii) the terms on which Underlying Loans may,
or 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 into the
applicable Distribution Account, which will also be established by the
applicable Trustee for each such Series of Securities, for distribution to the
related Holders. Unless otherwise specified in the related Prospectus
Supplement, the applicable Trustee will invest the funds in the Collection
Account and the Distribution Account(s) 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 into the
Distribution Account(s) or otherwise distributed and, in the case of funds in
the Distribution Account(s), 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 Agencies.
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 into 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"). In no case will the Pre-Funded
Amount exceed 50% of the aggregate principal amount of the related Securities,
and in no case will the Pre-Funding Period exceed one year. The Primary Assets
to be so purchased generally will be selected on the basis of the same criteria
as those used to select the initial Primary Assets, and the same representations
and warranties will be made with respect thereto. 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 into 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 a Security Policy, issue Subordinated
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 Agencies. The Enhancement will
support the payment of principal of 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.
SUBORDINATED SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinated Securities. The rights of the
related Subordinated Securityholders 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 (the "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 expenses will not affect the
total amount in respect of 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.
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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 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 the
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 applicable Trustee as part of the Trust Fund for such Series or for the
benefit of any Enhancer with respect to such Series (each, a "Reserve Fund")
cash, a letter or letters of credit, cash collateral accounts, Eligible
Investments, or other instruments meeting the criteria of the Rating Agencies
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 applicable
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 into a Reserve Fund will be invested by the applicable
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 Agencies 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 applicable
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
(each, an "Escrow Account") with respect to Loans in which payments by obligors
to pay taxes, assessments, mortgage and hazard Insurance Policy 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 Federal Deposit Insurance Corporation or that 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 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 in respect of principal, including prepayments, on
such Primary Assets;
(ii) All payments in respect 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;
33
(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,
net of related liquidation expenses ("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 Policy
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 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; provided, that 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
Insurance Proceeds) that represent late recoveries of Scheduled Payments
with respect to 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 Insurance Proceeds;
(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 into the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the 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 applicable Trustee of such Series for
deposit into the related 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.
In addition, if the Servicer deposits into 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.
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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 that represent late recoveries of
principal or interest, Insurance Proceeds or Liquidation Proceeds respecting
which any such Advance was made. If an Advance is made and subsequently
determined to be nonrecoverable from late collections, Insurance Proceeds or
Liquidation Proceeds from the related Loan, the Servicer may be entitled to
reimbursement from other funds in the Collection Account or Distribution
Account(s), 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
any improvements on the Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
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 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.
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
35
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 Insurance Policies
(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 into 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 that
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 into 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
Insurance Proceeds. 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 change in
the terms 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 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
36
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 each applicable Trustee and independent accountants, payment of Security
Policy and Insurance Policy premiums, if applicable, 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 applicable Trustee for deposit
into the related 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 Principal Balance of and unpaid interest on the
related Loan that 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
Insurance Proceeds, 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 applicable 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 applicable
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.
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 a 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.
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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, that 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 that 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 that is not incidental to its servicing
responsibilities under such Agreement that, in its opinion, may involve it in
any expense or liability. The Servicer may, in its discretion, undertake any
such action that 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.
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 Contracts. 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
38
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 Holders 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
Holders 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 Loan 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.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the PS Trustee (or its nominee or
correspondent). The PS Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the PS 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,
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 PS 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
39
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 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 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) a Principal Balance, after deduction of all Scheduled Payments due in the
month of substitution, not in excess of the 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 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 will be 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 applicable 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 applicable Trustee to institute such proceeding in its
own name as Trustee thereunder and have offered to such Trustee reasonable
indemnity, and such Trustee for 60 days has neglected or refused to institute
any such proceeding.
40
REPORTS TO HOLDERS
The applicable 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 amount 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 amount 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 applicable 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 each
applicable 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
applicable Trustee. The applicable Trustee will forward such reports only to the
entity or its nominee that is the registered holder of the global certificate
that 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 policies 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(s) to enable the applicable 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 applicable Trustee for such Series, or to the Servicer and such 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 that 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 applicable Trustee, or to
the Servicer and such 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
41
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 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 applicable 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 applicable Trustee or exercising
any trust or power conferred upon such Trustee. However, the applicable 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 such Trustee reasonable
security or indemnity against the cost, expenses and liabilities that may be
incurred by such Trustee therein or thereby. The applicable Trustee may decline
to follow any such direction if such Trustee determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting 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 that
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within 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 Indenture 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 Indenture
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
42
have become due if there had not been such a declaration. In addition, the
Indenture 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 of 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 Indenture 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 Indenture 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 Indenture 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 Indenture 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 Indenture 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 that is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a Series of Notes, the Indenture 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 Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities that 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 Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such Series, and the Holders of a majority of the then-aggregate outstanding
amount of the Notes of such Series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the Holders of the outstanding
Notes of such Series affected thereby.
THE TRUSTEES
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee or Indenture Trustee, as the case may be, for each
Series of Securities will be set forth in the related Prospectus Supplement.
Entities 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, each Trustee will have the power to
appoint co-trustees or separate trustees. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the applicable
Trustee by the Agreement relating to such Series will be conferred or imposed
upon such Trustee and each such separate trustee or co-trustee jointly, or, in
any jurisdiction in which such 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 applicable Trustee. The applicable Trustee may also appoint
agents to perform any of the responsibilities of such Trustee, which agents will
have any or all of the rights, powers, duties and obligations of such Trustee
conferred on them by such appointment; provided, that the applicable Trustee
will continue to be responsible for its duties and obligations under the
Agreement.
43
DUTIES OF TRUSTEES
No Trustee will make any representations as to the validity or sufficiency
of the related 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 applicable Trustee will be required to perform only those duties
specifically required of it under such Agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the applicable Trustee will be required to examine them to determine
whether they are in the form required by the related Agreement. However, such
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 related
Agreement.
Each Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that no Trustee will 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 related
Holders in an Event of Default. No Trustee will be required to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties under the related 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 TRUSTEES
Each 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 such 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. Each Trustee may also be
removed at any time (i) if such Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if such 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 applicable
Trustee and to the Depositor. Any resignation or removal of a 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 applicable 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
applicable Trustee or the Servicer, (iv) to add any other provisions with
respect to matters or questions arising under 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 any
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 delivered to the applicable Trustee. Any such amendment except pursuant
to clause (vi) above shall be deemed not to adversely affect in any material
respect the interests of any Holder if the applicable 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, each Agreement for each
Series may also be amended by the applicable 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
44
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 such
Holders propose to transmit, the applicable Trustee will afford such Holders
access during business hours to the most recent list of Holders of that Series
held by such 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 under the circumstances described in the related
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 Indenture Trustee for cancellation of all
the Notes of such Series or, with certain limitations, upon deposit with the
Indenture 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 Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America that, 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 of and interest on, if any, their Notes
until maturity.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially),
45
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 that 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 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.
46
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 that 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.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the Loans. The failure to comply with such laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs. Such
liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of such substances, and could exceed
the value of the property and the aggregate assets of the owner or operator. In
addition, persons who transport or dispose of hazardous substances, or arrange
for the transportation, disposal or treatment of hazardous substances, at
off-site locations may also be held liable if there are releases or threatened
releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an
47
existing mortgage against such property. Under CERCLA, such a lien is
subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (the "SWDA") provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
A regulation promulgated by the U.S. Environmental Protection Agency (the
"EPA") in April 1992 attempted to clarify the activities in which lenders could
engage both prior to and subsequent to foreclosure of a security interest
without forfeiting the secured creditor exemption under CERCLA. The rule was
struck down in 1994 by the United States Court of Appeals for the District of
Columbia Circuit in Kelley ex rel State of Michigan v. Environmental Protection
Agency, 15 F.3d 1100 (D.C Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied
sub nom. Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA
regulation promulgated in 1995 clarifies the activities in which lenders may
engage without forfeiting the secured creditor exemption under the underground
storage tank provisions of the SWDA. That regulation has not been struck down.
On September 30, 1996, Congress amended both CERCLA and the SWDA to provide
additional clarification regarding the scope of the lender liability exemptions
under the two statutes. Among other things, the 1996 amendments specify the
circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, the amendments state that a lender who holds indicia of
ownership primarily to protect a security interest in a facility will be
considered to participate in management only if, while the borrower is still in
possession of the facility encumbered by the security interest, the lender
(i) exercises decision-making control over environmental compliance related to
the facility such that the lender has undertaken responsibility for hazardous
substance handling or disposal practices related to the facility or
(ii) exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested responsibility for
(a) overall management of the facility encompassing daily decision-making with
respect to environmental compliance or (b) overall or substantially all of the
operational functions (as distinguished from financial or administrative
functions) of the facility other than the function of environmental compliance.
The amendments also specify certain activities that are not considered to be
"participation in management," including monitoring or enforcing the terms of
the extension of credit or security interest, inspecting the facility, and
requiring a lawful means of addressing the release or threatened release of a
hazardous substance.
The 1996 amendments also specify that a lender who did not participate in
management of a facility prior to foreclosure will not be considered an "owner
or operator," even if the lender forecloses on the facility and after
foreclosure sells or liquidates the facility, maintains business activities,
winds up operations, undertakes an appropriate response action, or takes any
other measure to preserve, protect, or prepare the facility prior to sale or
disposition, if the lender seeks to sell or otherwise divest the facility at the
earliest practicable, commercially reasonable time, on commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements.
The CERCLA and SWDA lender liability amendments specifically address the
potential liability of lenders who hold mortgages or similar conventional
security interests in real property, such as the Trust Fund does in connection
with the Mortgage Loans and the Home Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, such persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
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release or threatened release at a property pledged as collateral for one of the
Loans would be imposed on the Trust Fund, and thus occasion a loss to the
Holders, therefore depends on the specific factual and legal circumstances at
issue.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the 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.
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 that 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 that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference
49
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 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 mortgage 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
50
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.
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 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.
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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.
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 in effect in the applicable jurisdiction
(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.
52
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 that is the seller of goods that 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 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
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 that 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 that 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 (each, an "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 Policy
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
53
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 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 any 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.
THE DEPOSITOR
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.
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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 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 is a summary of certain anticipated material federal income
tax consequences of the purchase, ownership, and disposition of the Securities
and is based on the opinion of Brown & Wood LLP, special counsel to the
Depositor (in such capacity, "Tax Counsel"). The summary is based upon the
provisions of the Internal Revenue Code of 1986, as amended (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 summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances. This summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit (a "REMIC") under 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 (v) an election is made to treat the Trust Fund relating to a
particular Series of Securities as a Financial Asset Securitization Investment
Trust ("FASIT") under the Code. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
As used herein, the term "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States, any state thereof or the District of
Columbia (other than a partnership that is not treated as a United States person
under any applicable Treasury regulations), an estate whose income is subject to
U.S. federal income tax regardless of its source of income, or a trust if a
court within the United States is able to exercise primary supervision of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence, to
the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be treated as United States persons shall be considered U.S. Persons
as well.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided in
the related Prospectus Supplement, if the Securities are regular interests in a
REMIC ("Regular Interest Securities") or represent interests in a grantor trust,
Tax Counsel is of the opinion that: (i) Securities held by a domestic building
and loan association will constitute "loans... secured by an interest in real
property" within the meaning of Code section 7701(a)(19)(C)(v); and
(ii) Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code section 856(c)(4)(A) and interest on
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).
55
Interest and Acquisition Discount. In the opinion of Tax Counsel, Regular
Interest Securities are generally taxable to Holders in the same manner as
evidences of indebtedness issued by the REMIC. Stated interest on the Regular
Interest Securities will be taxable as ordinary income and taken into account
using the accrual method of accounting, regardless of the Holder's normal
accounting method. Interest (other than original issue discount) on Securities
(other than Regular Interest Securities) that are characterized as indebtedness
for federal income tax purposes will be includible in income by Holders thereof
in accordance with their usual methods of accounting. Securities characterized
as debt for federal income tax purposes and Regular Interest Securities will be
referred to hereinafter collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID, which are set forth in
Sections 1271-1275 of the Code and the Treasury regulations issued thereunder on
February 2, 1994 and amended on June 11, 1996 (the "OID Regulations"). A Holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a Holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if it
is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular Class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such Class will be treated as
the fair market value of such Class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security Holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below); provided, that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. In the opinion
of Tax Counsel, the interest on such Debt Securities will be unconditionally
payable and constitute qualified stated interest, not OID. However, absent
clarification of the OID Regulations, where Debt Securities do not provide for
default remedies, the interest payments will be included in the Debt Security's
stated redemption price at maturity and taxed as OID. Interest is payable at a
single fixed rate only if the rate appropriately takes into account the length
of the interval between payments. Distributions of interest on Debt Securities
with respect to which deferred interest will accrue, will not constitute
qualified stated interest payments, in which case the stated redemption price at
maturity of such Debt Securities includes all distributions of interest as well
as principal thereon. Where the interval between the issue date and the first
Distribution Date on a Debt Security is either longer or shorter than the
interval between subsequent Distribution Dates, all or part of the interest
foregone, in the case of the longer interval, and all of the additional
interest, in the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule described
below. In the case of a Debt Security with a long first period that has non-de
minimis OID, all stated interest in excess of interest payable at the effective
interest rate for the long first period will be included in the stated
redemption price at maturity and the Debt Security will generally have OID.
Holders of Debt Securities should consult their own tax advisors to determine
the issue price and stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years)
56
from the issue date until each distribution in reduction of stated redemption
price at maturity is scheduled to be made by a fraction, the numerator of which
is the amount of each distribution included in the stated redemption price at
maturity of the Debt Security and the denominator of which is the stated
redemption price at maturity of the Debt Security. Holders generally must report
de minimis OID pro rata as principal payments are received, and such income will
be capital gain if the Debt Security is held as a capital asset. However,
accrual method Holders may elect to accrue all de minimis OID as well as market
discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and
(iii) interest is based on a "qualified floating rate," an "objective rate," or
a combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The Internal Revenue Service (the "IRS") recently issued final regulations
(the "Contingent Payment Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Payment
Regulations, represent the only guidance regarding the views of the IRS with
respect to contingent interest instruments and specifically do not apply for
purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the Debt Security. Additionally, the OID Regulations
do not contain provisions specifically interpreting Code Section 1272(a)(6).
Until the Treasury issues guidance to the contrary, the applicable Trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such OID. 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 OID 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 or OID, reduced by the total payments made with
respect to such Debt Security in all prior periods, other than qualified stated
interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events that 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-
57
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 IRS were to require
that OID be accrued without such adjustments, the rate of accrual of OID for a
Class of Regular Interest Securities could increase.
Certain Classes of Regular Interest Securities may represent more than one
Class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the applicable Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
Holders will be required to report income with respect to the related Securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the Loans, except
possibly to the extent that it can be established that such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
Holder of such a Security in any period could significantly exceed the amount of
cash distributed to such Holder in that period. The Holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is reduced
as a result of a Loan default. However, the timing and character of such losses
or reductions in income are uncertain and, accordingly, Holders of Securities
should consult their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "--Tax Status as a Grantor Trust; General" herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on Loans underlying Pass-Through
Securities ("Interest Weighted Securities"). The Trustee intends to take the
position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that are
entitled to some payments of principal and that are Regular Interest Securities
the IRS could assert that income derived from an Interest Weighted Security
should be calculated as if the Security were a security purchased at a premium
equal to the excess of the price paid by such Holder for such Security over its
stated principal amount, if any. Under this approach, a Holder would be entitled
to amortize such premium only if it has in effect an election under Section 171
of the Code with respect to all taxable debt instruments held by such Holder, as
described below. Alternatively, the IRS could assert that an Interest Weighted
Security should be taxable under the rules governing bonds issued with
contingent payments. Such treatment may be more likely in the case of Interest
Weighted Securities that are Stripped Securities as described below. See "--Tax
Status as a Grantor Trust--Discount or Premium on Pass-Through Securities."
Variable Rate Debt Securities. In the opinion of Tax Counsel, in the case
of Debt Securities bearing interest at a rate that varies directly, according to
a fixed formula, with an objective index, it appears that (i) the yield to
maturity of such Debt Securities and (ii) in the case of Pay-Through Securities,
the present value of all payments remaining to be made on such Debt Securities,
should be calculated as if the interest index remained at its value as of the
issue date of such Securities. Because the proper method of adjusting accruals
of OID on a variable rate Debt Security is uncertain, Holders of variable rate
Debt Securities should consult their own tax advisers regarding the appropriate
treatment of such Securities for federal income tax purposes.
Market Discount. In the opinion of Tax Counsel, a purchaser of a Security
may be subject to the market discount rules of Sections 1276-1278 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
58
Security received in that month and, if the Securities are sold, the gain
realized. Such market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, such market
discount would in general accrue either (i) on the basis of a constant yield (in
the case of a Pay-Through Security, taking into account a prepayment assumption)
or (ii) in the ratio of (a) in the case of Securities (or in the case of a
Pass-Through Security, as set forth below, the Loans underlying such Security)
not originally issued with original issue discount, stated interest payable in
the relevant period to total stated interest remaining to be paid at the
beginning of the period or (b) in the case of Securities (or, in the case of a
Pass-Through Security, as described below, the Loans underlying such Security)
originally issued at a discount, OID in the relevant period to total OID
remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a Holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity, generally
will be considered to have purchased the Security at a premium, which it may
elect to amortize as an offset to interest income on such Security (and not as a
separate deduction item) on a constant yield method. 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 IRS. 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 Tax Counsel, if a REMIC election is made with
respect to a Series of Securities, then the arrangement by which the Securities
of that Series are issued will be treated as a REMIC as long as all of the
provisions of the applicable Agreement are complied with and the statutory and
regulatory requirements are satisfied. Securities will be designated as "Regular
Interests" or "Residual Interests" in a REMIC, as specified in the related
Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, in the opinion of
Tax Counsel (i) Securities held by a domestic building and loan
59
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 securities, "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)(4)(A), 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.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses of a
REMIC will be taken into account by Holders of the Residual Interest Securities.
In the case of a "single class REMIC," however, the expenses will be allocated,
under Treasury regulations, among the Holders of the Regular Interest Securities
and the Holders of the Residual Interest Securities on a daily basis in
proportion to the relative amounts of income accruing to each Holder on that
day. In the case of a Holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), such expenses will be deductible
only to the extent that such expenses, plus other "miscellaneous itemized
deductions" of the Holder, exceed 2% of such Holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Regular Interest Security to
such a Holder. In general terms, a single class REMIC is one that either
(i) would qualify, under existing Treasury regulations, as a grantor trust if it
were not a REMIC (treating all interests as ownership interests, even if they
would be classified as debt for federal income tax purposes) or (ii) is similar
to such a trust and that is structured with the principal purpose of avoiding
the single class REMIC rules. Unless otherwise specified in the related
Prospectus Supplement, the expenses of the REMIC will be allocated to Holders of
the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the Holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between (i) the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets, and (ii)
deductions, including stated interest and OID accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A Holder of a Residual Interest Security
that is an individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such Holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such Holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
60
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 OID (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
In the opinion of Tax Counsel, the Holder of a Certificate representing a
residual interest (a "Residual Interest Security") will take into account the
"daily portion" of the taxable income or net loss of the REMIC for each day
during the taxable year on which such Holder held the Residual Interest
Security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the Holders (on such
day) of the Residual Interest Securities in proportion to their respective
holdings on such day.
In the opinion of Tax Counsel, the Holder of a Residual Interest Security
must report its proportionate share of the taxable income of the REMIC whether
or not it receives cash distributions from the REMIC attributable to such income
or loss. The reporting of taxable income without corresponding distributions
could occur, for example, in certain REMIC issues in which the loans held by the
REMIC were issued or acquired at a discount, since mortgage prepayments cause
recognition of discount income, while the corresponding portion of the
prepayment could be used in whole or in part to make principal payments on REMIC
Regular Interests issued without any discount or at an insubstantial discount
(if this occurs, it is likely that cash distributions will exceed taxable income
in later years). Taxable income may also be greater in earlier years of certain
REMIC issues as a result of the fact that interest expense deductions, as a
percentage of outstanding principal on REMIC Regular Interest Securities, will
typically increase over time as lower yielding Securities are paid, whereas
interest income with respect to loans will generally remain constant over time
as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
61
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a Holder may take into account currently is limited to the
Holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A Holder's basis in a Residual Interest Security will initially equal
such Holder's purchase price, and will subsequently be increased by the amount
of the REMIC's taxable income allocated to the Holder, and decreased (but not
below zero) by the amount of distributions made and the amount of the REMIC's
net loss allocated to the Holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of Holders of Residual Interest Securities to deduct
net losses may be subject to additional limitations under the Code, as to which
such Holders should consult their tax advisers.
Distributions. In the opinion of Tax Counsel, distributions on a Residual
Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a Holder of a Residual Interest Security. If the amount of such payment
exceeds a Holder's adjusted basis in the Residual Interest Security, however,
the Holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a Holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such Holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. Except to the extent provided in regulations,
which have not yet been issued, any loss upon disposition of a Residual Interest
Security will be disallowed if the selling Holder acquires any residual interest
in a REMIC or similar mortgage pool within six months before or after such
disposition.
Excess Inclusions. In the opinion of Tax Counsel, the portion of the REMIC
taxable income of a Holder of a Residual Interest Security consisting of "excess
inclusion" income may not be offset by other deductions or losses, including net
operating losses, on such Holder's federal income tax return. Further, if the
Holder of a Residual Interest Security is an organization subject to the tax on
unrelated business income imposed by 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 Small Business Job
Protection Act of 1996 has eliminated the special rule permitting Section 593
institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from Residual
Interest Securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to Residual Interest Securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual Holder. First, alternative minimum taxable income
for such residual Holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
Holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after
December 31, 1986, unless a residual Holder elects to have such rules apply only
to tax years beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated
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to a Holder and the amount of distributions made on the Residual Interest
Security before the beginning of the quarter. The long-term federal rate, which
is announced monthly by the Treasury Department, is an interest rate that is
based on the average market yield of outstanding marketable obligations of the
United States government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the IRS recently finalized regulations (the "Final
Mark-to-Market Regulations"), which provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market. Prospective
purchasers of a REMIC Residual Interest Security should consult their tax
advisors regarding the possible application of the Mark to Market Regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
63
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related Prospectus Supplement, if a
REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association (or publicly traded partnership) 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.
In the opinion of Tax Counsel, each Holder must report on its federal
income tax return its share of the gross income derived from the Loans (not
reduced by the amount payable as fees to the applicable Trustee and the Servicer
and similar fees (collectively, the "Servicing Fee")), at the same time and in
the same manner as such items would have been reported under the Holder's tax
accounting method had it held its interest in the Loans directly, received
directly its share of the amounts received with respect to the Loans, and paid
directly its share of the Servicing Fees. In the case of Pass-Through Securities
other than Stripped Securities, such income will consist of a pro rata share of
all of the income derived from all of the Loans and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the Holder owns an interest.
The Holder of a Security will generally be entitled to deduct such Servicing
Fees under Section 162 or Section 212 of the Code to the extent that such
Servicing Fees represent "reasonable" compensation for the services rendered by
the applicable Trustee and the Servicer (or third parties that are compensated
for the performance of services). In the case of a noncorporate Holder, however,
Servicing Fees (to the extent not otherwise disallowed, e.g., because they
exceed reasonable compensation) will be deductible in computing such Holder's
regular tax liability only to the extent that such fees, when added to other
miscellaneous itemized deductions, exceed 2% of adjusted gross income and may
not be deductible to any extent in computing such Holder's alternative minimum
tax liability. In addition, for taxable years beginning after December 31, 1990,
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. In the opinion of Tax
Counsel, the Holder's purchase price of a Pass-Through Security is to be
allocated among the Loans in proportion to their fair market values, determined
as of the time of purchase of the Securities. In the typical case, the Trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
Loan as having a fair market value proportional to the share of the aggregate
Principal Balances of all of the Loans that it represents, since the Securities,
unless otherwise specified in the related Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
Loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the Principal Balance of the Loan allocable to the Security, the interest in the
Loan allocable to the Pass-Through Security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a Holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more
64
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 OID, a stripped bond or a stripped coupon is treated as a
debt instrument issued on the date that such stripped interest is purchased with
an issue price equal to its purchase price or, if more than one stripped
interest is purchased, the ratable share of the purchase price allocable to such
stripped interest.
Servicing fees in excess of reasonable servicing fees (the "excess
servicing fee") 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's
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 OID 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 that 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 OID must be calculated separately for each
Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the applicable Trustee intends, absent contrary authority, to report income to
Holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that (i) in certain Series, each non-Interest Weighted Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments;
65
(ii) the non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there
is no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be, and, although
the matter is not free from doubt, Stripped Securities should be considered to
represent "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code, and "loans secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; and interest income attributable to the
Securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Code. Reserves or funds underlying the Securities
may cause a proportionate reduction in the above-described qualifying status
categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, in the opinion of Tax Counsel, a Holder's tax
basis in its Security is the price such Holder pays for a Security, plus amounts
of original issue or market discount included in income and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a Security, measured by the difference between the amount realized and the
Security's basis as so adjusted, will generally be capital gain or loss,
assuming that the Security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the Security is one year
or more and short-term capital gain or loss if the holding period of the
Security is less than one year. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
In the case of a Security held by a bank, thrift, or similar institution
described in Section 582 of the Code, however, gain or loss realized on the sale
or exchange of a Regular Interest Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of (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 REMIC Residual Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the Holder of a Security (i) fails to furnish the applicable Trustee with its
taxpayer identification number (the "TIN"); (ii) furnishes the applicable
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 applicable 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.
66
The applicable Trustee will report to the Holders and to the Servicer for
each calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the Securities.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
"New Regulations"), which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after
December 31, 1999, subject to certain transition rules. Prospective investors
are urged to consult their own tax advisors regarding the New Regulations.
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 non-U.S. Person ("Nonresident"), in the opinion of Tax Counsel, such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a holder, directly or by attribution, of 10% or more of the capital
or profits interest in the issuer, 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.
Interest and OID of Nonresidents are not subject to withholding if they are
effectively connected with a United States business conducted by the
Nonresident. They will, however, generally be subject to the regular United
States income tax.
Payments to Nonresidents will generally be treated as interest for purposes
of the 30% (or lower treaty rate) United States withholding tax. Holders should
assume that such income does not qualify for exemption from United States
withholding tax as "portfolio interest." It is clear that, to the extent that a
payment represents a portion of REMIC taxable income that constitutes excess
inclusion income, a Holder of a Residual Interest Security will not be entitled
to an exemption from or reduction of the 30% (or lower treaty rate) withholding
tax rule. If the payments are subject to United States withholding tax, they
generally will be taken into account for withholding tax purposes only when paid
or distributed (or when the Residual Interest Security is disposed of). The
Treasury has statutory authority, however, to promulgate regulations that 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 U.S. 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."
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TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a partnership
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust
Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. In such a circumstance, Tax Counsel is, except
as otherwise provided in the related Prospectus Supplement, of the opinion that
the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of Tax Counsel, the Notes
will not be considered issued with OID. The stated interest thereon will be
taxable to a Noteholder as ordinary interest income when received or accrued in
accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a Holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A Holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis Holder of a Short-Term Note (and certain cash method
Holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis Holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis Holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
68
Sale or Other Disposition. In the opinion of Tax Counsel, if a Noteholder
sells a Note, the Holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the Holder's adjusted tax
basis in the Note. The adjusted tax basis of a Note to a particular Noteholder
will equal the Holder's cost for the Note, increased by any market discount,
acquisition discount, OID and gain previously included by such Noteholder in
income with respect to the Note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except for
gain representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made (or
accrued) to a Noteholder who is a Nonresident 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
Nonresident and the Nonresident (i) is not actually or constructively a "10
percent shareholder" of the Trust Fund or the Seller (including a Holder of 10%
of the outstanding Certificates) or a "controlled foreign corporation" with
respect to which the Trust Fund or the Seller is a "related person" within the
meaning of the Code and (ii) provides the 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 Nonresident and
providing the Nonresident's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a Nonresident 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 Nonresident and (ii) in the case of an individual Nonresident, the
Nonresident 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.
The New Regulations described herein make certain modifications to the
backup withholding and information reporting rules. The New Regulations
generally will be effective for payments made after December 31, 1999, subject
to certain transition rules. Prospective investors are urged to consult their
own tax advisors regarding the New Regulations.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Tax Counsel, the IRS successfully asserted that one or more of the Notes did
not represent debt for federal income tax purposes, the Notes might be treated
as equity interests in the Trust Fund. If so treated, the Trust Fund might be
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 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 Nonresident Holders generally would be subject to
69
U.S. tax and U.S. tax return filing and withholding requirements, and individual
Holders might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single Class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the opinion
of Tax Counsel, the Trust Fund will not be subject to federal income tax.
Rather, in the opinion of Tax Counsel, each Certificateholder will be required
to separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are allocable
to the partners in accordance with the Code, Treasury regulations and the
partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that the Certificateholders will be
allocated taxable income of the Trust Fund for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, in the opinion of Tax Counsel,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, in the opinion of Tax Counsel, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis Holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
70
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of expenses
of the Trust Fund (including fees to the Servicer but not interest expense)
would be miscellaneous itemized deductions. Such deductions might be 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 Fund should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be greater or less than
the remaining Principal Balance of the Loans at the time of purchase. If so, in
the opinion of Tax Counsel, the Loan will have been acquired at a premium or
discount, as the case may be. (As indicated above, the Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, 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. Pursuant to final Treasury
regulations issued May 9, 1997 under Section 708 of the Code, if such a
termination occurs, the Trust Fund (the "old partnership") would be deemed to
contribute its assets to a new partnership (the "new partnership") in exchange
for interests in the new partnership. Such interests would be deemed distributed
to the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the Holder's cost increased by the Holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the Certificates
and the amount realized on a sale of a Certificate would include the Holder's
share of the Notes and other liabilities of the Trust Fund. A Holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share of
unrecognized accrued market discount on the 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
71
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a Holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust 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 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-l information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (a) the name, address and identification number of such person,
(b) 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 (c) 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 non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged
72
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
Nonresident Certificateholders pursuant to Section 1446 of the Code, as if such
income were effectively connected to a U.S. trade or business, at a rate of 35%
for foreign Holders that are taxable as corporations and 39.6% for all other
foreign Holders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Trust 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 foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign Holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
Holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code. The New Regulations described herein make
certain modifications to the backup withholding and information reporting rules.
The New Regulations will generally be effective for payments made after
December 31, 1999, subject to certain transition rules. Prospective investors
are urged to consult their own tax advisors regarding the New Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations 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.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities ("FASIT
Securities"). Although the FASIT provisions of the Code became effective on
September 1, 1997, no Treasury regulations or other administrative guidance has
been issued with respect to those provisions. Accordingly, definitive guidance
cannot be provided with respect to many aspects of the tax treatment of Holders
of FASIT Securities. Investors also should note that the FASIT discussions
contained herein constitutes only a summary of the federal income tax
consequences to Holders of FASIT Securities. With respect to each Series of
FASIT Securities, the related Prospectus Supplement will provide a detailed
discussion regarding the federal income tax consequences associated with the
particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for
73
such purposes, but rather as representing rights and responsibilities with
respect to the taxable income or loss of the related Series. The Prospectus
Supplement for each Series of Securities will indicate whether one or more FASIT
elections will be made for such Series, and which Securities of such Series will
be designated as Regular Securities, and which, if any, will be designated as
Ownership Securities.
Qualification as a FASIT. The Trust Fund underlying a Series (or one or
more designated pools of assets held in the Trust Fund) will qualify under the
Code as a FASIT in which the FASIT Regular Securities and the FASIT Ownership
Securities will constitute the "regular interests" and the "ownership
interests," respectively, if (i) a FASIT election is in effect, (ii) certain
tests concerning (a) the composition of the FASIT's assets and (b) the nature of
the Holders' interest in the FASIT are met on a continuing basis and (iii) the
Trust Fund is not a regulated company as defined in Section 851(a) of the Code.
Asset Composition. In order for a Trust Fund (on one or more designated
pools of assets held by a Trust Fund) to be eligible for FASIT status,
substantially all of the assets of the Trust Fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the Closing Date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include (i) cash or cash equivalents, (ii) debt instruments
with fixed terms that would qualify as REMIC regular interests if issued by a
REMIC (generally, instruments that provide for interest at a fixed rate, a
qualifying variable rate, or a qualifying interest-only ("IO") type rate,
(iii) foreclosure property, (iv) certain hedging instruments (generally,
interest and currency rate swaps and credit enhancement contracts) that are
reasonably required to guarantee or hedge against the FASIT's risks associated
with being the obligor on FASIT interests, (v) contract rights to acquire
qualifying debt instruments or qualifying hedging instruments, (vi) FASIT
regular interests and (vii) REMIC regular interests. Permitted assets do not
include any debt instruments issued by the Holder of the FASIT's ownership
interest or by any person related to such Holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT also must meet certain requirements. All
of the interests in a FASIT must belong to either of the following: (i) one or
more Classes of regular interests or (ii) a single Class of ownership interest
that is held by a fully taxable domestic corporation. In the case of Series that
include FASIT Ownership Securities, the ownership interest will be represented
by the FASIT Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its Holder to a specified principal amount,
(iv) the issue price of the interest does not exceed 125% of its stated
principal amount, (v) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5% and (vi) if it pays
interest, such interest is payable at either (a) a fixed rate with respect to
the principal amount of the regular interest or (b) a permissible variable rate
with respect to such principal amount. Permissible variable rates for FASIT
regular interests are the same as those for REMIC regular interest (i.e.,
certain qualified floating rates and weighted average rates). See "Certain
Federal Income Tax Considerations--Taxation of Debt Securities--Variable Rate
Debt Securities."
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv) or (v) above, but otherwise meets the above requirements,
it may still qualify as a type of regular interest known as a "High-Yield
Interest." In addition, if a FASIT Security fails to meet the requirements of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, Holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See "Certain Federal Income Tax Considerations--FASIT
Securities--Tax Treatment of FASIT Regular Securities--Treatment of High-Yield
Interests."
Consequences of Disqualification. If a Series of FASIT Securities fails to
comply with one or more of the Code's ongoing requirements for FASIT status
during any taxable year, the Code provides that its FASIT status may be lost for
that year and thereafter. If FASIT status is lost, the treatment of the former
FASIT and the interests therein for federal income tax purposes is uncertain.
The former FASIT might be treated as a grantor trust, as a separate association
taxed as a corporation, or as a partnership. The FASIT Regular Securities could
be
74
treated as debt instruments for federal income tax purposes or as equity
interests. Although the Code authorizes the Treasury to issue regulations that
address situations where a failure to meet the requirements for FASIT status
occurs inadvertently and in good faith, such regulations have not yet been
issued. It is possible that disqualification relief might be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
FASIT's income for a period of time in which the requirements for FASIT status
are not satisfied.
Tax Treatment of FASIT Regular Securities. Payments received by Holders of
FASIT Regular Securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC Regular Securities. As in the case of Holders of REMIC Regular
Securities, Holders of FASIT Regular Securities must report income from such
Securities under an accrual method of accounting, even if they otherwise would
have used the case receipts and disbursements method. Except in the case of
FASIT Regular Securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on such Security will be treated as a return of capital to the extent
that the Holder's basis is allocable to that payment. FASIT Regular Securities
issued with original issue discount or acquired with market discount or premium
generally will treat interest and principal payments on such Securities in the
same manner described for REMIC Regular Securities. See "Certain Federal Income
Tax Considerations--Taxation of Debt Securities," "--Market Discount," and
"--Premium" above. High-Yield Securities may be held only by fully taxable
domestic corporations, other FASITs, and certain securities dealers. Holders of
High-Yield Securities are subject to limitations on their ability to use current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "Certain Federal Income Tax Considerations--Sale or
Exchange." In addition, if a FASIT Regular Security becomes wholly or partially
worthless as a result of Default and Delinquencies of the underlying assets, the
Holder of such Security should be allowed to deduct the loss sustained (or
alternatively be able to report a lesser amount of income). See "Certain Federal
Income Tax Considerations--Taxation of Debt Instruments--Effects of Default and
Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c)(4)(A) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See "Certain Federal Income Tax Considerations--Taxation of
Debt Securities--Status as Real Property Loans." In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of
Section 582(c)(1) of the Code. FASIT Securities will not qualify as "Government
Securities" for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified Holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT Regular
Security and that have the same features as High-Yield Interests.
75
Tax Treatment of FASIT Ownership Securities. A FASIT Ownership Security
represents the residual equity interest in a FASIT. As such, the Holder of a
FASIT Ownership Security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the Holder of a FASIT
Ownership Interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
Holder of a FASIT Ownership Interest is treated as ordinary income. In
determining that taxable income, the Holder of a FASIT Ownership Security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT Regular
Securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, Holders of FASIT Ownership
Securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT Security as are the Holders of High-Yield
Interests. See "Certain Federal Income Tax Considerations--Treatment of
High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the Holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
Holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent Holders of
REMIC Securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, Holders of record of FASIT Securities
generally will be treated in the same manner as Holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO HOLDERS
AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY ASPECTS OF
THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING
THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE
SECURITIES.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into subclasses.
If Securities are divided into subclasses, the related Prospectus Supplement
will contain information concerning considerations relating to ERISA and the
Code that are applicable to such Securities and such subclasses of Securities.
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including certain individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively
76
"Plans") subject to ERISA and on persons who are fiduciaries with respect to
such Plans. Generally, ERISA applies to investments made by Plans. Among other
things, ERISA requires that the assets of Plans be held in trust and that the
trustee, or other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Plan is considered to be a fiduciary of such Plan (subject to
certain exceptions not here relevant). Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)) and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in ERISA
Section 3(33)), are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Securities without regard to the ERISA
considerations described above and below, subject to the provisions of
applicable state law. Any such plan that is qualified and exempt from taxation
under Code Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and Section 4975 of the Code prohibit a
broad range of transactions involving Plan assets and persons ("Parties in
Interest") having certain specified relationships to a Plan and imposes
additional prohibitions where Parties in Interest are fiduciaries with respect
to such Plan. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code, or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations (Labor Reg. Section 2510.3-101) concerning the
definition of what constitutes the assets of a Plan (the "Plan Asset
Regulation"). Under this regulation, the underlying assets and properties of
corporations, partnerships and certain other entities in which a Plan acquires
an "equity" interest could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances.
Under the Plan Asset Regulation, the term "equity" interest is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the Trust Fund issues Notes that are not treated as equity
interests in the Trust Fund for purposes of the Plan Asset Regulation, a Plan's
investment in such Notes would not cause the assets of the Trust to be deemed
Plan assets. However, the Seller, the Servicer, the Special Servicer, the Backup
Servicer, the Indenture Trustee, the Owner Trustee and the Depositor may be the
sponsor of or investment advisor with respect to one or more Plans. Because such
parties may receive certain benefits in connection with the sale of the Notes,
the purchase of Notes using Plan assets over which any such parties (or any
affiliates thereof) has investment authority might be deemed to be a violation
of the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, Notes may not be purchased using the assets of
any Plan if the Seller, the Servicer, the Special Servicer, the Indenture
Trustee, the Owner Trustee, the Depositor or any of their affiliates (a) has
investment or administrative discretion with respect to such Plan assets;
(b) has authority or responsibility to give, or regularly gives, investment
advice with respect to such Plan assets for a fee and pursuant to an agreement
of understanding that such advice (i) will serve as a primary basis for
investment decisions with respect to such Plan assets and (ii) will be based on
the particular investment needs for such Plan; or (c) is an employer maintaining
or contributing to such Plan.
In addition, the Trust Fund, any underwriter, trustee, servicer,
administrator or producer of credit support or their affiliates might be
considered or might become Parties in Interest with respect to a Plan. Also, any
holder of Notes, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest with respect to certain
Plans, including but not limited to Plans sponsored by such holder. In either
case, the acquisition or holding of Notes by or on behalf of such a Plan could
be considered to give rise to an indirect prohibited transaction within the
meaning of ERISA and the Code, unless it is subject to one or more exemptions
such as: Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified professional
asset manager"; PTCE 90-1, which exempts certain transactions involving
insurance company pooled separate accounts; PTCE 91-38, which exempts certain
transactions involving bank collective investment funds; PTCE 95-60, which
exempts certain transactions involving insurance company general accounts; or
PTCE 96-23, which exempts certain transactions effected on behalf of a Plan by
certain "in-house asset managers." There can be no assurance that any of these
class exemptions will apply with
77
respect to any particular Plan investment in Notes, or, even if it did apply,
that any exemption would apply to all prohibited transactions that may occur in
connection with such an investment. Each prospective purchaser or transferee of
a Note that is a Plan or a person acting on behalf or investing the assets of a
Plan shall be required to represent (or, with respect to any transfer of a
beneficial interest in a Global Note, shall be deemed to represent) to the
Indenture Trustee and the Note Registrar that the relevant conditions for
exemptive relief under at least one of the foregoing exemptions have been
satisfied.
The Plan Asset Regulation provides that, generally, the assets of a
corporation or partnership in which a Plan invests will not be deemed for
purposes of ERISA to be assets of such Plan if the equity interest acquired by
the investing Plan is a publicly-offered security. A publicly-offered security,
as defined in the Plan Asset Regulation, is a security that is widely held,
freely transferable and registered under the Exchange Act.
If no exception under the Plan Asset Regulation applies, then if a Plan (or
a person investing Plan assets, such as an insurance company general account)
acquires an equity interest in the Trust Fund, then the assets of the Trust Fund
would be considered to be assets of the Plan. Because the Loans held by the
Trust Fund may be deemed Plan assets of each Plan that purchases Securities, an
investment in the Securities by a Plan might be a prohibited transaction under
ERISA Sections 406 and 407 and subject to an excise tax under Code Section 4975
and may cause transactions undertaken in the course of operating the Trust Fund
to constitute prohibited transactions, unless a statutory or administrative
exemption applies.
In Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which amended
Prohibited Transaction Class Exemption 81-7, the DOL exempted from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage pool investment trusts and the purchase, sale and holding
of "mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTCE 83-1 permits, subject to certain conditions, transactions
that might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans related to the origination, maintenance and termination
of mortgage pools consisting of mortgage loans secured by first or second
mortgages or deeds of trust on single-family residential property, and the
acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans. If the general
conditions (discussed below) of PTCE 83-1 are satisfied, investments by a Plan
in Securities that represent interests in a Pool consisting of Loans conforming
to these requirements ("Single Family Securities") will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and
(2) (relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTCE 83-1 does not
provide an exemption for transactions involving Subordinated Securities.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinated Security or a Security that is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTCE
83-1, the term "mortgage pass-through certificate" would include:
(i) Securities issued in a Series consisting of only a single Class of
Securities; and (ii) Securities issued in a Series in which there is only one
Class of those particular Trust Securities; provided, that the Securities in the
case of clause (i), or the Securities in the case of clause (ii), evidence the
beneficial ownership of both a specified percentage of future interest payments
(greater than 0%) and a specified percentage (greater than 0%) of future
principal payments on the Loans. It is not clear whether a Class of Securities
that evidences the beneficial ownership in a Trust Fund divided into Loan
groups, beneficial ownership of a specified percentage of interest payments only
or principal payments only, or a notional amount of either principal or interest
payments, or a Class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other Classes or after the
occurrence of certain specified events would be a "mortgage pass-through
certificate" for purposes of PTCE 83-1.
PTCE 83-1 sets forth three general conditions that must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and
78
property securing such loans, and for indemnifying Holders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Pool. The Depositor believes that the first general condition referred to
above will be satisfied with respect to the Securities in a Series issued
without a subordination feature, or the unsubordinated Securities only in a
Series issued with a subordination feature; provided, that the subordination and
Reserve Account, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described herein (such subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of Securities is
maintained in an amount not less than the greater of one percent of the
aggregate Principal Balance of the Loans or the Principal Balance of the largest
Loan. See "Description of the Securities" herein. In the absence of a ruling
that the system of insurance or other protection with respect to a Series of
Securities satisfies the first general condition referred to above, there can be
no assurance that these features will be so viewed by the DOL. The Trustee will
not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTCE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL issued to Bear, Stearns & Co. Inc., an individual exemption
(Prohibited Transaction Exemption 90-30; Exemption Application No. D-8207, 55
Fed. Reg. 21461 (1990)) (the "Underwriter Exemption"), which applies to certain
sales and servicing of "certificates" that are obligations of a "trust" with
respect to which Bear, Stearns & Co. Inc. is the underwriter, manager or
co-manager of an underwriting syndicate. The Underwriter Exemption provides
relief generally similar to that provided by PTCE 83-1, but is broader in
several respects.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTCE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate," which includes an interest that entitles the Holder
to pass-through payments of principal, interest and/or other payments. The
Underwriter Exemption contains an expanded definition of "trust," which permits
the trust corpus to consist of secured consumer receivables. The definition of
"trust," however, does not include any investment pool unless, inter alia,
(i) the investment pool consists only of assets of the type that have been
included in other investment pools, (ii) certificates evidencing interests in
such other investment pools have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of certificates pursuant
to the Underwriter Exemption and (iii) certificates in such other investment
pools have been rated in one of the three highest generic rating categories of
the four credit rating agencies noted below. Generally, the Underwriter
Exemption holds that the acquisition of the certificates by a Plan must be on
terms (including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an unrelated
party. The Underwriter Exemption requires that the rights and interests
evidenced by the certificates not be "subordinated" to the rights and interests
evidenced by other certificates of the same trust. The Underwriter Exemption
requires that certificates acquired by a Plan have received a rating at the time
of their acquisition that is in one of the three highest generic rating
categories of Standard & Poor's, a division of The McGraw-Hill Companies, Inc.,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA,
Inc. The Underwriter Exemption specifies that the pool trustee must not be an
affiliate of the pool sponsor, nor an affiliate of the Underwriter, the pool
servicer, any obligor with respect to mortgage loans included in the trust
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the trust, or any affiliate of such entities. The
Underwriter Exemption stipulates that any Plan investing in the certificates
must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Commission under the Securities Act.
79
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Underwriter Exemption, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the certificates
being offered by the trust, to be transferred to the trust within a 90-day or
three-month period following the closing date (the "Specified Funding Period"),
instead of requiring that all such Obligations be either identified or
transferred on or before the Closing Date. The relief is available when the
following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to
the total principal amount of the certificates being offered (the
"Specified Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the trust, which
terms and conditions have been approved by an Exemption Rating Agency.
(3) The transfer of such Additional Obligations to the trust during
the Specified Funding Period must not result in the certificates to be
covered by the Exemption receiving a lower credit rating from an Exemption
Rating Agency upon termination of the Specified 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 for all of the Obligations in the trust at
the end of the Specified Funding Period must not be more than 100 basis
points lower than the average interest rate for the Obligations transferred
to the trust on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which
were transferred to the Trust Fund:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to each
Exemption Rating Agency rating the certificates, the related
underwriter and the related trustee) stating whether or not the
characteristics of the Additional Obligations conform to the
characteristics described in the related prospectus or prospectus
supplement and/or pooling and servicing agreement. In preparing such
letter, the independent accountant must use the same type of
procedures as were applicable to the Obligations transferred to the
trust as of the Closing Date.
(6) The period of pre-funding must end no later than three months or
90 days after the Closing Date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the pooling
and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in certain permitted investments ("Permitted Investments").
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the Specified
Funding Limit for the trust; and
(iv) that the amounts remaining in the pre-funding account at
the end of the Specified Funding Period will be remitted to
certificateholders as repayments of principal.
80
(9) The related pooling and servicing agreement must describe the
Permitted Investments for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
Neither PTCE 83-1 nor the Underwriter Exemption applies to a trust which
contains unsecured obligations.
Any Plan fiduciary that proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTCE 83-1 and the Underwriter Exemption, and the potential
consequences in their specific circumstances, prior to making such investment.
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 MATTERS
The legality of the Securities of each Series, including certain material
federal income tax consequences with respect thereto, will be passed upon for
the Depositor by Brown & Wood LLP, One World Trade Center, New York, New York
10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities,
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund assets and any credit enhancement with respect to the
related Class and will reflect such Rating Agency's assessment solely of the
likelihood that the related Holders will receive payments to which such Holders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating should not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agencies in the future if in their judgment circumstances so warrant.
In addition to being lowered or withdrawn due to any erosion in the adequacy of
the value of the Trust Fund assets or any credit enhancement with respect to a
Series, such rating might also be lowered or withdrawn because of, among other
reasons, an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating Classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required
81
with respect to each such Class. There can be no assurance that the historical
data supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of mortgage
loans accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the related Loans. If the residential real estate markets
should experience an overall decline in property values such that the Principal
Balances of the Loans in a particular Trust Fund and any secondary financing on
the related Properties become equal to or greater than the value of such
Properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
additional, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by mortgagors of scheduled
payments of principal of and interest on the Loans and, accordingly, the rates
of delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the Holders of one or more Classes of the
Securities of the related Series.
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.
82
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
complete definition of such terms.
"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.
"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.
"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 applicable Trustee is 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.
"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.
"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.
"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 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 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 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,
receives proprietary leases or occupancy agreements that confer exclusive rights
to occupy specific units and that is described in Section 216 of the Code.
"Cooperative Dwelling" means an individual housing unit in a building owned
by a Cooperative.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
83
"Deferred Interest" means the excess of the interest accrued on the
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.
"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 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.
"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.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Event of Default" means an event of default under and as specified in the
related Agreement.
"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.
"Holder" means the person or entity in whose name a Security is registered.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies maintained with respect to the 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 that is identified as such in the
related Prospectus Supplement.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note, as the context may require.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgaged Property" means the related property subject to a Mortgage.
84
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"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.
"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.
"Primary Assets" means the Private Securities and/or Loans, as the case may
be, that 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.
"Regular Interest" means a regular interest in a REMIC.
"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.
"REO Property" means real property that secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentage specified in the related Prospectus Supplement that 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.
"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 Subordinated Securityholders, 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.
85
"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.
"Subordinated Securityholder" means a Holder of a Subordinated 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 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, held, with respect to a Series of Certificates, 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
Indenture Trustee as security for such Notes, including, without limitation, the
Primary Assets (except any Retained Interests), all amounts in the Distribution
Account(s), 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.
"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.
86
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary of Terms.............................. S-3
Risk Factors.................................. S-7
Use of Proceeds............................... S-14
Description of the Trust...................... S-14
The Home Loan Pool............................ S-15
The Seller.................................... S-22
The Servicer.................................. S-24
Description of Credit Enhancement............. S-26
Description of the Securities................. S-26
Description of the Transfer and Servicing
Agreements.................................. S-33
Prepayment and Yield Considerations........... S-37
Certain Federal Income Tax Consequences....... S-44
ERISA Considerations.......................... S-47
Underwriting.................................. S-48
Legal Investment Matters...................... S-48
Ratings....................................... S-49
Legal Opinions................................ S-49
Index of Terms................................ S-50
PROSPECTUS
Prospectus Supplement......................... 3
Reports to Holders............................ 3
Available Information......................... 3
Incorporation of Certain Documents by
Reference................................... 4
Summary of Terms.............................. 5
Risk Factors.................................. 15
Description of the Securities................. 21
The Trust Funds............................... 24
Enhancement................................... 31
Servicing of Loans............................ 33
The Agreements................................ 38
Certain Legal Aspects of the Loans............ 45
The Depositor................................. 54
Use of Proceeds............................... 55
Certain Federal Income Tax Considerations..... 55
State Tax Considerations...................... 73
FASIT Securities.............................. 73
ERISA Considerations.......................... 76
Legal Matters................................. 81
Financial Information......................... 81
Rating........................................ 81
Legal Investment.............................. 82
Plan of Distribution.......................... 82
Glossary of Terms............................. 83
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$141,629,000
UNITED NATIONAL
HOME LOAN
OWNER TRUST 1999-1
UNITED NATIONAL BANK
SELLER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
ADVANTA MORTGAGE CORP. USA
SERVICER
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PROSPECTUS SUPPLEMENT
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BEAR, STEARNS & CO. INC.
COAST PARTNERS SECURITIES, INC.
MARCH 10, 1999
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