PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 5, 1999)
$305,000,000
GMAC MORTGAGE CORPORATION
Seller and Servicer
GMACM HOME EQUITY LOAN TRUST 1999-2
Issuer
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1999-2
THE TRUST
o will issue four classes of term notes, the variable
funding notes and the certificates. Only the four
classes of term notes are offered by this prospectus
supplement and the accompanying prospectus.
o will make payments on the notes and the certificates
primarily from collections on four groups of residential
mortgage loans consisting of home equity revolving
credit line loans and home equity loans. The trust will
also hold cash to purchase additional residential
mortgage loans subsequent to the date of issuance of the
term notes.
THE TERM NOTES
o will consist of the following four classes:
INITIAL NOTE
CLASS BALANCE DESIGNATIONS NOTE RATE
----- ------------ ------------ -----------
A-1 $125,000,000 Senior Variable
A-2 $ 75,000,000 Senior Variable
A-3 $ 30,000,000 Senior Variable
A-4 $ 75,000,000 Senior 7.52%
An expanded summary of the initial note balances, note
rates and rating of the notes is set forth on page S-5
of this prospectus supplement.
o currently have no trading market.
o are not deposits and are not insured or guaranteed by
any governmental agency.
CREDIT ENHANCEMENT
o Excess interest, to the extent described in this
prospectus supplement;
o Overcollateralization and limited
cross-collateralization, to the extent described herein;
and
o An irrevocable and unconditional financial guaranty
insurance policy issued by MBIA Insurance Corporation,
which will protect holders of the term notes against
certain shortfalls in amounts due to be distributed at
the times and to the extent described herein.
BEFORE YOU DECIDE TO INVEST, READ THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS,
ESPECIALLY THE RISK FACTORS BEGINNING ON PAGE S-17 IN THIS PROSPECTUS SUPPLEMENT
AND ON PAGE 3 OF THE ATTACHED PROSPECTUS.
The term notes represent non-recourse obligations of the trust only and are not
interests in or obligations of any other person or entity.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE TERM NOTES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. IT IS ILLEGAL FOR ANYONE
TO TELL YOU OTHERWISE.
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The underwriter will offer the term notes set forth above, subject to
certain conditions, from time to time in negotiated transactions at varying
prices to be determined at the time of sale. Delivery of the term notes is
expected to be made in book entry form on or about November 17, 1999. The term
notes will be offered in the United States and Europe.
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BEAR, STEARNS & CO. INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS NOVEMBER 3, 1999
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS:
We tell you about the term notes in two separate documents that
progressively provide more detail: (i) the accompanying prospectus, which
provides general information, some of which may not apply to a particular series
of securities, including your term notes; and (ii) this prospectus supplement,
which describes the specific terms of your term notes and may be different from
the information in the prospectus.
If the terms of your term notes vary between this prospectus supplement
and the prospectus, you should rely on the information in this prospectus
supplement.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents provides the pages
on which these captions can be found.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Defined Terms"
beginning on page S-86 in this prospectus supplement.
If you require additional information, the mailing address of the
principal executive office of the depositor is Bear Stearns Asset Backed Asset
Securities, Inc., 245 Park Avenue, New York, New York 10167 and its telephone
number is (212) 272-4095. For other means of acquiring additional information
about the depositor or the term notes, see "Incorporation of Certain Information
by Reference" beginning on page 85 of the attached prospectus.
S-2
Table of Contents
Page
----
Prospectus Supplement
Summary.................................................................... S-4
Risk Factors................................................................S-17
Description of the Mortgage Loans...........................................S-22
The Seller and Servicer.....................................................S-44
The Issuer..................................................................S-48
The Owner Trustee...........................................................S-48
The Indenture Trustee.......................................................S-48
The Enhancer................................................................S-49
Description of the Securities...............................................S-51
Description of the Policy...................................................S-61
Yield and Prepayment Considerations.........................................S-63
The Agreements..............................................................S-72
Use of Proceeds.............................................................S-82
Certain Federal Income Tax Considerations...................................S-82
ERISA Considerations........................................................S-82
Legal Investment............................................................S-83
Underwriting................................................................S-83
Experts.....................................................................S-84
Legal Matters...............................................................S-84
Ratings.....................................................................S-84
Index of Defined Terms......................................................S-85
Appendix A - Initial HELOCs -- Characteristics of Loan Groups I, II and III..A-1
Appendix B - Form of Policy..................................................B-1
Prospectus
Risk Factors...................................................................3
Description of the Securities..................................................8
The Trust Funds...............................................................13
Enhancement...................................................................22
Servicing of Loans............................................................25
The Agreements................................................................32
Certain Legal Aspects of the Loans............................................42
The Depositor.................................................................53
Use of Proceeds...............................................................53
Certain Federal Income Tax Considerations.....................................53
State Tax Considerations......................................................76
FASIT Securities..............................................................76
ERISA Considerations..........................................................79
Legal Matters.................................................................85
Financial Information.........................................................85
Available Information.........................................................85
Incorporation of Certain Information by Reference.............................85
Rating........................................................................86
Legal Investment..............................................................87
Plan of Distribution..........................................................87
Index of Defined Terms........................................................88
S-3
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SUMMARY
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this prospectus supplement and the
accompanying prospectus. Capitalized terms used herein but not otherwise defined
have the meanings assigned to them in the prospectus. We refer you to the index
of defined terms beginning on page S-87 herein for the location herein of the
definitions of certain capitalized terms used herein.
Issuer..................The GMACM Home Equity Loan Trust 1999-2, a Delaware
business trust, will be formed pursuant to a trust
agreement. The property of the issuer will include:
o the unpaid principal balance of the home equity
revolving credit line loans and home equity loans
on the cut-off date;
o the unpaid principal balance as of the related
subsequent cut-off date of home equity revolving
credit line loans and home equity loans added to
the property of the trust after the closing date;
and
o any additions to the home equity revolving credit
line loans as a result of draws or new advances of
money made pursuant to the related credit line
agreements after the cut-off date or related
subsequent cut-off date and prior to the beginning
of the related rapid amortization period.
Depositor...............Bear Stearns Asset Backed Securities, Inc.
For more information on the depositor, we refer you to
"The Depositor" in the accompanying prospectus.
Seller and Servicer.....GMAC Mortgage Corporation, a Pennsylvania corporation,
will be the seller and servicer of the mortgage loans.
The servicer will be obligated to service the mortgage
loans pursuant to the servicing agreement to be dated as
of November 17, 1999, among the servicer, the issuer and
the indenture trustee.
We refer you to "The Agreements--The Servicing
Agreement" and "The Seller and Servicer --General" in
this prospectus supplement for further information on
the seller and servicer.
Owner Trustee..... .....Wilmington Trust Company.
We refer you to "The Owner Trustee" in this prospectus
supplement for further information on the owner trustee.
Indenture Trustee.......Norwest Bank Minnesota, National Association.
We refer you to "The Indenture Trustee" in this
prospectus supplement for further information on the
indenture trustee.
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S-4
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Term Notes
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Note Initial Initial Rating
Class Rate Note Balance (Moody's/S&P)(1) Final Payment Date(2) Designations
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Senior/
A-1 Variable(3) $125,000,000 Aaa/AAA November 25, 2029 Variable Rate
Senior/
A-2 Variable(4) $ 75,000,000 Aaa/AAA November 25, 2029 Variable Rate
Senior/
A-3 Variable(5) $ 30,000,000 Aaa/AAA November 25, 2029 Variable Rate
Senior/
A-4 7.52%(6) $ 75,000,000 Aaa/AAA November 25, 2029 Fixed Rate
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Total Term Notes $305,000,000
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(1) See "Ratings" in this prospectus supplement.
(2) Due to losses and prepayments on the home equity revolving credit line
loans and the home equity loans in each loan group, the actual final
payment date on each class of term notes may be substantially earlier than
such dates.
(3) On any payment date, equal to the least of (i) LIBOR plus a margin of
0.33% per annum, (ii) the weighted average net loan rate of the home
equity revolving credit line loans in the related loan group, and (iii)
14.00% per annum. The margin for the Class A-1 Term Notes will increase to
0.66% on the payment date on which the clean-up call may first be
exercised for such class of notes. Beginning on the 13th payment date,
0.50% will be subtracted from the calculation of the rate in clause (ii)
above. On any payment date for which the note rate has been determined by
clause (ii) above, the interest shortfall, if any, will be determined and
will be payable on later payment dates, to the extent funds are available
for that purpose from the related loan group. Interest shortfalls will not
be covered by the financial guaranty insurance policy and may remain
unpaid on the final payment date for such class of notes.
(4) On any payment date, equal to the least of (i) LIBOR plus a margin of
0.32% per annum, (ii) the weighted average net loan rate of the home
equity revolving credit line loans in the related loan group, and (iii)
14.00% per annum. The margin for the Class A-2 Term Notes will increase to
0.64% on the payment date on which the clean-up call may first be
exercised for such class of notes. Beginning on the 13th payment date,
0.50% will be subtracted from the calculation of the rate in clause (ii)
above. On any payment date for which the note rate has been determined by
clause (ii) above, the interest shortfall, if any, will be determined and
will be payable on later payment dates, to the extent funds are available
for that purpose from the related loan group. Interest shortfalls will not
be covered by the financial guaranty insurance policy and may remain
unpaid on the final payment date for such class of notes.
(5) On any payment date, equal to the least of (i) LIBOR plus a margin of
0.36% per annum, (ii) the weighted average net loan rate of the home
equity revolving credit line loans in the related loan group, and (iii)
14.00% per annum. The margin for the Class A-3 Term Notes will increase to
0.72% on the payment date on which the clean-up call may first be
exercised for such class of notes. Beginning on the 13th payment date,
0.50% will be subtracted from the calculation of the rate in clause (ii)
above. On any payment date for which the note rate has been determined by
clause (ii) above, the interest shortfall, if any, will be determined and
will be payable on later payment dates, to the extent funds are available
for that purpose from the related loan group. Interest shortfalls will not
be covered by the financial guaranty insurance policy and may remain
unpaid on the final payment date for such class of notes.
(6) The note rate on the Class A-4 Term Notes will increase by 0.50% to 8.02%
per annum on the payment date on which the clean-up call may first be
exercised for such class of term notes.
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S-5
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Closing Date ...........On or about November 17, 1999.
Statistical
Calculation Date .......The close of business on October 14, 1999.
Cut-Off Date ...........November 1, 1999.
Payment Date ...........The 25th day of each month (or, if that day is not a
Business Day, the next Business Day), beginning on
December 27, 1999.
Denominations and
Registration ...........Each class of the term notes will be issued in minimum
denominations of $25,000 and integral multiples of
$1,000 in excess of that amount. The term notes will
initially be issued in book-entry form. Those acquiring
beneficial ownership interests in the term notes, the
term note owners, may elect to hold their term notes
through The Depository Trust Company in the United
States, or Cedelbank or the Euroclear System in Europe.
Transfers within The Depository Trust Company, Cedelbank
or the Euroclear System will be in accordance with the
usual rules and operating procedures of that system. No
term note owner can receive a physical certificate
representing their interest, except if definitive term
notes are issued under the limited circumstances
described in this prospectus supplement. All references
in this prospectus supplement to any term notes reflect
the rights of term note owners only as those rights may
be exercised through The Depository Trust Company and
its participating organizations for so long as those
term notes are in book-entry form.
We refer you to "Description of the
Securities--Book-Entry Notes" in this prospectus
supplement and "Description of the
Securities--Book-Entry Securities" in the attached
prospectus for further information.
Variable Funding Notes..Home Equity Loan-Backed Variable Funding Notes, Series
1999-2. The variable funding notes are not offered by
this prospectus supplement.
Certificates ...........Home Equity Loan-Backed Certificates, Series 1999-2. The
certificates are not offered by this prospectus
supplement.
The Mortgage Pool ......Unless we indicate otherwise, the statistical
information we present in this prospectus supplement
reflects the initial pool of mortgage loans as of the
statistical calculation date. The aggregate outstanding
principal balance of the initial mortgage loans as of
the statistical calculation date is $227,825,634.87. The
outstanding principal balance of each mortgage loan as
of the related statistical calculation date is the
"statistical calculation date balance."
o home equity revolving credit line loans to be sold
to the issuer will be adjustable rate home equity
revolving credit line loans evidenced by the
related credit line agreements and secured by the
related mortgages or deeds of trust on residential
properties.
o No more than approximately 96.76% of the initial
home equity revolving credit line loans (by
statistical calculation date balance)
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S-6
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are secured by second or more junior mortgages or
deeds of trust and the rest are secured by first
mortgages or deeds of trust.
The unpaid principal balance of a home equity revolving
credit line loan on any day will be equal to:
o its cut-off date balance,
o plus any additional balances relating to that home
equity revolving credit line loan sold to the
issuer before that day,
o minus all collections credited against its
principal balance in accordance with the related
credit line agreement since the cut-off date or,
if applicable, subsequent cut-off date. The
principal balance of a liquidated home equity
revolving credit line loan after the final
recovery of related liquidation proceeds will be
zero.
The home equity loans to be sold to the issuer will be
fixed rate closed-end home equity loans evidenced by
promissory notes and secured by mortgages on the related
mortgaged properties. No more than approximately 98.73%
of the initial home equity loans (by statistical
calculation date balance) are secured by second or more
junior mortgages or deeds of trust and the remainder are
secured by first mortgages or deeds of trust. The
initial home equity loans provide for substantially
equal payments in an amount sufficient to amortize the
home equity loans over their terms.
As of the statistical calculation date, the home equity
revolving credit line loans had the following
characteristics:
Number of loans 6,741
Aggregate principal balance $170,178,482.44
Average principal balance $25,245.29
Range of principal balances $1,001.39 to $279,064.99
Weighted average interest rate 8.528%
Range of interest rates 5.990% to 15.000%
Weighted average maximum interest rate 18.109%
Weighted average original term 199 months
Weighted average remaining term 195 months
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S-7
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As of the statistical calculation date, the home equity
loans had the following characteristics:
Number of loans 2,201
Aggregate principal balance $57,647,152.43
Average principal balance $26,191.35
Range of principal balances $2,038.11 to $100,000.00
Weighted average interest rate 10.494%
Range of interest rates 5.700% to 17.990%
Weighted average original term 168 months
Weighted average remaining term 165 months
See "Description of the Mortgage Loans" in this
prospectus supplement.
Loan Rate...............The loan rate of each mortgage loan is the per annum
interest rate required to be paid by the mortgagor under
the terms of the related mortgage note or credit line
agreement. The loan rate borne by each mortgage loan,
after the completion of any initial teaser period during
which the loan rate may be fixed or set at a discounted
variable rate for a period of from three to six months,
is:
o in the case of a home equity revolving credit line
loan, adjustable on the date specified in the
related credit line agreement to a rate based on
an index; and
o in the case of a home equity loan, fixed as of the
date of its origination.
Interest on each home equity revolving credit line loan
is computed daily and payable monthly on the average
daily outstanding principal balance of such home equity
revolving credit line loan. After any initial teaser
period during which the loan rate may be fixed or set at
a discounted variable rate for approximately three to
six months, the loan rate on each home equity revolving
credit line loan will be adjusted on each adjustment
date to a rate equal to the sum of the index and a fixed
percentage specified in the related credit line
agreement, and is generally subject to a maximum loan
rate over the life of the home equity revolving credit
line loan specified in such credit line agreement. As of
the statistical calculation date, the weighted average
loan rate for the home equity revolving credit line
loans, after the expiration of any applicable teaser
periods, is approximately 10.675% and for the home
equity loans is approximately 10.494%.
We refer you to "Description of the Mortgage
Loans--Initial HELOC Characteristics" and "--Initial HEL
Characteristics" in this prospectus supplement for
further information.
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S-8
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Mortgage Loan Groups....The mortgage loans sold and transferred to the issuer as
of the closing date will be divided into the following
four loan groups:
o The first loan group will include home equity
revolving credit line loans that have an aggregate
outstanding principal balance as of the
statistical calculation date of approximately
$88,809,843.30. As to each loan in the first loan
group secured by a first lien on the related
property, the original principal balance was
generally no more than $240,000 for single-family
properties and $307,100 for two-family properties.
As to each loan in the first loan group secured by
a second lien on the related property, (i) the
original principal balance was generally no more
than $120,000, and (ii) if the related senior lien
loan was owned by Fannie Mae at the time such
second lien loan was originated, the sum of the
original principal balance of such second lien
loan and the outstanding principal balance of the
related senior lien loan was generally no more
than $240,000 for single-family properties and
$307,100 for two-family properties.
o The second loan group will include home equity
revolving credit line loans that have an aggregate
outstanding principal balance as of the
statistical calculation date of approximately
$55,568,307.02. As to each loan in the second loan
group secured by a first lien on the related
property, the original principal balance was
generally no more than $240,000 for single-family
properties and $307,100 for two-family properties.
As to each loan in the second loan group secured
by a second lien on the related property, (i) the
original principal balance was generally no more
than $120,000 for single-family properties and
$153,550 for two-family properties, and (ii) the
sum of the original principal balance of such
second lien loan and the outstanding principal
balance of the related senior lien loan was
generally no more than $240,000 for single-family
properties and $307,100 for two-family properties.
o The third loan group will include home equity
revolving credit line loans that have an aggregate
outstanding principal balance as of the
statistical calculation date of approximately
$25,800,332.12 and will include loans that do and
loans that do not meet the restrictions applicable
to the first or second loan groups.
o The fourth loan group will include home equity
loans and is expected to have an aggregate
outstanding principal balance as of the
statistical calculation date of approximately
$57,647,152.43.
Payments on the Class A-1, Class A-2 and Class A-3 Term
Notes will be based primarily on amounts collected or
received in respect of the home equity revolving credit
line loans in the first, second and third loan groups,
respectively. The variable funding notes generally will
be entitled to receive a portion of the collections on
the home equity revolving credit line loans in the
first, second and/or third loan groups depending on the
loan group or groups into which the additional balances
backing the variable funding notes are added. Payments
on the Class A-4 Term Notes will be based primarily on
amounts collected or
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S-9
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received in respect of the home equity loans in the
fourth loan group. Except for the application of any
funds on deposit in the reserve account as described
below, collections or amounts received in respect of a
loan group will not support or be available for payment
to the holders of term notes or variable funding notes
backed by the mortgage loans in any other loan group.
Pre-Funding Account.....On the closing date, approximately $77,174,365.13 will
be deposited into an account designated the "pre-funding
account". Approximately $59,821,517.56 will be allocated
to purchasing home equity revolving credit line loans
and $17,352,847.57 will be allocated to purchasing home
equity loans. This amount will come from the proceeds of
the sale of the term notes. During the pre-funding
period as described in this prospectus supplement, funds
on deposit in the pre-funding account will be used by
the issuer to buy mortgage loans from the seller from
time to time. The pre-funding period will be the period
from the closing date to the earliest of:
o the date on which the amount on deposit in the
pre-funding account is less than $100,000;
o April 30, 2000; or
o the occurrence of a rapid amortization event, as
further described herein.
The mortgage loans sold to the trust after the closing
date, as well as all initial mortgage loans, will
conform to certain specified characteristics. After the
end of the pre-funding period, mortgage loans will
continue to be purchased by the issuer through the end
of the revolving period for the Term Notes backed by the
home equity revolving credit line loans, as described in
this prospectus supplement, subject to certain
conditions.
We refer you to "Description of the Mortgage
Loans-Conveyance of Subsequent Mortgage Loans, the
Pre-Funding Account and the Funding Account" in this
prospectus supplement for further information.
Capitalized Interest
Account.................On the closing date, if required by MBIA, part of the
proceeds of the sale of the term notes will be deposited
into an account designated the "capitalized interest
account", which will be held by the indenture trustee.
Amounts on deposit in the capitalized interest account
will be withdrawn on each payment date during the
pre-funding period to cover any shortfall in interest
payments on the term notes due to the pre-funding
feature during the pre-funding period. Any amounts
remaining in the capitalized interest account at the end
of the pre-funding period will be paid to the seller.
We refer you to "Description of the
Securities--Capitalized Interest Account" in this
prospectus supplement for further information.
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Funding Account.........An account designated the "funding account" will be set
up with the indenture trustee on the closing date. On
each payment date during the revolving period for each
class of term notes, the indenture trustee will deposit
principal collections for the related loan group into
the funding account, and will apply them first to buy
additional balances arising under home equity revolving
credit line loans in the trust and thereafter to buy
more mortgage loans, to the extent they are available.
If not all principal collections in the funding account
have been applied to buy additional balances and
mortgage loans at the end of the revolving period for
the term notes backed by the home equity revolving
credit line loans, the amount left in the funding
account will be paid to noteholders as a payment of
principal. During the revolving periods, we expect that
mortgage loans bought with amounts in the funding
account will be primarily home equity revolving credit
line loans.
We refer you to "Description of the Mortgage
Loans--Conveyance of Subsequent Mortgage Loans, the
Pre-Funding Account and the Funding Account" in this
prospectus supplement for further information.
Interest Payments.......Interest payments on each class of term notes will be
made monthly on each payment date, beginning in December
1999, at the respective note rate described above.
Interest on the Class A-1, Class A-2 and Class A-3 Term
Notes for each payment date will accrue from the
preceding payment date (or, in the case of the first
payment date, from the closing date) through the day
before that payment date, on the basis of the actual
number of days in that interest period and a 360-day
year. The interest period for the Class A-4 Term Notes
for each payment date will be the calendar month
preceding the month in which that payment date occurs,
on the basis of a 360-day year consisting of twelve
30-day months.
All interest payments on each class of notes for any
payment date will be allocated to the term notes and the
variable funding notes pro rata based on their
respective interest accruals from collections with
respect to the related loan group. The interest rate on
the variable funding notes for any payment date will not
significantly exceed the note rates on the Class A-1,
Class A-2 and Class A-3 Term Notes for the related
interest period.
Principal Payments......With respect to any payment date during each revolving
period, no principal will be paid on the related class
of term notes, and all principal collections will be
deposited into the funding account and used to purchase
additional balances relating to home equity revolving
credit line loans and to purchase additional mortgage
loans. On each payment date during the managed
amortization period for the term notes backed by the
home equity revolving credit line loans, the aggregate
amount payable as principal of each such class of term
notes and the variable funding notes will be equal to
net principal collections for the related loan group for
that payment date, as further described in this
prospectus supplement. The Class A-4 Term Notes will not
have a managed amortization period. On each payment date
during the rapid amortization period for each class of
term notes, the aggregate amount payable as principal of
each such class of notes will be equal to the
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S-11
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principal collections for the related loan group for
that payment date. In addition, on each payment date
after the end of the revolving period for each class of
term notes, to the extent of funds available for that
purpose, holders of each class of term notes and the
holders of the variable funding notes will be entitled
to get certain additional amounts in reduction of their
note balance, generally equal to liquidation loss
amounts, as further described in this prospectus
supplement.
All principal payments due and payable on the Class A-1,
Class A-2 and Class A-3 Term Notes and the variable
funding notes will be allocated among such classes of
notes based on the principal collections in the related
loan groups until the outstanding principal balances
thereof are paid in full. In no event will principal
payments on any class of notes on a payment date exceed
the related principal balance of such class of notes on
that payment date. On the final payment date, principal
will be due and payable on the notes in an amount equal
to the related principal balance remaining outstanding
on that payment date.
As to each class of term notes backed by the home equity
revolving credit line loans, the revolving period will
be the period beginning on the closing date and ending
on the earlier of November 30, 2000 and the occurrence
of a managed amortization event or certain rapid
amortization events; the managed amortization period
will be the period beginning on the first payment date
following the end of the related revolving period and
ending on the earlier of November 30, 2004 and the
occurrence of certain rapid amortization events; and the
rapid amortization period will be the period beginning
on the earlier of the first payment date following the
end of the managed amortization period and the
occurrence of certain rapid amortization events, and
ending upon the termination of the issuer. A managed
amortization event will be deemed to occur on any date
on which the amount on deposit in the funding account
equals or exceeds $10,000,000.
As to the Class A-4 Term Notes, the revolving period
will be the period beginning on the closing date and
ending on the earlier of March 31, 2000 and the
occurrence of certain rapid amortization events; and the
rapid amortization period will be the period beginning
on the earlier of the first payment date following the
end of the related revolving period and the occurrence
of certain rapid amortization events, and ending upon
the termination of the issuer.
We refer you to "Description of the Securities--Priority
of Distributions" in this prospectus supplement for a
description of the allocation of principal payments on
the term notes.
Reserve Account.........An account designated the "reserve account" will be set
up with the indenture trustee on the closing date. On
each payment date, if the aggregate
overcollateralization for all loan groups is less than
the aggregate overcollateralization target for all loan
groups, the amount of any remaining excess spread for
each loan group will be deposited in the reserve account
to be applied to cover any unpaid current interest with
respect to the term notes backed by any loan group and
any liquidation losses for each loan group not otherwise
covered by principal and interest collections from such
loan group. At such time, if
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S-12
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any, that the aggregate overcollateralization for all
loan groups equals or exceeds the aggregate
overcollateralization target for all loan groups, any
funds on deposit in the reserve account will no longer
be applied to cover unpaid current interest or
liquidation losses.
We refer you to "Description of the Securities--Priority
of Distributions" in this prospectus supplement for
further information.
Allocation of Payments
on the Mortgage Loans...All collections on the mortgage loans will generally be
allocated by the servicer according to the terms of the
related credit line agreements or mortgage notes between
amounts collected in respect of interest and principal.
We refer you to "The Agreements--The Servicing
Agreement--P & I Collections" in this prospectus
supplement, which describes the calculation of principal
collections and interest collections on the mortgage
loans for the collection period related to each payment
date.
o With respect to each payment date, the portion of
interest collections for each loan group available
to be applied towards the payment of interest on
the related class of notes will equal interest
collections for such loan group for such payment
date
o The portion of principal collections for each loan
group available to be applied towards the payment
of principal on the related class of notes will
equal:
o at any time during the revolving periods, zero,
o at any time during the managed amortization
period, net principal collections on the home
equity revolving credit line loans for such
payment date, and
o at any time during the rapid amortization
periods, principal collections for such loan
group for such payment date.
During the revolving period for each class of term
notes, principal collections for the related loan group
will be applied by the trust to buy mortgage loans for
such loan group, to the extent mortgage loans are
available. During the period from the closing date to
the beginning of the rapid amortization period for the
term notes backed by the home equity revolving credit
line loans, principal collections will also be applied
to purchase additional balances for the related loan
group, to the extent additional balances are available.
Principal collections will no longer be applied to
acquire mortgage loans after the end of the revolving
periods and will no longer be applied to buy additional
balances during the rapid amortization period for the
term notes backed by the home equity revolving credit
line loans.
We refer you to "Description of the Securities--Priority
of Distributions" in this prospectus supplement for a
description of events that would cause the rapid
amortization period to begin.
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S-13
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Credit Enhancement......The credit enhancement provided for the benefit of the
noteholders will consist of:
o excess interest;
o overcollateralization and limited
cross-collateralization; and
o the financial guaranty insurance policy,
each as further described in this prospectus supplement.
The Enhancer............MBIA Insurance Corporation.
We refer you to "The Enhancer" in this prospectus
supplement for further information.
Optional Redemption ....With respect to each of the four loan groups, a
principal payment may be made to redeem the related
class of term notes upon the exercise by the servicer of
its option to purchase the mortgage loans in such loan
group together with the related assets of the trust
after the aggregate note balance of the related class of
term notes is reduced to an amount less than or equal to
10% of their initial aggregate note balance. The
purchase price payable by the servicer for the mortgage
loans in each of the four loan groups will be the sum
of:
o the aggregate outstanding principal balance of the
mortgage loans in such loan group, plus accrued
and unpaid interest thereon at the weighted
average of the net loan rates of the mortgage
loans through the day preceding the payment date
of this purchase;
o an amount equal to any interest shortfalls plus
accrued and unpaid interest on these interest
shortfalls; and
o all amounts due and owing MBIA with respect to the
mortgage loans in such loan group.
Final Payment of
Principal on the
Term Notes..............The notes will be payable in full on the final payment
date in November 2029 to the extent of any outstanding
note balance on that date. In addition, the issuer will
pay each class of notes in full upon the exercise by the
servicer of its option to purchase all of the mortgage
loans in the related loan group and all property
acquired relating to such mortgage loans.
We refer you to "Description of the Securities--Maturity
and Optional Redemption" in this prospectus supplement
and "The Agreements--Termination--Indenture" in the
attached prospectus for further information.
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S-14
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Optional Removal of
Certain Mortgage Loans..In certain instances where a mortgagor either:
o requests an increase in the credit limit on the
related home equity revolving credit line loan
above the limit stated on the related credit line
agreement;
o asks to place a lien on the related mortgaged
property senior to the lien of the related
mortgage loan; or
o refinances the senior lien resulting in a combined
loan-to-value ratio above the prior combined
loan-to-value ratio for that loan;
then the servicer will have the option to purchase from
the trust that home equity revolving credit line loan,
as further described in this prospectus supplement.
ERISA Considerations....The term notes are eligible for purchase by pension,
profit-sharing or other employee benefit plans as well
as individual retirement accounts and certain types of
Keogh Plans. However, any fiduciary or other investor of
assets of a plan that proposes to acquire or hold the
term notes on behalf of or with assets of any plan
should consult with its counsel with respect to the
potential applicability of the fiduciary responsibility
provisions of ERISA and the prohibited transaction
provisions of ERISA and the Internal Revenue Code of
1986, as amended, to the proposed investment.
We refer you to "ERISA Considerations" in this
prospectus supplement and in the attached prospectus for
further information.
Certain Federal
Income Tax
Considerations..........In the opinion of Brown & Wood LLP, special tax counsel
to the depositor, for federal income tax purposes, the
term notes will be characterized as indebtedness, and
neither the issuer, nor any portion of the issuer as
created and governed pursuant to the terms and
conditions of the trust agreement, will be characterized
as an association (or a publicly traded partnership)
taxable as a corporation for federal income tax
purposes, or as a "taxable mortgage pool" within the
meaning of section 7701(i) of the Internal Revenue Code
of 1986, as amended. In addition, each noteholder, by
its acceptance of a note, will agree to treat that note
as debt for federal, state and local tax purposes.
For further information regarding certain income tax
considerations in respect of an investment in the term
notes, we refer you to "Certain Federal Income Tax
Considerations" in this prospectus supplement and in the
attached prospectus and "State Tax Considerations" in
the attached prospectus.
Legal Investment........The term notes will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended, because the
property of the trust includes mortgage loans secured by
subordinate liens on the related mortgaged properties.
Institutions the investment activities of which are
subject to legal
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S-15
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investment laws and regulations or to review by certain
regulatory authorities may be subject to restrictions on
investment in the term notes.
We refer you to "Legal Investment" in this prospectus
supplement for further information.
Ratings.................It is a condition to the issuance of the term notes that
they receive the ratings shown on page S-6 of this
prospectus supplement. 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. A security rating does
not address the frequency of prepayments of the mortgage
loans or draws on the home equity revolving credit line
loans, the likelihood of the receipt of any amounts in
respect of interest shortfalls or any corresponding
effect on the yield to investors.
We refer you to "Yield and Prepayment Considerations"
and "Ratings" in this prospectus supplement for further
information.
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S-16
RISK FACTORS
You should consider the following information carefully, as well as the
information beginning on page 3 of the attached prospectus, since it identifies
certain significant sources of risk associated with an investment in the term
notes. Capitalized terms used herein but not otherwise defined have the meanings
assigned to them in the prospectus. We refer you to the index of defined terms
beginning on page S-87 herein for the location herein of the definitions of
certain capitalized terms used herein.
The mortgaged Although the Mortgage Loans are secured by liens on
properties might not Mortgaged Properties, this collateral may not give
be adequate security assurance of repayment of the Mortgage Loans comparable
for the mortgage to that many first lien lending programs provide, and
loans. the Mortgage Loans (especially those with high CLTVs)
may have risk of repayment characteristics more similar
to unsecured consumer loans.
Approximately 97.26% (by aggregate Statistical
Calculation Date Balance) of the Initial Mortgage Loans
are secured by second or more junior Mortgages that are
subordinate to the rights of the mortgagee under a
senior mortgage or mortgages. The proceeds from any
liquidation, insurance or condemnation proceedings will
be available to satisfy the outstanding Principal
Balance of these Mortgage Loans only to the extent that
the claims of the senior mortgages have been satisfied
in full, including any related foreclosure costs. If the
Servicer determines that it would be uneconomical to
foreclose on the related Mortgaged Property, the
Servicer may write off the entire outstanding Principal
Balance of the related Mortgage Loan. These
considerations will be particularly applicable to
Mortgage Loans secured by second or more junior
Mortgages that have high Combined Loan-to-Value Ratios
because, in these cases, the Servicer is more likely to
determine that foreclosure would be uneconomical. These
losses will be borne by Noteholders if the applicable
credit enhancement is insufficient to absorb them.
Defaults on Mortgage Loans are generally expected to
occur with greater frequency in their early years. The
rate of default of Mortgage Loans secured by junior
Mortgages may be greater than that of Mortgage Loans
secured by senior Mortgages on comparable properties.
We cannot assure you that the values of the Mortgaged
Properties have remained or will remain at their levels
on the dates of origination of the related Mortgage
Loans. If the residential real estate market experiences
an overall decline in value, this could extinguish the
value of the interest of a junior mortgagee in the
Mortgaged Property before having any adverse effect on
the interest of the related senior mortgagees.
Dependency on the As a result of the above considerations, the
creditworthiness of underwriting standards and procedures applicable to the
the mortgagors. Mortgage Loans, as well as the repayment prospects of
the Mortgage Loans, may be more dependent on the
creditworthiness of the borrower and less dependent on
the adequacy of the Mortgaged Property as collateral
than would be the case under many first lien lending
programs. As to the Mortgage Loans, future changes in
the borrower's economic circumstances will have a
significant effect on the likelihood of repayment, since
additional draws on the HELOCs may be made by the
borrower in the future up to the applicable credit
limit. Although the HELOCs are generally subject to
provisions whereby the
S-17
Servicer may reduce the applicable credit limit as a
result of a material adverse change in the borrower's
economic circumstances, the Servicer generally will not
monitor for these changes and may not become aware of
them until after the borrower has defaulted. Under
certain circumstances, a borrower with a HELOC may draw
his entire credit limit in response to personal
financial needs resulting from an adverse change in
circumstances.
Under the home equity program of the Seller (the "GMACM
Home Equity Program") relating to the HELOCs, the Seller
generally qualifies Mortgagors based on an assumed
payment that reflects a Loan Rate significantly lower
than the related Maximum Loan Rate. The repayment of any
HELOC may thus be dependent on the ability of the
related Mortgagor to make larger interest payments if
the Loan Rate of the related Mortgage Loan is adjusted
during the life of the HELOC.
Future changes in a borrower's economic circumstances
may result from a variety of unforeseeable personal
factors, including loss of employment, reduction in
income, illness and divorce. Any increase in prevailing
market interest rates may adversely affect a borrower by
increasing debt service on the related HELOC or other
similar debt of the borrower. In addition, changes in
the payment terms of any related senior mortgage loan
may adversely affect the borrower's ability to pay
principal and interest on the senior mortgage loan. For
example, these changes may result if the senior mortgage
loan is an adjustable rate loan and the interest rate on
the loan increases, which may occur with or without an
increase in prevailing market interest rates if the
increase is due to the phasing out of a reduced initial
rate. Specific information about these senior mortgage
loans, other than the amount of these loans at
origination of the corresponding Mortgage Loan, is not
available, and we are not including it in this
Prospectus Supplement.
General economic conditions, both on a national and
regional basis, will also have an impact on the ability
of borrowers to repay their Mortgage Loans. Certain
geographic regions of the United States from time to
time will experience weaker regional economic conditions
and housing markets, and, as a result, will experience
higher rates of loss and delinquency than mortgage loans
generally. For example, a region's economic condition
and housing market may be directly, or indirectly,
adversely affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods,
eruptions or riots. The economic impact of any of these
types of events may also be felt in areas beyond the
region immediately affected by the disaster or
disturbance. The Mortgage Loans may be concentrated in
these regions, and this concentration may present risk
considerations in addition to those generally present
for similar mortgage-backed securities without this
concentration. You should note that approximately 48.44%
and 7.94% (by aggregate Statistical Calculation Date
Balance) of the Initial Mortgage Loans are secured by
Mortgaged Properties located in the States of California
and Michigan, respectively. In addition, any change in
the deductibility for federal income tax purposes of
interest payments on home equity loans may also have an
adverse impact on the ability of borrowers to repay
their Mortgage Loans.
S-18
Loan rates may reduce The Note Rate on each class of the Term Notes backed by
the note rate on each the HELOCs will be a floating rate, as described in this
class of Term Notes prospectus supplement. The Loan Rates of the HELs are
backed by the HELOCs. fixed and do not adjust. As such, if one-month LIBOR
rises, you could get interest at a rate less than LIBOR
plus the specified margin due to these limitations on
the Note Rate. In addition, the weighted average Loan
Rate of the Mortgage Loans will change, and may
decrease, over time due to scheduled amortization of the
Mortgage Loans, prepayments of Mortgage Loans, transfers
to the Issuer of Subsequent Mortgage Loans and removal
of Mortgage Loans by the Seller. We cannot assure you
that the weighted average Loan Rate of the Mortgage
Loans in any loan group will not decrease after the
Closing Date.
Yield and prepayment The yield to maturity of all classes of the Term Notes
considerations on the will depend on the rate and timing of principal payments
term notes. (including payments in excess of required installments,
prepayments or terminations, liquidations and
repurchases) on the Mortgage Loans, the rate and timing
of draws on the related HELOCs, and the price you pay
for your Term Notes. This yield may be adversely
affected by a higher or lower than anticipated rate of
principal payments or draws on the related HELOCs. The
Mortgage Loans may be prepaid in full or in part without
penalty. The rate and timing of defaults on the Mortgage
Loans in a loan group will also affect the yield to
maturity of the related class of Term Notes.
During the Revolving Periods, if the Seller does not
sell enough Additional Balances and/or Subsequent
Mortgage Loans to the Issuer, the Issuer will not fully
apply amounts on deposit in the Funding Account to the
purchase of Additional Balances and Subsequent Mortgage
Loans by the end of the Revolving Period for the Term
Notes backed by the HELOCs. These remaining amounts will
be paid to the Holders of the Term Notes as principal on
the first Payment Date following the end of the
Revolving Period for the Term Notes backed by the
HELOCs. See "Yield and Prepayment Considerations"
herein.
Limitations on the We cannot assure you that, at any particular time, the
repurchase or Seller will be able, financially or otherwise, to
replacement of repurchase or replace Defective Mortgage Loans as
defective mortgage described in this prospectus supplement. If the Seller
loans by the Seller. repurchases or is required to repurchase defective
mortgage loans from any other series of asset backed
securities, the financial ability of the Seller to
repurchase Defective Mortgage Loans from the Issuer may
be adversely affected. In addition, other events
relating to the Seller and its operations could occur
that would adversely affect the financial ability of the
Seller to repurchase Defective Mortgage Loans from the
Issuer, including the termination of borrowing
arrangements that provide the Seller with funding for
its operations, or the sale or other disposition of all
or any significant portion of the Seller's assets. If
the Seller does not repurchase or replace a Defective
Mortgage Loan, then the Servicer, on behalf of the
Issuer, will try to recover the maximum amount possible
with respect to such Defective Mortgage Loan, and any
resulting delay or loss will be borne by the
Noteholders, to the extent that the related credit
enhancement does not cover this delay or loss.
S-19
Possible variations in Each Subsequent Mortgage Loan will satisfy the
the subsequent mortgage eligibility criteria referred to in this prospectus
loans from the initial supplement at the time the Seller transfers it to the
mortgage loans. Issuer. However, the Seller may originate or acquire
Subsequent Mortgage Loans using credit criteria
different from those it applied to the Initial Mortgage
Loans. As such, these Subsequent Mortgage Loans may be
of a different credit quality from the Initial Mortgage
Loans. Thus, after the transfer of Subsequent Mortgage
Loans to the Issuer, the aggregate characteristics of
the Mortgage Loans in each loan group that are part of
the Trust Estate may vary from those of the Initial
Mortgage Loans. See "Description of the Mortgage
Loans--Conveyance of Subsequent Mortgage Loans, the
Pre-Funding Account and the Funding Account".
Legal considerations The Mortgage Loans are secured by Mortgages. With
present respect to Mortgage Loans that are secured by first
certain risks. Mortgages, the Servicer may, under certain
circumstances, agree to a new mortgage lien on the
related Mortgaged Property having priority over that
Mortgage. Mortgage Loans secured by second Mortgages are
entitled to proceeds that remain from the sale of the
related Mortgaged Property after any senior mortgage
loans and prior statutory liens have been satisfied. If
these proceeds are insufficient to satisfy these senior
loans and prior liens in the aggregate, the Issuer, and
accordingly, the Noteholders, will bear the risk of
delay in distributions while the Servicer gets a
deficiency judgment (to the extent available in the
related state) against the related Mortgagor, and also
bear the risk of loss if the Servicer cannot get or
realize upon that deficiency judgment. See "Certain
Legal Aspects of the Loans" in the Prospectus.
If the Seller becomes insolvent, the receiver of the
Seller may try to recharacterize the Seller's sale of
the Mortgage Loans as a borrowing by the Seller secured
by a pledge of the Mortgage Loans. If the receiver
decided to challenge this transfer, you could experience
delays in payments on your Term Notes, and possible
reductions in the amount paid. The Depositor will
warrant that the transfer of its interest in the
Mortgage Loans to the Issuer is a valid transfer and
assignment of that interest.
If a conservator, receiver or trustee is appointed for
the Seller, or if certain other events relating to the
insolvency of the Seller occur, Additional Balances and
Subsequent Mortgage Loans will no longer be transferred
by the Seller to the Depositor pursuant to the Purchase
Agreement. If this happens, an Event of Default under
the Trust Agreement and the Indenture will occur, and
the Indenture Trustee will try to sell the Mortgage
Loans (unless the Enhancer or Holders of Securities
evidencing undivided interests aggregating at least 51%
of the aggregate outstanding principal balance of the
Securities instruct otherwise). This would cause early
payment of the Term Note Balance of the Term Notes.
If the Servicer becomes bankrupt or insolvent, the
related bankruptcy trustee or receiver may have the
power to prevent the appointment of a successor
Servicer.
S-20
The repurchase option In certain instances in which a Mortgagor either:
of the servicer could
result in an increase o requests an increase in the credit limit on the
in prepayments. related HELOC above the limit stated in the Credit
Line Agreement;
o requests to place a lien on the related Mortgaged
Property senior to the lien of the related
Mortgage Loan; or
o refinances the senior lien resulting in a Combined
Loan-to-Value Ratio above the previous Combined
Loan-to-Value Ratio for such loan;
then the Servicer will have the option to purchase from
the Trust Estate the related Mortgage Loan at a price
equal to the Repurchase Price. There are no limitations
on the frequency of these repurchases or the
characteristics of the Mortgage Loans so repurchased.
These repurchases may cause an increase in prepayments
on the Mortgage Loans, which may reduce the yield on the
Term Notes. In addition, these repurchases may affect
the characteristics of the Mortgage Loans in the
aggregate with respect to Loan Rates and credit quality.
Limitations of, and Credit enhancement will be provided for the Term Notes
the possible reduction in the form of:
and substitution of,
credit enhancement. o Excess Spread (representing excess interest
collections, if available);
o overcollateralization; and
o the Policy, to the limited extent described
herein.
None of the Seller, the Depositor, the Servicer, the
Indenture Trustee or any of their respective affiliates
will be required to take any other action to maintain,
or have any obligation to replace or supplement, this
credit enhancement or any rating of the Term Notes. To
the extent that losses are incurred on the Mortgage
Loans that are not covered by Excess Spread,
overcollateralization or the Policy, Securityholders
(including the Term Noteholders) will bear the risk of
such losses.
Social, economic and The ability of the Issuer to purchase Subsequent
other factors could Mortgage Loans is largely dependent upon whether
affect the purchase mortgagors perform their payment and other obligations
of subsequent mortgage required by the related mortgage loans in order that
loans. such mortgage loans meet the specified requirements for
transfer on a Subsequent Transfer Date as a Subsequent
Mortgage Loan. The performance by these mortgagors may
be affected as a result of a variety of social and
economic factors. Economic factors include interest
rates, unemployment levels, the rate of inflation and
consumer perception of economic conditions generally.
However, we cannot predict whether or to what extent
economic or social factors will affect the performance
by such mortgagors and the availability of Subsequent
Mortgage Loans.
S-21
DESCRIPTION OF THE MORTGAGE LOANS
General
The statistical information presented in this Prospectus Supplement
relates to the Mortgage Loans as of the close of business on the Statistical
Calculation Date (the "Initial Mortgage Loans"). Unless otherwise indicated, all
percentages set forth in this Prospectus Supplement are based upon the
outstanding principal balances of the Initial Mortgage Loans as of the
Statistical Calculation Date (the "Statistical Calculation Date Balance".
Between the Statistical Calculation Date and the Cut-Off Date, some of the
Initial Mortgage Loans may prepay in full or in part. As a result, the
statistical distribution characteristics of the Initial Mortgage Loans as of the
Cut-Off Date may vary from the characteristics described in this Prospectus
Supplement, but the variance is not expected to be material. Mortgage Loans sold
to the Issuer after the Closing Date (the "Subsequent Mortgage Loans"), will be
selected using generally the same criteria as that used to select the Initial
Mortgage Loans, and generally the same representations and warranties will be
made with respect thereto. See "Description of the Mortgage Loans--Conveyance of
Subsequent Mortgage Loans, the Pre-Funding Account and the Funding Account"
herein
With respect to each adjustable rate home equity revolving credit line
loan (the "HELOCs"), the "Combined Loan-to-Value Ratio" or "CLTV" generally will
be the ratio, expressed as a percentage, of the sum of (i) the credit limit
thereof pursuant to the related Credit Line Agreement (the "Credit Limit") and
(ii) any outstanding principal balance, at origination of such HELOC, of all
other mortgage loans, if any, secured by senior or subordinate liens on the
related Mortgaged Property, to the Appraised Value, or, when not available, the
Stated Value. With respect to each HELOC, the "Junior Ratio" generally will be
the ratio, expressed as a percentage, of the Credit Limit of such HELOC to the
sum of (i) the greater of the Statistical Calculation Date Balance or the Credit
Limit, if applicable, of such HELOC and (ii) the principal balance of any
related senior mortgage loan at origination of such HELOC. The "Credit
Utilization Rate" is determined by dividing the Statistical Calculation Date
Balance of a HELOC by the Credit Limit of the related Credit Line Agreement. The
"Appraised Value" for any HELOC will be the appraised value of the related
Mortgaged Property determined in the appraisal used in the origination of such
HELOC (which may have been obtained at an earlier time); provided that if such
HELOC was originated simultaneously with a senior lien on the related Mortgaged
Property, the Appraised Value shall be the lesser of the appraised value at the
origination of the senior lien and the sales price for such Mortgaged Property.
However, with respect to not more than 3.87% of the HELOCs transferred to the
Issuer on the Closing Date (the "Initial HELOCs") for which the documentation
type is known, the "Stated Value" will be based on the stated value of the
Mortgaged Property given by the related Mortgagor in his or her application. See
"Description of the Mortgage Loans--Underwriting Standards" herein.
With respect to each fixed rate home equity loan (the "HELs" and, together
with the HELOCs, the "Mortgage Loans"), the Combined Loan-to-Value Ratio
generally will be the ratio, expressed as a percentage, of the sum of (i) the
initial principal balance of such HEL and (ii) any outstanding principal
balance, at origination of such HEL, of all other mortgage loans, if any,
secured by senior or subordinate liens on the related Mortgaged Property, to the
Appraised Value, or, when not available, the Stated Value. The Appraised Value
for any HEL will be the appraised value of the related Mortgaged Property
determined in the appraisal used in the origination of such HEL (which may have
been obtained at an earlier time); provided, that if such HEL was originated
simultaneously with a senior lien on the related Mortgaged Property, the
Appraised Value shall be the lesser of the appraised value at the origination of
the senior lien and the sales price for such Mortgaged Property. However, with
respect to not more than 20.35% of the HELs transferred to the Issuer on the
Closing Date (the "Initial Group IV HELs") for which the documentation type is
known, the Stated Value will be based on the stated value of the Mortgaged
Property given by the related Mortgagor in his or her application. See
"Description of the Mortgage Loans--Underwriting Standards" herein.
The Initial Mortgage Loans will be divided into four loan groups (each, a
"Loan Group") as follows:
o The first Loan Group ("Loan Group I") will include Initial HELOCs
that satisfy the following restrictions: As to each loan in Loan
Group I secured by a first lien on the related property, the
original principal balance was generally no more than $240,000 for
single-family properties and $307,100 for two-family properties. As
to each loan in Loan Group I secured by a second lien on the related
property, (i) the original principal balance was generally no more
than $120,000, and (ii) if the related senior lien loan was owned
S-22
by Fannie Mae at the time such second lien loan was originated, the
sum of the original principal balance of such second lien loan and
the outstanding principal balance of the related senior lien loan
was generally no more than $240,000 for single-family properties and
$307,100 for two-family properties. Any Subsequent Mortgage Loans
that are HELOCs and included in Loan Group I will also satisfy such
requirements.
o The second Loan Group ("Loan Group II") will include Initial HELOCs
that satisfy the following restrictions: As to each loan in Loan
Group II secured by a first lien on the related property, the
original principal balance was generally no more than $240,000 for
single-family properties and $307,100 for two-family properties. As
to each loan in Loan Group II secured by a second lien on the
related property, (i) the original principal balance was generally
no more than $120,000 for single-family properties and $153,550 for
two-family properties, and (ii) the sum of the original principal
balance of such second lien loan and the outstanding principal
balance of the related senior lien loan was generally no more than
$240,000 for single-family properties and $307,100 for two-family
properties. Any Subsequent Mortgage Loans that are HELOCs and
included in Loan Group II will also satisfy such requirements.
o The third Loan Group ("Loan Group III") will include Initial HELOCs
that do and Initial HELOCs that do not meet the restrictions
applicable to Loan Groups I or II, and any Subsequent Mortgage Loans
that are HELOCs and that are not included in Loan Groups I or II.
o The fourth Loan Group ("Loan Group IV") will include the Initial
HELs and any Subsequent Mortgage Loans that are HELs.
Payments on the Class A-1, Class A-2 and Class A-3 Term Notes will be
based primarily on amounts collected or received in respect of the HELOCs in
Loan Groups I, II and III, respectively. The Variable Funding Notes generally
will be entitled to receive a portion of the collections on the HELOCs in Loan
Groups I, II and/or III depending on the loan group or groups into which the
Additional Balances backing the Variable Funding Notes are added. Payments on
the Class A-4 Term Notes will be based primarily on amounts collected or
received in respect of the HELs in Loan Group IV.
Initial HELOCs
The Initial HELOCs were originated or acquired by GMAC Mortgage
Corporation (the "Seller"). No more than 96.76% (by Statistical Calculation Date
Balance) of the Initial HELOCs are secured by second mortgages or deeds of trust
and the remainder of which by first mortgages or deeds of trust. The Mortgaged
Properties securing the Initial HELOCs consist primarily of residential
properties. As to approximately 100.00% of the Initial HELOCs, the borrower
represented at the time of origination that the related Mortgaged Property would
be owner occupied as a primary or second home.
All percentages of the Initial HELOCs described herein are approximate
percentages determined (except as otherwise indicated) by the aggregate
Statistical Calculation Date Balance of the Initial HELOCs. Each Initial HELOC
is included in either Loan Group I, II or III. Certain additional
characteristics of the Initial HELOCs in Loan Groups I, II and III are set forth
in Appendix A hereto.
The Statistical Calculation Date Balance of the Initial HELOCs is
$170,178,482.44. As of the Statistical Calculation Date, no Initial HELOC is 30
days or more delinquent. The latest scheduled maturity of any Initial HELOC is
September 20, 2024. With respect to approximately 49.04% and approximately 9.05%
of the Initial HELOCs, the related Mortgaged Properties are located in the
States of California and Michigan, respectively. With respect to the Initial
HELOCs, the average Statistical Calculation Date Balance is approximately
$25,245.29, the minimum Statistical Calculation Date Balance is $1,001.39, the
maximum Statistical Calculation Date Balance is $279,064.99, the lowest Loan
Rate and the highest Loan Rate on the Statistical Calculation Date are 5.990%
and 15.000% per annum, respectively, and the weighted average Loan Rate on the
Statistical Calculation Date is approximately 8.528% per annum. The minimum and
maximum Combined Loan-to-Value Ratios as of the Statistical Calculation Date are
5.00% and 101.37%, respectively, and the weighted average Combined Loan-to-Value
Ratio based on the Statistical Calculation Date Balance of the Initial HELOCs is
approximately 83.18 % as of the Statistical Calculation Date.
S-23
Loan Terms of the HELOCs
Interest on each HELOC is calculated based on the average daily balance
outstanding during the Billing Cycle, and with respect to each HELOC, the
"Billing Cycle" is the calendar month preceding the related due date.
Each HELOC has a per annum interest rate required to be paid by the
Mortgagor under the terms of the related Credit Line Agreement (the "Loan
Rate"), that is subject to adjustment on each day (each such day, an "Adjustment
Date") to equal the sum of (a) an index (the "Index") which is the prime rate
(or high point in a range of prime rates) published in the "Money Rate" column
of The Wall Street Journal and (b) the fixed percentage specified in the related
Credit Line Agreement (the "Gross Margin"), provided, however, that the Loan
Rate on each Initial HELOC will in no event be greater than the maximum Loan
Rate (the "Maximum Loan Rate") set forth in the related Credit Line Agreement
(subject to the maximum rate permitted by applicable law).
As of the Statistical Calculation Date, approximately 60.30% of the
Initial HELOCs have a Loan Rate below the rate equal to the sum of the related
Index and the Gross Margin (such rate, the "Teaser Rate"), which is in effect
during the first 6 months of the term of the loan. With respect to approximately
29.44% of the Initial HELOCs, the Teaser Rate will be equal to the Prime Rate
less 1.00%.
With respect to approximately 1.81% of the Initial HELOCs, the Gross
Margin is adjustable from time to time based on the then outstanding balance and
Combined Loan-to-Value Ratio generally as follows:
Gross Margins
CLTV not CLTV
Outstanding Balance more than 80% more than 80%
- ------------------- ------------- -------------
$25,000 or less 2.00% 3.00%
$25,001 to $50,000 1.75% 2.75%
$50,001 or more 1.50% 2.50%
The Gross Margins with respect to the Initial HELOCs may be reduced below
the applicable levels indicated above by 0.25% or by 0.50% in certain instances
based on specific employee status with General Motors Corporation ("GM") or its
subsidiaries at the time of origination of the Initial HELOC (with no adjustment
in the event of any change in such status of the borrower).
Each Initial HELOC had a term to maturity from the date of origination of
not more than 300 months (the "25-Year Loans"), 180 months (the "15-Year
Loans"), 120 months (the "10-Year Loans") or 60 months (the "5-Year Loans"). The
related mortgagor (the "Mortgagor") for each Initial HELOC may make a draw at
any time during the period stated in the related Credit Line Agreement (the
"Draw Period"). In addition, with respect to certain of the Initial HELOCs, the
related Mortgagor will not be permitted to make any draw during the time period
stated in the related Credit Line Agreement (the "Repayment Period"). The Draw
Period and the Repayment Period vary for the Initial HELOCs based on such loan's
Combined Loan-to-Value ratio at origination, state of origination and original
term to maturity. The 25-Year Loans, which comprise approximately 32.77% of the
Initial HELOCs, have a Draw Period of 15 years and a Repayment Period of 10
years. With respect to 15-Year Loans and 10-Year Loans with Combined
Loan-to-Value Ratios of 90% or less, the Draw Period will be at any time during
the term of the loan and there will be no Repayment Period, except with respect
to approximately 1.10% of the Initial HELOCs, all of which were originated in
the Commonwealth of Massachusetts, which will have a Draw Period for the first 5
years of the loan and a Repayment Period for the last 5 years of the loan with
respect to such 10-Year Loans and a Draw Period for the first 10 years of the
loan and a Repayment Period for the last 5 years of the loan with respect to
such 15-Year Loans. With respect to the 5-Year Loans, the Draw Period will be 5
years and there will be no Repayment Period.
The maximum amount of each draw with respect to any HELOC is equal to the
excess, if any, of the Credit Limit over the outstanding principal balance under
such Credit Line Agreement at the time of such draw. Each HELOC may be prepaid
in full or in part at any time and without penalty, but with respect to each
HELOC, the related Mortgagor will have the right during the related Draw Period
to make a draw in the amount of any
S-24
prepayment theretofore made with respect to such HELOC. Each Mortgagor generally
will have access to make draws by check, subject to applicable law. Generally,
the Credit Line Agreement or Mortgage related to each HELOC will, subject to
applicable law, contain a customary "due-on-sale" clause.
As to each HELOC, the Mortgagor's right to receive draws during the Draw
Period may be suspended, or the Credit Limit may be reduced, for cause under a
number of circumstances, including, but not limited to: a materially adverse
change in the Mortgagor's financial circumstances; a decline in the value of the
Mortgaged Property significantly below its appraised value at origination; or a
payment default by the Mortgagor. However, generally such suspension or
reduction will not affect the payment terms for previously drawn balances. GMAC
Mortgage Corporation (the "Servicer") will have no obligation under the
servicing agreement to be dated as of November 17, 1999, among the Servicer, the
Issuer and the Indenture Trustee (the "Servicing Agreement") to investigate as
to whether any such circumstances have occurred and may have no knowledge
thereof; therefore there can be no assurance that any Mortgagor's ability to
receive draws will be suspended or reduced in the event that the foregoing
circumstances occur. In the event of default under a HELOC, the HELOC may be
terminated and declared immediately due and payable in full. For this purpose, a
default includes, but is not limited to: the Mortgagor's failure to make any
payment as required; any action or inaction by the Mortgagor that adversely
affects the Mortgaged Property or the rights in the Mortgaged Property; or fraud
or material misrepresentation by a Mortgagor in connection with the HELOC.
Prior to the related Repayment Period or prior to the date of maturity for
loans without Repayment Periods, the Mortgagor for each HELOC will be obligated
to make monthly payments thereon in a minimum amount that generally will be
equal to the Finance Charge (as defined below) for such Billing Cycle. Except as
described below, if such loan has a Repayment Period, during such period, the
Mortgagor will be obligated to make monthly payments consisting of principal
installments which would substantially amortize the Principal Balance by the
maturity date, plus current Finance Charges and Additional Charges (as defined
below). In addition, certain Mortgagors will be required to pay an annual fee of
up to $35.
With respect to each HELOC, (a) the "Finance Charge" for any Billing Cycle
will be an amount equal to the aggregate of, as calculated for each day in the
Billing Cycle, the then-applicable Loan Rate divided by 365 multiplied by the
daily Principal Balance and (b) the "Account Balance" on any day generally will
be the aggregate of the unpaid principal of the HELOC outstanding at the
beginning of such day, plus the sum of any unpaid fees, insurance premiums and
other charges, if any (collectively, "Additional Charges") and any unpaid
Finance Charges that are due on such HELOC, plus the aggregate of all related
draws funded on such day, minus the aggregate of all payments and credits that
are applied to the repayment of any such draws on such day. Payments made by or
on behalf of the Mortgagor for each HELOC will be applied to any unpaid Finance
Charges that are due thereon, prior to application, to any unpaid principal
outstanding.
Approximately 0.032% of the Initial HELOCs are insured by mortgage
insurance policies covering all or a portion of any losses on each such loan,
subject to certain limitations.
Initial HELOC Characteristics
Set forth below is a description of certain additional characteristics of
the Initial HELOCs as of the Statistical Calculation Date. Unless otherwise
specified, all principal balances of the Initial HELOCs are as of the
Statistical Calculation Date and are rounded to the nearest dollar. All
percentages are approximate percentages by aggregate principal balance as of the
Statistical Calculation Date (except as indicated otherwise).
S-25
PROPERTY TYPE
Percent of
Initial HELOCs by
Statistical Statistical
Number of Calculation Calculation
Property Type Initial HELOCs Date Balance Date Balance
- ------------- -------------- --------------- -----------------
Single-Family Dwelling................... 5,782 $145,945,896.93 85.76%
Condominium.............................. 525 12,956,274.77 7.61
PUD...................................... 403 10,741,631.15 6.31
Two-Family............................... 29 511,495.42 0.30
Manufactured Housing..................... 2 23,184.17 0.01
----- --------------- ------
Total.......................... 6,741 $170,178,482.44 100.00%
===== =============== ======
OCCUPANCY TYPES
Percent of
Statistical Initial HELOCs by
Occupancy Number of Calculation Statistical Calculation
(as indicated by Borrower) Initial HELOCs Date Balance Date Balance
- -------------------------- -------------- --------------- -----------------------
Owner Occupied............................ 6,702 $168,939,646.73 99.27%
Non-Owner Occupied........................ 39 1,238,835.71 0.73
----- --------------- ------
Total........................... 6,741 $170,178,482.44 100.00%
===== =============== ======
PRINCIPAL BALANCES
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Range of Principal Balances ($) Initial HELOCs Date Balance Date Balance
- ------------------------------- -------------- -------------- -----------------------
$0.00 to $25,000.00....... 4,257 $ 54,030,608.16 31.75%
$25,000.01 to $50,000.00....... 1,908 68,994,898.82 40.54
$50,000.01 to $75,000.00....... 372 22,425,489.54 13.18
$75,000.01 to $100,000.00....... 111 10,487,830.71 6.16
$100,000.01 to $125,000.00....... 32 3,604,760.60 2.12
$125,000.01 to $150,000.00....... 25 3,557,999.27 2.09
$150,000.01 to $175,000.00....... 12 1,993,300.64 1.17
$175,000.01 to $200,000.00....... 15 2,886,648.48 1.70
$200,000.01 to $225,000.00....... 3 654,989.15 0.38
$225,000.01 to $250,000.00....... 4 989,365.08 0.58
$250,000.01 to $275,000.00....... 1 273,527.00 0.16
$275,000.01 to $300,000.00....... 1 279,064.99 0.16
----- --------------- ------
Total............... 6,741 $170,178,482.44 100.00%
===== =============== ======
The average Principal Balance as of the
Statistical Calculation Date is $25,245.29.
S-26
COMBINED LOAN-TO-VALUE RATIOS
Percent of
Statistical Initial HELOCs by
Range of Combined Number of Calculation Statistical Calculation
Loan-to-Value Ratios(%) Initial HELOCs Date Balance Date Balance
- ----------------------- -------------- --------------- -----------------------
0.000% to 50.000%............ 252 $ 6,236,146.50 3.66%
50.001% to 60.000%............ 184 4,390,285.96 2.58
60.001% to 70.000%............ 385 9,988,481.15 5.87
70.001% to 80.000%............ 2,015 50,628,173.08 29.75
80.001% to 90.000%............ 2,428 52,494,742.46 30.85
90.001% to 100.000%............ 1,476 46,439,011.20 27.29
100.001% or greater............. 1 1,642.09 0.00
----- --------------- ------
Total................. 6,741 $170,178,482.44 100.00%
===== =============== ======
The minimum and maximum Combined Loan-to-Value Ratios of the Initial
HELOCs as of the Statistical Calculation Date are approximately 5.00% and
101.37%, respectively, and the weighted average Combined Loan-to-Value
Ratio of the Initial HELOCs as of the Statistical Calculation Date is
approximately 83.18%.
GEOGRAPHICAL DISTRIBUTIONS
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Location Initial HELOCs Date Balance Date Balance
- -------- -------------- --------------- -----------------------
California.............................. 2,845 $ 83,458,314.16 49.04%
Michigan................................ 736 15,397,182.43 9.05
Florida................................. 240 5,932,018.60 3.49
Pennsylvania............................ 230 5,289,165.06 3.11
New York................................ 177 4,747,798.63 2.79
New Jersey.............................. 198 4,680,289.57 2.75
Other (1)............................... 2,315 50,673,713.99 29.78
----- --------------- -------
Totals................................ 6,741 $170,178,482.44 100.00%
===== =============== ======
(1) Other includes states and the District of Columbia with under 2.5%
concentrations individually.
S-27
JUNIOR RATIOS(1)(2)
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical
Range of Junior Ratios (%) Initial HELOCs Date Balance Date Balance
- -------------------------- -------------- ---------------- -----------------
0.00% to 9.99%............... 717 $ 13,579,097.81 7.98%
10.00% to 19.99%............... 3,289 67,923,661.03 39.91
20.00% to 29.99%............... 1,675 50,472,783.62 29.66
30.00% to 39.99%............... 564 19,715,582.19 11.59
40.00% to 49.99%............... 276 10,123,489.95 5.95
50.00% to 59.99%............... 127 4,221,765.09 2.48
60.00% to 69.99%............... 45 1,954,274.75 1.15
70.00% to 79.99%............... 26 1,169,789.07 0.69
80.00% to 89.99%............... 14 675,661.50 0.40
90.00% to 100.00%............... 8 342,377.43 0.20
----- --------------- ------
Total................. 6,741 $170,178,482.44 100.00%
===== =============== ======
(1) The Junior Ratio of a HELOC is the ratio (expressed as a percentage)
of the credit limit of such HELOC to the sum of such credit limit
and the outstanding balance of any senior mortgage computed as of
the date such HELOC is underwritten.
(2) The weighted average Junior Ratio of the Initial HELOCs as of the
Statistical Calculation Date is 23.24%.
LOAN RATES
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Range of Loan Rates(%) Initial HELOCs Date Balance Date Balance
- ---------------------- -------------- --------------- -----------------------
5.001% to 8.000%............. 4,083 $102,605,239.12 60.29%
8.001% to 9.000%............. 141 4,317,295.72 2.54
9.001% to 10.000%.............. 573 11,348,285.20 6.67
10.001% to 11.000%.............. 637 11,889,695.28 6.99
11.001% to 12.000%.............. 393 11,630,764.95 6.83
12.001% to 13.000%.............. 450 13,514,158.11 7.94
13.001% to 14.000%.............. 439 14,012,355.62 8.23
14.001% to 15.000%.............. 25 860,688.44 0.51
----- --------------- ------
Total................ 6,741 $170,178,482.44 100.00%
===== =============== ======
The weighted average Loan Rate as of the Statistical Calculation Date is
8.528%.
S-28
FULLY INDEXED GROSS MARGIN
Percent of
Statistical Initial HELOCs by
Range of Fully Indexed Number of Calculation Statistical Calculation
Gross Margins(%) Initial HELOCs Date Balance Date Balance
- ---------------- -------------- --------------- -----------------------
- -1.000% to -0.001%............... 2 $ 60,663.19 0.04%
0.000% to 1.000%............... 2,198 51,427,375.67 30.22
1.001% to 2.000%............... 2,112 43,619,638.07 25.63
2.001% to 3.000%............... 730 22,023,949.62 12.94
3.001% to 4.000%............... 662 19,961,289.58 11.73
4.001% to 5.000%............... 972 30,819,543.42 18.11
5.001% to 6.000%............... 63 2,183,797.60 1.28
6.001% to 7.000%............... 2 82,225.29 0.05
----- --------------- ------
Total..... 6,741 $170,178,482.44 100.00%
===== =============== ======
The weighted average fully indexed gross margin as of the
Statistical Calculation Date is approximately 2.425% per annum.
CREDIT UTILIZATION RATES
Percent of
Statistical Initial HELOCs by
Range of Credit Number of Calculation Statistical Calculation
Utilization Rates (%) Initial HELOCs Date Balance Date Balance
- --------------------- -------------- ---------------- -----------------------
0.01% to 30.00%............... 1,208 $ 8,420,223.58 4.95%
30.01% to 35.00%............... 200 2,331,623.30 1.37
35.01% to 40.00%............... 231 3,195,305.17 1.88
40.01% to 45.00%............... 185 2,813,071.15 1.65
45.01% to 50.00%............... 236 3,986,474.56 2.34
50.01% to 55.00%............... 173 3,686,041.35 2.17
55.01% to 60.00%............... 200 4,214,650.06 2.48
60.01% to 65.00%............... 192 4,284,895.65 2.52
65.01% to 70.00%............... 194 4,648,658.94 2.73
70.01% to 75.00%............... 183 4,316,266.38 2.54
75.01% to 80.00%............... 190 5,077,970.89 2.98
80.01% to 85.00%............... 175 5,278,461.00 3.10
85.01% to 90.00%............... 204 5,710,926.32 3.36
90.01% to 95.00%............... 208 6,192,911.41 3.64
95.01% to 100.00%............... 2,934 104,911,083.70 61.65
100.01% or greater................ 28 1,109,918.98 0.65
----- --------------- ------
Total................. 6,741 $170,178,482.44 100.00%
===== =============== ======
The weighted average Credit Utilization Rate based on the
Statistical Calculation Date Credit Limit of the Initial HELOCs as of the
Statistical Calculation Date is 85.08%.
S-29
CREDIT LIMITS
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Range of Credit Limits ($) Initial HELOCs Date Balance Date Balance
- -------------------------- -------------- --------------- -----------------------
$0.01 to $ 25,000.00........ 2,796 $ 35,758,414.49 21.01%
$25,000.01 to $ 50,000.00........ 2,861 76,300,709.71 44.84
$50,000.01 to $ 75,000.00........ 556 23,733,479.95 13.95
$75,000.01 to $100,000.00........ 364 17,878,885.64 10.51
$100,000.01 to $125,000.00........ 37 2,519,144.55 1.48
$125,000.01 to $150,000.00........ 53 4,679,979.26 2.75
$150,000.01 to $175,000.00........ 15 1,595,211.30 0.94
$175,000.01 to $200,000.00........ 35 4,063,295.01 2.39
$200,000.01 to $225,000.00........ 5 755,042.86 0.44
$225,000.01 to $250,000.00........ 15 1,935,768.75 1.14
$250,000.01 to $275,000.00........ 3 679,485.93 0.40
$325,000.01 to $350,000.00........ 1 279,064.99 0.16
----- --------------- ------
Total......... 6,741 $170,178,482.44 100.00%
===== =============== ======
The average of the Credit Limits as of the Statistical Calculation
Date is $37,463.84.
MAXIMUM LOAN RATES
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Maximum Loan Rates (%) Initial HELOCs Date Balance Date Balance
- ---------------------- -------------- --------------- -----------------------
14.001% to 15.000%............. 116 $ 2,136,981.45 1.26%
15.001% to 16.000%............. 93 1,793,159.40 1.05
17.001% to 18.000%............. 2,024 52,148,073.75 30.64
18.001% to 19.000%............. 4,508 114,100,267.84 67.05
----- --------------- ------
Total................ 6,741 $170,178,482.44 100.00%
===== =============== ======
The weighted average Maximum Loan Rate as of the Statistical
Calculation Date is approximately 18.109%.
S-30
MONTHS REMAINING TO SCHEDULED MATURITY
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Range of Months Initial HELOCs Date Balance Date Balance
- --------------- -------------- ---------------- -----------------------
0 to 60...... 8 $ 238,494.60 0.14%
61 to 120...... 3,180 58,365,627.05 34.30
121 to 180...... 1,726 55,789,191.83 32.78
181 to 240...... 1 22,439.02 0.01
241 to 300...... 1,826 55,762,729.94 32.77
----- --------------- ------
Total....... 6,741 $170,178,482.44 100.00%
===== =============== ======
The weighted average months remaining to scheduled maturity as of
the Statistical Calculation Date is 195 months.
ORIGINATION YEAR
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Origination Year Initial HELOCs Date Balance Date Balance
- ---------------- -------------- --------------- -----------------------
1988...................................... 1 $ 29,669.90 0.02%
1991...................................... 1 11,301.64 0.01
1992...................................... 1 185,000.00 0.11
1993...................................... 2 15,392.44 0.01
1994...................................... 13 491,749.28 0.29
1995...................................... 13 243,988.67 0.14
1996...................................... 7 58,696.07 0.03
1997...................................... 44 832,442.51 0.49
1998...................................... 335 3,512,792.61 2.06
1999...................................... 6,324 164,797,449.32 96.84
----- --------------- ------
Total........................... 6,741 $170,178,482.44 100.00%
===== =============== ======
LIEN PRIORITY
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Lien Position Initial HELOCs Date Balance Date Balance
- ------------- -------------- --------------- -----------------------
First.................................... 127 $ 5,513,601.30 3.24%
Second................................... 6,614 164,664,881.14 96.76
----- --------------- ------
Total............................ 6,741 $170,178,482.44 100.00%
===== =============== ======
S-31
DEBT-TO-INCOME RATIOS
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Range of Debt-to-Income Ratios (%) Initial HELOCs Date Balance Date Balance
- ---------------------------------- -------------- -------------- -----------------------
0.00% to 9.99%................. 19 $ 651,511.18 0.38%
10.00% to 19.99%................. 247 5,579,438.79 3.28
20.00% to 29.99%................. 1,131 24,169,398.73 14.20
30.00% to 39.99%................. 2,158 52,369,190.83 30.77
40.00% to 49.99%................. 2,422 63,094,639.79 37.08
50.00% to 59.99%................. 562 17,937,404.76 10.54
60.00% to 69.99%................. 123 4,220,632.65 2.48
70.00% to 79.99%................. 31 849,858.20 0.50
80.00% to 89.99%................. 28 716,768.45 0.42
90.00% or greater.................. 20 589,639.06 0.35
----- --------------- ------
Total................... 6,741 $170,178,482.44 100.00%
===== =============== ======
TEASER EXPIRATION MONTH
Percent of
Statistical Initial HELOCs by
Number of Calculation Statistical Calculation
Teaser Expiration Month Initial HELOCs Date Balance Date Balance
- ----------------------- -------------- --------------- -----------------------
No Teaser................................ 2,657 $ 67,553,989.53 39.70%
October 1999............................. 302 7,808,589.91 4.59
November 1999............................ 878 25,783,825.12 15.15
December 1999............................ 897 24,388,183.06 14.33
January 2000............................. 555 9,255,948.10 5.44
February 2000............................ 957 21,269,651.52 12.50
March 2000............................... 495 14,118,295.20 8.30
----- --------------- ------
Total......................... 6,741 $170,178,482.44 100.00%
===== =============== ======
S-32
DOCUMENTATION TYPE
Percent of
Initial HELOCs by
Number of Statistical Calculation Statistical Calculation
Documentation Initial HELOCs Date Balance Date Balance
- ------------- -------------- --------------------- -----------------------
Standard................................. 5,441 $144,413,783.73 84.86%
Family First Direct...................... 409 7,837,606.19 4.61
No Income No Appraisal................... 471 6,585,386.86 3.87
Select................................... 132 5,590,335.15 3.28
No Income Verification................... 151 2,666,674.24 1.57
Alternative.............................. 43 1,106,026.62 0.65
Streamline............................... 21 856,652.14 0.50
Super Express............................ 58 777,933.51 0.46
Express.................................. 13 315,584.00 0.19
Quick.................................... 2 28,500.00 0.02
----- --------------- ------
Total............................. 6,741 $170,178,482.44 100.00%
===== =============== ======
Initial HELs
The Initial HELs were originated or acquired by the Seller generally in
accordance with the underwriting standards of the Seller. The Initial HELs are
fixed rate, closed-end home equity loans evidenced by the related promissory
notes (the "Mortgage Notes") and secured by the related mortgages or deeds of
trusts (with respect to HELOCs and HELs, the "Mortgages") on the related
residential properties (with respect to HELOCs and HELs, the "Mortgaged
Properties"). Approximately 98.73% of the Initial HELs (by aggregate Statistical
Calculation Date Balance) are secured by second mortgages or deeds of trust and
the remainder are secured by first mortgages or deeds of trust. The Mortgaged
Properties securing the Initial HELs consist primarily of residential
properties. As to 100.00% of the Initial HELs, the borrower represented at the
time of origination that the related Mortgaged Property would be owner occupied
as a primary or second home.
All percentages of the Initial HELs described herein are approximate
percentages determined (except as otherwise indicated) by the aggregate
Statistical Calculation Date Balance of the Initial HELs. The Initial HELs are
all part of Loan Group IV.
The Statistical Calculation Date Balance of the Initial HELs is
$57,647,152.43. As of the Statistical Calculation Date, no Initial HEL is 30
days or more delinquent. With respect to the Initial HELs, the average
Statistical Calculation Date Balance is approximately $26,191.35, the minimum
Statistical Calculation Date Balance is $2,038.11, the maximum Statistical
Calculation Date Balance is $100,000.00, the lowest Loan Rate and the highest
Loan Rate on the Statistical Calculation Date are 5.700% and 17.990% per annum,
respectively, and the weighted average Loan Rate on the Statistical Calculation
Date is approximately 10.494% per annum. The minimum and maximum Combined
Loan-to-Value Ratios as of the Statistical Calculation Date are 7.00% and
100.00% respectively, and the weighted average Combined Loan-to-Value Ratio
based on the Statistical Calculation Date Balance of the Initial HELs is
approximately 79.53 % as of the Statistical Calculation Date. The latest
scheduled maturity of any Initial HEL is October 1, 2029. With respect to 46.67%
and 4.67% of the Initial HELs, the related Mortgaged Properties are located in
the States of California and Michigan, respectively.
S-33
Loan Terms of the HELs
The Loan Rate of each Initial HEL is the per annum interest rate required
to be paid by the Mortgagor under the terms of the related Mortgage Note. The
Loan Rate borne by each Initial HEL is fixed as of the date of origination of
such Initial HEL.
Interest on each HEL is charged on that part of the principal which has
not been paid. Interest is charged from the date the loan is advanced until the
full amount of the principal has been paid. Interest on each HEL is calculated
on a daily basis. The amount of the daily interest is equal to the annual
interest rate divided by the number of days in the year times the outstanding
principal balance.
Each Initial HEL had a term to maturity from the date of origination of
not more than 360 months. The Initial HELs provide for substantially equal
payments in an amount sufficient to amortize the HELs over their terms.
Initial HEL Characteristics
Set forth below is a description of certain additional characteristics of
the Initial HELs as of the Statistical Calculation Date. Unless otherwise
specified, all principal balances of the Initial HELs are as of the Statistical
Calculation Date and are rounded to the nearest dollar. All percentages are
approximate percentages by aggregate principal balance as of the Statistical
Calculation Date (except as indicated otherwise).
PROPERTY TYPE
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
Property Type Initial HELs Date Balance Date Balance
- ------------- ------------ -------------- -----------------------
Single-Family Dwelling................... 1,913 $50,207,143.29 87.09%
Condominium.............................. 146 3,480,518.59 6.04
PUD...................................... 114 3,242,142.81 5.62
Two-Family............................... 24 612,736.90 1.06
Manufactured............................. 4 104,610.84 0.18
----- -------------- ------
Total............................. 2,201 $57,647,152.43 100.00%
===== ============== ======
S-34
OCCUPANCY TYPES
Percent of
Statistical Initial HELs by
Occupancy Number of Calculation Statistical Calculation
(as indicated by Borrower) Initial HELs Date Balance Date Balance
- -------------------------- ------------ -------------- -----------------------
Owner..................................... 2,187 $57,278,211.51 99.36%
Second Home............................... 14 368,940.92 0.64
----- -------------- ------
Total.............................. 2,201 $57,647,152.43 100.00%
===== ============== ======
PRINCIPAL BALANCES
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
Range of Principal Balances ($) Initial HELs Date Balance Date Balance
- ------------------------------- ------------ -------------- -----------------------
$0.00 to $25,000.00........ 1,273 $21,073,845.08 36.56%
$25,000.01 to $50,000.00........ 816 28,792,819.26 49.95
$50,000.01 to $75,000.00........ 76 4,585,579.58 7.95
$75,000.01 to $100,000.00........ 36 3,194,908.51 5.54
----- -------------- ------
Total................. 2,201 $57,647,152.43 100.00%
===== ============== ======
The average Principal Balance as of the Statistical Calculation Date is
approximately $26,191.35.
COMBINED LOAN-TO-VALUE RATIOS
Statistical Percent of
Calculation Initial HELs by
Range of Combined Number of Date Statistical Calculation
Loan-to-Value Ratios(%) Initial HELs Balance Date Balance
- ----------------------- ------------ ------------- -----------------------
0.001% to 50.000%............ 130 $ 2,847,404.13 4.94%
50.001% to 60.000%............ 91 2,220,655.92 3.85
60.001% to 70.000%............ 208 5,875,673.61 10.19
70.001% to 80.000%............ 628 16,595,509.98 28.79
80.001% to 90.000%............ 927 23,433,224.79 40.65
90.001% to 100.000%............ 217 6,674,684.00 11.58
----- -------------- ------
Total.................... 2,201 $57,647,152.43 100.00%
===== ============== ======
The minimum and maximum Combined Loan-to-Value Ratios of the Initial
HELs as of the Statistical Calculation Date are approximately 7.00% and
100.00%, respectively, and the weighted average Combined Loan-to-Value
Ratio of the Initial HELs as of the Statistical Calculation Date is
approximately 79.53%.
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GEOGRAPHICAL DISTRIBUTIONS
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
State Initial HELs Date Balance Date Balance
- ----- ------------ -------------- -----------------------
California............................... 909 $26,902,932.58 46.67%
Michigan................................. 112 2,690,157.43 4.67
New York................................. 69 1,997,288.49 3.46
Massachusetts............................ 76 1,991,480.56 3.45
Florida.................................. 84 1,730,764.07 3.00
Illinois................................. 65 1,648,830.04 2.86
Washington............................... 66 1,557,421.00 2.70
New Jersey............................... 64 1,509,594.06 2.62
Other(1)................................. 756 17,618,684.20 30.56
----- -------------- ------
Total.......................... 2,201 $57,647,152.43 100.00%
===== ============== ======
(1) Other includes states and the District of Columbia with under 2.5%
concentrations individually.
JUNIOR RATIOS(1)(2)
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
Range of Junior Ratios (%) Initial HELs Date Balance Date Balance
- -------------------------- ------------ --------------- -----------------------
0.00% to 9.99%................. 265 $ 4,072,021.20 7.06%
10.00% to 19.99%................. 1,169 27,797,618.08 48.22
20.00% to 29.99%................. 478 15,269,294.24 26.49
30.00% to 39.99%................. 174 5,906,686.51 10.25
40.00% to 49.99%................. 58 2,503,770.86 4.34
50.00% to 59.99%................. 27 1,150,902.78 2.00
60.00% to 69.99%................. 10 277,038.69 0.48
70.00% to 79.99%................. 9 374,715.55 0.65
80.00% to 89.99%................. 6 156,353.55 0.27
90.00% to 99.99%................. 5 138,750.97 0.24
----- -------------- ------
Total..................... 2,201 $57,647,152.43 100.00%
===== ============== ======
(1) The Junior Ratio of a HEL is the ratio (expressed as a
percentage) of the credit limit of such HEL to the sum of such credit
limit and the outstanding balance of any senior mortgage computed as of
the date such HEL is underwritten.
(2) The weighted average Junior Ratio of the Initial HELs as of the
Statistical Calculation Date is 22.00%.
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LOAN RATES
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
Range of Loan Rates(%) Initial HELs Date Balance Date Balance
- ---------------------- ------------ -------------- -----------------------
5.001% to 8.000%............. 41 $ 395,121.60 0.69%
8.001% to 9.000%............. 70 2,066,716.09 3.59
9.001% to 10.000%............. 895 23,571,585.56 40.89
10.001% to 11.000%............. 767 19,771,225.42 34.30
11.001% to 12.000%............. 266 7,020,230.47 12.18
12.001% to 13.000%............. 75 2,496,390.95 4.33
13.001% to 14.000%............. 1 25,000.00 0.04
14.001% to 15.000%............. 30 821,247.92 1.42
15.001% to 16.000%............. 55 1,455,684.23 2.53
17.001% to 18.000%............. 1 23,950.19 0.04
----- -------------- ------
Total.................. 2,201 $57,647,152.43 100.00%
===== ============== ======
The weighted average Loan Rate as of the Statistical Calculation
Date is approximately 10.494%.
MONTHS REMAINING TO SCHEDULED MATURITY
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
Range of Months Initial HELs Date Balance Date Balance
- --------------- ------------ --------------- -----------------------
0 to 60....................... 241 $ 4,002,800.85 6.94%
61 to 120....................... 606 13,238,762.56 22.97
121 to 180....................... 1,199 35,519,985.60 61.62
181 to 240....................... 34 1,149,219.02 1.99
241 to 300....................... 97 2,917,669.77 5.06
301 or greater.................... 24 818,714.63 1.42
----- -------------- ------
Total.................... 2,201 $57,647,152.43 100.00%
===== ============== ======
The weighted average months remaining to scheduled maturity as of
the Statistical Calculation Date is approximately 165 months.
S-37
LIEN PRIORITY
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
Lien Position Initial HELs Date Balance Date Balance
- ------------- ------------ -------------- -----------------------
First................................. 23 $ 734,482.61 1.27%
Second................................ 2,178 56,912,669.82 98.73
----- -------------- ------
Total......................... 2,201 $57,647,152.43 100.00%
===== ============== ======
ORIGINATION YEAR
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
Origination Year Initial HELs Date Balance Date Balance
- ---------------- ------------ --------------- -----------------------
1996................................... 1 $ 17,926.50 0.03%
1997................................... 3 52,782.08 0.09
1998................................... 45 1,096,055.01 1.90
1999................................... 2,152 56,480,388.84 97.98
----- -------------- ------
Total.......................... 2,201 $57,647,152.43 100.00%
===== ============== ======
DEBT-TO-INCOME RATIOS
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
Range of Debt-to-Income Ratios (%) Initial HELs Date Balance Date Balance
- ---------------------------------- ------------ -------------- -----------------------
0.00% to 9.99%.................. 9 $ 326,420.55 0.57%
10.00% to 19.99%.................. 51 1,183,860.65 2.05
20.00% to 29.99%.................. 407 9,587,787.60 16.63
30.00% to 39.99%.................. 722 18,332,517.19 31.80
40.00% to 49.99%.................. 867 24,374,556.54 42.28
50.00% to 59.99%.................. 113 3,085,820.91 5.35
60.00% to 69.99%.................. 15 375,997.20 0.65
70.00% to 79.99%.................. 15 310,931.76 0.54
80.00% to 89.99%.................. 2 69,260.03 0.12
----- -------------- ------
Total.................... 2,201 $57,647,152.43 100.00%
===== ============== ======
S-38
DOCUMENTATION TYPE
Percent of
Statistical Initial HELs by
Number of Calculation Statistical Calculation
Documentation Initial HELs Date Balance Date Balance
- ------------------------------------------ ------------------ ----------------------- ------------------------
Standard.................................. 1,346 $37,509,893.53 65.07%
No Income No Appraisal.................... 511 11,729,212.56 20.35
No Income Verification.................... 161 4,072,646.05 7.06
Family First Direct....................... 124 2,729,772.86 4.74
Super Express............................. 36 800,899.37 1.39
Select.................................... 9 422,546.20 0.73
Streamline................................ 5 186,300.46 0.32
Express................................... 6 141,338.29 0.25
Alternative............................... 3 54,543.11 0.09
----- -------------- ------
Total........................... 2,201 $57,647,152.43 100.00%
===== ============== ======
The information set forth in the preceding sections is based upon
information provided by the Seller and tabulated by the Depositor. The Depositor
makes no representation as to the accuracy or completeness of such information.
Conveyance of Subsequent Mortgage Loans, the Pre-Funding Account and the Funding
Account
The Purchase Agreement permits the Issuer to acquire Subsequent Mortgage
Loans. Accordingly, the statistical characteristics of the entire pool of
Mortgage Loans upon the acquisition of the Subsequent Mortgage Loans may vary
somewhat from the statistical characteristics of the Initial Mortgage Loans as
of the Statistical Calculation Date as presented in this Prospectus Supplement.
During the Revolving Period for the Floating Rate Term Notes, it is expected
that Subsequent Mortgage Loans acquired with amounts withdrawn from the Funding
Account will consist primarily of HELOCs and be included in Loan Groups I, II
and/or III.
Each Subsequent Mortgage Loan will have been underwritten substantially in
accordance with the criteria set forth herein under "Description of the Mortgage
Loans--Underwriting Standards." Subsequent Mortgage Loans will be transferred to
the Issuer pursuant to subsequent transfer instruments (the "Subsequent Transfer
Agreements") between the Seller and the Issuer. In connection with the purchase
of Subsequent Mortgage Loans on such dates of transfer (the "Subsequent Transfer
Dates"), the Issuer will be required to pay to the Seller from amounts on
deposit in the Pre-Funding Account or the Funding Account a cash purchase price
of 100% of the Principal Balance thereof. In each instance in which Subsequent
Mortgage Loans are transferred to the Trust Estate pursuant to a Subsequent
Transfer Agreement, the Issuer will designate a cut-off date (such cut-off date,
the "Subsequent Cut-Off Date") with respect to the Subsequent Mortgage Loans
acquired on such date. The amount paid from the Pre-Funding Account or Funding
Account, as applicable, on each Subsequent Transfer Date will not include
accrued interest on the Subsequent Mortgage Loans. Following each Subsequent
Transfer Date, the aggregate Principal Balance of the Mortgage Loans will
increase by an amount equal to the aggregate Principal Balance of the Subsequent
Mortgage Loans so acquired and the amount in the Pre-Funding Account or Funding
Account, as applicable, will decrease accordingly.
Any conveyance of Subsequent Mortgage Loans on a Subsequent Transfer Date
is subject to certain conditions including, but not limited to: (a) each such
Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Agreement and the Purchase
Agreement; (b) the Seller will select such Subsequent Mortgage Loans in a manner
that it reasonably believes is not adverse to the interests of the holders of
the Term Notes (the "Term Noteholders") or the holders of the Variable Funding
Notes (together with the Term Noteholders, the "Noteholders") or the Enhancer;
(c) the Seller will deliver certain opinions of
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counsel acceptable to the Enhancer and the Indenture Trustee with respect to the
validity of the conveyance of such Subsequent Mortgage Loans; and (d) as of each
Subsequent Cut-Off Date, each Subsequent Mortgage Loan will satisfy the
following criteria: (i) such Subsequent Mortgage Loan may not be 30 or more days
contractually delinquent as of the related Subsequent Cut-Off Date; (ii) the
original stated term to maturity of such Subsequent Mortgage Loan will not
exceed 360 months; (iii) the lien securing any such Subsequent Mortgage Loan
must be a first or second lien priority; (iv) such Subsequent Mortgage Loan must
have an outstanding Principal Balance of at least $1,000 and no more than
$511,000 as of the Subsequent Cut-Off Date; (v) such Subsequent Mortgage Loan
will be underwritten substantially in accordance with the criteria set forth
under "Description of the Mortgage Loans--Underwriting Standards" herein; (vi)
such Subsequent Mortgage Loan must have a Combined-Loan-to-Value Ratio at
origination of no more than 100%; (vii) such Subsequent Mortgage Loan shall not
provide for negative amortization; and (viii) following the purchase of such
Subsequent Mortgage Loan by the Issuer, the Mortgage Loans included in the
assets of the Issuer (the "Trust Estate") must have a weighted average Loan
Rate, a weighted average remaining term to maturity and a weighted average
Combined Loan-to-Value Ratio at origination, as of each respective Subsequent
Cut-Off Date, which would not vary materially from the Initial Mortgage Loans
included initially in the Trust Estate. In addition, the Indenture Trustee will
not agree to any transfer of Subsequent Mortgage Loans without the approval of
the Enhancer, which approval shall not be unreasonably withheld; provided,
however that the Enhancer will provide notice of approval or disapproval within
5 Business Days or such Subsequent Mortgage Loans will be deemed approved by the
Enhancer. Subsequent Mortgage Loans with characteristics materially varying from
those set forth above may be purchased by the Issuer and included in the Trust
Estate with the approval of the Enhancer; provided, however, that the addition
of such Subsequent Mortgage Loans will not materially affect the aggregate
characteristics of the entire pool of Mortgage Loans.
The Pre-Funding Account. The Indenture Trustee will establish an account
in its name designated the "pre-funding account" (the "Pre-Funding Account"),
and approximately $77,174,365.13 (the "Original Pre-Funded Amount") will be
deposited therein on the Closing Date from the net proceeds of the sale of the
Securities. Approximately $59,821,517.56 of the Original Pre-Funded Amount will
be allocated to purchasing HELOCs and $17,352,847.57 will be allocated to
purchasing HELs. Monies in the Pre-Funding Account will be applied during the
period from the Closing Date to the earliest of: (i) the date on which the
amount on deposit in the Pre-Funding Account is less than $100,000; (ii) April
30, 2000 or (iii) the occurrence of a Rapid Amortization Event (the "Pre-Funding
Period") to purchase Subsequent Mortgage Loans from the Seller. The Pre-Funding
Account will be part of the Trust Estate, but monies on deposit therein will not
be available to cover losses on or in respect of the Mortgage Loans. Any portion
of the Original Pre-Funded Amount remaining on deposit in the Pre-Funding
Account at the end of the Pre-Funding Period will be applied first to acquire
any additional draws under the HELOCs (the "Additional Balances") and thereafter
will be deposited into the Funding Account. Monies on deposit in the Pre-Funding
Account may be invested in Permitted Investments as provided in the Servicing
Agreement. Net income on investment of funds in the Pre-Funding Account will be
deposited into or credited to an account held by the Indenture Trustee
designated the "capitalized interest account" (the "Capitalized Interest
Account"). There can be no assurance that a sufficient number of Subsequent
Mortgage Loans will be available for application of the entire Original
Pre-Funded Amount.
The Funding Account. The Notes will be subject to redemption in part on
the Payment Date immediately succeeding the date on which the Revolving Period
for the Floating Rate Term Notes ends, in the event that any amounts remain on
deposit in the Funding Account, exclusive of any investment earnings thereon,
after giving effect to the purchase by the Issuer of all Subsequent Mortgage
Loans and Additional Balances, including any such purchase on the date on which
the Revolving Period for the Floating Rate Term Notes ends.
Non-Recordation of Assignments
Subject to the consent of the Enhancer, the Seller will not be required to
record assignments of the Mortgages to the Indenture Trustee in the real
property records of the states in which the related Mortgaged Properties are
located. The Seller will retain record title to such Mortgages on behalf of the
Indenture Trustee and the Securityholders. Although the recordation of the
assignments of the Mortgages in favor of the Indenture Trustee is not necessary
to effect a transfer of the Mortgage Loans to the Indenture Trustee, if the
Seller were to sell, assign, satisfy or discharge any Mortgage 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
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Trustee. In some states, in the absence of such recordation of the assignments
of the Mortgages, the transfer to the Indenture Trustee of the Mortgage Loans
may not be effective against certain creditors or purchasers from the Seller or
a trustee in bankruptcy thereof. If such other parties, creditors or purchasers
have rights to the Mortgage Loans that are superior to those of the Indenture
Trustee, Securityholders could lose the right to future payments of principal
and interest to the extent that such rights are not otherwise enforceable in
favor of the Indenture Trustee under the applicable Mortgage Documents.
Amendments to Mortgage Documents
Subject to applicable law, the Servicer may change the terms of the
Mortgage Documents at any time, provided that such changes (i) do not adversely
affect the interests of the Securityholders or the Enhancer and (ii) are
consistent with prudent business practice. In addition, the Servicing Agreement
will permit the Servicer, with certain limitations described therein, to
increase the credit limit or reduce the margin of a HELOC and to reduce the Loan
Rate on a HEL.
Optional Removal of Mortgage Loans
In certain instances in which a Mortgagor either (i) requests an increase
in the credit limit on the related HELOC above the limit stated on the Credit
Line Agreement, (ii) requests to place a lien on the related Mortgaged Property
senior to the lien of the related Mortgage Loan, or (iii) refinances the senior
lien resulting in a Combined Loan-to-Value Ratio above the previous Combined
Loan-to-Value Ratio for such loan, the Servicer will have the option to purchase
from the Trust Estate the related Mortgage Loan at a price equal to the
Repurchase Price (as defined herein).
Underwriting Standards
All of the Mortgage Loans will be acquired by the Depositor from the
Seller. The following is a brief description of the various underwriting
standards and procedures applicable to the Mortgage Loans.
The Seller's underwriting standards with respect to the Mortgage Loans
generally will conform to those published in the GMACM Underwriting Guidelines
(as modified from time to time, the "GMACM Underwriting Guide"), including the
provisions of the GMACM Underwriting Guide applicable to the GMAC Mortgage Home
Equity Program. The underwriting standards as set forth in the GMACM
Underwriting Guide are continually revised based on prevailing conditions in the
residential mortgage market and the market for mortgage securities.
The underwriting standards set forth in the GMACM Underwriting Guide with
respect to Mortgage Loans originated or acquired under the GMAC Mortgage Home
Equity Program provide for varying levels of documentation. For standard
documented loans, a prospective borrower is required to fill out a detailed
application providing pertinent credit information, including tax returns if
they are self-employed or received income from dividends and interest, rental
properties or other income which can be verified via tax returns, and a credit
report is obtained. In addition, a borrower may demonstrate income and
employment directly by providing alternative documentation in the form of a pay
stub and a W-2. These loans require drive-by appraisals for property values of
$500,000 or less, and full appraisals for property values of more than $500,000
and for all three and four unit properties.
Under the GMACM Underwriting Guide, loans may also be originated under the
"Quick Program," a no income verification program for self-employed borrowers.
For such loans, only a credit check and an appraisal are required. Such loans
are generally limited to a loan amount of $50,000 or less, and are limited to
primary residences. In addition, the borrower may be qualified under a "No
Income/No Appraisal" program. Under such a program, a credit check is required,
and the Combined Loan-to-Value Ratio is limited to 80%, or 90% in the case of GM
and GM subsidiary employees under the "Family First Direct" program. The
borrower is qualified on his or her stated income in the application, the
Combined Loan-to-Value Ratio is based on the borrower's stated value of the
property and no appraisal is made, except that with respect to Combined
Loan-to-Value Ratios over 80% under the "Family First Direct" program, the
borrower must supply evidence of value. The maximum loan under such program is
generally limited to $40,000 ($250,000 under the "Family First Direct" program).
In addition, the
S-41
borrower may be qualified under a "No Income Verification" program. Under such
program, a credit check is required, and the Combined Loan-to-Value Ratio is
limited to 90%. The borrower is qualified based on the income stated on the
application. Such loans are generally limited to an amount of $100,000 or less,
and are limited to primary residences. These loans require drive-by appraisals
for property values of $500,000 or less, and full appraisals for property values
of more than $500,000.
In addition, the GMACM Underwriting Guide provides for loans under its
"Select" program to employees and retirees of GM. Such loans are made to
executives of GM or affiliates of GM, dealer principals and general managers
with a minimum annual base salary of $75,000 or to GM or GM affiliate retirees
with a minimum base retirement annual income of $60,000. Underwriting is subject
to a maximum Combined Loan-to-Value Ratio of 100% for primary residences and a
maximum Combined Loan-to-Value Ratio of 80% for second homes, and a maximum loan
amount of $250,000. The Combined Loan-to-Value Ratio is based on the borrower's
stated value and no appraisal is made for Combined Loan-to-Value Ratios of 80%
or less. The borrower must supply evidence of value when the property value is
under $500,000 and the Combined Loan-to-Value Ratio is between 80% and 90%. A
drive-by appraisal is required for a Combined Loan-to-Value of Ratio greater
than 90% and a property value under $500,000. A full appraisal is required for a
Combined Loan-to-Value Ratio greater than 90% with property values of $500,000
and above.
The HELOCs included in the Mortgage Pool generally were originated subject
to a maximum Combined Loan-to-Value Ratio of 100.00%, and the HELs included in
the Mortgage Pool generally were originated subject to a maximum Combined
Loan-to-Value Ratio of 100.00%. Additionally, loans were generally originated
with a maximum total monthly debt to income ratio of 45%, although variances are
permitted based on compensating factors. There can be no assurance that the
Combined Loan-to-Value Ratio or the debt to income ratio for any Mortgage Loans
will not increase from the levels established at origination.
The underwriting standards set forth in the GMACM Underwriting Guide with
respect to Mortgage Loans originated under the GMACM Home Equity Program may be
varied in appropriate cases. There can be no assurance that every Mortgage Loan
was originated in conformity with the applicable underwriting standards in all
material respects, or that the quality or performance of the Mortgage Loans will
be equivalent under all circumstances.
GMAC Mortgage's underwriting standards include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the application
of such underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a Mortgage Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Mortgage Loan may be considered to
comply with a set of underwriting standards, even if one or more specific
criteria included in such underwriting standards were not satisfied, if other
factors compensated for the criteria that were not satisfied or if the Mortgage
Loan is considered to be in substantial compliance with the underwriting
standards.
Conformity with the applicable underwriting standards will vary depending
on a number of factors relating to the specific Mortgage Loan, including the
principal amount or Credit Limit, the Combined Loan-to-Value Ratio, the loan
type or loan program, and the applicable credit score of the related borrower
used in connection with the origination of the Mortgage Loan (as determined
based on a credit scoring model acceptable to the Seller). Credit scores are not
used to deny loans. However, credit scores are used as a "tool" to analyze a
borrower's credit. Generally, such credit scoring models provide a means for
evaluating the information about a prospective borrower that is available from a
credit reporting agency. The underwriting criteria applicable to any program
under which the Mortgage Loans may be originated may provide that qualification
for the loan, the level of review of the loan's documentation, or the
availability of certain loan features (such as maximum loan amount, maximum
Combined Loan-to-Value Ratio, property type and use, and documentation level)
may depend on the borrower's credit score.
The following is a brief description of the underwriting standards under
the GMACM Home Equity Program for standard documentation loan programs.
Initially, a prospective borrower (other than a trust if the trust is the
borrower) is required to fill out a detailed application providing pertinent
credit information. As part of the application, the borrower is required to
provide a statement of income and expenses, as well as an authorization to apply
for a credit report which summarizes the borrower's credit history with
merchants and lenders and any record of bankruptcy. The borrower generally must
show, among other things, a minimum of one year credit history
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reported on the credit report and that no mortgage delinquencies (thirty days or
greater) in the past 12 months existed. Borrowers who have less than a 12 month
first mortgage payment history may be subject to certain additional lending
restrictions. In addition, under the GMACM Home Equity Program, generally
borrowers with a previous foreclosure or bankruptcy within the past five years
may not be allowed and a borrower generally must satisfy all judgments, liens
and other legal actions with an original amount of $1,000 or greater prior to
closing. Borrowers with a previous foreclosure or bankruptcy generally do not
qualify for a loan unless extenuating credit circumstances beyond their control
are documented. In addition, an income verification is obtained. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has
accounts. In the case of a Mortgage Loan secured by a property owned by a trust,
the foregoing procedures may be waived where the Credit Line Agreement is
executed on behalf of the trust.
An appraisal may be made of the Mortgaged Property securing each Mortgage
Loan. Such appraisals may be either a full appraisal, a drive-by appraisal or a
statistical property evaluation. Such appraisals may be performed by appraisers
independent from or affiliated with the GMAC Mortgage or their affiliates. Such
appraisals, however, will not establish that the Mortgaged Properties provide
assurance of repayment of the Mortgage Loans. See "Risk Factors-The Mortgage
Properties might not be Adequate Security for the Mortgage Loans" herein. If a
full appraisal is required, the appraiser may be required to inspect the
property and verify that it is in good condition and that construction, if new,
has been completed. If a drive-by appraisal is required, the appraiser is only
required to perform an exterior inspection of the property. The appraisal is
based on various factors, including the market value of comparable homes and the
cost of replacing the improvements. In certain circumstances on or after
September 1, 1999, a statistical property evaluation may have been completed in
lieu of a drive-by appraisal by a third-party who performs an electronic
comparison of the stated value of the mortgaged properties with comparable
properties in the area. The Seller believes that no more than 20% (by aggregate
Statistical Calculation Date Balance) of the Initial Mortgage Loans are secured
by Mortgaged Properties which may have been appraised using the statistical
property evaluation method. Each appraisal is required to be dated no more than
180 days prior to the date of approval of the Mortgage Loan; provided, that
depending on the Credit Limit an earlier appraisal may be utilized if such
appraisal was made not earlier than one year prior to the date of origination of
the mortgage loan and the related appraiser certifies that the value of the
related mortgaged property has not declined since the date of the original
appraisal or if a field review or statistical property evaluation is obtained.
Title searches are undertaken in most cases, and title insurance may be required
on all Mortgage Loans with Credit Limits in excess of $100,000.
Under the GMACM Home Equity Program, the Combined Loan-to-Value Ratio is
generally calculated by reference to the lower of the appraised value as so
determined or the sales price, if the Mortgage Loan is originated concurrently
with the origination of a first mortgage loan. In all other cases, the value
used is generally the appraised value as so determined.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations (including
debt service on any related mortgage loan secured by a senior lien on the
related Mortgaged Property). For qualification purposes the monthly payment is
based solely on the payment of interest only on the loan. The Loan Rate in
effect from the origination date of a Mortgage Loan to the first adjustment date
generally will be lower, and may be significantly lower, than the sum of the
then applicable Index and Gross Margin. The Mortgage Loans will not provide for
negative amortization. Payment of the full outstanding principal balance at
maturity may depend on the borrower's ability to obtain refinancing or to sell
the Mortgaged Property prior to the maturity of the mortgage loan, and there can
be no assurance that such refinancing will be available to the borrower or that
such a sale will be possible.
The underwriting standards set forth in the GMACM Underwriting Guide may
be varied in appropriate cases, including in "limited" or "reduced loan
documentation" mortgage loan programs. Limited documentation programs generally
permit fewer supporting documents to be obtained or waive income, appraisals,
asset and employment documentation requirements, and limited documentation
programs generally compensate for increased credit risk by placing greater
emphasis on either the review of the property to be financed or the borrower's
ability to repay the Mortgage Loan. Generally, in order to be eligible for a
reduced loan documentation program, a borrower must have a good credit history,
and other compensating factors (such as a relatively low Combined Loan-to-Value
Ratio, or
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other favorable underwriting factors) must be present and the borrower's
eligibility for such program may be determined by use of a credit scoring model.
THE SELLER AND SERVICER
General
GMAC Mortgage Corporation is the Seller and Servicer for all of the
Mortgage Loans. The Seller is an indirect wholly-owned subsidiary of General
Motors Acceptance Corporation and is one of the nation's largest mortgage
bankers. The Seller is engaged in the mortgage banking business, including the
origination, purchase, sale and servicing of residential loans.
The Notes do not represent an interest in or an obligation of the Seller
or the Servicer. The Seller's only obligations with respect to the Notes will be
pursuant to certain limited representations and warranties made by the Seller or
as otherwise provided herein.
The Seller maintains its executive and principal offices at 100 Witmer
Road, Horsham, Pennsylvania 19044. Its telephone number is (215) 682-1000.
The Servicer will be responsible for servicing the Mortgage Loans in
accordance with the its program guide and the terms of the Servicing Agreement.
The Custodian will be The Bank of Maryland.
Billing statements for HELOCs are mailed monthly by the Servicer. The
statement details the monthly activity on the related HELOC and specifies the
minimum payment due to the Servicer and the available credit line. Notice of
changes in the applicable Loan Rate are provided by the Servicer to the
Mortgagor with such statements. All payments are due by the applicable due date.
For information regarding foreclosure procedures, see "--Realization Upon
Defaulted Loans" below. Servicing and charge-off policies and collection
practices may change over time in accordance with the Servicer's business
judgment, changes in the Servicer's portfolio of real estate secured revolving
credit line loans that it services for its clients and applicable laws and
regulations, and other considerations.
Collection and Other Servicing Procedures
The Servicer will make reasonable efforts to collect all payments called
for under the Mortgage Loans and will, consistent with the Servicing Agreement,
follow such collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
Mortgage Loans. Consistent with the foregoing, the Servicer may in its
discretion waive any prepayment charge in connection with the prepayment of a
Mortgage Loan or extend the due dates for payments due on a Mortgage Loan,
provided that the insurance coverage for such Mortgage Loan or any coverage
provided by any alternative credit enhancement will not be adversely affected
thereby.
In certain instances in which a Mortgage Loan is in default (or if default
is reasonably foreseeable), and if determined by the Servicer to be in the best
interests of the Enhancer and the Noteholders, the Servicer may permit certain
modifications of the Mortgage Loan or make forbearances on the Mortgage Loan
rather than proceeding with foreclosure or repossession (if applicable). In
making such determination, the loss that might result if such Mortgage Loan were
liquidated would be taken into account. Such modifications may have the effect
of reducing the Loan Rate or extending the final maturity date of the Mortgage
Loan. Any such modified Mortgage Loan may remain in the Trust Estate, and the
reduction in collections resulting from such modification may result in reduced
distributions of interest (or other amounts) on, or may extend the final
maturity of, the Notes.
In any case in which Mortgaged Property subject to a Mortgage Loan is
being conveyed by the Mortgagor, the Servicer shall in general be obligated, to
the extent it has knowledge of such conveyance, to exercise its rights to
accelerate the maturity of such Mortgage Loan under any due-on-sale clause
applicable thereto, but only if the exercise of such rights is permitted by
applicable law and only to the extent it would not adversely affect or
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jeopardize coverage under any applicable credit enhancement arrangements. If the
Servicer is prevented from enforcing such due-on-sale clause under applicable
law or if the Servicer determines that it is reasonably likely that a legal
action would be instituted by the related Mortgagor to avoid enforcement of such
due-on-sale clause, the Servicer will enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person will become liable under the Credit Line
Agreement subject to certain specified conditions. The original Mortgagor may be
released from liability on a Mortgage Loan if the Servicer shall have determined
in good faith that such release will not adversely affect the ability to make
full and timely collections on the related Mortgage Loan. Any fee collected by
the Servicer for entering into an assumption or substitution of liability
agreement will be retained by the Servicer as additional servicing compensation.
In connection with any such assumption, the Loan Rate borne by the related
Credit Line Agreement may not be altered.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Servicer may approve such a request if it has determined,
exercising its good faith business judgment in the same manner as it would if it
were the owner of the related Mortgage Loan, that such approval will not
adversely affect the security for, and the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Servicer for processing such
request will be retained by the Servicer as additional servicing compensation.
The Servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the Servicer in connection with its activities under the
Servicing Agreement. The Servicer may be subject to certain restrictions under
the Servicing Agreement with respect to the refinancing of a lien senior to a
Mortgage Loan secured by a lien on the related Mortgaged Property.
Realization Upon Defaulted Loans
With respect to a Mortgage Loan secured by a lien on a Mortgaged Property
in default, the Servicer will decide whether to foreclose upon the Mortgaged
Property or with respect to any such Mortgage Loan, write off the principal
balance of the Mortgage Loan as a bad debt or take an unsecured note. In
connection with such decision, the Servicer will, following usual practices in
connection with senior and junior mortgage servicing activities or repossession
and resale activities, estimate the proceeds expected to be received and the
expenses expected to be incurred in connection with such foreclosure or
repossession and resale to determine whether a foreclosure proceeding or a
repossession and resale is appropriate. To the extent that a Mortgage Loan
secured by a lien on a Mortgaged Property is junior to another lien on the
related Mortgaged Property, following any default thereon, unless foreclosure
proceeds for such Mortgage Loan are expected to at least satisfy the related
senior mortgage loan in full and to pay foreclosure costs, it is likely that
such Mortgage Loan will be written off as bad debt with no foreclosure
proceeding. See "Risk Factors-- The mortgaged properties might not be adequate
security for the mortgage loans" in this Prospectus Supplement. In the event
that title to any Mortgaged Property is acquired in foreclosure or by deed in
lieu of foreclosure, the deed or certificate of sale will be issued to the
Indenture Trustee or to its nominee on behalf of Noteholders. Notwithstanding
any such acquisition of title and cancellation of the related Mortgage Loan,
such Mortgage Loan secured by a lien on a Mortgaged Property (an "REO Loan")
will be considered for most purposes to be an outstanding Mortgage Loan held in
the Trust Estate until such time as the Mortgaged Property is sold and all
recoverable Liquidation Proceeds and Insurance Proceeds have been received with
respect to such defaulted Mortgage Loan (a "Liquidated Loan"). Any income (net
of expenses and fees and other than gains described below) received by the
Servicer on such Mortgaged Property, prior to its disposition will be deposited
in the Custodial Account upon receipt and will be available at such time for
making payments to Noteholders.
With respect to a Mortgage Loan secured by a lien on a Mortgaged Property
in default, the Servicer may pursue foreclosure (or similar remedies) subject to
any senior lien positions and certain other restrictions pertaining to junior
loans concurrently with pursuing any remedy for a breach of a representation and
warranty made by the Seller. However, the Servicer is not required to continue
to pursue both such remedies if it determines that one such remedy is more
likely to result in a greater recovery. Upon the first to occur of final
liquidation and a repurchase or substitution pursuant to a breach of a
representation and warranty, such Mortgage Loan will be removed from the Trust
Estate. The Servicer may elect to treat a defaulted Mortgage Loan as having been
finally liquidated if substantially all amounts expected to be received in
connection therewith have been received. Any additional
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liquidation expenses relating to such Mortgage Loan thereafter incurred will be
reimbursable to the Servicer from any amounts otherwise payable to the
Noteholders, or may be offset by any subsequent recovery related to such
Mortgage Loan. Alternatively, for purposes of determining the amount of related
Liquidation Proceeds to be paid to Noteholders, the amount of any loss or the
amount required to be drawn under any applicable form of credit enhancement, the
Servicer may take into account minimal amounts of additional receipts expected
to be received, as well as estimated additional liquidation expenses expected to
be incurred in connection with such defaulted Mortgage Loan.
The Servicer has the option to purchase from the Trust Estate any
defaulted Mortgage Loan after 60 days at the Repurchase Price. If a defaulted
Mortgage Loan or REO Loan is not so removed from the Trust Estate, then, upon
the final liquidation thereof, if a loss is realized which is not covered by any
applicable form of credit enhancement or other insurance, the Noteholders will
bear such loss. However, if a gain results from the final liquidation of an REO
Loan which is not required by law to be remitted to the related Mortgagor, the
Servicer will be entitled to retain such gain as additional servicing
compensation.
Delinquency and Loss Experience of the Servicer's Portfolio
The following tables summarize the delinquency and loss experience for all
home equity lines of credit loans originated by the Seller. The data presented
in the following tables is for illustrative purposes only, and there is no
assurance that the delinquency and loss experience of the Mortgage Loans will be
similar to that set forth below.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the Servicer's HELOC loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of such HELOC loans serviced for each
period would be higher than those shown if certain of such home equity loans
were artificially isolated at a point in time and the information showed the
activity only with respect to such HELOC loans.
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DELINQUENCY AND LOSS EXPERIENCE
Home Equity Loan Portfolio Delinquency Experience (1)
================================================================================================================================
At September 30, 1999 At December 31, 1998 At December 31, 1997 At December 31, 1996
$ Loans % by $ $ Loans % by $ $ Loans % by $ $ Loans % by $
------- ------ ------- ------ ------- ------ ------- ------
Number of Loans 35,864 25,494 20,159 17,321
Total Portfolio......... $788,260,590 100.00% $656,651,283 100.00% $568,400,751 100.00% $496,075,875 100.00%
Period of Delinquency...
30-59 Days........... 7,965,996 1.01% 8,640,057 1.32% 8,367,782 1.47% 7,385,849 1.49%
60-89 Days........... 1,926,233 0.24% 2,193,177 0.33% 1,165,224 0.21% 1,052,747 0.21%
90+ Days............ 3,204,109 0.41% 2,033,104 0.31% 2,396,182 0.42% 1,817,260 0.37%
Total Loans............. 13,096,338 1.66% 12,866,339 1.96% 11,929,188 2.10% 10,255,856 2.07%
Foreclosure............. 3,003,916 0.38% 3,637,492 0.55% 3,333,258 0.59% 3,255,995 0.66%
Foreclosed.............. 436,727 0.06% 573,533 0.09% 1,951,334 0.34% 1,387,670 0.28%
Total Loans in
Foreclosure............. 3,440,644 0.44% 4,211,025 0.64% 5,284,592 0.93% 4,643,665 0.94%
Total Delinquent Loans.. $16,536,982 2.10% $17,077,364 2.60% $17,213,780 3.03% $14,899,521 3.00%
======================================================================================================
Home Equity Loan Portfolio Loss and Foreclosure Experience (1)
================================================================================================================================
At September 30, 1999 At December 31, 1998 At December 31, 1997 At December 31, 1996
$ Loans % by $ $ Loans % by $ $ Loans % by $ $ Loans % by $
------- ------ ------- ------ ------- ------ ------- ------
Number of Loans 35,864 25,494 20,159 17,321
Total Portfolio.......... $788,260,590 100.00% $656,651,283 100.00% $568,400,751 100.00% $496,075,875 100.00%
Total Loans in
Foreclosure.............. 3,440,644 0.44% 4,221,025 0.64% 5,284,592 0.93% 4,643,665 0.94%
Net Chargeoffs for Period $626,546 0.08% $1,873,593 0.29% $1,332,166 0.23% $1,553,129 0.31%
=====================================================================================================
(1) Performing loans in bankruptcy are not included in delinquency statistics.
Servicing and Other Compensation and Payment of Expenses
The servicing fee for each Mortgage Loan (the "Servicing Fee") is payable
out of the interest payments on such Mortgage Loan. The weighted average
Servicing Fee as of the Cut-Off Date is approximately 0.50% per annum. The
Servicing Fee consists of (a) servicing compensation payable to the Servicer in
respect of its servicing activities and (b) other related compensation. The
Servicer is obligated to pay certain ongoing expenses associated with its
servicing activities and incurred by the Servicer in connection with its
responsibilities under the Servicing Agreement.
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THE ISSUER
The GMACM Home Equity Loan Trust 1999-2 is a business trust established
under the laws of the State of Delaware, and will be created and governed by a
trust agreement dated as of November 17, 1999 (the "Trust Agreement"), between
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") and the Owner
Trustee, for the purposes described in this Prospectus Supplement. The Trust
Agreement will constitute the "governing instrument" of the Issuer under the
laws of the State of Delaware relating to business trusts. The Issuer will not
engage in any activity other than (i) acquiring and holding the Mortgage Loans
and the other assets comprising the Trust Estate and proceeds therefrom, (ii)
issuing the Notes and the Certificates, (iii) making payments on the Notes and
the Certificates and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The Issuer's principal offices are at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890, in care of Wilmington Trust Company,
as Owner Trustee.
THE OWNER TRUSTEE
Wilmington Trust Company (the "Owner Trustee") will be the Owner Trustee
under the Trust Agreement. The Owner Trustee is a Delaware banking corporation,
and its principal offices are located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for taking any action or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement, or for errors in judgment; provided, that
none of the Owner Trustee or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed upon them by
reason of their willful malfeasance, bad faith or negligence in the performance
of their duties, or by reason of their reckless disregard of their obligations
and duties under the Trust Agreement. All persons into which the Owner Trustee
may be merged or with which it may be consolidated, or any entity resulting from
such merger or consolidation, will be the successor Owner Trustee under the
Trust Agreement.
The commercial bank or trust company serving as Owner Trustee may have
normal banking relationships with the Depositor, the Seller and/or their
respective affiliates.
The Owner Trustee may resign at any time, in which event the Indenture
Trustee will be obligated to appoint a successor owner trustee as set forth in
the Trust Agreement and the Indenture. The Indenture Trustee may also remove the
Owner Trustee if the Owner Trustee ceases to be eligible to continue as such
under the Trust Agreement or if the Owner Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Indenture Trustee will be obligated to
appoint a successor Owner Trustee after consultation with the Servicer. Any
resignation or removal of the Owner Trustee and appointment of a successor Owner
Trustee will not become effective until acceptance of the appointment by the
successor Owner Trustee.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association (the "Indenture Trustee"),
will be the Indenture Trustee under the indenture to be dated as of November 17,
1999 between the Issuer and the Indenture Trustee (the "Indenture"). The
principal offices of the Indenture Trustee are located at Norwest Center, Sixth
and Marquette, Minneapolis, Minnesota 55479-0070, with administrative offices
located at 11000 Broken Land Parkway, Columbia, Maryland 21044.
The Indenture Trustee may have normal banking relationships with the
Depositor, the Seller and/or their respective affiliates.
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The Indenture Trustee may resign at any time, in which event the Owner
Trustee will be obligated to appoint a successor indenture trustee as set forth
in the Indenture. The Owner Trustee as set forth in the Indenture may also
remove the Indenture Trustee if the Indenture Trustee ceases to be eligible to
continue as such under the Indenture or if the Indenture Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Owner Trustee will be
obligated to appoint a successor Indenture Trustee after consultation with the
Servicer. If so specified in the Indenture, the Indenture Trustee may also be
removed at any time by the Enhancer or by the holders of a majority principal
balance of the Notes. Any resignation or removal of the Indenture Trustee and
appointment of a successor Indenture Trustee will not become effective until
acceptance of the appointment by the successor Indenture Trustee.
The Indenture Trustee has undertaken a firmwide initiative to address the
year 2000 issue. The Indenture Trustee does not believe that the year 2000 issue
will materially affect its ability to perform its functions with respect to the
Issuer or have a material financial impact on the Issuer. However, there can be
no assurance of this. Further, there can be no guarantee that the systems of
third parties, on which the Indenture Trustee's systems rely, will be timely
converted or that a failure to convert by such third parties or a conversion
that is incompatible with the Indenture Trustee's systems will not have a
material adverse effect on the Issuer.
THE ENHANCER
The following information has been supplied by the Enhancer for inclusion
in this Prospectus Supplement. Accordingly, the Depositor, the Seller, the
Servicer and the Indenture Trustee do not make any representation as to the
accuracy and completeness of such information.
The Enhancer
The Enhancer is the principal operating subsidiary of MBIA Inc., a New
York Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts
of or claims against the Enhancer. The Enhancer is domiciled in the State of New
York and licensed to do business in and subject to regulation under the laws of
all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Enhancer has two European branches, one in
the Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Enhancer, changes in control and
transactions among affiliates. Additionally, the Enhancer is required to
maintain contingency reserves on its liabilities in specified amounts and for
specified periods of time.
Financial Information About the Enhancer
The consolidated financial statements of the Enhancer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1998 and
December 31, 1997 and for each of the three years in the period ended December
31, 1998, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1998, and the consolidated financial statements of the Enhancer and
its subsidiaries as of June 30, 1999 and for the six month periods ended June
30, 1999 and June 30, 1998 included in the Quarterly Report on Form 10-Q of MBIA
Inc. for the period ended June 30, 1999, are hereby incorporated by reference
into this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated by reference herein shall be
modified or superseded for purposes of this Prospectus Supplement to the extent
that a statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Enhancer and its subsidiaries included in
documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the
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date of this Prospectus Supplement and prior to the termination of the offering
of the Securities shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The tables below present selected financial information of the Enhancer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities and generally accepted accounting
principles:
Statutory Accounting Practices
---------------------------------------
December 31,1998 June 30, 1999
---------------- -------------
(Audited) (Unaudited)
(In Millions)
Admitted Assets............... $6,521 $6,807
Liabilities................... 4,231 4,468
Capital and Surplus........... 2,290 2,339
Generally Accepted Accounting
Practices
---------------------------------------
December 31, 1998 June 30, 1999
----------------- -------------
(Audited) (Unaudited)
(In Millions)
Assets...................... $7,488 $7,429
Liabilities................. 3,211 3,234
Shareholder's Equity....... 4,277 4,195
Where You Can Obtain Additional Information About the Enhancer
Copies of the financial statements of the Enhancer incorporated by
reference herein and copies of the Enhancer's 1998 year-end audited financial
statements prepared in accordance with statutory accounting practices are
available, without charge, from the Enhancer. The address of the Enhancer is 113
King Street, Armonk, New York 10504. The telephone number of the Enhancer is
(914) 273-4545.
Year 2000 Readiness Disclosure
MBIA Inc. is actively managing a high-priority Year 2000 or Y2K program.
MBIA Inc. has established an independent Y2K testing lab in its Armonk
headquarters, with a committee of business unit managers overseeing the project.
MBIA Inc. has a budget of $1.13 million for its 1998-2000 Y2K efforts.
Expenditures are proceeding as anticipated, and MBIA Inc. does not expect the
project budget to materially exceed this amount. MBIA Inc. has initiated a
comprehensive Y2K plan that includes assessment, remediation, testing and
contingency planning. This plan covers "mission-critical" internally developed
systems, vendor software, hardware and some third-party entities through which
MBIA Inc. conducts its business. Testing to date indicates that functions
critical to the financial guarantee business, both domestic and international,
were Y2K-ready as of December 31, 1998. Additional testing will continue
throughout 1999.
Financial Strength Ratings of the Insurer
Moody's Investors Service, Inc. rates the financial strength of the
Enhancer "Aaa."
Standard & Poor's Ratings Services, a division of the McGraw-Hill
Companies, Inc., rates the financial strength of the Enhancer "AAA."
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Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the financial strength of the Enhancer "AAA."
Each rating of the Enhancer should be equivalent independently. The
ratings reflect each respective rating agency's current assessment of the
creditworthiness of the Enhancer and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Notes,
and the ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the Notes. The Enhancer does
not guaranty the market price of the Notes nor does it guaranty that the ratings
on the Notes will not be revised or withdrawn.
DESCRIPTION OF THE SECURITIES
General
The Home Equity Loan-Backed Term Notes, Series 1999-2 (the "Term Notes"),
Class A-1, Class A-2, Class A-3 and Class A-4, and the Home Equity Loan-Backed
Variable Funding Notes, Series 1999-2 (the "Variable Funding Notes" and,
together with the Term Notes, the "Notes"), will be issued pursuant to the
Indenture. The Home Equity Loan-Backed Certificates, Series 1999-2 (the
"Certificates" and, together with the Notes, the "Securities"), will be issued
pursuant to the Trust Agreement. The Class A-1, Class A-2 and Class A-3 Term
Notes are also referred to as the "Floating Rate Term Notes". The following
summaries describe certain provisions of the Securities, the Indenture and the
Trust Agreement. Such summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of the
applicable agreements. Only the Term Notes are being offered hereby.
The Notes will be secured by the Trust Estate, which will be pledged by
the Issuer to the Indenture Trustee pursuant to the Indenture. The Trust Estate
will consist of, without limitation, (i) the Mortgage Loans (including all
Additional Balances and any Subsequent Mortgage Loans), (ii) all amounts on
deposit in the Custodial Account, the Note Payment Account, the Distribution
Account, the Capitalized Interest Account, the Pre-Funding Account, the Reserve
Account and the Funding Account, (iii) the Policy and (iv) all proceeds of the
foregoing.
Until the beginning of the Rapid Amortization Period for the Floating Rate
Term Notes , Additional Balances are expected to become assets of the Trust
Estate. Apart from the use of any funds in the Pre-Funding Account and/or
Funding Account as described in this Prospectus Supplement to acquire Additional
Balances, neither the Issuer nor the Indenture Trustee is obligated to fund any
Additional Balances.
The Variable Funding Notes will be issued to the Seller. The Variable
Funding Balance will be increased from time to time until the commencement of
the Rapid Amortization Period for the Floating Rate Term Notes in consideration
for Additional Balances and, in some cases, Subsequent Mortgage Loans sold to
the Issuer, if Principal Collections in respect of the related Collection Period
(and, during the Revolving Period for the Floating Rate Term Notes, funds on
deposit in the Funding Account) are insufficient or unavailable to cover the
full consideration therefor. In addition, the Seller may, at its option, sell
Subsequent Mortgage Loans to the Issuer from time to time during the Revolving
Period for the Floating Rate Term Notes. The consideration for any such sale
will be, after the application of amounts, if any, on deposit in the Funding
Account, an increase in the Variable Funding Balance. Notwithstanding any of the
foregoing, the Variable Funding Balance may not exceed $65,000,000 (the "Maximum
Variable Funding Balance"). Initially, the Variable Funding Balance will be
zero. The Variable Funding Notes generally will be entitled to receive a portion
of the collections on the HELOCs in Loan Groups I, II and/or III depending on
the Loan Group or Groups into which the Additional Balances backing the Variable
Funding Notes are added.
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Book-Entry Notes
The Term Notes will initially be issued as Book-Entry Notes. Persons
acquiring beneficial ownership interests in the Term Notes (the "Term Note
Owners") may elect to hold their Term Notes through the Depository Trust Company
("DTC") in the United States, or Cedelbank or the Euroclear System ("Euroclear")
in Europe, if they are participants of such systems ("Participants"), or
indirectly through organizations that are Participants in such systems. The
Book-Entry Notes will be issued in one or more securities that equal the
aggregate Term Note Balance of the Term Notes, and will initially be registered
in the name of Cede & Co., the nominee of DTC. Cedelbank and Euroclear will hold
omnibus positions on behalf of their Participants through customers' securities
accounts in the names of Cedelbank and Euroclear on the books of their
respective depositaries, which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Investors
may hold such beneficial interests in the Book-Entry Notes in minimum
denominations representing Term Note Balances of $25,000 and in integral
multiples of $1,000 in excess thereof. Except as described below, no Term Note
Owner will be entitled to receive a physical certificate representing such
security (each, a "Definitive Note"). Unless and until Definitive Notes are
issued, it is anticipated that the only "Holder" of the Term Notes will be Cede
& Co., as nominee of DTC. Term Note Owners will not be "Holders" or
"Noteholders" as such terms are used in the Indenture.
A Term Note Owner's ownership of a Book-Entry Note will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains such Term Note
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes will be recorded on the records of DTC (or of
a Participating firm that acts as agent for the Financial Intermediary, the
interest of which will in turn be recorded on the records of DTC, if such Term
Note Owner's Financial Intermediary is not a DTC Participant, and on the records
of Cedelbank or Euroclear, as appropriate).
Term Note Owners will receive all payments of principal of and interest on
the Term Notes from the Indenture Trustee through DTC and DTC Participants.
While the Term Notes are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "DTC Rules"), DTC is required to make book-entry
transfers among Participants on whose behalf it acts with respect to the Term
Notes and is required to receive and transmit payments of principal of and
interest on the Term Notes. Participants and Indirect Participants with which
Term Note Owners have accounts with respect to Term Notes are similarly required
to make book-entry transfers and receive and transmit such payments on behalf of
their respective Term Note Owners. Accordingly, although Term Note Owners will
not possess physical certificates, the DTC Rules provide a mechanism by which
Term Note Owners will receive payments and will be able to transfer their
interests.
Term Note Owners will not receive or be entitled to receive Definitive
Notes representing their respective interests in the Term Notes, except under
the limited circumstances described below. Unless and until Definitive Notes are
issued, Term Note Owners that are not Participants may transfer ownership of
their Term Notes only through Participants and Indirect Participants by
instructing such Participants and Indirect Participants to transfer the Term
Notes, by book-entry transfer, through DTC for the account of the purchasers of
such Term Notes, which account is maintained with the related Participants.
Under the DTC Rules and in accordance with DTC's normal procedures, transfers of
ownership of the Term Notes will be executed through DTC, and the accounts of
the respective Participants at DTC will be debited and credited. Similarly, the
Participants and Indirect Participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Term Note
Owners.
Under a book-entry format, Term Note Owners of the Book-Entry Notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Indenture Trustee to Cede & Co. Payments with respect to Term
Notes held through Cedelbank or Euroclear will be credited to the cash accounts
of Cedelbank Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the related
Depositary. Such payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a Term Note Owner to pledge
Book-Entry Notes to persons or entities that do not participate in the
Depositary system, or otherwise take actions in respect of such Book-Entry
Notes, may be limited due to the lack of physical certificates for such
Book-Entry Notes. In addition, the issuance of the Term Notes in book-entry form
may reduce
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the liquidity thereof in the secondary market, since certain potential investors
may be unwilling to purchase securities for which they cannot obtain physical
certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to the DTC accounts of which the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries the holdings of which include such Book-Entry Notes. Cedelbank or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by Term Note Owners under the Indenture on behalf of a Cedelbank
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the related Depositary to effect
such actions on its behalf through DTC.
Definitive Notes will be issued to Term Note Owners or their nominees,
rather than to DTC, if (a) the Indenture Trustee determines that the DTC is no
longer willing, qualified or able to properly discharge its responsibilities as
nominee and depository with respect to the Book-Entry Notes and the Indenture
Trustee is unable to locate a qualified successor, (b) the Indenture Trustee
elects to terminate the book-entry system through DTC or (c) after the
occurrence of an Event of Default, Term Note Owners representing Percentage
Interests aggregating at least a majority of the Term Note Balances of the Term
Notes advise DTC through the Financial Intermediaries and the DTC Participants
in writing that the continuation of the book-entry system through DTC (or a
successor thereto) is no longer in the best interests of Term Note Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all Term
Note Owners of the occurrence of such event and the availability through DTC of
Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue and authenticate Definitive
Notes, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as "Holders" and "Noteholders" under the Indenture.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Term Notes between and among
Participants of DTC, Cedelbank and Euroclear, they will be under no obligation
to perform or continue to perform such procedures, and such procedures may be
discontinued at any time. See "Risk Factors--Book-Entry Registration" and "The
Agreements--Book-Entry Securities" in the Prospectus.
Payments on the Notes
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the 25th day of each month or, if such day is not a Business Day, then
the next succeeding Business Day (each, a "Payment Date"), commencing in
December 1999. Payments on the Notes will be made to the persons in the names of
which such Notes are registered at the close of business on the day prior to
each Payment Date (or, in the case of the Term Notes, if the Term Notes are no
longer Book-Entry Notes, at the related Record Date). See "The
Agreements--Book-Entry Securities" in the Prospectus. Payments will be made by
wire transfer, check or money order mailed to the address of the person entitled
thereto (which, in the case of Book-Entry Notes, will be DTC or its nominee) as
it appears on the Note Register, in the amounts calculated as described herein
on the related Determination Date. However, the final payment in respect of the
Term Notes (if the Term Notes are no longer Book-Entry Notes ) will be made only
upon presentation and surrender thereof at the office or the agency of the
Indenture Trustee specified in the notice to Noteholders of such final payment.
A "Business Day" is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in the States of Minnesota, Pennsylvania, New York,
Maryland or Delaware are required or authorized by law or government decree to
be closed. The "Paying Agent" will initially be the Indenture Trustee.
Interest Payments on the Notes
Interest payments will be made on the Notes on each Payment Date at the
applicable Note Rate for the related Interest Period, subject to the limitations
set forth below, which may result in Interest Shortfalls. As to the Floating
Rate Term Notes, the "Interest Period" for any Payment Date will be the period
from the preceding Payment Date (or, in the case of the first Payment Date, from
the Closing Date) through the day preceding such
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Payment Date. As to the Class A-4 Term Notes, the Interest Period for any
Payment Date will be calendar month preceding the month in which such Payment
Date occurs.
As to each Class of Floating Rate Term Notes, the related "Note Rate" for
each Interest Period will be a floating rate equal to the least of: (i) LIBOR
plus a specified margin; (ii) the Net Loan Rate, as described below, and (iii)
14.0% per annum. The margins for the Class A-1, Class A-2 and Class A-3 Term
Notes will be 0.33%, 0.32% and 0.36% per annum, respectively. Notwithstanding
the foregoing, the margins on the Class A-1, Class A-2 and Class A-3 Term Notes
will increase to 0.66%, 0.64% and 0.72%, respectively, commencing on the related
Step-up Date.
As to the Class A-4 Term Notes, the Note Rate for each Interest Period
will be a fixed rate equal to 7.52% per annum. Notwithstanding the foregoing,
the Note Rate on the Class A-4 Term Notes will increase by 0.50% to 8.02% per
annum commencing on the related Step-up Date.
Further, on any Payment Date for which the related Note Rate on a Class of
Floating Rate Term Notes has been determined pursuant to clause (ii) of the
definition of Note Rate, the excess of (a) the amount of interest that would
have accrued on such Class of Floating Rate Term Notes during the related
Interest Period had such amount been determined pursuant to clause (i) of the
definition of Note Rate (but not at a rate in excess of 14.0% per annum) over
(b) the interest actually accrued on such Class of Floating Rate Term Notes
during such Interest Period (such excess, an "Interest Shortfall") will accrue
interest at the related Note Rate (as adjusted from time to time) and will be
paid on subsequent Payment Dates to the extent funds are available therefor.
Interest Shortfalls will not be covered by the Policy and may remain unpaid on
the final Payment Date in November 2029 (the "Final Payment Date").
The "Net Loan Rate" will be, with respect to any Payment Date and Loan
Group I, II or III, the weighted average of the Loan Rates of the Mortgage Loans
in each such Loan Group as of the first day of the calendar month in which the
related Interest Period begins, net of the premium rate on the Policy, the rate
of the monthly fee for the Limited Reimbursement Agreement, the rate of the fee
of the Servicer and, beginning on the thirteenth Payment Date, 0.50% (50 basis
points), adjusted to an effective rate reflecting interest calculated on the
basis of a 360-day year assumed to consist of twelve 30-day months.
As to any Class of Term Notes, the related "Step-up Date" will be the
first Payment Date on which the aggregate Note Balance of such Class of Term
Notes is less than 10% of the initial aggregate Note Balance of such Class.
Interest on each Class of Floating Rate Term Notes in respect of any
Payment Date will accrue during the related Interest Period on the basis of the
actual number of days in such Interest Period and a 360-day year. Interest on
the Class A-4 Term Notes in respect of any Payment Date will accrue during the
related Interest Period on the basis of a 30-day calendar month and a 360-day
year. Interest payments on each Class of Term Notes will be funded from Interest
Collections on the Mortgage Loans in the related Loan Group and, if necessary,
from draws on the Policy.
All interest payments on the Notes in respect of any Payment Date will be
allocated to the Term Notes and the Variable Funding Notes pro rata based on
their respective interest accruals. The interest rate on the Variable Funding
Notes for any Payment Date will not significantly exceed the Note Rates on the
Floating Rate Term Notes for the related Interest Period.
On each Payment Date, LIBOR will be established by the Indenture Trustee.
As to any Interest Period, "LIBOR" will equal, for any Interest Period other
than the first Interest Period, the rate for United States dollar deposits for
one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m.,
London, England time, on the second LIBOR Business Day prior to the first day of
such Interest Period. With respect to the first Interest Period, LIBOR will
equal the rate for United States dollar deposits for one month that appears on
the Telerate Screen Page 3750 as of 11:00 a.m., London, England time, two LIBOR
Business Days prior to the Closing Date. If such rate does not appear on such
page (or such other page as may replace such page on such service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be reasonably selected by the Indenture Trustee after
consultation with the Servicer and the Enhancer), the rate will be the
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Reference Bank Rate. If no such quotations can be obtained and no Reference Bank
Rate is available, LIBOR will be LIBOR applicable to the preceding Payment Date.
"Telerate Page 3750" means the display page so designated on the Bridge
Information Systems Telerate Service (or such other page as may replace page
3750 on such service for the purpose of displaying London interbank offered
rates of major banks). If such rate does not appear on such page (or such other
page as may replace such page on such service, or if such service is no longer
offered, such other service for displaying LIBOR or comparable rates as may be
selected by the Indenture Trustee after consultation with the Servicer), the
rate will be the Reference Bank Rate.
The "Reference Bank Rate" will be, with respect to any Interest Period, as
follows: the arithmetic mean (rounded upwards, if necessary, to the nearest one
sixteenth of one percent) of the offered rates for United States dollar deposits
for one month which are offered by the Reference Banks as of 11:00 a.m., London,
England time, on the second LIBOR Business Day prior to the first day of such
Interest Period to prime banks in the London interbank market for a period of
one month in amounts approximately equal to the sum of the outstanding Note
Balance of the Notes; provided, that at least two such Reference Banks provide
such rate. If fewer than two offered rates appear, the Reference Bank Rate will
be the arithmetic mean of the rates quoted by one or more major banks in New
York City, selected by the Indenture Trustee after consultation with the
Servicer and the Enhancer, as of 11:00 a.m., New York time, on such date for
loans in U.S. Dollars to leading European Banks for a period of one month in
amounts approximately equal to the aggregate Note Balance of the Notes. If no
such quotations can be obtained, the Reference Bank Rate will be the Reference
Bank Rate applicable to the preceding Interest Period. The "Reference Banks" are
Barclays Bank plc, National Westminster Bank and Bankers Trust Company.
"LIBOR Business Day" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the city of London, England are
required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Notes for the related Interest Period will, in the absence of
manifest error, be final and binding.
Capitalized Interest Account
On the Closing Date, if required by the Enhancer, a cash deposit will be
made into the Capitalized Interest Account from the proceeds of the sale of the
Term Notes. On each Payment Date during the Pre-Funding Period, the Indenture
Trustee will transfer from the Capitalized Interest Account to the Note Payment
Account an amount equal to the Capitalized Interest Requirement, if any, for
such Payment Date.
The "Capitalized Interest Requirement" will be, with respect to each
Payment Date during the Pre-Funding Period, the excess, if any of (i) the sum of
(A) the amount of interest accrued at the applicable Note Rate or Rates on the
amount on deposit in the Pre-Funding Account as of the preceding Payment Date
(or as of the Closing Date, in the case of the first Payment Date) and (B) the
amount of the monthly fees paid to the Enhancer, the Owner Trustee, the
Indenture Trustee and the provider of the Limited Reimbursement Agreement over
(ii) the amount of reinvestment earnings on funds on deposit in the Pre-Funding
Account.
On the Payment Date following the end of the Pre-Funding Period, the
Indenture Trustee will distribute to the Seller any amounts remaining in the
Capitalized Interest Account after taking into account withdrawals therefrom on
such Payment Date. The Capitalized Interest Account will be closed following
such payment.
Principal Payments on the Notes
No principal will be payable on any Class of Term Notes during the related
Revolving Period. On each Payment Date during the Managed Amortization Period,
principal will be payable on each Class of Floating Rate Term Notes and the
Variable Funding Notes in an amount equal to Net Principal Collections for the
related Loan Group for the related Collection Period. On each Payment Date
during the Rapid Amortization Period for each Class of Notes, principal will be
payable on the Notes in an amount equal to Principal Collections for the related
Loan
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Group for the related Collection Period. In addition, on each Payment Date
following the end of the Revolving Period for each Class of Notes, to the extent
of funds available therefor, holders of the related Class of Term Notes and the
Variable Funding Notes will be entitled to receive certain additional amounts to
be applied in reduction of the related Note Balances or Variable Funding
Balance, as applicable, equal to Liquidation Loss Amounts, as described herein.
As to each Class of Floating Rate Term Notes, the "Revolving Period" will
be the period beginning on the Closing Date and ending on the earlier of (i)
November 30, 2000 and (ii) the occurrence of a Managed Amortization Event or a
Rapid Amortization Event, as defined below; the "Managed Amortization Period"
will be the period beginning on the first payment date following the end of the
related Revolving Period and ending on the earlier of (i) November 30, 2004 and
(ii) the occurrence of a Rapid Amortization Event; and the "Rapid Amortization
Period" will be the period beginning on the earlier of (i) the first Payment
Date following the end of the Managed Amortization Period and (ii) the
occurrence of a Rapid Amortization Event, and ending upon the termination of the
Issuer. The Managed Amortization Period and the Rapid Amortization Period are
referred to as the "Amortization Periods". A "Managed Amortization Event" will
be deemed to occur on any date on which the amount on deposit in the Funding
Account equals or exceeds $10,000,000.
As to the Class A-4 Term Notes, the Revolving Period will be the period
beginning on the Closing Date and ending on the earlier of (i) March 31, 2000
and (ii) the occurrence of a Rapid Amortization Event; and the Rapid
Amortization Period will be the period beginning on the earlier of (i) the first
Payment Date following the end of the related Revolving Period and (ii) the
occurrence of a Rapid Amortization Event, and ending upon the termination of the
Issuer. The Class A-4 Term Notes will not have a Managed Amortization Period.
All principal payments due and payable on each Class of Floating Rate Term
Notes and the Variable Funding Notes for each Payment Date will be allocated
among such Classes of Notes based on the Principal Collections in the related
Loan Group until the related Note Balance or Variable Funding Balance thereof is
paid in full. In no event will principal payments on any Class of Notes on a
Payment Date exceed the related Note Balance or Variable Funding Balance, as
applicable, on such Payment Date. On the Final Payment Date, principal will be
due and payable on the Notes in an amount equal to the related Note Balance or
Variable Funding Balance, as applicable, remaining outstanding on such Payment
Date.
Priority of Distributions
On each Payment Date, from amounts withdrawn from the Custodial Account
(including any draw on the Policy for such Payment Date and any Enhancer
Optional Deposit), the following payments will be made in the following order of
priority:
(i) from P&I Collections for each Loan Group, to the Note Payment
Account, for payment to the Holders of the related Class of Term Notes
and, as applicable, Variable Funding Notes, pro rata, interest for the
related Interest Period at the related Note Rate on the related Note
Balance immediately prior to such Payment Date, other than any Interest
Shortfalls;
(ii) during the Amortization Periods, to the Note Payment Account,
the Principal Distribution Amount for each Loan Group backing the Floating
Rate Term Notes and Variable Funding Notes for payment to the Holders of
the related Class or Classes of such Notes; and the Principal Distribution
Amount for Loan Group IV for payment to the Holders of the Class A-4 Term
Notes;
(iii) (a) the amount of the premium for the Policy to the Enhancer,
with interest thereon, as provided in the insurance agreement dated as of
November 1, 1999 among the Enhancer, the Seller, the Depositor, the
Servicer, the Indenture Trustee and the Issuer (the "Insurance
Agreement"), and (b) the amount, if any, of the monthly fee to an
affiliate of the Enhancer for the limited reimbursement agreement to be
entered into by such entity as of the Closing Date (the "Limited
Reimbursement Agreement");
(iv) to the Enhancer, to reimburse it for prior draws made on the
Policy, with interest thereon, as provided in the Insurance Agreement;
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(v) during the Revolving Periods, to the Funding Account, the amount
(but not in excess of the related Group Excess Spread for each Loan Group
backing the Floating Rate Term Notes and Variable Funding Notes) necessary
to be applied on such Payment Date so that the Overcollateralization
Amount for each Loan Group backing the Floating Rate Term Notes and
Variable Funding Notes is not less than the Overcollateralization Target
Amount for each such Loan Group; and the amount (but not in excess of the
Group IV Excess Spread) necessary to be applied on such Payment Date so
that the Overcollateralization Amount for Loan Group IV is not less than
the Overcollateralization Target Amount for Loan Group IV;
(vi) during the Amortization Periods, to the Note Payment Account,
the amount (but not in excess of the related Group Excess Spread for each
Loan Group backing the Floating Rate Term Notes and Variable Funding
Notes) necessary to be applied on such Payment Date for payment to the
Holders of the related Class or Classes of such Notes so that the
Overcollateralization Amount for each Loan Group backing the Floating Rate
Term Notes and Variable Funding Notes is not less than the
Overcollateralization Target Amount for each such Loan Group; and the
amount (but not in excess of the Group IV Excess Spread) necessary to be
applied on such Payment Date for payment to the Holders of the Class A-4
Term Notes so that the Overcollateralization Amount for Loan Group IV is
not less than the Overcollateralization Target Amount for Loan Group IV;
(vii) if the aggregate Overcollateralization Amount for all Loan
Groups is less than the aggregate Overcollateralization Target Amount for
all Loan Groups, the remaining Group Excess Spread for each Loan Group
shall be deposited in the Reserve Account to be applied from time to time
pursuant to clause (viii) below; and, at such time, if any, that the
aggregate Overcollateralization Amount for all Loan Groups equals or
exceeds the aggregate Overcollateralization Target Amount for all Loan
Groups, the remaining Group Excess Spread for each Loan Group, together
with any funds then on deposit in the Reserve Account, shall be applied
pursuant to clauses (ix) through (xii) below;
(viii) to the Note Payment Account from funds on deposit in the
Reserve Account, the sum (but not in excess of the amount, if any, then on
deposit in the Reserve Account) of (A) any shortfalls in current interest
for any Class of Term Notes and, as applicable, Variable Funding Notes
that have not been paid to the related Holders pursuant to clause (i)
above on such Payment Date or prior Payment Dates (other than any Interest
Shortfalls) and (B) any Liquidation Loss Amounts for each Loan Group not
otherwise covered by payments pursuant to clause (ii) above on such
Payment Date or prior Payment Dates, for payment to the Holders of the
related Class or Classes of Term Notes and, as applicable, Variable
Funding Notes, pro rata, based on the amount of unpaid interest and/or
Liquidation Loss Amounts;
(ix) to the Enhancer, any other amounts owed the Enhancer pursuant
to the Insurance Agreement;
(x) from any remaining Group Excess Spread for each Loan Group, to
the Note Payment Account, for payment to the Holders of the related Class
or Classes of Term Notes and, as applicable, Variable Funding Notes, pro
rata, any Interest Shortfalls not previously paid, together with interest
thereon at the related Note Rate (as adjusted from time to time), based on
the amount remaining unpaid with respect thereto;
(xi) during the Amortization Periods, to the Indenture Trustee,
certain other amounts owing to the Indenture Trustee by the Servicer to
the extent remaining unpaid; and
(xii) any remaining amount, to the Distribution Account, for
distribution to the Certificateholders (or, under certain circumstances
during the Revolving Period, to the Funding Account in connection with the
optional removal of certain Mortgage Loans);
provided, that on the Final Payment Date, the amount to be paid pursuant to
clause (ii) above will be equal to the sum of the aggregate Term Note Balance
and the Variable Funding Balance immediately prior to such Payment Date. For
purposes of the foregoing, the Note Balance or Variable Funding Balance, as
applicable, of each Class of Notes on each Payment Date during the Amortization
Periods for such class of Notes will be reduced by the pro rata portion
allocable to such Notes of all Liquidation Loss Amounts for such Payment Date,
but only to the extent that
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such Liquidation Loss Amounts are not otherwise covered by payments made
pursuant to clauses (ii) or (viii) above or by a draw on the Policy and the
Overcollateralization Amount for the related Loan Group or Groups for such
Payment Date is zero. In the event of any such reduction of the Note Balance of
any Class of Term Notes, the amount of the principal reductions allocated to the
Term Notes will be payable to the Noteholders on later Payment Dates only to the
extent of any excess cashflow remaining on such later Payment Dates.
"Aggregate Balance Differential" means, with respect to any Payment Date
and any Variable Funding Note, the sum of the Balance Differentials that have
been added to the Variable Funding Balance of such Variable Funding Note prior
to such Payment Date. "Balance Differential" means, with respect to any Payment
Date, the amount, if any, by which the sum of the aggregate Principal Balance of
all Subsequent Mortgage Loans and the amount of any Additional Balances
transferred to the Trust Estate and included in Loan Groups I, II and/or III
during the related Collection Period exceeds the aggregate Principal Collections
for the previous Collection Period.
"Enhancer Optional Deposit" means amounts deposited by or on behalf of the
Enhancer in the Note Payment Account, other than Insured Amounts, to be applied
to the Notes. The amount of any payments due under the Policy will be reduced by
any Enhancer Optional Deposits paid directly to the Issuer under the Limited
Reimbursement Agreement. Further, under the Limited Reimbursement Agreement,
some amounts otherwise payable under the Policy will be reimbursed to the
Enhancer, or if directed by the Enhancer, will be paid directly by a third party
to the Issuer as an Enhancer Optional Deposit. The Issuer is not a party to the
Limited Reimbursement Agreement and has no rights with respect to it. In the
event those amounts are not paid to the Issuer under the Limited Reimbursement
Agreement, the Enhancer will nevertheless remain obligated to make all payments
required to be made under the Policy as described in this Prospectus Supplement.
"Excess Spread" means, with respect to each Loan Group, the related Group
Excess Spread for such Loan Group.
"Group Excess Spread" means, with respect to any Payment Date and Loan
Group and without taking into account any draw on the Policy for such Payment
Date, the excess, if any, of (i) Interest Collections for the related Collection
Period with respect to Mortgage Loans in such Loan Group over (ii) the sum of
(x) the portion of the Servicing Fee, the premium for the Policy and the fee for
the Limited Reimbursement Agreement allocable to such Loan Group for such
Payment Date, and (y) the amounts paid on such Payment Date to the Holders of
the Term Notes and, with respect to Loan Groups I, II and III only, the Variable
Funding Notes pursuant to clause (i) of the payment priorities above.
"Liquidated Mortgage Loan" means, with respect to any Payment Date, any
Mortgage Loan in respect of which the Servicer has determined, in accordance
with the servicing procedures specified in the Servicing Agreement, as of the
end of the related Collection Period that substantially all Liquidation Proceeds
it reasonably expects to recover, if any, with respect to the disposition of the
related Mortgaged Property have been recovered.
"Liquidation Loss Amount" means, with respect to any Payment Date and any
Liquidated Mortgage Loan in a Loan Group, the unrecovered Principal Balance
thereof at the end of the related Collection Period in which such Mortgage Loan
became a Liquidated Mortgage Loan, after giving effect to the Net Liquidation
Proceeds in connection therewith.
"Note Balance" means the Term Note Balance and/or the Variable Funding
Balance, as the context requires.
"Overcollateralization Amount" will be as to any Loan Group and Payment
Date, the amount, if any, by which the outstanding Principal Balance of the
Mortgage Loans in such Loan Group as of the close of business on the last day of
the related Collection Period, together with the related portion of the property
of the Issuer allocable to such Loan Group (including the allocable portion of
the Pre-Funded Amount and amounts on deposit in the Funding Account and the
Reserve Account) exceeds the Note Balance of the related Class of Term Notes,
together with, in the case of Loan Groups I, II and III only, the portion, if
any, of the Variable Funding Notes related to such Loan Group.
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"Overcollateralization Target Amount" will be as to any Loan Group and
Payment Date prior to the thirtieth (30th) Payment Date, an amount equal to the
sum of (i) at least 1.85% of the Note Balance of the related Class of Term
Notes, together with, in the case of Loan Groups I, II and III only, the
portion, if any, of the Variable Funding Notes related to such Loan Group, after
taking into account the payment of the Principal Distribution Amount for such
Loan Group on such Payment Date and (ii) 100% of the Principal Balances of all
Mortgage Loans in such Loan Group that are 180 or more days contractually
delinquent as of the last day of the related Collection Period, and thereafter
will be adjusted from time to time pursuant to the terms of the Indenture.
"Principal Distribution Amount" means, for any Payment Date and Loan Group
(i) during the Revolving Period, zero, (ii) during the Managed Amortization
Period, Net Principal Collections for the Mortgage Loans in such Loan Group, and
(iii) during the Rapid Amortization Period, Principal Collections for the
Mortgage Loans in such Loan Group; provided, that on any Payment Date during the
Amortization Periods, the Principal Distribution Amount shall also include an
amount equal to the aggregate Liquidation Loss Amounts, if any, for the Mortgage
Loans in such Loan Group.
A "Rapid Amortization Event" will be deemed to occur upon the occurrence
of any one of the following events:
(a) the failure on the part of the Seller (i) to make any payment or
deposit required to be made under the Purchase Agreement within five (5)
Business Days after the date such payment or deposit is required to be
made; or (ii) to observe or perform in any material respect any other
covenants or agreements of the Seller set forth in the Purchase Agreement,
which failure continues unremedied for a period of sixty (60) days after
written notice thereof to the Seller, and such failure materially and
adversely affects the interests of the Enhancer or the Securityholders;
provided, that a Rapid Amortization Event will not be deemed to occur if
the Seller has repurchased or caused to be repurchased or substituted for
the related Mortgage Loans or all Mortgage Loans, as applicable, during
such period in accordance with the provisions of the Indenture;
(b) any representation or warranty made by the Seller in the
Purchase Agreement shall prove to have been incorrect in any material
respect when made and shall continue to be incorrect in any material
respect for the related cure period specified in the Servicing Agreement
after written notice and as a result of which the interests of the
Enhancer or the Securityholders are materially and adversely affected ;
provided, that a Rapid Amortization Event will not be deemed to occur if
the Seller has repurchased or caused to be repurchased or substituted for
the related Mortgage Loans or all Mortgage Loans, as applicable, during
such period in accordance with the provisions of the Indenture;
(c) the entry against the Seller of a decree or order by a court or
agency or supervisory authority having jurisdiction in the premises for
the appointment of a trustee, conservator, receiver or liquidator in any
insolvency, conservatorship, receivership, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for the
winding up or liquidation of its affairs, and the continuance of any such
decree or order unstayed and in effect for a period of sixty (60)
consecutive days;
(d) the Seller shall voluntarily go into liquidation, consent to the
appointment of a conservator, receiver, liquidator or similar person in
any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings of or relating to the Seller or the
Issuer or of or relating to all or substantially all of its property, or a
decree or order of a court, agency or supervisory authority having
jurisdiction in the premises for the appointment of a conservator,
receiver, liquidator or similar person in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Seller or the Issuer and such decree or order shall remain in
force undischarged, unbonded or unstayed for a period of sixty (60) days
or the Seller or the Issuer shall admit in writing its inability to pay
its debts generally as they become due, file a petition to take advantage
of any applicable insolvency or reorganization statute, make an assignment
for the benefit of its creditors or voluntarily suspend payment of its
obligations;
(e) the Issuer becomes subject to regulation by the Commission as an
investment company within the meaning of the Investment Company Act of
1940, as amended;
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(f) a Servicing Default occurs and is unremedied under the Servicing
Agreement and a qualified successor Servicer has not been appointed;
(g) the aggregate of all draws under the Policy exceeds 1% of the
initial aggregate Note Balance;
(h) the Issuer is determined to be an association (or a publicly
traded partnership) taxable as a corporation for federal income tax
purposes; or
(i) an event of default under the Insurance Agreement (except for a
default by the Enhancer, unless such Enhancer cannot be replaced without
additional expense).
In the case of any event described in (a), (b), (f), (g) or (i), a Rapid
Amortization Event will be deemed to have occurred only if, after any applicable
grace period described in such clauses, either the Indenture Trustee, the
Enhancer or Securityholders evidencing not less than 51% of the aggregate Note
Balance of the Securities, by written notice to the Depositor, the Servicer and
the Owner Trustee (and to the Indenture Trustee, if given by the
Securityholders), declare that a Rapid Amortization Event has occurred as of the
date of such notice. In the case of any event described in clauses (c), (d), (e)
or (h), a Rapid Amortization Event will be deemed to have occurred without any
notice or other action on the part of the Indenture Trustee, the Enhancer or the
Securityholders immediately upon the occurrence of such event; provided, that
any Rapid Amortization Event may be waived and deemed of no effect with the
written consent of the Enhancer and each Rating Agency, subject to the
satisfaction of any conditions to such waiver.
"Term Note Balance" means, with respect to any Payment Date and any Term
Note, the initial Term Note Balance thereof reduced by all payments of principal
of such Term Note prior to such Payment Date.
"Variable Funding Balance" means, with respect to any Payment Date and any
Variable Funding Note, the initial Variable Funding Balance thereof (i)
increased by the Aggregate Balance Differential for such Variable Funding Note
immediately prior to such Payment Date and (ii) reduced by all distributions of
principal thereon prior to such Payment Date.
Reserve Account
On or after the Closing Date the Indenture Trustee will establish an
account in its name designated the "reserve account" (the "Reserve Account"). On
each Payment Date, the Indenture Trustee will transfer from the Reserve Account
to the Note Payment Account the amount (but not in excess of the amount, if any,
then on deposit in the Reserve Account) of any unpaid current interest for any
Class of Notes on such Payment Date or prior Payment Dates, or any Liquidation
Loss Amounts for each Loan Group not otherwise covered by the payment of the
Principal Distribution Amount for such Loan Group on such Payment Date or prior
Payment Dates. The Reserve Account will be funded only from amounts representing
the Excess Spread, if any, for each Loan Group remaining after such Excess
Spread is applied towards the creation and/or maintenance of
overcollateralization with respect to such Loan Group. Moneys on deposit in the
Reserve Account may be invested in Permitted Investments as provided in the
Servicing Agreement. Net income on the investment of funds in the Reserve
Account will be retained therein.
Overcollateralization and Cross-collateralization
The cashflow mechanics of the Trust Estate are intended to create
overcollateralization by depositing the Excess Spread in the Funding Account
during the Revolving Periods and applying it to acquire Additional Balances
and/or Subsequent Mortgage Loans and by using a portion or all of the Excess
Spread to make principal payments on the Notes during the Amortization Periods.
Such application of Excess Spread will continue until the Overcollateralization
Amount for a Loan Group equals the Overcollateralization Target Amount for such
Loan Group at which point such application will cease unless necessary on a
later Payment Date to increase the amount of overcollateralization to the target
level. In addition, the Overcollateralization Target Amount may be permitted to
step down in the future in which case a portion of the Excess Spread will not be
used to acquire Additional Balances and/or Subsequent Mortgage Loans or paid to
the holders of the Notes but will instead be distributed to the holders
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of the Certificates. As a result of these mechanics, the weighted average lives
of the Notes will be different than they would have been in the absence of such
mechanics.
The cashflow mechanics of the Trust Estate are intended to provide limited
cross-collateralization by depositing any remaining Excess Spread in the Reserve
Account and applying it to cover any unpaid current interest for any Class of
Notes or any remaining Liquidation Loss Amounts that are not otherwise covered
by P&I Collections with respect to the related Loan Group. Such application of
any remaining Excess Spread will continue until the aggregate
Overcollateralization Amount for all Loan Groups equals or exceeds the aggregate
Overcollateralization Target Amount for all Loan Groups at which point any funds
on deposit in the Reserve Account will be applied in accordance with the normal
distribution priorities. The trapping of any remaining Excess Spread in the
Reserve Account may resume on a later Payment Date or Dates if the aggregate
Overcollateralization Amount for all Loan Groups falls below the aggregate
Overcollateralization Target Amount for all Loan Groups.
To the extent that the protection provided by the application of Excess
Spread and the availability of overcollateralization and limited
cross-collateralization are exhausted and if payments are not made under the
Policy as required, Noteholders may incur a loss on their investments.
The Paying Agent
The Paying Agent will initially be the Indenture Trustee. The Paying Agent
will have the revocable power to withdraw funds from the Note Payment Account
for the purpose of making payments to the Noteholders.
Maturity and Optional Redemption
The Notes will be payable in full on the Final Payment Date, to the extent
of the aggregate outstanding Note Balance on such date, if any. In addition, a
principal payment may be made in redemption of any Class of Term Notes upon the
exercise by the Servicer of its option to purchase the Mortgage Loans in the
related Loan Group together with the related assets of the Trust Estate after
the aggregate Note Balance of such Class of Term Notes is reduced to an amount
less than or equal to 10% of their initial aggregate Note Balance. The purchase
price of such Mortgage Loans will be the sum of the outstanding Principal
Balance of such Mortgage Loans and accrued and unpaid interest thereon
(including any Interest Shortfalls and interest thereon) at the weighted average
of the Loan Rates of such Mortgage Loans through the day preceding the Payment
Date on which such purchase occurs, together with all amounts due and owing the
Enhancer with respect to the related Loan Group and Notes.
DESCRIPTION OF THE POLICY
The following information has been supplied by the Enhancer for inclusion
in this Prospectus Supplement. The Enhancer does not accept any responsibility
for the accuracy or completeness of this Prospectus Supplement or any
information or disclosure contained herein, or omitted herefrom, other than with
respect to the accuracy of the information regarding the Policy and the Enhancer
set forth under the headings "DESCRIPTION OF THE POLICY" and "THE ENHANCER"
herein. Additionally, the Enhancer makes no representation regarding the Notes
or the advisability of investing in the Notes. No representation is made by the
Depositor, the Servicer, the Indenture Trustee, the Underwriter or any of their
affiliates as to the accuracy or completeness of the information in such
sections.
The Enhancer, in consideration of the payment of a premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any Noteholder that an amount equal to each full and complete Insured Amount
will be received from the Enhancer by the Indenture Trustee or its successors,
as Indenture Trustee for the Noteholders, on behalf of the Noteholders, for
distribution by the Indenture Trustee to each Noteholder of that Noteholder's
proportionate share of the Insured Amount.
The Enhancer's obligations under the Policy, with respect to a particular
Insured Amount, will be discharged to the extent funds equal to the applicable
Insured Amount are received by the Indenture Trustee, whether or not those funds
are properly applied by the Indenture Trustee. Insured Amounts will be made only
at the
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time set forth in the Policy, and no accelerated Insured Amounts will be made
regardless of any acceleration of the Notes, unless the acceleration is at the
sole option of the Enhancer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of any liability for withholding taxes), Interest Shortfalls or Relief
Act Shortfalls.
The Enhancer will pay any Insured Amount that is a Preference Amount on
the business day following receipt on a business day by the Enhancer's fiscal
agent of the following:
o a certified copy of the order requiring the return of a preference
payment;
o an opinion of counsel satisfactory to the Enhancer that the order is
final and not subject to appeal;
o an assignment in a form that is reasonably required by the Enhancer,
irrevocably assigning to the Enhancer all rights and claims of the
Noteholder relating to or arising under the Notes against the debtor which
made the preference payment or otherwise with respect to the preference
payment; and
o appropriate instruments to effect the appointment of the Enhancer as
agent for the Noteholder in any legal proceeding related to the preference
payment, which instruments are in a form satisfactory to the Enhancer;
provided that if these documents are received after 12:00 p.m., New York time,
on that business day, they will be deemed to be received on the following
business day. Payments by the Enhancer will be disbursed to the receiver or the
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Noteholder and not to any Noteholder directly
unless the Noteholder has returned principal or interest paid on the Notes to
the receiver or trustee in bankruptcy, in which case that payment will be
disbursed to the Noteholder.
The Enhancer will pay any other amount payable under the Policy no later
than 12:00 p.m., New York time, on the later of the Payment Date on which the
related Deficiency Amount is due or the third business day following receipt in
New York, New York on a business day by State Street Bank and Trust Company,
N.A., as fiscal agent for the Enhancer or any successor fiscal agent appointed
by the Enhancer of a notice from the Indenture Trustee specifying the Insured
Amount which is due and owing on the applicable Payment Date, provided that if
the notice is received after 12:00 p.m., New York time, on that business day, it
will be deemed to be received on the following business day. If any notice
received by the Enhancer's fiscal agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Policy, it will be
deemed not to have been received by the Enhancer's fiscal agent for the purposes
of this paragraph, and the Enhancer or the fiscal agent, as the case may be,
will promptly so advise the Indenture Trustee and the Indenture Trustee may
submit an amended notice.
Insured Amounts due under the Policy, unless otherwise stated therein,
will be disbursed by the Enhancer's fiscal agent to the Indenture Trustee, on
behalf of the Noteholders, by wire transfer of immediately available funds in
the amount of the Insured Amount less, in respect of Insured Amounts related to
Preference Amounts, any amount held by the Indenture Trustee for the payment of
the Insured Amount and legally available therefor.
The fiscal agent is the agent of the Enhancer only and the fiscal agent
will in no event be liable to Noteholders for any acts of the fiscal agent or
any failure of the Enhancer to deposit or cause to be deposited sufficient funds
to make payments due under the Policy.
Subject to the terms of the Servicing Agreement, the Enhancer will be
subrogated to the rights of each Noteholder to receive payments under the Notes
to the extent of any payment by the Enhancer under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Deficiency Amount" means (a) with respect to any Payment Date, an amount
if any, equal to the sum of (i) the amount by which the aggregate amount of
accrued interest on the Notes (excluding any Relief Act Shortfalls for
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such Payment Date) at the respective Note Rates on such Payment Date exceeds the
amount on deposit in the Note Payment Account available for interest
distributions on such Payment Date and (ii)(a) with respect to any Payment Date
that is not the Final Payment Date, any Liquidation Loss Amount for such Payment
Date, to the extent not included in the Principal Distribution Amount for such
Payment Date or a reduction in the overcollateralization amount or (b) on the
Final Payment Date, the aggregate outstanding balance of the Notes to the extent
otherwise not paid on such date.
"Insured Amount" means (a) as of any Payment Date, any Deficiency Amount
and (b) any Preference Amount.
"Preference Amount" means any amount previously distributed to a
Noteholder on the Notes that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction.
"Relief Act Shortfalls" means current interest shortfalls resulting from
the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
Capitalized terms used in the Policy and not otherwise defined in the
insurance policy shall have the meanings set forth in the Servicing Agreement as
of the date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Servicing Agreement unless such amendment or
modification has been approved in writing by the Enhancer.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Notes.
The Policy is being issued under and pursuant to, and will be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a Note will depend on the price paid by the
related Noteholder for such Note, the Note Rate, the rate and timing of
principal payments (including payments in excess of the Monthly Payment,
prepayments in full or terminations, liquidations and repurchases) on the
Mortgage Loans in the related Loan Group and, in the case of the HELOCs, the
rate and timing of draws and the allocations thereof.
In general, if a Term Note is purchased at a premium over its face amount
and payments of principal of such Term Note occur at a rate faster than that
assumed at the time of purchase, the purchaser's actual yield to maturity will
be lower than that anticipated at the time of purchase. Conversely, if a Term
Note is purchased at a discount from its face amount and payments of principal
of such Term Note occur at a rate that is slower than that assumed at the time
of purchase, the purchaser's actual yield to maturity will be lower than
originally anticipated.
With respect to certain HELOCs, the Loan Rate at origination may be below
the rate that would result from the sum of the then-applicable Index and Gross
Margin. Under the GMACM Underwriting Guide, Mortgagors are generally qualified
based on an assumed payment which reflects a rate significantly lower than the
maximum rate. The repayment of any such HELOC may thus be dependent on the
ability of the borrower to make larger interest payments following the
adjustment of the Loan Rate.
For any Mortgage Loans secured by junior mortgages, any inability of the
Mortgagor to pay off the balance thereof may also affect the ability of the
Mortgagor to obtain refinancing at any time of any related senior mortgage loan,
thereby preventing a potential improvement in the Mortgagor's circumstances.
Under the Servicing Agreement the Servicer may be restricted or prohibited from
consenting to any refinancing of any related senior mortgage loan,
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which in turn could adversely affect the Mortgagor's circumstances or result in
a prepayment or default under the corresponding junior Mortgage Loan.
In addition to the Mortgagor's personal economic circumstances, a number
of factors, including homeowner mobility, job transfers, changes in the
Mortgagor's housing needs, the Mortgagor's net equity in the Mortgaged Property,
changes in the value of the Mortgaged Property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the
Mortgage Loans or draws on the HELOCs. There can be no assurance as to the rate
of principal payments on the Mortgage Loans or draws on the HELOCs. The Mortgage
Loans may be prepaid in full or in part without penalty. The rate of principal
payments and the rate of draws may fluctuate substantially from time to time.
Generally, home equity loans are not viewed by borrowers as permanent financing.
Due to the unpredictable nature of both principal payments and draws on the
HELOCs, the rates of principal payments net of draws on the HELOCs may be much
more volatile than for typical first lien mortgage loans.
The yield to maturity of the Term Notes, and the rate and timing of
principal payments on the Mortgage Loans or draws on the HELOCs, may also be
affected by a wide variety of specific terms and conditions applicable to the
respective programs under which the Mortgage Loans were originated. For example,
the HELOCs may provide for future draws to be made only in specified minimum
amounts, or alternatively may permit draws to be made by check in any amount. A
pool of Mortgage Loans including HELOCs subject to the latter provisions may be
likely to remain outstanding longer with a higher aggregate principal balance
than a pool of Mortgage Loans including HELOCs with the former provisions,
because of the relative ease of making new draws. Furthermore, the HELOCs may
provide for interest rate changes on a daily or monthly basis, or may have Gross
Margins that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, Term Notes backed by Mortgage
Loans including HELOCs with adjustable rates subject to substantially higher
maximum rates than typically apply to adjustable rate first mortgage loans may
experience rates of default and liquidation substantially higher than those that
have been experienced on other adjustable rate mortgage loan pools.
As a result of the payment terms of the HELOCs, there may be no principal
payments on any Class of Floating Rate Term Notes in any given month. In
addition, it is possible that the aggregate draws on HELOCs may exceed the
aggregate payments with respect to principal on the Mortgage Loans for the
related period. Each Class of the Floating Rate Term Notes provide for a period
during which all or a portion of the principal collections on the Mortgage Loans
are reinvested in Additional Balances and/or Subsequent Mortgage Loans or are
accumulated in a trust account pending commencement of an amortization period
with respect to such Class of Term Notes.
The Mortgage Loans generally will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of such Mortgage Loan upon
sale or certain transfers by the Mortgagor of the underlying Mortgaged Property.
The Servicer will generally enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or proposed conveyance of the underlying Mortgaged
Property and it is entitled to do so under applicable law. The extent to which
Mortgage Loans are assumed by purchasers of the Mortgaged Properties rather than
prepaid by the related Mortgagors in connection with the sales of the Mortgaged
Properties will affect the weighted average life of the Term Notes. See "The
Seller and Servicer--Collection and Other Servicing Procedures" herein for a
description of certain provisions of the Servicing Agreement that may affect the
prepayment experience on the Mortgage Loans.
The Servicer may allow the refinancing of a Mortgage Loan in the Trust
Estate by accepting prepayments thereon and permitting a new loan to the same
borrower secured by a mortgage on the same property, which may be originated by
the Servicer or by an unrelated entity. In the event of such a refinancing, the
new loan would not be included in the Trust Estate and, therefore, such
refinancing would have the same effect as a prepayment in full of the related
Mortgage Loan. The Servicer may, from time to time, implement programs designed
to encourage refinancing. Such programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. Targeted solicitations may be based on a variety of
factors, including the credit of the borrower or the location of the Mortgaged
Property. In addition, the Servicer may encourage refinancing of Mortgage Loans,
including defaulted Mortgage Loans, under which creditworthy borrowers assume
the outstanding indebtedness of
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such Mortgage Loans which may be removed from the Trust Estate. As a result of
such programs, (i) the rate of principal prepayments of the Mortgage Loans may
be higher than would otherwise be the case, and (ii) in some cases, the average
credit or collateral quality of the Mortgage Loans remaining in the Trust Estate
may decline.
Investors in the Term Notes should note that in certain instances in which
a Mortgagor either (i) requests an increase in the credit limit on the related
HELOC above the limit stated on the Credit Line Agreement, (ii) requests to
place a lien on the related Mortgaged Property senior to the lien of the related
Mortgage Loan, or (iii) refinances the senior lien resulting in a Combined
Loan-to-Value Ratio above the previous Combined Loan-to-Value Ratio for such
loan, the Servicer will have the option to purchase from the Trust Estate the
related Mortgage Loan at the Repurchase Price. There are no limitations on the
frequency of such repurchases or the characteristics of the Mortgage Loans so
repurchased. In addition, on any Payment Date the Seller, in its capacity as the
holder of the Certificates, may designate certain Mortgage Loans for removal
from the Trust Estate. Such repurchases may lead to an increase in prepayments
on the Mortgage Loans in the Trust Estate, which may reduce the yield on the
Term Notes. In addition, such repurchases may affect the characteristics of the
Mortgage Loans in the Trust Estate in the aggregate with respect to Loan Rates
and credit quality.
Although the Loan Rates on the HELOCs are subject to periodic adjustments,
such adjustments generally (i) will not increase the Loan Rates over a fixed
maximum rate during the life of any HELOC and (ii) will be based on an Index
(which may not rise and fall consistently with prevailing market interest rates)
plus the related Gross Margin (which may vary under certain circumstances, and
which may be different from margins being used at the time for newly originated
adjustable rate mortgage loans). As a result, the Loan Rates on the HELOCs at
any time may not equal the prevailing rates for similar, newly originated
adjustable rate home equity mortgage loans and accordingly the rate of principal
payments, if any, and draws on the HELOCs may be lower or higher than would
otherwise be anticipated. There can be no certainty as to the rate of principal
payments on the Mortgage Loans or draws on the HELOCs during any period or over
the life of the Term Notes.
The yield to investors on the each Class of Floating Rate Term Notes will
be sensitive to fluctuations in the level of LIBOR and the related Note Rate
will be capped. See "Risk Factors--Loan rates may reduce the note rate on each
class of Term Notes backed by the HELOCs" herein.
With respect to the indices used in determining the Note Rates for the
Term Notes or the Loan Rates of the underlying Mortgage Loans, a number of
factors affect the performance of each such index and may cause such index to
move in a manner different from other indices. To the extent that such index may
reflect changes in the general level of interest rates less quickly than other
indices, in a period of rising interest rates, increases in the yield to the
Term Noteholders due to such rising interest rates may occur later than that
which would be produced by other indices, and in a period of declining rates,
such index may remain higher than other market interest rates which may result
in a higher level of prepayments of the Mortgage Loans, which, in the case of
HELOCs, adjust in accordance with such index, than of mortgage loans which
adjust in accordance with other indices.
The timing of changes in the rate of principal payments on a Term Note may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a payment of principal on a Term
Note, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of the Term Notes would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
The rate and timing of defaults on the Mortgage Loans will also affect the
rate and timing of principal payments on the Mortgage Loans and thus the yield
on the Term Notes. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans, however, the rate of such losses and
delinquencies are likely to be higher than those of traditional first lien
mortgage loans, particularly in the case of Mortgage Loans with high Combined
Loan-to-Value Ratios or low Junior Ratios. To the extent that any losses are
incurred on any of the Mortgage Loans that are not covered by the applicable
credit enhancements, holders of the Term Notes will bear all risk of such losses
resulting from default by Mortgagors. Even where the Policy covers all losses
incurred on the Mortgage Loans, the effect of losses may be to increase
prepayment rates on the Mortgage Loans, thus reducing the weighted average life
and affecting the yield to maturity.
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Amounts on deposit in the Funding Account may be used during the Revolving
Periods to acquire Additional Balances and Subsequent Mortgage Loans. In the
event that, at the end of the Revolving Period for the Floating Rate Term Notes,
any amounts on deposit in the Funding Account have not been used to acquire
Subsequent Mortgage Loans or Additional Balances, then the Notes will be prepaid
in part on the following Payment Date.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor thereof of each dollar distributed in reduction of principal of
such security (assuming no losses). The weighted average life of the Term Notes
will be influenced by, among other factors, the rate of principal payments (and,
with respect to the HELOCs, the rate of draws) on the Mortgage Loans.
The primary source of information available to investors concerning the
Term Notes will be the monthly statements discussed herein under "The
Agreements--The Trust Agreement and the Indenture--Reports to Noteholders",
which will include information as to the outstanding Term Note Balance. There
can be no assurance that any additional information regarding the Term Notes
will be available through any other source. In addition, the Depositor is not
aware of any source through which price information about the Term Notes will be
generally available on an ongoing basis. The limited nature of such information
regarding the Term Notes may adversely affect the liquidity of the Term Notes,
even if a secondary market for the Term Notes becomes available.
The Constant Prepayment Rate ("CPR") model is used herein with respect to
the HELOCs. The CPR model assumes that the outstanding principal balance of a
pool of mortgage loans prepays at a specified constant annual rate of CPR. In
generating monthly cash flows, this rate is converted to an equivalent constant
monthly rate. To assume 35% CPR or any other CPR percentage is to assume that
the stated percentage of the Pool Balance is prepaid over the course of a year.
With respect to the HELs, the prepayment model ("PPC") used herein assumes an
initial 5% CPR that increases each month by 1.8182% per annum until it reaches
25% CPR in month 12. No representation is made that the Mortgage Loans will
prepay at that or any other rate.
The tables set forth below are based on a CPR or PPC, as applicable,
constant draw rate (in the case of the HELOCs, and which, for purposes of the
assumptions, is the amount of Additional Balances drawn each month as an
annualized percentage of the Pool Balance outstanding at the beginning of such
month) and optional termination assumptions as indicated in the tables below and
further assume that the Initial HELOCs and Initial HELs consist of mortgage
loans having the following characteristics:
Original Term Remaining Term
Balance Gross WAC Net WAC (months) (months)
--------------- ----------------- -------------- ----------------- ------------------
HELOCs.............. $230,000,000 10.675% 10.175% 199 195
HELs................ $ 75,000,000 10.928% 10.428% 168 165
In addition, it was assumed that (i) payments are made in accordance with
the description set forth under "Description of the Securities--Priority of
Distributions", (ii) payments on the Notes will be made on the 25th day of each
calendar month regardless of the day on which the Payment Date actually occurs
commencing in December 1999, (iii) no extension past the scheduled maturity date
of a Mortgage Loan is made, (iv) no delinquencies or defaults occur, (v) in the
case of the HELOCs, monthly draws are calculated under each of the assumptions
as set forth in the tables below before giving effect to prepayments, (vi) the
Mortgage Loans pay on the basis of a 30-day month and a 360-day year, (vii)
there is no restriction on the Maximum Variable Funding Balance, (viii) no Rapid
Amortization Event or Managed Amortization Event occurs, (ix) each Mortgage Loan
is payable monthly, (x) the closing date is November 17, 1999 (the "Closing
Date"), (xi) for each Payment Date, LIBOR is equal to 5.40875% per annum, (xii)
the initial Term Note Balance is as set forth on the cover page hereof, and
(xiii) all principal payments due and payable on the Floating Rate Term Notes
and the Variable Funding Notes will be allocated to such classes on a pro rata
basis.
S-66
The actual characteristics and performance of the Mortgage Loans will
likely differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment and
(in the case of the HELOCs) draw scenarios. For example, it is very unlikely
that the Mortgage Loans will prepay and/or experience draws at a constant rate
until maturity or that all Mortgage Loans will prepay and/or experience draws at
the same rate. Moreover, the diverse remaining terms to stated maturity of the
Mortgage Loans could produce slower or faster principal distributions than
indicated in the tables at the various assumptions specified, even if the
weighted average remaining term to stated maturity of the Mortgage Loans is as
assumed. Any difference between such assumptions and the actual characteristics
and performance of the Mortgage Loans, or actual prepayment experience, will
affect the percentages of initial Term Note Balances outstanding over time and
the weighted average life of the Term Notes. Neither the CPR or PPC models nor
any other prepayment model or assumption purports to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans.
Variations in the actual prepayment experience and the Principal Balances of the
Mortgage Loans that prepay may increase or decrease each weighted average life
shown in the following tables. Such variations may occur even if the average
prepayment experience of all Mortgage Loans equals the CPR or PPC, as
applicable.
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PERCENTAGE OF INITIAL CLASS A-1 TERM NOTE BALANCE (1)(2)(3)
Payment Date Percentage of Balance
- ------------------------------------------------------------------------------------------------------------------------
CPR 10% 25% 30% 35% 40% 45% 50%
- ------------------------------------------------------------------------------------------------------------------------
Initial.................................... 100 100 100 100 100 100 100
November 2000.............................. 100 100 100 100 100 100 100
November 2001.............................. 100 83 78 72 66 61 55
November 2002.............................. 100 69 60 52 44 37 31
November 2003.............................. 100 57 46 37 29 23 17
November 2004.............................. 100 48 36 27 20 14 9
November 2005.............................. 90 36 25 17 12 7 4
November 2006.............................. 81 27 18 11 7 4 2
November 2007.............................. 72 20 12 7 4 2 1
November 2008.............................. 65 15 9 5 2 1 *
November 2009.............................. 58 11 6 3 1 * *
November 2010.............................. 53 8 4 2 1 * 0
November 2011.............................. 47 6 3 1 * 0 0
November 2012.............................. 42 5 2 1 * 0 0
November 2013.............................. 38 3 1 * * 0 0
November 2014.............................. 34 2 1 * 0 0 0
November 2015.............................. 31 2 1 * 0 0 0
November 2016.............................. 0 0 0 0 0 0 0
Weighted Average Life to 10% call (years).. 11.58 5.19 4.30 3.69 3.22 2.87 2.59
Weighted Average Life to maturity (years).. 11.58 5.46 4.55 3.89 3.39 3.01 2.71
(1) Assumes (i) except where indicated, that no optional termination is
exercised and (ii) in the case of the HELOCs, a gross CPR as disclosed
above less a constant draw rate of 10.0%.
(2) All percentages are rounded to the nearest 1%.
(3) * less than 1% but greater than 0.
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PERCENTAGE OF INITIAL CLASS A-2 TERM NOTE BALANCE (1)(2)(3)
Payment Date Percentage of Balance
- ------------------------------------------------------------------------------------------------------------------------
CPR 10% 25% 30% 35% 40% 45% 50%
- ------------------------------------------------------------------------------------------------------------------------
Initial........................................ 100 100 100 100 100 100 100
November 2000.................................. 100 100 100 100 100 100 100
November 2001.................................. 100 83 78 72 66 61 55
November 2002.................................. 100 69 60 52 44 37 31
November 2003.................................. 100 57 46 37 29 23 17
November 2004.................................. 100 48 36 27 20 14 9
November 2005.................................. 90 36 25 17 12 7 4
November 2006.................................. 81 27 18 11 7 4 2
November 2007.................................. 72 20 12 7 4 2 1
November 2008.................................. 65 15 9 5 2 1 *
November 2009.................................. 58 11 6 3 1 * *
November 2010.................................. 53 8 4 2 1 * 0
November 2011.................................. 47 6 3 1 * 0 0
November 2012.................................. 42 5 2 1 * 0 0
November 2013.................................. 38 3 1 * * 0 0
November 2014.................................. 34 2 1 * 0 0 0
November 2015.................................. 31 2 1 * 0 0 0
November 2016.................................. 0 0 0 0 0 0 0
Weighted Average Life to 10% call (years)...... 11.58 5.19 4.30 3.69 3.22 2.87 2.59
Weighted Average Life to maturity (years)...... 11.58 5.46 4.55 3.89 3.39 3.01 2.71
(1) Assumes (i) except where indicated, that no optional termination is
exercised and (ii) in the case of the HELOCs, a gross CPR as disclosed
above less a constant draw rate of 10.0%.
(2) All percentages are rounded to the nearest 1%.
(3) * less than 1% but greater than 0.
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PERCENTAGE OF INITIAL CLASS A-3 TERM NOTE BALANCE (1)(2)(3)
Payment Date Percentage of Balance
- ------------------------------------------------------------------------------------------------------------------------
CPR 10% 25% 30% 35% 40% 45% 50%
- ------------------------------------------------------------------------------------------------------------------------
Initial........................................ 100 100 100 100 100 100 100
November 2000.................................. 100 100 100 100 100 100 100
November 2001.................................. 100 83 78 72 66 61 55
November 2002.................................. 100 69 60 52 44 37 31
November 2003.................................. 100 57 46 37 29 23 17
November 2004.................................. 100 48 36 27 20 14 9
November 2005.................................. 90 36 25 17 12 7 4
November 2006.................................. 81 27 18 11 7 4 2
November 2007.................................. 72 20 12 7 4 2 1
November 2008.................................. 65 15 9 5 2 1 *
November 2009.................................. 58 11 6 3 1 * *
November 2010.................................. 53 8 4 2 1 * 0
November 2011.................................. 47 6 3 1 * 0 0
November 2012.................................. 42 5 2 1 * 0 0
November 2013.................................. 38 3 1 * * 0 0
November 2014.................................. 34 2 1 * 0 0 0
November 2015.................................. 31 2 1 * 0 0 0
November 2016.................................. 0 0 0 0 0 0 0
Weighted Average Life to 10% call (years)...... 11.58 5.19 4.30 3.69 3.22 2.87 2.59
Weighted Average Life to maturity (years)...... 11.58 5.46 4.55 3.89 3.39 3.01 2.71
(1) Assumes (i) except where indicated, that no optional termination is
exercised and (ii) in the case of the HELOCs, a gross CPR as disclosed
above less a constant draw rate of 10.0%.
(2) All percentages are rounded to the nearest 1%.
(3) *less than 1% but greater than 0.
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PERCENTAGE OF INITIAL CLASS A-4 TERM NOTE BALANCE (1)(2)(3)
Payment Date Percentage of Balance
- ------------------------------------------------ -----------------------------------------------------------------------
PPC 0% 50% 75% 100% 125% 150% 175%
- ------------------------------------------------ --------- --------- ---------- --------- --------- ---------- ---------
Initial........................................ 100 100 100 100 100 100 100
November 2000.................................. 97 89 85 81 77 73 68
November 2001.................................. 93 75 66 58 50 43 36
November 2002.................................. 89 62 51 41 33 26 20
November 2003.................................. 84 51 39 29 21 15 10
November 2004.................................. 79 42 30 21 14 9 5
November 2005.................................. 73 34 23 14 9 5 3
November 2006.................................. 67 27 17 10 5 3 1
November 2007.................................. 59 21 12 6 3 1 *
November 2008.................................. 51 16 8 4 2 * 0
November 2009.................................. 42 12 5 2 1 0 0
November 2010.................................. 33 8 3 1 * 0 0
November 2011.................................. 22 4 2 * 0 0 0
November 2012.................................. 10 1 * 0 0 0 0
November 2013.................................. 0 0 0 0 0 0 0
Weighted Average Life to 10% call (years)...... 8.51 4.86 3.81 3.08 2.56 2.18 1.89
Weighted Average Life to maturity (years)...... 8.54 5.00 3.99 3.26 2.73 2.33 2.02
(1) Assumes (i) except where indicated, that no optional termination is
exercised and (ii) in the case of the HELs, a percentage of PPC as
disclosed above.
(2) All percentages are rounded to the nearest 1%.
(3) * less than 1% but greater than 0.
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THE AGREEMENTS
The Purchase Agreement
The Initial Mortgage Loans to be transferred to the Issuer by the
Depositor were or will be purchased by the Depositor from the Seller pursuant to
a Mortgage Loan Purchase Agreement dated as of the Cut-Off Date (the "Purchase
Agreement") among the Seller, the Depositor, as purchaser, the Issuer and the
Indenture Trustee. The following summary describes certain terms of the Purchase
Agreement among the Seller, the Depositor, the Issuer and the Indenture Trustee.
The summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the Purchase Agreement. See "The
Agreements" in the Prospectus.
Under the Purchase Agreement, the Seller has agreed to transfer to the
Depositor the Initial Mortgage Loans and related Additional Balances. Pursuant
to an assignment by the Depositor executed on the Closing Date, upon such
transfer to the Depositor, the Initial Mortgage Loans will be transferred by the
Depositor to the Issuer, as well as the Depositor's rights in, to and under the
Purchase Agreement, which will include the right to purchase Additional Balances
relating to the Initial Mortgage Loans. Subsequent Mortgage Loans are intended
to be purchased by the Issuer from the Seller on or before April 25, 2000, as
set forth in the Purchase Agreement, from funds on deposit in the Pre-Funding
Account. Subsequent Mortgage Loans are also intended to be purchased, under
certain circumstances, by the Issuer from the Seller from funds on deposit in
the Funding Account. The Purchase Agreement will provide that the Subsequent
Mortgage Loans must conform to certain specified characteristics described above
under "Description of the Mortgage Loans-Conveyance of Subsequent Mortgage
Loans, the Pre-Funding Account and the Funding Account." For a general
description of the Seller, see "The Seller and Servicer" herein.
Transfer of Mortgage Loans. Pursuant to the Purchase Agreement, the Seller
will transfer and assign to the Depositor all of its right, title and interest
in and to the Initial Mortgage Loans, the related loan agreements evidencing the
HELOCs (the "Credit Line Agreements"), the related Mortgage Notes, the Mortgages
and other related documents (collectively, the "Related Documents") and all of
the Additional Balances thereafter created prior to the commencement of the
Rapid Amortization Period. The purchase price of the Initial Mortgage Loans is a
specified percentage of the face amount thereof as of the time of transfer and
is payable by the Depositor, as provided in the Purchase Agreement. The Purchase
Price paid for any Subsequent Mortgage Loans by the Indenture Trustee, at the
direction of the Issuer, from amounts on deposit in the Pre-Funding Account
shall be one-hundred percent (100%) of the aggregate Principal Balances of the
Subsequent Mortgage Loans as of the date so transferred (as identified on the
Mortgage Loan Schedule attached to the related Subsequent Transfer Agreement
provided by the Seller). The purchase price of each Additional Balance is the
amount of the related new advance and is payable by the Issuer, either in cash
or in the form of an increase in the Variable Funding Balance of the Variable
Funding Notes (and, in certain circumstances, the issuance of additional
Certificates), as provided in the Purchase Agreement and the Indenture.
The Purchase Agreement will require that, within the time period specified
therein, the Seller deliver to the Indenture Trustee (as the Issuer's agent for
such purpose) the Mortgage Loans and the Related Documents. In lieu of delivery
of original mortgages, the Seller may deliver true and correct copies thereof
that have been certified as to authenticity by the appropriate county recording
office where such mortgage is recorded.
Representations and Warranties. The Seller will represent and warrant to
the Depositor, and to the Issuer with respect to any Subsequent Mortgage Loans,
that, among other things, (a) the information with respect to the Mortgage Loans
set forth in the schedule attached to the Purchase Agreement is true and correct
in all material respects and (b) immediately prior to the sale of the Initial
Mortgage Loans to the Depositor and the Subsequent Mortgage Loans to the Issuer,
the Seller was the sole owner and holder of the Mortgage Loans free and clear of
any and all liens and security interests. The Seller will also represent and
warrant to the Depositor, and to the Issuer with respect to any Subsequent
Mortgage Loans, that, among other things, as of the Closing Date and the related
Subsequent Transfer Date with respect to any Subsequent Mortgage Loans, (i) the
Purchase Agreement constitutes a legal, valid and binding obligation of the
Seller and (ii) the Purchase Agreement constitutes a valid transfer and
assignment of all right, title and interest of the Seller in and to the Initial
Mortgage Loans or the Subsequent Mortgage Loans, as applicable, and the proceeds
thereof.
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Within 90 days of the Closing Date and one Business Day prior to the
related Subsequent Transfer Date with respect to any Subsequent Mortgage Loans,
the Custodian will review or cause to be reviewed the Mortgage Loans and the
Related Documents and if any Mortgage Loan or Related Document is found to be
defective in any material respect which may materially and adversely affect the
value of the related Mortgage Loan or the interests of the Indenture Trustee (as
pledgee of the Trust Estate), the Securityholders or the Enhancer in such
Mortgage Loan and such defect is not cured within 90 days following notification
thereof to the Seller and the Issuer by the Custodian, the Seller will be
obligated under the Purchase Agreement to deposit the Repurchase Price into the
Custodial Account. In lieu of any such deposit, the Seller may substitute an
Eligible Substitute Loan. Any such purchase or substitution will result in the
removal of the defective Mortgage Loan from the Trust Estate (each such Mortgage
Loan, a "Deleted Loan"). The obligation of the Seller to remove a Deleted Loan
from the Trust Estate is the sole remedy regarding any defects in the Mortgage
Loans and Related Documents available to the Issuer, the Certificateholders (or
the Owner Trustee on behalf of the Certificateholders) and the Noteholders (or
the Indenture Trustee on behalf of the Noteholders) against the Seller.
With respect to any Mortgage Loan, the "Repurchase Price" is equal to the
Principal Balance of such Mortgage Loan at the time of any removal plus accrued
and unpaid interest thereon to the date of removal. In connection with the
substitution of an Eligible Substitute Loan, the Seller will be required to
deposit in the Custodial Account an amount (the "Substitution Adjustment
Amount") equal to the excess of the Principal Balance of the related Deleted
Loan over the Principal Balance of such Eligible Substitute Loan.
An "Eligible Substitute Loan" is a mortgage loan substituted by the Seller
for a Deleted Loan and assigned to the same Loan Group as the Deleted Loan,
which mortgage loan must, on the date of such substitution, (i) have an
outstanding Principal Balance (or in the case of a substitution of more than one
Mortgage Loan for a Deleted Loan, an aggregate outstanding Principal Balance)
not in excess of the Principal Balance of such Deleted Loan; (ii) have a Loan
Rate, Net Loan Rate and, if applicable, Gross Margin no lower than and not more
than 1% in excess of the Loan Rate, Net Loan Rate and Gross Margin,
respectively, of such Deleted Loan; (iii) have a Combined Loan-to-Value Ratio at
the time of substitution no higher than that of the Deleted Loan at the time of
substitution; (iv) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Deleted Loan;
(v) comply with each representation and warranty as to the Mortgage Loans set
forth in the Purchase Agreement (deemed to be made as of the date of
substitution); and (vi) satisfy certain other conditions specified in the
Indenture.
In addition, the Seller will be obligated to deposit the Repurchase Price
or substitute an Eligible Substitute Loan with respect to a Mortgage Loan as to
which there is a material breach of a representation or warranty in the Purchase
Agreement and such breach is not cured by the Seller within the time provided in
the Purchase Agreement.
In addition, the Seller has made representations and warranties to the
Depositor with respect to the Initial Mortgage Loans and will make certain
representations and warranties to the Issuer with respect to any Subsequent
Mortgage Loans. The representations and warranties of the Seller will be
assigned to the Indenture Trustee for the benefit of the Noteholders, and
therefore a breach of the representations and warranties of the Seller will be
enforceable on behalf of the Trust Estate.
The representations and warranties will generally include, among other
things, that: (i) as of the Cut-Off Date (or related Subsequent Transfer Date,
with respect to any Subsequent Mortgage Loans), the information set forth in a
schedule of the related Mortgage Loans is true and correct in all material
respects as of the date or dates respecting which such information is furnished;
(ii) the Seller was the sole holder and owner of the Mortgage Loans free and
clear of any and all liens and security interests; (iii) to the best of Seller's
knowledge, each Mortgage Loan complied in all material respects with all
applicable local, state and federal laws; (iv) no Mortgage Loan is one month or
more delinquent in payment of principal and interest; and (v) to the best of
Seller's knowledge, there is no delinquent recording or other tax or fee or
assessment lien against any related Mortgaged Property.
The Depositor will assign to the Owner Trustee all of its right, title and
interest in the Purchase Agreement, insofar as the Purchase Agreement relates to
the representations and warranties made by the Seller in respect of the Initial
Mortgage Loans and any remedies provided for with respect to any breach of such
representations and warranties. If the Seller cannot cure a breach of any
representation or warranty made by it in respect of a Mortgage Loan which
materially and adversely affects the interests of the Noteholders or the
Enhancer in such Mortgage
S-73
Loan, within 90 days after notice from the Servicer, the Seller will be
obligated to repurchase such Mortgage Loan at the Repurchase Price.
As to any such Mortgage Loan required to be purchased by the Seller as
provided above, rather than purchase the Mortgage Loan, the Seller may, at its
sole option, remove such Deleted Loan from the Trust Estate and substitute in
its place an Eligible Substitute Loan.
Assignment of the Mortgage Loans. On the Closing Date, the Depositor will
cause the Initial Mortgage Loans to be assigned without recourse to the Trust
Estate and on any Subsequent Transfer Date the Seller will cause the related
Subsequent Mortgage Loans to be assigned without recourse to the Indenture
Trustee, as assignee of the Owner Trustee, on behalf of the Trust Estate,
together with all principal and interest received on or with respect to such
Mortgage Loans after the Cut-Off Date or related Subsequent Cut-Off Date with
respect to any Subsequent Mortgage Loans (other than principal and interest due
on or before the Cut-Off Date or related Subsequent Cut-Off Date). The Owner
Trustee will, concurrently with such assignment, grant a security interest in
the Trust Estate to the Indenture Trustee to secure the Notes. Each Initial
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Purchase Agreement and each Subsequent Mortgage Loan will be identified in a
schedule appearing as an exhibit to the related Subsequent Transfer Agreement.
Such schedules will include, among other things, information as to the Principal
Balance of each Initial Mortgage Loan as of the Cut-Off Date or of any
Subsequent Mortgage Loans as of the Subsequent Cut-Off Date, as well as
information respecting the Loan Rate, the currently scheduled monthly payment of
principal and interest, the maturity of the Credit Line Agreement or Mortgage
Note, as applicable, and the Combined Loan-to-Value Ratio at origination or
modification.
The Seller will, as to each Mortgage Loan, deliver to the Custodian the
legal documents relating to such Mortgage Loan that are in possession of the
Seller, which will include the following: (i) the Credit Line Agreement or
Mortgage Note, as applicable (and any modification or amendment thereto),
endorsed without recourse in blank; (ii) the Mortgage (or a copy of such
Mortgage certified by an Officer of the Servicer for any Mortgage not returned
from the public recording office) with evidence of recording indicated thereon;
(iii) an assignment in recordable form of the Mortgage; and (iv) if applicable,
any riders or modifications to such Credit Line Agreement or Mortgage Note, as
applicable, and Mortgage, together with certain other documents at such times as
set forth in the related Agreement. Such assignments may be blanket assignments
covering Mortgages secured by Mortgaged Properties located in the same county,
if permitted by law. With the exception of items (i), (ii) and (iii), the Seller
may not be required to deliver one or more of such documents if such documents
are missing from the files of the party from whom such Mortgage Loans were
purchased.
Review of Mortgage Loans. The Bank of Maryland will be the custodian (the
"Custodian") with respect to the Mortgage Loans pursuant to a custodial
agreement (the "Custodial Agreement"), and will maintain possession of and
review documents relating to the Mortgage Loans as the agent of the Indenture
Trustee or, following payment in full of the Notes and discharge of the
Indenture, the Owner Trustee.
The Custodian will hold such documents in trust for the benefit of the
holders of the Securities and will review such documents within 90 days. If any
such document is found to be defective in any material respect, the Custodian
will be required to notify the Indenture Trustee, as pledgee of the Issuer. The
Indenture Trustee will be required to then notify the Seller. If the Seller
cannot cure such defect 90 days after notice of the defect is given to the
Seller, the Seller will be required to, within 90 days, either repurchase the
related Mortgage Loan or any property acquired in respect thereof from the
Indenture Trustee, or substitute for such Mortgage Loan a new Mortgage Loan in
accordance with the standards set forth herein. The Depositor will not be
obligated to purchase or substitute for such Mortgage Loan if the Seller
defaults on its obligation to do so. The obligation to repurchase or substitute
for a Mortgage Loan constitutes the sole remedy available to the Noteholders or
the Indenture Trustee for a material defect in a constituent document. Any
Mortgage Loan not so purchased or substituted for shall remain in the Trust
Estate.
The Servicing Agreement
The following summary describes certain terms of the Servicing Agreement
among the Issuer, the Indenture Trustee and the Servicer. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of the Servicing Agreement. See "The Agreements" in
the Prospectus.
S-74
All of the Mortgage Loans will initially be serviced by the Servicer, but
may be subserviced by one or more subservicers designated by the Servicer
pursuant to subservicing agreements between the Servicer and any future
subservicers. For a general description of the Servicer and its activities, and
certain information concerning the Servicer's delinquency experience on
residential mortgage loans, see "The Seller and Servicer--Delinquency and Loss
Experience of the Servicer's Portfolio" herein.
P&I Collections. The Servicer will be required to establish and maintain
an account (the "Custodial Account") in which the Servicer will be required to
deposit or cause to be deposited any amounts representing payments on and any
collections received in respect of the Mortgage Loans received by it subsequent
to the Cut-Off Date or related Subsequent Cut-Off Date with respect to any
Subsequent Mortgage Loans. The Custodial Account must be an Eligible Account. An
"Eligible Account" is either (i) maintained with a depository institution whose
debt obligations at the time of any deposit therein are rated by the Rating
Agencies in their highest rating category, (ii) an account or accounts the
deposits in which are fully insured to the limits established by the FDIC,
provided that any deposits not so insured shall be otherwise maintained such
that, as evidenced by an opinion of counsel, the Noteholders have a claim with
respect to the funds in such accounts or a perfected first priority security
interest in any collateral securing such funds that is superior to the claims of
any other depositors or creditors of the depository institution with which such
accounts are maintained, (iii) in the case of the Custodial Account, a trust
account or accounts maintained in either the corporate trust department or the
corporate asset services department of a financial institution which has debt
obligations that meet certain rating criteria, (iv) in the case of the Note
Payment Account, a trust account or accounts maintained with the Indenture
Trustee, or (v) such other account or accounts acceptable to the Rating
Agencies. On the 20th day of each month, or if such day is not a Business Day,
the next succeeding Business Day (the "Determination Date"), the Servicer will
determine the aggregate amounts required to be withdrawn from the Custodial
Account and deposited into the Note Payment Account and the Distribution Account
prior to the close of business on the Business Day next succeeding each
Determination Date.
"Permitted Investments" are specified in the Indenture and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then-current ratings of the Notes.
The Servicer will make withdrawals from the Custodial Account, including
but not limited to the following, and deposit such amounts as follows:
(i) to the Note Payment Account, an amount equal to the P&I Collections on
the Business Day prior to each Payment Date; and
(ii) to pay to itself or the Seller various reimbursement amounts and
other amounts as provided in the Servicing Agreement.
As to any Payment Date, "P&I Collections" will equal the sum of (a)
Interest Collections for such Payment Date and (b) during the Managed
Amortization Period for the Floating Rate Term Notes, "Net Principal
Collections" for such Payment Date, which are the excess, if any, of Principal
Collections for Loan Groups I, II and III for such Payment Date over the
aggregate amount of Additional Balances created during the related Collection
Period and conveyed to the Issuer, or, during each Rapid Amortization Period,
Principal Collections for the related Loan Group for such date. After the
commencement of the Rapid Amortization Period for the Floating Rate Term Notes,
Principal Collections for Loan Groups I, II and III for a Collection Period will
no longer be applied to acquire Additional Balances during such Collection
Period.
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements or Mortgage Notes, as applicable,
between amounts collected in respect of interest and amounts collected in
respect of principal. As to any Payment Date, "Interest Collections" will be
equal to the sum of (i) the amounts collected during the related Collection
Period, including Net Liquidation Proceeds (as defined below), allocated to
interest pursuant to the terms of the Credit Line Agreements or Mortgage Notes,
as applicable (exclusive of the pro rata portion thereof attributable to
Additional Balances not conveyed to the Trust Estate during the Rapid
Amortization Period for the Floating Rate Term Notes), reduced by the Servicing
Fees for such Collection Period and (ii) the interest portion of (A) the
Repurchase Price for any Deleted Loans and (B) the cash purchase price paid in
connection with any optional purchase of the Mortgage Loans by the Servicer. As
to any Payment Date, "Principal Collections" will be equal to the sum of (i) the
amount collected during the related Collection Period, including Net Liquidation
Proceeds allocated to principal pursuant to the terms of the Credit Line
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Agreements or Mortgage Notes, as applicable (exclusive of the pro rata portion
thereof attributable to Additional Balances not conveyed to the Trust Estate
during the Rapid Amortization Period for the Floating Rate Term Notes) and (ii)
the principal portion of the Repurchase Price for any Deleted Loans, any
Substitution Adjustment Amounts and the cash purchase price paid in connection
with any optional purchase of the Mortgage Loans by the Servicer.
As to any Payment Date, the "Collection Period" is the calendar month
preceding the month of such Payment Date.
"Net Liquidation Proceeds" with respect to any Mortgage Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with the
liquidation of such Mortgage Loan, whether through trustee's sale, foreclosure
sale or otherwise, reduced by related expenses, but not including the portion,
if any, of such amount that exceeds the Principal Balance of the Mortgage Loan
at the end of the Collection Period immediately preceding the Collection Period
in which such Mortgage Loan became a Liquidated Mortgage Loan.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the sum of the Principal Balances of all Mortgage Loans as of such
date and the Pre-Funded Amount, if any, on deposit in the Pre-Funding Account.
The "Principal Balance" of a Mortgage Loan (other than a Liquidated Mortgage
Loan) on any day is equal to the related Cut-Off Date Balance, plus (i) any
Additional Balances in respect of such Mortgage Loan conveyed to the Trust
Estate minus (ii) all collections credited against the Principal Balance of such
Mortgage Loan in accordance with the related Credit Line Agreement or Mortgage
Note, as applicable, prior to such day (exclusive of the pro rata portion
thereof attributable to Additional Balances not conveyed to the Trust Estate
during the Rapid Amortization Period for the Floating Rate Term Notes). The
Principal Balance of a Liquidated Mortgage Loan after final recovery of
substantially all of the related Liquidation Proceeds which the Servicer
reasonably expects to receive will be zero.
Events of Default; Rights Upon Event of Default. A "Servicing Default"
under the Servicing Agreement generally will include: (i) any failure by the
Servicer to deposit to the Custodial Account or the Note Payment Account any
required payment which continues unremedied for five (5) business days after the
date upon which written notice of such failure shall have been given to the
Servicer by the Issuer or the Indenture Trustee, or to the Servicer, the Issuer
and the Indenture Trustee by the Enhancer; (ii) any failure by the Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the Servicing Agreement which continues unremedied for 45 days
after the date upon which written notice of such failure shall have been given
to the Servicer by the Issuer or the Indenture Trustee, or to the Servicer, the
Issuer and the Indenture Trustee by the Enhancer and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Servicer and certain actions by the Servicer
indicating its insolvency or inability to pay its obligations.
So long as a Servicing Default remains unremedied, either the Depositor,
the Enhancer (so long as it is not in default of its payment obligations under
the Policy) or the Indenture Trustee may, by written notification to the
Servicer and to the Issuer or the Indenture Trustee, as applicable, terminate
all of the rights and obligations of the Servicer under the Servicing Agreement
(other than any right of the Servicer as Securityholder and other than the right
to receive servicing compensation and expenses for servicing the Mortgage Loans
during any period prior to the date of such termination, and such other
reimbursement of amounts the Servicer is entitled to withdraw from the Custodial
Account) whereupon the Indenture Trustee, within 90 days of such termination,
will succeed to all responsibilities, duties and liabilities of the Servicer
under the Servicing Agreement (other than the obligation to purchase Mortgage
Loans under certain circumstances) and will be entitled to similar compensation
arrangements. In the event that the Indenture Trustee would be obligated to
succeed the Servicer but is unwilling so to act, it may appoint (or if it is
unable so to act, it shall appoint) or petition a court of competent
jurisdiction for the appointment of an approved mortgage servicing institution
with a net worth of at least $10,000,000 to act as successor to the Servicer
under the Servicing Agreement; provided that any such successor Servicer shall
be acceptable to the Enhancer, as evidenced by the Enhancer's prior written
consent (which consent shall not be unreasonably withheld) and provided further
that the appointment of any such successor Servicer will not result in the
qualification, reduction or withdrawal of the ratings assigned to the Notes by
the Rating Agencies, if determined without regard to the Policy. Pending such
appointment, the Indenture Trustee is obligated to act in such capacity. The
Indenture Trustee and such successor may agree upon the servicing compensation
to be paid, which in no event may be greater than the compensation to the
initial Servicer under the Servicing Agreement.
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Servicing Compensation and Payment of Expenses. The principal servicing
compensation to be paid to the Servicer in respect of its servicing activities
will be equal to 0.50% per annum, based on the aggregate Principal Balance of
the Mortgage Loans. The Servicer will retain all assumption fees and late
payment charges, to the extent collected from Mortgagors, and any benefit which
may accrue as a result of the investment of funds in the Custodial Account, the
Note Payment Account or the Distribution Account.
The Servicer (or, if specified in the Servicing Agreement, the Indenture
Trustee on behalf of the Trust Estate) will pay or cause to be paid certain
ongoing expenses associated with the Trust Estate and incurred by it in
connection with its responsibilities under the Servicing Agreement, including,
without limitation, payment of the fees of the Enhancer, payment of the fees and
disbursements of the Indenture Trustee, the Owner Trustee, the Custodian, the
Note Registrar and any Paying Agent, and payment of expenses incurred in
enforcing the obligations of the Seller. If the Servicer is not the same person
as the Seller, the Servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of the Seller under certain limited
circumstances. In addition, as indicated in the preceding section, the Servicer
will be entitled to reimbursements for certain expenses incurred by it in
connection with Liquidated Loans and in connection with the restoration of
Mortgaged Properties, such right of reimbursement being prior to the rights of
Noteholders to receive any related Liquidation Proceeds (including Insurance
Proceeds).
Evidence as to Compliance. The Servicing Agreement provides for delivery
(on or before a specified date in each year) to the Depositor, the Enhancer and
the Indenture Trustee of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled in all material respects
the minimum servicing standards set forth in the Uniform Single Attestation
Program for Mortgage Bankers (the "Audit Guide") throughout the preceding year
or, if there has been a material default in the fulfillment of any such
obligation, such statement shall specify each such known default and the nature
and status thereof. Such statement may be provided as a single form making the
required statements as to the Servicing Agreement along with other similar
agreements.
The Servicing Agreement also provides that on or before a specified date
in each year, beginning the first such date that is at least a specified number
of months after the Cut-Off Date, a firm of independent public accountants will
furnish a statement to the Depositor and the Indenture Trustee to the effect
that, on the basis of an examination by such firm conducted substantially in
compliance with the standards established by the American Institute of Certified
Public Accountants, the servicing of mortgage loans under agreements (including
the Servicing Agreement) was conducted substantially in compliance with the
minimum servicing standards set forth in the Audit Guide (to the extent that
procedures in the Audit Guide are applicable to the servicing obligations set
forth in such agreements) except for such significant exceptions or errors in
records that shall be reported in such statement.
Copies of the annual statement of an officer of the Servicer may be
obtained by Noteholders without charge upon written request to the Servicer, at
the address indicated in the monthly statement to Noteholders.
Certain Matters Regarding the Servicer. The Servicing Agreement provides
that the Servicer may not resign from its obligations and duties thereunder
except upon a determination that performance of such duties is no longer
permissible under applicable law or except in connection with a permitted
transfer of servicing. No such resignation will become effective until the
Indenture Trustee or a successor servicer has assumed the Servicer's obligations
and duties under the Servicing Agreement.
The Servicing Agreement also provides that, except as set forth below,
neither the Servicer nor any director, officer, employee or agent of the
Servicer will be under any liability to the Trust Estate or the Noteholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Servicing Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. The Servicing Agreement
further provides that the Servicer and any director, officer, employee or agent
of the Servicer is entitled to indemnification by the Trust Estate and will be
held harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Servicing Agreement, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
Servicing Agreement provides that the Servicer will not be under any obligation
to appear in, prosecute or defend any legal or administrative action that is not
incidental to its respective duties under the Servicing Agreement and which in
its
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opinion may involve it in any expense or liability. The Servicer may, however,
in its discretion undertake any such action which it may deem necessary or
desirable with respect to the Servicing Agreement and the rights and duties of
the parties thereto and the interests of the Noteholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Estate and the
Servicer will be entitled to be reimbursed therefor out of funds otherwise
payable to Noteholders.
Any person into which the Servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the Servicer is a
party or any person succeeding to the business of the Servicer will be the
successor of the Servicer under the Servicing Agreement, provided that such
person meets the requirements set forth in the Servicing Agreement. In addition,
notwithstanding the prohibition on its resignation, the Servicer may assign its
rights and delegate its duties and obligations under the Servicing Agreement to
any person reasonably satisfactory to the Enhancer and meeting the requirements
set forth in the Servicing Agreement; provided, that such consent to assignment
may not be unreasonably withheld. In the case of any such assignment, the
Servicer will be released from its obligations under the Servicing Agreement,
exclusive of liabilities and obligations incurred by it prior to the time of
such assignment.
Amendment. The Servicing Agreement may be amended by the parties thereto,
provided that any amendment be accompanied by a letter from each Rating Agency
that such amendment will not result in the qualification, reduction or
withdrawal of the rating then assigned to the Notes, if determined without
regard to the Policy, and provided further, that the consent of the Enhancer and
the Indenture Trustee shall be obtained.
The Trust Agreement and the Indenture
The following summary describes certain terms of the Trust Agreement and
the Indenture. Such summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the respective provisions of the
Trust Agreement and the Indenture. See "The Agreements" in the Prospectus.
The Trust Estate. Simultaneously with the issuance of the Notes, the
Issuer will pledge the Trust Estate to the Indenture Trustee as collateral for
the Notes. As pledgee of the Mortgage Loans, the Indenture Trustee will be
entitled to direct the Issuer in the exercise of all rights and remedies of the
Trust Estate against the Seller under the Purchase Agreement and against the
Servicer under the Servicing Agreement.
Reports To Noteholders. The Indenture Trustee will, to the extent such
information is provided to it by the Servicer pursuant to the terms of the
Servicing Agreement, make available to each Term Noteholder, at its address
listed on the Note Register maintained with the Indenture Trustee, and each
Rating Agency, the Enhancer and the Depositor, a report setting forth certain
amounts relating to the Term Notes for each Payment Date, including, among other
things:
(i) the amount of principal, if any, payable on such Payment Date to the
Term Noteholders;
(ii) the amount of interest payable on such Payment Date to the Term
Noteholders and the amount, if any, of Interest Shortfalls;
(iii) the Term Note Balance after giving effect to any payment of
principal on such Payment Date;
(iv) the P & I Collections for each Loan Group for the related Collection
Period;
(v) the aggregate Principal Balance of the Mortgage Loans in each Loan
Group as of the end of the preceding Collection Period;
(vi) the balance of the Pre-Funding Account as of the end of the preceding
Collection Period;
(vii) the balance of the Funding Account, Capitalized Interest Account and
Reserve Account as of the end of the preceding Collection Period;
(viii) the aggregate Principal Balance of all Subsequent Mortgage Loans
transferred pursuant to a Subsequent Transfer Agreement since the Closing Date;
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(ix) the Overcollateralization Amount for each Loan Group as of the end of
the preceding Collection Period; and
(x) the amount paid, if any, under the Policy for such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts will be expressed as a dollar amount per $1,000 in face
amount of Term Notes.
The Indenture Trustee will make the reports to Term Noteholders (and, at
its option, any additional files containing the same information in an
alternative format) available each month to Term Noteholders, and other parties
to the Indenture via the Indenture Trustee's internet website and its
fax-on-demand service. The Indenture Trustee's fax-on-demand service may be
accessed by calling (301) 815-6610. The Indenture Trustee's internet website
shall initially be located at www.ctslink.com. Assistance in using the website
or the fax-on-demand service can be obtained by calling the Indenture Trustee's
customer service desk at (301) 815-6600. Parties that are unable to use the
above distribution options are entitled to have a paper copy mailed to them via
first class mail by calling the customer service desk and indicating such. The
Indenture Trustee shall have the right to change the way the reports to Term
Noteholders are distributed in order to make such distribution more convenient
and/or more accessible and the Indenture Trustee shall provide timely and
adequate notification to all above parties regarding any such changes.
Certain Covenants. The Indenture will provide that the Issuer may not
consolidate or merge with or into any other entity, unless
(i) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States, any state or the District of
Columbia;
(ii) such entity expressly assumes, by an indenture supplemental to the
Indenture, the Issuer's obligation to make due and punctual payments upon the
Notes and the performance or observance of any agreement and covenant of the
Issuer under the Indenture;
(iii) no Event of Default (as defined herein) shall have occurred and be
continuing immediately after such merger or consolidation;
(iv) the Issuer has received consent of the Enhancer and has been advised
that the ratings of the Notes (without regard to the Policy) then in effect
would not be reduced or withdrawn by any Rating Agency as a result of such
merger or consolidation;
(v) any action that is necessary to maintain the lien and security
interest created by the Indenture has been taken;
(vi) the Issuer has received an Opinion of Counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Issuer or to any Noteholder or Certificateholder; and
(vii) the Issuer has delivered to the Indenture Trustee an officer's
certificate and an Opinion of Counsel each stating that such consolidation or
merger and such supplemental indenture comply with the Indenture and that all
conditions precedent, as provided in the Indenture, relating to such transaction
have been complied with.
The Issuer will not, among other things, (i) except as expressly permitted
by the Indenture, sell, transfer, exchange or otherwise dispose of any of the
assets of the Issuer, (ii) claim any credit on or make any deduction from the
principal and interest payable in respect of the Notes (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of Notes because of the payment of taxes levied or
assessed upon the Issuer, (iii) permit the validity or effectiveness of the
Indenture to be impaired or permit any person to be released from any covenants
or obligations with respect to the Notes under the Indenture except as may be
expressly permitted thereby or (iv) permit any lien, charge, excise, claim,
security interest, mortgage or other encumbrance to be created on or extend to
or otherwise arise upon or burden the assets of the Issuer or any part thereof,
or any interest therein or the proceeds thereof. The Issuer may not engage in
any activity other than as specified under "The Issuer" herein.
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Events of Default; Rights Upon Event of Default. An "Event of Default"
under the Indenture includes:
(i) a default for five (5) days or more in the payment of any principal of
or interest on any Note;
(ii) there occurs a default in the observance or performance in any
material respect of any covenant or agreement of the Issuer made in the
Indenture, or any representation or warranty of the Issuer made in the Indenture
or in any certificate delivered pursuant hereto or in connection herewith
proving to have been incorrect in any material respect as of the time when the
same shall have been made that has a material adverse effect on the Noteholders
or the Enhancer, and such default shall continue or not be cured, or the
circumstance or condition in respect of which such representation or warranty
was incorrect shall not have been eliminated or otherwise cured, for a period of
30 days after there shall have been given, by registered or certified mail, to
the Issuer by the Indenture Trustee or to the Issuer and the Indenture Trustee
by the Holders of at least 25% of the outstanding Note Balance of the Notes or
the Enhancer, a written notice specifying such default or incorrect
representation or warranty and requiring it to be remedied and stating that such
notice is a notice of default hereunder;
(iii) there occurs the filing of a decree or order for relief by a court
having jurisdiction in the premises in respect of the Issuer or any substantial
part of the Trust Estate in an involuntary case under any applicable federal or
state bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of the Issuer or for any substantial part of the Trust Estate,
or ordering the winding-up or liquidation of the Issuer's affairs, and such
decree or order shall remain unstayed and in effect for a period of 60
consecutive days; or
(iv) there occurs the commencement by the Issuer of a voluntary case under
any applicable federal or state bankruptcy, insolvency or other similar law now
or hereafter in effect, or the consent by the Issuer to the entry of an order
for relief in an involuntary case under any such law, or the consent by the
Issuer to the appointment or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Issuer or
for any substantial part of the assets of the Trust Estate, or the making by the
Issuer of any general assignment for the benefit of creditors, or the failure by
the Issuer generally to pay its debts as such debts become due, or the taking of
any action by the Issuer in furtherance of any of the foregoing.
If an Event of Default with respect to the Notes at the time outstanding
occurs and is continuing, either the Indenture Trustee, the Enhancer or the
holders of Notes representing a majority of the aggregate Note Balance, with the
written consent of the Enhancer, may declare all Notes to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded and
annulled by the Enhancer or the holders of Notes representing a majority of the
aggregate Note Balance, with the written consent of the Enhancer.
If, following an Event of Default with respect to the Notes, the Notes
have been declared to be due and payable, the Indenture Trustee, with the
consent of the Enhancer, may in its discretion, notwithstanding such
acceleration, elect to maintain possession of the collateral securing the Notes
and to continue to apply payments 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 as they would
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 following an Event of Default, unless (i) all Noteholders consent to
such sale, (ii) 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 and to reimburse the Enhancer at the date of such sale or
(iii) 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 Notes
representing 66 2/3% of the then aggregate Note Balance and the Enhancer.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, 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 payments to the Noteholders would 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.
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In the event the principal of the Notes 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.
No Noteholder generally will have any right under the Indenture to
institute any proceeding with respect to the Indenture unless (a) such holder
previously has given to the Indenture Trustee written notice of default and the
continuance thereof, (b) the holders of any Note evidencing not less than 25% of
the aggregate Percentage Interests constituting such Note (i) have made written
request upon the Indenture Trustee to institute such proceeding in its own name
as Indenture Trustee thereunder and (ii) have offered to the Indenture Trustee
reasonable indemnity, (c) the Indenture Trustee has neglected or refused to
institute any such proceeding for 60 days after receipt of such request and
indemnity and (d) no direction inconsistent with such written request has been
given to the Indenture Trustee during such 60 day period by the Holders of a
majority of the outstanding principal balances of such Note (except as otherwise
provided for in the related Agreement with respect to the Enhancer). However,
the Indenture Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the Indenture or to institute, conduct or defend any
litigation thereunder or in relation thereto at the request, order or direction
of any of the holders of the Notes, unless such Noteholders have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred therein or thereby.
Amendment and Modification of Trust Agreement and Indenture. The Trust
Agreement may be amended from time to time by the parties thereto provided that
any amendment be accompanied by an opinion of counsel addressed to the Owner
Trustee and the Enhancer to the effect that such amendment (i) complies with the
provisions of the Trust Agreement and (ii) will not cause the Trust to be
subject to an entity level tax.
With the consent of the holders of a majority of each of the outstanding
Term Notes and Variable Funding Notes and the Enhancer, the Issuer and the
Indenture Trustee may execute a supplemental indenture to add provisions to,
change in any manner or eliminate any provisions of, the Indenture, or modify
(except as provided below) in any manner the rights of the Noteholders. Without
the consent of the holder of each outstanding Note affected thereby and the
Enhancer, however, no supplemental indenture will: (i) change the due date of
any installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or change any place of
payment where or the coin or currency in which any Note or any interest thereon
is payable; (ii) impair the right to institute suit for the enforcement of
certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate Note Balance of the outstanding Notes, the consent
of the holders of which is required for any supplemental indenture or the
consent of the holders of which is required for any waiver of compliance with
certain provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Issuer,
the Depositor or an affiliate of any of them; (v) decrease the percentage of the
aggregate Note Balance required to amend the sections of the Indenture which
specify the applicable percentage of the Note Balance necessary to amend the
Indenture or certain other related agreements; (vi) modify any of the provisions
of the Indenture in such manner as to affect the calculation of the amount of
any payment of interest or principal due on any Note (including the calculation
of any of the individual components of such calculation); or (vii) permit the
creation of any lien ranking prior to or, except as otherwise contemplated by
the Indenture, on a parity with the lien of the Indenture with respect to any of
the collateral for the Notes or, except as otherwise permitted or contemplated
in the Indenture, terminate the lien of the Indenture on any such collateral or
deprive the holder of any Note of the security afforded by the lien of the
Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Enhancer and without obtaining the consent
of the Noteholders, for the purpose of, among other things, curing any ambiguity
or correcting or supplementing any provision in the Indenture that may be
inconsistent with any other provision therein.
Termination; Redemption of Term Notes. The obligations created by the
Trust Agreement (other than certain limited payment and notice obligations of
the Owner Trustee and the Depositor, respectively) will terminate upon the
payment to the related Securityholders (including the Notes issued pursuant to
the Indenture) of all amounts held by the Servicer and required to be paid to
such Securityholders and the payment of all amounts due and owing the Enhancer
under the Insurance Agreement following the earliest of (i) the final
distribution of all moneys or other property or proceeds of the Trust Estate in
accordance with the terms of the Indenture and the Trust
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Agreement, (ii) the Final Payment Date or (iii) the purchase by the Servicer of
all Mortgage Loans pursuant to the Servicing Agreement. See "Description of the
Securities--Maturity and Optional Redemption" herein.
The Indenture will be discharged (except with respect to certain
continuing rights specified in the Indenture) upon the distribution to
Noteholders of all amounts required to be distributed pursuant to the Indenture.
Certain Matters Regarding the Indenture Trustee and the Issuer. Neither
the Indenture Trustee nor any director, officer or employee of the Indenture
Trustee will be under any liability to the Issuer or the Noteholders for any
action taken or for refraining from the taking of any action in good faith
pursuant to the Indenture or for errors in judgment; provided, however, that
none of the Indenture Trustee and any director, officer or employee thereof will
be protected against any liability which would otherwise be imposed by reason of
willful malfeasance, bad faith or negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the Indenture.
Subject to certain limitations set forth in the Indenture, the Indenture Trustee
and any director, officer, employee or agent of the Indenture Trustee will be
indemnified by the Issuer and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or negligence in the performance of its duties under such
Indenture or by reason of reckless disregard of its obligations and duties under
the Indenture. All persons into which the Indenture Trustee may be merged or
with which it may be consolidated or any person resulting from such merger or
consolidation will be the successor of the Indenture Trustee under the
Indenture.
USE OF PROCEEDS
The proceeds from the sale of the Term Notes will be used, together with
the proceeds from the sale of the Variable Funding Notes and the Certificates to
the Seller, to purchase the Initial Mortgage Loans from the Depositor and,
subsequently, to purchase certain Subsequent Mortgage Loans as described herein.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Brown & Wood LLP, special tax counsel to the Depositor,
for federal income tax purposes, the Term Notes will be characterized as
indebtedness, and neither the Issuer nor any portion of the Issuer will be
characterized as an association (or a publicly traded partnership) taxable as a
corporation or as a taxable mortgage pool within the meaning of Section 7701(i)
of the Code.
For federal income tax purposes, the Term Notes will not be treated as
having been issued with "original issue discount" as defined in the Prospectus.
Prospective investors in the Term Notes should see "Certain Federal Income
Tax Considerations" and "State Tax Considerations" in the Prospectus for a
discussion of the application of certain federal, state and local tax laws to
the Issuer and purchasers of the Term Notes.
ERISA CONSIDERATIONS
The Term Notes are eligible for purchase by pension, profit-sharing or
other employee benefit plans as well as individual retirement accounts and
certain types of Keogh Plans (each, a "Plan"). Any fiduciary or other investor
of Plan assets that proposes to acquire or hold the Term Notes on behalf of or
with assets of any Plan should consult with its counsel with respect to the
potential applicability of the fiduciary responsibility provisions of ERISA and
the prohibited transaction provisions of ERISA and the Internal Revenue Code to
the proposed investment. See "ERISA Considerations" in the Prospectus.
Each purchaser of a Term Note, by its acceptance of the Term Note, shall
be deemed to have represented that the acquisition and holding of the Term Note
by the purchaser does not constitute or give rise to a prohibited transaction
under section 406 of ERISA or section 4975 of the Internal Revenue Code, for
which no statutory, regulatory or administrative exemption is available. See
"ERISA Considerations" in the Prospectus.
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The Term Notes may not be purchased with the assets of a Plan if the
Underwriter, the Depositor, the Servicer, the Indenture Trustee, the Owner
Trustee, the Enhancer or any of their affiliates:
o has investment or administrative discretion with respect to such
Plan assets;
o has authority or responsibility to give, or regularly gives,
investment advice regarding such Plan assets, for a fee and under an
agreement or understanding that the advice will serve as a primary
basis for investment decisions regarding such Plan assets and will
be based on the particular investment needs for such Plan; or
o is an employer maintaining or contributing to such Plan.
The sale of any of the Term Notes to a Plan is in no respect a
representation by the Issuer or the Underwriter that such an investment meets
all relevant legal requirements with respect to investments by Plans generally
or any particular Plan, or that such an investment is appropriate for Plans
generally or any particular Plan.
LEGAL INVESTMENT
The Term Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
Accordingly, many institutions with legal authority to invest in
mortgage-related securities may not be legally authorized to invest in the Term
Notes. No representation is made herein as to whether the Term Notes constitute
legal investments for any entity under any applicable statute, law, rule,
regulation or order. Prospective purchasers are urged to consult with their
counsel concerning the status of the Term Notes as legal investments for such
purchasers prior to investing in the Term Notes. See "Legal Investment" in the
Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated November 3, 1999 (the "Underwriting Agreement"), Bear, Stearns & Co. Inc.
(the "Underwriter") has agreed to purchase, and the Depositor has agreed to sell
to the Underwriter, the Term Notes.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all of the Term Notes if any
of the Term Notes are purchased.
The distribution of the Term Notes by the Underwriter may be effected from
time to time in one or more negotiated transactions or otherwise, at varying
prices to be determined at the time of sale. Proceeds to the Depositor from the
sale of the Term Notes, before deducting expenses payable by the Depositor, will
be approximately 99.77% of the aggregate Term Note Balance as of the Closing
Date.
The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments the Underwriter may be required to make in respect
thereof. The Depositor is an affiliate of the Underwriter.
The Underwriter intends to make a secondary market in the Term Notes, but
has no obligation to do so. There can be no assurance that a secondary market
for the Term Notes will develop, or if it does develop, that it will provide
holders of the Term Notes with liquidity of investment at any particular time or
for the life of the Term Notes. The Term Notes will not be listed on any
securities exchange.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
Until 90 days from the date of this Prospectus Supplement, all dealers
effecting transactions in the Term Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and
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Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters with respect to the Servicer and the Seller will be
passed upon for the Servicer and the Seller by the General Counsel to GMAC
Mortgage Corporation. Certain legal matters with respect to the Term Notes will
be passed upon for the Depositor and the Underwriter by Brown & Wood LLP, New
York, New York.
RATINGS
It is a condition to issuance thereof that the Term Notes be rated "Aaa"
by Moody's Investors Service, Inc. ("Moody's"), and "AAA" by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's" and, together with Moody's, the "Rating Agencies"). The Depositor has
not requested a rating on the Term Notes by any Rating Agency other than Moody's
and Standard & Poor's. However, there can be no assurance as to whether any
other Rating Agency will rate the Term Notes or, if it does, what rating would
be assigned by any such other Rating Agency. Any rating on the Term Notes by
another Rating Agency could be lower than the ratings assigned to the Term Notes
by Moody's and Standard & Poor's. A securities rating addresses the likelihood
of the receipt by the Term Noteholders of distributions on the Mortgage Loans.
The rating takes into consideration the structural, legal and tax aspects
associated with the Certificates and the Term Notes, but does not address
Interest Shortfalls. The ratings on the Term Notes do not constitute statements
regarding the possibility that the Term Noteholders might realize a lower than
anticipated yield. A securities rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-84
INDEX OF DEFINED TERMS
10-Year Loans.................................................................24
15-Year Loans.................................................................24
25-Year Loans.................................................................24
5-Year Loans..................................................................24
Account Balance...............................................................25
Additional Balances...........................................................41
Additional Charges............................................................25
Adjustment Date...............................................................24
Aggregate Balance Differential................................................58
Amortization Periods..........................................................56
Appraised Value...............................................................22
Audit Guide...................................................................77
Balance Differential..........................................................58
Billing Cycle.................................................................24
Business Day..................................................................53
Capitalized Interest Account..................................................41
Capitalized Interest Requirement..............................................55
Certificates..................................................................52
Closing Date..................................................................67
CLTV..........................................................................22
Collection Period.............................................................76
Combined Loan-to-Value Ratio..................................................22
CPR...........................................................................66
Credit Limit..................................................................22
Credit Line Agreements........................................................72
Credit Utilization Rate.......................................................22
Custodial Account.............................................................75
Custodial Agreement...........................................................74
Custodian.....................................................................74
Cut-Off Date..................................................................6
Definitive Note...............................................................52
Deleted Loan..................................................................73
Depositor.....................................................................49
Determination Date............................................................75
Draw Period...................................................................24
DTC...........................................................................52
DTC Rules.....................................................................52
Eligible Account..............................................................75
Eligible Substitute Loan......................................................73
Enhancer Optional Deposit.....................................................58
Euroclear.....................................................................52
Event of Default..............................................................80
Excess Spread.................................................................58
Final Payment Date............................................................54
Finance Charge................................................................25
Financial Intermediary........................................................52
Floating Rate Term Notes......................................................52
GM ...........................................................................24
GMACM Home Equity Program.....................................................18
GMACM Underwriting Guide......................................................42
Gross Margin..................................................................24
Group Excess Spread...........................................................58
HEL...........................................................................22
HELOC.........................................................................22
Indenture.....................................................................49
IndentureTrustee..............................................................49
Index.........................................................................24
Initial Group I HELOCs........................................................1
InitialHELOCs.................................................................22
Initial HELs..................................................................22
Initial Mortgage Loans........................................................22
Insurance Agreement...........................................................57
S-85
Interest Collections..........................................................76
Interest Period...............................................................54
Interest Shortfall............................................................54
Junior Ratio..................................................................22
LIBOR.........................................................................54
LIBOR Business Day............................................................55
Limited Reimbursement Agreement...............................................57
Liquidated Loan...............................................................46
Liquidated Mortgage Loan......................................................58
Liquidation Loss Amount.......................................................58
Loan Group....................................................................23
Loan Group I..................................................................23
Loan Group II.................................................................23
Loan Group III................................................................23
Loan Group IV.................................................................23
Loan Rate.....................................................................24
Managed Amortization Event....................................................56
Managed Amortization Period...................................................56
Maximum Loan Rate.............................................................24
Maximum Variable Funding Balance..............................................52
Moody's.......................................................................84
Mortgage Loans................................................................22
Mortgage Notes................................................................34
Mortgaged Properties..........................................................34
Mortgages.....................................................................34
Mortgagor.....................................................................24
Net Liquidation Proceeds......................................................76
Net Loan Rate.................................................................54
Net Principal Collections.....................................................75
Note Balance..................................................................59
Note Rate.....................................................................53
Noteholders...................................................................41
Notes.........................................................................52
Original Pre-Funded Amount....................................................41
Overcollateralization Amount..................................................59
Overcollateralization Target Amount...........................................59
Owner Trustee.................................................................49
P&I Collections...............................................................75
Participants..................................................................52
Paying Agent..................................................................53
Payment Date..................................................................53
Permitted Investments.........................................................75
Plan..........................................................................84
Pool Balance..................................................................76
PPC...........................................................................66
Pre-Funding Account...........................................................41
Pre-Funding Period............................................................41
Principal Balance.............................................................76
Principal Collections.........................................................76
Principal Distribution Amount.................................................59
Purchase Agreement............................................................72
Rapid Amortization Event......................................................59
Rapid Amortization Period.....................................................56
Rating Agencies...............................................................84
Reference Bank Rate...........................................................55
Reference Banks...............................................................55
Related Documents.............................................................72
REO Loan......................................................................46
Repayment Period..............................................................25
Repurchase Price..............................................................73
Reserve Account...............................................................60
Revolving Period..............................................................56
Securities....................................................................51
Seller........................................................................23
S-86
Servicer......................................................................25
Servicing Agreement...........................................................25
Servicing Default.............................................................76
Servicing Fee.................................................................48
Standard & Poor's.............................................................84
Stated Value..................................................................22
Statistical Calculation Date Balance..........................................22
Step-up Date..................................................................54
Subsequent Cut-Off Date.......................................................40
Subsequent Mortgage Loans.....................................................22
Subsequent Transfer Agreements................................................40
Subsequent Transfer Dates.....................................................40
Substitution Adjustment Amount................................................73
Teaser Rate...................................................................24
Telerate Page 3750............................................................55
Term Note Balance.............................................................60
Term Note Owners..............................................................52
Term Noteholders..............................................................39
Term Notes....................................................................51
Trust Agreement...............................................................48
TrustEstate...................................................................41
Underwriter...................................................................83
Underwriting Agreement........................................................83
Variable Funding Balance......................................................60
Variable Funding Notes........................................................51
S-87
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APPENDIX A
INITIAL HELOCs -- CHARACTERISTICS OF LOAN GROUPS I, II AND III
Initial Group I HELOC Characteristics
Set forth below is a description of certain additional characteristics of
the Initial HELOCs in Loan Group I (the "Initial Group I HELOCs") as of the
Statistical Calculation Date. Unless otherwise specified, all principal balances
of the Initial Group I HELOCs are as of the Statistical Calculation Date and are
rounded to the nearest dollar. All percentages are approximate percentages by
the aggregate Statistical Calculation Date Balance of the Initial Group I HELOCs
(except as indicated otherwise).
PROPERTY TYPE OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Property Type Group I HELOCs Date Balance Date Balance
- ------------- -------------- ------------ ------------
Single-Family Dwelling.................... 2,915 $72,630,990.60 81.78%
Condominium............................... 331 8,202,375.32 9.24
PUD....................................... 274 7,624,307.30 8.58
Two-Family................................ 15 328,985.91 0.37
Manufactured Housing...................... 2 23,184.17 0.03
----- -------------- ------
Total....................... 3,537 $88,809,843.30 100.00%
===== ============== ======
OCCUPANCY TYPES OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Occupancy Number of Initial Calculation Statistical Calculation
(as indicated by Borrower) Group I HELOCs Date Balance Date Balance
- -------------------------- -------------- ------------ ------------
Owner Occupied............................ 3,513 $88,082,826.99 99.18%
Non-Owner Occupied........................ 24 727,016.31 0.82
----- -------------- ------
Total................... 3,537 $88,809,843.30 100.00%
===== ============== ======
A-1
PRINCIPAL BALANCES OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Principal Balances ($) Group I HELOCs Date Balance Date Balance
- ------------------------------- -------------- ------------ ------------
$0.00 to $25,000.00......... 2,205 $27,213,756.44 30.64%
$25,000.01 to $50,000.00......... 969 35,595,094.28 40.08
$50,000.01 to $75,000.00......... 258 15,677,344.49 17.65
$75,000.01 to $100,000.00........ 83 7,831,057.00 8.82
$100,000.01 to $125,000.00........ 21 2,344,080.09 2.64
$125,000.01 to $150,000.00........ 1 148,511.00 0.17
----- -------------- ------
Total.............. 3,537 $88,809,843.30 100.00%
===== ============== ======
The average Principal Balance as of the Statistical Calculation Date is
$25,108.81.
COMBINED LOAN-TO-VALUE RATIOS OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Range of Combined Number of Initial Calculation Statistical
Loan-to-Value Ratios(%) Group I HELOCs Date Balance Date Balance
- ----------------------- -------------- ------------ ------------
0.000% to 50.000%............... 20 $ 842,066.80 0.95%
50.001% to 60.000%............... 23 844,417.51 0.95
60.001% to 70.000%............... 141 3,710,573.64 4.18
70.001% to 80.000%............... 1,162 27,845,175.98 31.35
80.001% to 90.000%............... 1,518 32,641,357.55 36.75
90.001% to 100.000%.............. 672 22,924,609.73 25.81
100.001% or greater............... 1 1,642.09 0.00
----- -------------- ------
Total................. 3,537 $88,809,843.30 100.00%
===== ============== ======
The minimum and maximum Combined Loan-to-Value Ratios of the Initial Group
I HELOCs as of the Statistical Calculation Date are approximately 17.63% and
101.37%, respectively, and the weighted average Combined Loan-to-Value Ratio of
the Initial Group I HELOCs as of the Statistical Calculation Date is
approximately 85.14%.
A-2
GEOGRAPHICAL DISTRIBUTIONS OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Location Group I HELOCs Date Balance Date Balance
- -------- -------------- ------------ ------------
California............................... 1,514 $46,623,719.49 52.50%
Michigan................................. 430 7,754,175.11 8.73
Florida.................................. 121 2,890,953.51 3.26
New Jersey............................... 111 2,552,271.59 2.87
New York................................. 85 2,243,799.93 2.53
Other(1)................................. 1,276 26,744,923.67 30.11
----- -------------- ------
Total..................... 3,537 $88,809,843.30 100.00%
===== ============== ======
(1) Other includes states and the District of Columbia with under 2.5%
concentrations individually.
JUNIOR RATIOS OF GROUP I HELOC LOANS (1)(2)
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Junior Ratios (%) Group I HELOCs Date Balance Date Balance
- -------------------------- -------------- ------------ ------------
0.00% to 9.99%................... 405 $ 7,544,176.05 8.49%
10.00% to 19.99%.................. 1,846 40,830,923.63 45.98
20.00% to 29.99%.................. 816 25,725,106.00 28.97
30.00% to 39.99%.................. 270 8,877,238.04 10.00
40.00% to 49.99%.................. 112 3,384,180.78 3.81
50.00% to 59.99%.................. 58 1,568,929.11 1.77
60.00% to 69.99%.................. 15 252,606.15 0.28
70.00% to 79.99%.................. 11 478,390.65 0.54
80.00% to 89.99%.................. 2 127,492.34 0.14
90.00% to 100.00%................. 2 20,800.55 0.02
----- -------------- ------
Total................... 3,537 $88,809,843.30 100.00%
===== ============== ======
(1) The Junior Ratio of a HELOC is the ratio (expressed as a percentage)
of the credit limit of such HELOC to the sum of such credit limit and the
outstanding balance of any senior mortgage computed as of the date such HELOC is
underwritten.
(2) The weighted average Junior Ratio of the Initial Group I HELOCs as of
the Statistical Calculation Date is 21.04%.
A-3
LOAN RATES OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Loan Rates(%) Group I HELOCs Date Balance Date Balance
- ---------------------- -------------- ------------ ------------
5.001% to 8.000%................. 2,314 $57,751,293.96 65.03%
8.001% to 9.000%................. 72 2,100,455.94 2.37
9.001% to 10.000%................ 269 5,338,910.42 6.01
10.001% to 11.000%................ 354 5,935,229.37 6.68
11.001% to 12.000%................ 183 5,650,641.51 6.36
12.001% to 13.000%................ 185 5,911,153.25 6.66
13.001% to 14.000%................ 151 5,739,001.21 6.46
14.001% to 15.000%................ 9 383,157.64 0.43
----- -------------- ------
Total.................. 3,537 $88,809,843.30 100.00%
===== ============== ======
The weighted average Loan Rate as of the Statistical Calculation Date is
8.231%.
FULLY INDEXED GROSS MARGIN OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Fully Indexed Gross Margins(%) Group I HELOCs Date Balance Date Balance
- --------------------------------------- -------------- ------------ ------------
- -1.000% to -0.001%................ 2 $ 60,663.19 0.07%
0.000% to 1.000%................. 998 22,186,759.92 24.98
1.001% to 2.000%................. 1,305 26,436,020.97 29.77
2.001% to 3.000%................. 406 12,425,724.67 13.99
3.001% to 4.000%................. 338 10,704,276.44 12.05
4.001% to 5.000%................. 459 15,829,484.42 17.82
5.001% to 6.000%................. 28 1,109,296.28 1.25
6.001% to 7.000%................. 1 57,617.41 0.06
----- -------------- ------
Total.................. 3,537 $88,809,843.30 100.00%
===== ============== ======
The weighted average fully indexed gross margin as of the Statistical
Calculation Date is approximately 2.492% per annum.
A-4
CREDIT UTILIZATION RATES OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Range of Credit Number of Initial Calculation Statistical Calculation
Utilization Rates (%) Group I HELOCs Date Balance Date Balance
- --------------------- -------------- ------------ ------------
0.01% to 30.00%............... 701 $ 5,259,831.53 5.92%
30.01% to 35.00%............... 110 1,311,837.22 1.48
35.01% to 40.00%............... 124 1,902,234.23 2.14
40.01% to 45.00%............... 101 1,680,124.87 1.89
45.01% to 50.00%............... 124 2,240,853.36 2.52
50.01% to 55.00%............... 92 2,066,006.38 2.33
55.01% to 60.00%............... 117 2,684,175.37 3.02
60.01% to 65.00%............... 117 2,671,939.82 3.01
65.01% to 70.00%............... 98 2,417,023.32 2.72
70.01% to 75.00%............... 96 2,486,999.12 2.80
75.01% to 80.00%............... 111 2,647,914.30 2.98
80.01% to 85.00%............... 103 2,826,902.38 3.18
85.01% to 90.00%............... 104 2,939,225.59 3.31
90.01% to 95.00%............... 101 2,743,193.10 3.09
95.01% to 100.00%.............. 1,425 52,386,573.70 58.99
100.01% or greater.............. 13 545,009.01 0.61
----- -------------- ------
Total................ 3,537 $88,809,843.30 100.00%
===== ============== ======
The weighted average Credit Utilization Rate based on the Statistical
Calculation Date Credit Limit of the Initial Group I HELOCs as of the
Statistical Calculation Date is 83.28%.
CREDIT LIMITS OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Credit Limits ($) Group I HELOCs Date Balance Date Balance
- -------------------------- -------------- ------------ ------------
$0.01 to $ 25,000.00..... 1,357 $16,827,264.26 18.95%
$25,000.01 to $ 50,000.00..... 1,466 38,456,069.72 43.30
$50,000.01 to $ 75,000.00..... 371 16,058,524.12 18.08
$75,000.01 to $100,000.00...... 263 13,249,425.47 14.92
$100,000.01 to $125,000.00...... 24 1,588,115.44 1.79
$125,000.01 to $150,000.00...... 25 1,169,397.73 1.32
$150,000.01 to $175,000.00...... 6 120,658.77 0.14
$175,000.01 to $200,000.00...... 16 878,538.79 0.99
$200,000.01 to $225,000.00...... 1 23,774.24 0.03
$225,000.01 to $250,000.00...... 8 8,074.76 0.49
----- -------------- ------
Total............ 3,537 $88,809,843.30 100.00%
===== ============== ======
The average of the Credit Limits as of the Statistical Calculation Date is
$39,483.63.
A-5
MAXIMUM LOAN RATES OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Maximum Loan Rates (%) Group I HELOCs Date Balance Date Balance
- ---------------------- -------------- ------------ ------------
14.001% to 15.000%.............. 56 $ 868,992.81 0.98%
15.001% to 16.000%.............. 45 745,446.90 0.84
17.001% to 18.000%.............. 1,248 31,931,893.20 35.96
18.001% to 19.000%.............. 2,188 55,263,510.39 62.23
----- -------------- ------
Total................ 3,537 $88,809,843.30 100.00%
===== ============== ======
The weighted average Maximum Loan Rate as of the Statistical Calculation
Date is approximately 18.109%.
MONTHS REMAINING TO SCHEDULED MATURITY OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Months Group I HELOCs Date Balance Date Balance
- --------------- -------------- ------------ ------------
0 to 60..................... 4 $ 158,980.46 0.18%
61 to 120.................... 1,767 30,009,465.98 33.79
121 to 180.................... 785 27,448,415.41 30.91
241 to 300.................... 981 31,192,981.45 35.12
----- -------------- ------
Total.................. 3,537 $88,809,843.30 100.00%
===== ============== ======
The weighted average months remaining to scheduled maturity as of the
Statistical Calculation Date is 198 months.
ORIGINATION YEAR OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Origination Year Group I HELOCs Date Balance Date Balance
- ---------------- -------------- ------------ ------------
1988..................................... 1 $ 29,669.90 0.03%
1993..................................... 1 9,150.24 0.01
1994..................................... 6 229,253.89 0.26
1995..................................... 6 150,415.53 0.17
1996..................................... 4 21,550.60 0.02
1997..................................... 23 291,868.58 0.33
1998..................................... 199 1,973,392.87 2.22
1999..................................... 3,297 86,104,541.69 96.95
----- -------------- ------
Total.......................... 3,537 $88,809,843.30 100.00%
===== ============== ======
A-6
LIEN PRIORITY OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Lien Position Group I HELOCs Date Balance Date Balance
- ------------- -------------- ------------ ------------
First.................................... 30 $ 1,815,803.63 2.04%
Second................................... 3,507 86,994,039.67 97.96
----- -------------- ------
Total......................... 3,537 $88,809,843.30 100.00%
===== ============== ======
DEBT-TO-INCOME RATIOS OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Debt-to-Income Ratios (%) Group I HELOCs Date Balance Date Balance
- ---------------------------------- -------------- ------------ ------------
0.00% to 9.99%................... 4 $ 162,021.80 0.18%
10.00% to 19.99%................... 113 2,493,076.32 2.81
20.00% to 29.99%................... 611 12,341,110.10 13.90
30.00% to 39.99%................... 1,127 26,889,187.29 30.28
40.00% to 49.99%................... 1,323 35,491,342.16 39.96
50.00% to 59.99%................... 265 8,532,814.54 9.61
60.00% to 69.99%................... 54 1,863,236.93 2.10
70.00% to 79.99%................... 18 525,224.22 0.59
80.00% to 89.99%................... 12 336,949.85 0.38
90.00% or greater.................. 10 174,880.09 0.20
----- -------------- ------
Total.................... 3,537 $88,809,843.30 100.00%
===== ============== ======
TEASER EXPIRATION MONTH OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Teaser Expiration Month Group I HELOCs Date Balance Date Balance
- ----------------------- -------------- ------------ ------------
No Teaser................................ 1,223 $31,076,041.78 34.99%
October 1999............................. 153 3,980,445.88 4.48
November 1999............................ 467 13,525,128.95 15.23
December 1999............................ 613 17,906,444.04 20.16
January 2000............................. 261 4,106,713.14 4.62
February 2000............................ 530 10,791,582.49 12.15
March 2000............................... 290 7,423,487.02 8.36
----- -------------- ------
Total...................... 3,537 $88,809,843.30 100.00%
===== ============== ======
A-7
DOCUMENTATION TYPE OF GROUP I HELOC LOANS
Percent of
Initial Group I
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Documentation Group I HELOCs Date Balance Date Balance
- ------------- -------------- ------------ ------------
Standard................................. 2,866 $76,833,514.17 86.51%
Family First Direct...................... 262 4,425,161.90 4.98
No Income No Appraisal................... 214 3,102,713.14 3.49
Select................................... 81 2,140,501.34 2.41
No Income Verification................... 72 1,288,519.99 1.45
Alternative.............................. 20 436,527.33 0.49
Streamline............................... 13 373,871.27 0.42
Express.................................. 7 180,534.16 0.20
Quick.................................... 2 28,500.00 0.03
----- -------------- ------
Total...................... 3,537 $88,809,843.30 100.00%
===== ============== ======
A-8
Initial Group II HELOC -Characteristics
Set forth below is a description of certain additional characteristics of
the Initial Group II HELOCs as of the Statistical Calculation Date. Unless
otherwise specified, all principal balances of the Initial Group II HELOCs are
as of the Statistical Calculation Date and are rounded to the nearest dollar.
All percentages are approximate percentages by aggregate principal balance as of
the Statistical Calculation Date (except as indicated otherwise).
PROPERTY TYPE OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Property Type Group II HELOCs Date Balance Date Balance
- ------------- --------------- ------------ ------------
Single-Family Dwelling................... 2,342 $50,498,986.56 90.88%
Condominium.............................. 161 3,268,679.54 5.88
PUD...................................... 88 1,630,123.84 2.93
Two-Family............................... 13 170,517.08 0.31
----- -------------- ------
Total........................ 2,604 $55,568,307.02 100.00%
===== ============== ======
OCCUPANCY TYPES OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Occupancy Number of Initial Calculation Statistical Calculation
(as indicated by Borrower) Group II HELOCs Date Balance Date Balance
- -------------------------- --------------- ------------ ------------
Owner Occupied........................... 2,596 $55,412,518.22 99.72%
Non-Owner Occupied....................... 8 155,788.80 0.28
----- -------------- ------
Total..................... 2,604 $55,568,307.02 100.00%
===== ============== ======
PRINCIPAL BALANCES OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Principal Balances ($) Group II HELOCs Date Balance Date Balance
- ------------------------------- --------------- ------------ ------------
$0.00 to $ 25,000.00..... 1,759 $23,334,710.98 41.99%
$25,000.01 to $ 50,000.00..... 766 27,019,965.25 48.62
$50,000.01 to $ 75,000.00..... 64 3,796,220.90 6.83
$75,000.01 to $100,000.00...... 14 1,299,749.48 2.34
$100,000.01 to $125,000.00...... 1 117,660.41 0.21
----- -------------- ------
Total............ 2,604 $55,568,307.02 100.00%
===== ============== ======
The average Principal Balance as of the Statistical Calculation Date is
$21,339.60.
A-9
COMBINED LOAN-TO-VALUE RATIOS OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Range of Combined Number of Initial Calculation Statistical Calculation
Loan-to-Value Ratios(%) Group II HELOCs Date Balance Date Balance
- ----------------------- --------------- ------------ ------------
0.000% to 50.000%.............. 106 $ 2,243,187.79 4.04%
50.001% to 60.000%.............. 61 1,270,465.94 2.29
60.001% to 70.000%.............. 139 3,046,669.93 5.48
70.001% to 80.000%.............. 759 16,039,755.80 28.86
80.001% to 90.000%.............. 801 13,613,367.94 24.50
90.001% to 100.000%............. 738 19,354,859.62 34.83
----- -------------- ------
Total................ 2,604 $55,568,307.02 100.00%
===== ============== ======
The minimum and maximum Combined Loan-to-Value Ratios of the Initial Group
II HELOCs as of the Statistical Calculation Date are approximately 5.00% and
100.00%, respectively, and the weighted average Combined Loan-to-Value Ratio of
the Initial Group II HELOCs as of the Statistical Calculation Date is
approximately 83.85%.
GEOGRAPHICAL DISTRIBUTIONS OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Location Group II HELOCs Date Balance Date Balance
- -------- --------------- ------------ ------------
California............................... 1,062 $24,928,344.66 44.86%
Michigan................................. 224 3,386,990.09 6.10
Pennsylvania............................. 120 2,472,016.93 4.45
Florida.................................. 95 1,915,824.71 3.45
New York................................. 76 1,740,209.82 3.13
New Jersey............................... 72 1,507,199.85 2.71
Other (1)................................ 955 19,617,720.96 35.30
----- -------------- ------
Total..................... 2,604 $55,568,307.02 100.00%
===== ============== ======
(1) Other includes states and the District of Columbia with under 2.5%
concentrations individually.
A-10
JUNIOR RATIOS OF GROUP II HELOC LOANS (1)(2)
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Junior Ratios (%) Group II HELOCs Date Balance Date Balance
- -------------------------- --------------- ------------ ------------
0.00% to 9.99%.............. 234 $ 3,541,349.01 6.37%
10.00% to 19.99%.............. 1,238 21,486,145.49 38.67
20.00% to 29.99%.............. 716 18,170,570.26 32.70
30.00% to 39.99%.............. 223 6,626,195.90 11.92
40.00% to 49.99%.............. 112 3,447,799.02 6.20
50.00% to 59.99%.............. 43 1,254,122.20 2.26
60.00% to 69.99%.............. 19 665,864.78 1.20
70.00% to 79.99%.............. 9 160,109.20 0.29
80.00% to 89.99%.............. 5 68,322.39 0.12
90.00% to 100.00%.............. 5 147,828.77 0.27
----- -------------- ------
Total................ 2,604 $55,568,307.02 100.00%
===== ============== ======
(1) The Junior Ratio of a HELOC is the ratio (expressed as a percentage)
of the credit limit of such HELOC to the sum of such credit limit and the
outstanding balance of any senior mortgage computed as of the date such HELOC is
underwritten.
(2) The weighted average Junior Ratio of the Initial Group II HELOCs as of
the Statistical Calculation Date is 23.34%.
LOAN RATES OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Loan Rates(%) Group II HELOCs Date Balance Date Balance
- ---------------------- --------------- ------------ ------------
5.001% to 8.000%.............. 1,354 $27,291,076.46 49.11%
8.001% to 9.000%.............. 55 1,315,300.38 2.37
9.001% to 10.000%.............. 231 4,279,190.76 7.70
10.001% to 11.000%.............. 250 4,468,538.28 8.04
11.001% to 12.000%.............. 183 4,469,660.95 8.04
12.001% to 13.000%.............. 239 5,943,582.57 10.70
13.001% to 14.000%.............. 277 7,383,426.82 13.29
14.001% to 15.000%.............. 15 417,530.80 0.75
----- -------------- ------
Total................ 2,604 $55,568,307.02 100.00%
===== ============== ======
The weighted average Loan Rate as of the Statistical Calculation Date is
9.155%.
A-11
FULLY INDEXED GROSS MARGIN OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Range of Fully Indexed Number of Initial Calculation Statistical Calculation
Gross Margins(%) Group II HELOCs Date Balance Date Balance
- ---------------- --------------- ------------ ------------
0.000% to 1.000%................ 837 $15,905,165.87 28.62%
1.001% to 2.000%................ 704 12,386,427.81 22.29
2.001% to 3.000%................ 265 6,551,831.19 11.79
3.001% to 4.000%................ 285 7,067,070.27 12.72
4.001% to 5.000%................ 480 12,780,557.68 23.00
5.001% to 6.000%................ 32 852,646.32 1.53
6.001% to 7.000%................ 1 24,607.88 0.04
----- -------------- ------
Total................. 2,604 $55,568,307.02 100.00%
===== ============== ======
The weighted average fully indexed gross margin as of the Statistical
Calculation Date is approximately 2.599% per annum.
CREDIT UTILIZATION RATES OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Range of Credit Number of Initial Calculation Statistical Calculation
Utilization Rates (%) Group II HELOCs Date Balance Date Balance
- --------------------- --------------- ------------ ------------
0.01% to 30.00%............. 398 $ 2,361,170.21 4.25
30.01% to 35.00%............. 67 689,042.52 1.24
35.01% to 40.00%............. 88 908,654.52 1.64
40.01% to 45.00%............. 75 875,909.97 1.58
45.01% to 50.00%............. 92 1,356,958.20 2.44
50.01% to 55.00%............. 62 1,051,351.87 1.89
55.01% to 60.00%............. 64 1,025,266.38 1.85
60.01% to 65.00%............. 53 895,792.76 1.61
65.01% to 70.00%............. 76 1,423,251.99 2.56
70.01% to 75.00%............. 68 1,293,718.60 2.33
75.01% to 80.00%............. 57 1,174,716.01 2.11
80.01% to 85.00%............. 54 1,277,545.09 2.30
85.01% to 90.00%............. 78 1,931,636.48 3.48
90.01% to 95.00%............. 92 2,470,256.69 4.45
95.01% to 100.00%............. 1,268 36,411,329.15 65.53
100.00% or greater............. 12 421,706.58 0.76
----- -------------- ------
Total............... 2,604 $55,568,307.02 100.00%
===== ============== ======
The weighted average Credit Utilization Rate based on the Statistical
Calculation Date Credit Limit of the Initial Group II HELOCs as of the
Statistical Calculation Date is 86.94%.
A-12
CREDIT LIMITS OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Credit Limits ($) Group II HELOCs Date Balance Date Balance
- -------------------------- --------------- ------------ ------------
$0.01 to $ 25,000.00...... 1,279 $17,232,095.54 31.01%
$25,000.01 to $ 50,000.00...... 1,144 31,169,317.90 56.09
$50,000.01 to $ 75,000.00...... 120 4,707,225.86 8.47
$75,000.01 to $100,000.00....... 54 2,219,752.76 3.99
$100,000.01 to $125,000.00....... 6 227,914.96 0.41
$175,000.01 to $200,000.00....... 1 12,000.00 0.02
----- -------------- ------
Total............. 2,604 $55,568,307.02 100.00%
===== ============== ======
The average of the Credit Limits as of the Statistical Calculation Date is
$30,033.08.
MAXIMUM LOAN RATES OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Maximum Loan Rates (%) Group II HELOCs Date Balance Date Balance
- ---------------------- --------------- ------------ ------------
14.001% to 15.000%.............. 51 $ 946,526.08 1.70%
15.001% to 16.000%.............. 44 969,610.64 1.74
17.001% to 18.000%.............. 604 11,664,207.93 20.99
18.001% to 19.000%.............. 1,905 41,987,962.37 75.56
----- -------------- ------
Total................ 2,604 $55,568,307.02 100.00%
===== ============== ======
The weighted average Maximum Loan Rate as of the Statistical Calculation
Date is approximately 18.103%.
A-13
MONTHS REMAINING TO SCHEDULED MATURITY OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Months Group II HELOCs Date Balance Date Balance
- --------------- --------------- ------------ ------------
0 to 60................... 1 $ 15,734.14 0.03%
61 to 120................... 1,052 14,879,661.00 26.78
121 to 180................... 864 23,855,213.84 42.93
181 to 240................... 1 22,439.02 0.04
241 to 300................... 686 16,795,259.02 30.22
----- -------------- ------
Total................. 2,604 $55,568,307.02 100.00%
===== ============== ======
The weighted average months remaining to scheduled maturity as of the
Statistical Calculation Date is 196 months.
ORIGINATION YEAR OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Origination Year Group II HELOCs Date Balance Date Balance
- ---------------- --------------- ------------ ------------
1991.................................... 1 $ 11,301.64 0.02%
1993.................................... 1 6,242.20 0.01
1994.................................... 6 137,495.39 0.25
1995.................................... 7 93,573.14 0.17
1996.................................... 1 21,156.38 0.04
1997.................................... 16 164,139.77 0.30
1998.................................... 114 1,137,733.88 2.05
1999.................................... 2,458 53,996,664.62 97.17
----- -------------- ------
Total.......................... 2,604 $55,568,307.02 100.00%
===== ============== ======
LIEN PRIORITY OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Lien Position Group II HELOCs Date Balance Date Balance
- ------------- --------------- ------------ ------------
First................................... 52 $ 1,619,022.87 2.91%
Second.................................. 2,552 53,949,284.15 97.09
----- -------------- ------
Total......................... 2,604 $55,568,307.02 100.00%
===== ============== ======
A-14
DEBT-TO-INCOME RATIOS OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Range of Debt-to-Income Ratios (%) Group II HELOCs Date Balance Date Balance
- ---------------------------------- --------------- ------------ ------------
0.00% to 9.99%................. 9 $ 162,641.37 0.29%
10.00% to 19.99%................. 89 1,349,889.86 2.43
20.00% to 29.99%................. 409 7,615,700.38 13.71
30.00% to 39.99%................. 848 17,554,604.03 31.59
40.00% to 49.99%................. 941 21,685,861.07 39.03
50.00% to 59.99%................. 226 5,397,645.99 9.71
60.00% to 69.99%................. 50 1,043,046.90 1.88
70.00% to 79.99%................. 10 223,046.25 0.40
80.00% to 89.99%................. 14 336,059.18 0.60
90.00% or greater................. 8 199,811.99 0.36
----- -------------- ------
Total................... 2,604 $55,568,307.02 100.00%
===== ============== ======
TEASER EXPIRATION MONTH OF GROUP II HELOC LOANS
Percent of
Initial Group II
Statistical HELOCs by
Number of Initial Calculation Statistical Calculation
Teaser Expiration Month Group II HELOCs Date Balance Date Balance
- ----------------------- --------------- ------------ ------------
No Teaser................................. 1,249 $28,240,484.33 50.82%
October 1999.............................. 135 3,288,334.72 5.92
November 1999............................. 346 9,168,516.61 16.50
December 1999............................. 211 3,838,907.84 6.91
January 2000.............................. 229 3,187,847.58 5.74
February 2000............................. 303 5,158,711.12 9.28
March 2000................................ 131 2,685,504.82 4.83
----- -------------- ------
Total.................. 2,604 $55,568,307.02 100.00%
===== ============== ======
A-15
DOCUMENTATION TYPE OF GROUP II HELOC LOANS
Percent of
Initial Group II
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Documentation Group II HELOCs Date Balance Date Balance
- ------------- --------------- ------------ ------------
Standard................................... 2,193 $49,451,891.74 88.99%
No Income No Appraisal..................... 179 2,461,489.03 4.43
Family First Direct........................ 83 1,336,932.75 2.41
No Income Verification..................... 56 928,802.45 1.67
Super Express.............................. 49 676,860.21 1.22
Alternative................................ 16 271,265.24 0.49
Select..................................... 20 213,317.15 0.38
Streamline................................. 4 131,904.55 0.24
Express.................................... 4 95,843.90 0.17
----- -------------- ------
Total........................ 2,604 $55,568,307.02 100.00%
===== ============== ======
A-16
Initial Group III HELOC -Characteristics
Set forth below is a description of certain additional characteristics of
the Initial Group III HELOCs as of the Statistical Calculation Date. Unless
otherwise specified, all principal balances of the Initial Group III HELOCs are
as of the Statistical Calculation Date and are rounded to the nearest dollar.
All percentages are approximate percentages by aggregate principal balance as of
the Statistical Calculation Date (except as indicated otherwise).
PROPERTY TYPE OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Property Type Group III HELOCs Date Balance Date Balance
- ------------- ---------------- ------------ ------------
Single-Family Dwelling.................... 525 $22,815,919.77 88.43%
PUD....................................... 41 1,487,200.01 5.76
Condominium............................... 33 1,485,219.91 5.76
Two-Family................................ 1 11,992.43 0.05
--- -------------- ------
Total.......................... 600 $25,800,332.12 100.00%
=== ============== ======
OCCUPANCY TYPES OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Occupancy Number of Initial Calculation Calculation
(as indicated by Borrower) Group III HELOCs Date Balance Date Balance
- -------------------------- ---------------- ------------ ------------
Owner Occupied............................. 593 $25,444,301.52 98.62%
Non-Owner Occupied......................... 7 356,030.60 1.38%
--- -------------- ------
Total....................... 600 $25,800,332.12 100.00%
=== ============== ======
A-17
PRINCIPAL BALANCES OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Range of Principal Balances ($) Group III HELOCs Date Balance Date Balance
- ------------------------------- ---------------- ------------ ------------
$0.00 to $25,000.00...... 293 $ 3,482,140.74 13.50%
$25,000.01 to $50,000.00...... 173 6,379,839.29 24.73
$50,000.01 to $75,000.00...... 50 2,951,924.15 11.44
$75,000.01 to $100,000.00...... 14 1,357,024.23 5.26
$100,000.01 to $125,000.00...... 10 1,143,020.10 4.43
$125,000.01 to $150,000.00...... 24 3,409,488.27 13.21
$150,000.01 to $175,000.00...... 12 1,993,300.64 7.73
$175,000.01 to $200,000.00...... 15 2,886,648.48 11.19
$200,000.01 to $225,000.00...... 3 654,989.15 2.54
$225,000.01 to $250,000.00...... 4 989,365.08 3.83
$250,000.01 to $275,000.00...... 1 273,527.00 1.06
$275,000.01 to $300,000.00...... 1 279,064.99 1.08
--- -------------- ------
Total............ 600 $25,800,332.12 100.00%
=== ============== ======
The average Principal Balance as of the Statistical Calculation Date is
$43,000.55.
COMBINED LOAN-TO-VALUE RATIOS OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Range of Combined Number of Initial Calculation Calculation
Loan-to-Value Ratios(%) Group III HELOCs Date Balance Date Balance
- ----------------------- ---------------- ------------ ------------
0.000% to 50.000%.............. 126 $ 3,150,891.91 12.21%
50.001% to 60.000%.............. 100 2,275,402.51 8.82
60.001% to 70.000%.............. 105 3,231,237.58 12.52
70.001% to 80.000%.............. 94 6,743,241.30 26.14
80.001% to 90.000%.............. 109 6,240,016.97 24.19
90.001% to 100.000%.............. 66 4,159,541.85 16.12
--- -------------- ------
Total................. 600 $25,800,332.12 100.00%
=== ============== ======
The minimum and maximum Combined Loan-to-Value Ratios of the Initial Group
III HELOCs as of the Statistical Calculation Date are approximately 8.33% and
100.00%, respectively, and the weighted average Combined Loan-to-Value Ratio of
the Initial Group III HELOCs as of the Statistical Calculation Date is
approximately 74.96%.
A-18
GEOGRAPHICAL DISTRIBUTIONS OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Location Group III HELOCs Date Balance Date Balance
- -------- ---------------- ------------ ------------
California................................... 269 $11,906,250.01 46.15%
Michigan..................................... 82 4,256,017.23 16.50
Florida...................................... 24 1,125,240.38 4.36
Pennsylvania................................. 19 855,924.28 3.32
Georgia...................................... 14 793,809.09 3.08
New York..................................... 16 763,788.88 2.96
Washington................................... 15 660,001.02 2.56
Other (1).................................... 161 5,439,301.23 21.08
--- -------------- ------
Total.............................. 600 $25,800,332.12 100.00%
=== ============== ======
(1) Other means states or the District of Columbia where the individual
percentage is less than 2.5%.
JUNIOR RATIOS OF GROUP III HELOC LOANS(1)(2)
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Range of Junior Ratios (%) Group III HELOCs Date Balance Date Balance
- -------------------------- ---------------- ------------ ------------
0.00% to 9.99%............... 78 $ 2,493,572.75 9.66%
10.00% to 19.99%............... 205 5,606,591.91 21.73
20.00% to 29.99%............... 143 6,577,107.36 25.49
30.00% to 39.99%............... 71 4,212,148.25 16.33
40.00% to 49.99%............... 52 3,291,510.15 12.76
50.00% to 59.99%............... 26 1,398,713.78 5.42
60.00% to 69.99%............... 11 1,035,803.82 4.01
70.00% to 79.99%............... 6 531,289.22 2.06
80.00% to 89.99%............... 7 479,846.77 1.86
90.00% to 100.00%............... 1 173,748.11 0.67
--- -------------- ------
Total................. 600 $25,800,332.12 100.00%
=== ============== ======
(1) The Junior Ratio of a HELOC is the ratio (expressed as a percentage)
of the credit limit of such HELOC to the sum of such credit limit and the
outstanding balance of any senior mortgage computed as of the date such HELOC is
underwritten.
(2) The weighted average Junior Ratio of the Initial Group III HELOCs as
of the Statistical Calculation Date is 30.63%.
A-19
LOAN RATES OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Range of Loan Rates(%) Group III HELOCs Date Balance Date Balance
- ---------------------- ---------------- ------------ ------------
5.001% to 8.000%............... 415 $17,562,868.70 68.07%
8.001% to 9.000%............... 14 901,539.40 3.49
9.001% to 10.000%............... 73 1,730,184.02 6.71
10.001% to 11.000%............... 33 1,485,927.63 5.76
11.001% to 12.000%............... 27 1,510,462.49 5.85
12.001% to 13.000%............... 26 1,659,422.29 6.43
13.001% to 14.000%............... 11 889,927.59 3.45
14.001% to 15.000%............... 1 60,000.00 0.23
--- -------------- ------
Total................. 600 $25,800,332.12 100.00%
=== ============== ======
The weighted average Loan Rate as of the Statistical Calculation Date is
8.197%.
FULLY INDEXED GROSS MARGIN OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Range of Fully Indexed Gross Number of Initial Calculation Calculation
Margins(%) Group III HELOCs Date Balance Date Balance
- ---------------------------- ---------------- ------------ ------------
0.000% To 1.000%.................. 363 $13,335,449.88 51.69%
1.001% To 2.000%.................. 103 4,797,189.29 18.59
2.001% To 3.000%.................. 59 3,046,393.76 11.81
3.001% To 4.000%.................. 39 2,189,942.87 8.49
4.001% To 5.000%.................. 33 2,209,501.32 8.56
5.001% To 6.000%.................. 3 221,855.00 0.86
--- -------------- ------
Total................... 600 $25,800,332.12 100.00%
=== ============== ======
The weighted average fully indexed gross margin as of the Statistical
Calculation Date is approximately 1.818% per annum.
A-20
CREDIT UTILIZATION RATES OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Range of Credit Utilization Rates (%) Group III HELOCs Date Balance Date Balance
- ------------------------------------- ---------------- ------------ ------------
0.01% to 30.00%.................. 109 $ 799,221.84 3.10%
30.01% to 35.00%.................. 23 330,743.56 1.28
35.01% to 40.00%.................. 19 384,416.42 1.49
40.01% to 45.00%.................. 9 257,036.31 1.00
45.01% to 50.00%.................. 20 388,663.00 1.51
50.01% to 55.00%.................. 19 568,683.10 2.20
55.01% to 60.00%.................. 19 505,208.31 1.96
60.01% to 65.00%.................. 22 717,163.07 2.78
65.01% to 70.00%.................. 20 808,383.63 3.13
70.01% to 75.00%.................. 19 535,548.66 2.08
75.01% to 80.00%.................. 22 1,255,340.58 4.87
80.01% to 85.00%.................. 18 1,174,013.53 4.55
85.01% to 90.00%.................. 22 840,064.25 3.26
90.01% to 95.00%.................. 15 979,461.62 3.80
95.01% to 100.00%.................. 241 16,113,180.85 62.45
100.00% or greater.................. 3 143,203.39 0.56
--- -------------- ------
Total.................... 600 $25,800,332.12 100.00%
=== ============== ======
The weighted average Credit Utilization Rate based on the Statistical
Calculation Date Credit Limit of the Initial Group III HELOCs as of the
Statistical Calculation Date is 87.31%.
A-21
CREDIT LIMITS OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Range of Credit Limits ($) Group III HELOCs Date Balance Date Balance
- -------------------------- ---------------- ------------ ------------
$0.01 to $25,000.00.......... 160 $ 1,699,054.69 6.59%
$25,000.01 to $50,000.00.......... 251 6,675,322.09 25.87
$50,000.01 to $75,000.00.......... 65 2,967,729.97 11.50
$75,000.01 to $100,000.00......... 47 2,409,707.41 9.34
$100,000.01 to $125,000.00......... 7 703,114.15 2.73
$125,000.01 to $150,000.00......... 28 3,510,581.53 13.61
$150,000.01 to $175,000.00......... 9 1,474,552.53 5.72
$175,000.01 to $200,000.00......... 18 3,172,756.22 12.30
$200,000.01 to $225,000.00......... 4 731,268.62 2.83
$225,000.01 to $250,000.00......... 7 1,497,693.99 5.80
$250,000.01 to $275,000.00......... 3 679,485.93 2.63%
$325,000.01 to $350,000.00......... 1 279,064.99 1.08
--- -------------- ------
Total 600 $25,800,332.12 100.00%
=== ============== ======
The average of the Credit Limits as of the Statistical Calculation Date is
$57,806.74.
MAXIMUM LOAN RATES OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Maximum Loan Rates (%) Group III HELOCs Date Balance Date Balance
- ---------------------- ---------------- ------------ ------------
14.001% to 15.000%................ 9 $ 321,462.56 1.25%
15.001% to 16.000%................ 4 78,101.86 0.30
17.001% to 18.000%................ 172 8,551,972.62 33.15
18.001% to 19.000%................ 415 16,848,795.08 65.30
--- -------------- ------
Total.................. 600 $25,800,332.12 100.00%
=== ============== ======
The weighted average Maximum Loan Rate as of the Statistical Calculation
Date is approximately 18.120%.
A-22
MONTHS REMAINING TO SCHEDULED MATURITY OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Range of Months Group III HELOCs Date Balance Date Balance
- --------------- ---------------- ------------ ------------
0 to 60........................... 3 $ 63,780.00 0.25%
61 to 120.......................... 361 13,476,500.07 52.23
121 to 180.......................... 77 4,485,562.58 17.39
241 to 300.......................... 159 7,774,489.47 30.13
--- -------------- ------
Total........................ 600 $25,800,332.12 100.00%
=== ============== ======
The weighted average months remaining to scheduled maturity as of the
Statistical Calculation Date is 181 months.
ORIGINATION YEAR OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Origination Year Group III HELOCs Date Balance Date Balance
- ---------------- ---------------- ------------ ------------
1992.......................................... 1 $ 185,000.00 0.72%
1994.......................................... 1 125,000.00 0.48
1996.......................................... 2 15,989.09 0.06
1997.......................................... 5 376,434.16 1.46
1998.......................................... 22 401,665.86 1.56
1999.......................................... 569 24,696,243.01 95.72
--- -------------- ------
Total................................ 600 $25,800,332.12 100.00%
=== ============== ======
LIEN PRIORITY OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Lien Position Group III HELOCs Date Balance Date Balance
- ------------- ---------------- ------------ ------------
First.................................... 45 $ 2,078,774.80 8.06%
Second................................... 555 23,721,557.32 91.94
--- -------------- ------
Total............................ 600 $25,800,332.12 100.00%
=== ============== ======
A-23
DEBT-TO-INCOME RATIOS OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Range of Debt-to-Income Ratios (%) Group III HELOCs Date Balance Date Balance
- ---------------------------------- ---------------- ------------ ------------
0.00% to 9.99%...................... 6 $ 326,848.01 1.27%
10.00% to 19.99%..................... 45 1,736,472.61 6.73
20.00% to 29.99%..................... 111 4,212,588.25 16.33
30.00% to 39.99%..................... 183 7,925,399.51 30.72
40.00% to 49.99%..................... 158 5,917,436.56 22.94
50.00% to 59.99%..................... 71 4,006,944.23 15.53
60.00% to 69.99%..................... 19 1,314,348.82 5.09
70.00% to 79.99%..................... 3 101,587.73 0.39
80.00% to 89.99%..................... 2 43,759.42 0.17
90.00% or greater.................... 2 214,946.98 0.83
--- -------------- ------
Total...................... 600 $25,800,332.12 100.00%
=== ============== ======
TEASER EXPIRATION MONTH OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Teaser Expiration Month Group III HELOCs Date Balance Date Balance
- ----------------------- ---------------- ------------ ------------
No Teaser................................ 185 $ 8,237,463.42 31.93%
October 1999............................. 14 539,809.31 2.09
November 1999............................ 65 3,090,179.56 11.98
December 1999............................ 73 2,642,831.18 10.24
January 2000............................. 65 1,961,387.38 7.60
February 2000............................ 124 5,319,357.91 20.62
March 2000............................... 74 4,009,303.36 15.54
--- -------------- ------
Total............. 600 $25,800,332.12 100.00%
=== ============== ======
A-24
DOCUMENTATION TYPE OF GROUP III HELOC LOANS
Percent of
Initial Group III
HELOCs by
Statistical Statistical
Number of Initial Calculation Calculation
Documentation Group III HELOCs Date Balance Date Balance
- ------------- ---------------- ------------ ------------
Standard................................... 382 $18,128,377.82 70.26%
Select..................................... 31 3,236,516.66 12.54
Family First Direct........................ 64 2,075,511.54 8.04
No Income No Appraisal..................... 78 1,021,184.69 3.96
No Income Verification..................... 23 449,351.80 1.74
Alternative................................ 7 398,234.05 1.54
Streamline................................. 4 350,876.32 1.36
Super Express.............................. 9 101,073.30 0.39
Express.................................... 2 39,205.94 0.15
--- -------------- ------
Total................................ 600 $25,800,332.12 100.00%
=== ============== ======
A-25
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APPENDIX B
FORM OF POLICY
OBLIGATIONS: $[________________________] POLICY NUMBER: [_____]
MBIA Insurance Corporation (the "Insurer"), in consideration of the
payment of the premium and subject to the terms of this Note Guaranty Insurance
Policy (this "Policy"), hereby unconditionally and irrevocably guarantees to any
Owner that an amount equal to each full and complete Insured Amount will be
received from the Insurer by Norwest Bank Minnesota, National Association, or
its successors, as indenture trustee for the Owners (the "Indenture Trustee"),
on behalf of the Owners, for distribution by the Indenture Trustee to each Owner
of each Owner's proportionate share of the Insured Amount. The Insurer's
obligations hereunder with respect to a particular Insured Amount shall be
discharged to the extent funds equal to the applicable Insured Amount are
received by the Indenture Trustee, whether or not those funds are properly
applied by the Indenture Trustee. Insured Amounts will be made only at the time
set forth in the Policy, and no accelerated Insured Amounts will be made
regardless of any acceleration of the Notes, unless the acceleration is at the
sole option of the Insurer.
Notwithstanding the foregoing paragraph, this Policy does not cover
shortfalls, if any, attributable to the liability of the Trust or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability), Interest Shortfalls or Relief Act Shortfalls.
The Insurer will pay any Insured Amount that is a Preference Amount on the
Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (a) a certified copy of the order requiring the return of a
preference payment, (b) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (c) an assignment in such form as
is reasonably required by the Insurer, irrevocably assigning to the Insurer all
rights and claims of the Owner relating to or arising under the Obligations
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (d) appropriate instruments to effect the
appointment of the Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Obligations to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Insurer will pay any other amount payable hereunder no later than
12:00 noon, New York City time, on the later of the Payment Date on which the
related Deficiency Amount is due or the third Business Day following receipt in
New York, New York on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Insurer, or any successor fiscal agent appointed
by the Insurer (the "Fiscal Agent"), of a Notice (as described below), provided
that if such Notice is received after 12:00 noon, New York City time, on such
Business Day, it will be deemed to be received on the following Business Day. If
any such Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making claim hereunder, it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Indenture Trustee and the Indenture Trustee may submit an
amended Notice.
Insured Amounts due hereunder, unless otherwise stated herein, will be
disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owners
by wire transfer of immediately available funds in the amount of the Insured
Amount less, in respect of Insured Amounts related to Preference Amounts, any
amount held by the Indenture Trustee for the payment of such Insured Amount and
legally available therefor.
B-1
The Fiscal Agent is the agent of the Insurer only, and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under this Policy.
Subject to the terms of the Agreement, the Insurer shall be subrogated to
the rights of each Owner to receive payments under the Obligations to the extent
of any payment by the Insurer hereunder.
As used herein, the following terms shall have the following meanings:
"Agreement" means the Servicing Agreement dated as of November 17, 1999,
among the GMACM Home Equity Loan Trust 1999-2, as Issuer, GMAC Mortgage
Corporation, as Servicer, and the Indenture Trustee, as indenture trustee,
without regard to any amendment or supplement thereto, unless such amendment or
supplement has been approved in writing by the Insurer.
"Business Day" means any day other than (a) a Saturday or a Sunday (b) a
day on which the Insurer is closed or (c) a day on which banking institutions in
New York City or in the city in which the corporate trust office of the
Indenture Trustee under the Agreement is located are authorized or obligated by
law or executive order to close.
"Deficiency Amount" means (a) with respect to any Payment Date, the amount
by which the aggregate amount of accrued interest on the Notes (excluding any
Relief Act Shortfalls for such Payment Date) at the respective Note Rates on
such Payment Date exceeds the amount on deposit in the Note Payment Account
available for interest distributions on such Payment Date and (b)(i) with
respect to any Payment Date that is not the Final Payment Date, any Liquidation
Loss Amount for such Payment Date, to the extent not included in the Principal
Distribution Amount on such Payment Date or a reduction in the
overcollateralization amount or (ii) on the Final Payment Date, the aggregate
outstanding balance of the Notes to the extent otherwise not paid on such date.
"Insured Amount" means (a) as of any Payment Date, any Deficiency Amount
and (b) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by facsimile substantially in the form of Exhibit A attached hereto, the
original of which is subsequently delivered by registered or certified mail,
from the Indenture Trustee specifying the Insured Amount which shall be due and
owing on the applicable Payment Date.
"Owner" means each Noteholder (as defined in the Agreement) who, on the
applicable Payment Date, is entitled under the terms of the applicable Notes to
payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings set forth in the Agreement as of the date of execution
of this Policy, without giving effect to any subsequent amendment to or
modification of the Agreement unless such amendment or modification has been
approved in writing by the Insurer.
Any notice hereunder or service of process on the Fiscal Agent may be made
at the address listed below for the Fiscal Agent or such other address as the
Insurer shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
B-2
THIS POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND SHALL BE CONSTRUED
UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT
OF LAWS PRINCIPLES THEREOF.
The insurance provided by this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
This Policy is not cancelable for any reason. The premium on this Policy
is not refundable for any reason, including payment, or provision being made for
payment, prior to maturity of the Obligations.
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed and
attested this [______] day of [______], [______].
MBIA INSURANCE CORPORATION
By______________________________________
Title___________________________________
Attest:
By ________________________________
Secretary
B-3
EXHIBIT A
TO NOTE GUARANTY INSURANCE
POLICY NUMBER: [______]
NOTICE UNDER NOTE GUARANTY
INSURANCE POLICY NUMBER: [______]
State Street Bank and Trust Company, N.A., as Fiscal Agent
for MBIA Insurance Corporation
15th Floor
61 Broadway
New York, NY 10006
Attention: Municipal Registrar and
Paying Agency
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
The undersigned, a duly authorized officer of [NAME OF INDENTURE TRUSTEE],
as indenture trustee (the "Indenture Trustee"), hereby certifies to State Street
Bank and Trust Company, N.A. (the "Fiscal Agent") and MBIA Insurance Corporation
(the "Insurer"), with reference to Note Guaranty Insurance Policy Number:
[______] (the "Policy") issued by the Insurer in respect of the $305,000,000
GMACM Home Equity Loan Trust 1999-2 (the "Obligations"), that:
(a) the Indenture Trustee is the indenture trustee under the Servicing
Agreement dated as of November 17, 1999 among GMAC Home Equity Loan Trust
1999-2, as Issuer, GMAC Mortgage Corporation, as Servicer, and the
Indenture Trustee, as indenture trustee for the Owners;
(b) the amount due under clause (a) of the definition of Deficiency Amount for
any Payment Date occurring on [______] (the "Applicable Payment Date") is
$[______];
(c) the amount due under clause (b) of the definition of Deficiency Amount for
the Applicable Payment Date is $[______];
(d) the sum of the amounts listed in paragraphs (b) and (c) above is $[______]
(the "Deficiency Amount");
(e) the amount previously distributed payments on the Obligations that is
recoverable and sought to be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the Bankruptcy Code in accordance with a
final nonappealable order of a court having competent jurisdiction is
$[______] (the "Preference Amount");
(f) the total Insured Amount due is $[______], which amount equals the sum of
the Deficiency Amount and the Preference Amount;
(g) the Indenture Trustee is making a claim under and pursuant to the terms of
the Policy for the dollar amount of the Insured Amount set forth in (d)
above to be applied to the payment of the Deficiency Amount for the
Applicable Payment Date in accordance with the Agreement and for the
dollar amount of the Insured Amount set forth in (e) above to be applied
to the payment of any Preference Amount; and
(h) the Indenture Trustee directs that payment of the Insured Amount be made
to the following account by bank wire transfer of federal or other
immediately available funds in accordance with the terms of the Policy:
[INDENTURE TRUSTEE'S ACCOUNT NUMBER].
B-4
Any capitalized term used in this Notice and not otherwise defined herein
shall have the meaning assigned thereto in the Policy.
Any Person Who Knowingly And With Intent To Defraud Any Insurance Company
Or Other Person Files An Application For Insurance Or Statement Of Claim
Containing Any Materially False Information, Or Conceals For The Purpose Of
Misleading, Information Concerning Any Fact Material Thereto, Commits A
Fraudulent Insurance Act, Which Is A Crime, And Shall Also Be Subject To A Civil
Penalty Not To Exceed Five Thousand Dollars And The Stated Value Of The Claim
For Each Such Violation.
IN WITNESS WHEREOF, the Indenture Trustee has executed and delivered this
Notice under the Policy as of the [______] day of [______], [______].
[NAME OF INDENTURE TRUSTEE],
as Indenture Trustee
By _____________________________________
Title __________________________________
B-5
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PROSPECTUS
Asset-Backed Securities
(Issuable in Series)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
- --------------------------------------------------------------------------------
Consider carefully the risk factors beginning on page 3 of this prospectus.
The securities represent obligations of the trust only and do not represent
an interest in or obligation of the depositor, the seller, the master servicer
or any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
- --------------------------------------------------------------------------------
The Securities
Bear Stearns Asset Backed Securities, Inc., as depositor, will sell the
securities, which may be in the form of asset-backed certificates or
asset-backed notes. Each issue of securities will have its own series
designation and will evidence either:
o ownership interests in certain assets in a trust fund or
o debt obligations secured by certain assets in a trust fund.
Each series of securities will consist of one or more classes. Each class
of securities will represent the entitlement to a specified portion of future
interest payments and a specified portion of future principal payments on the
assets in the related trust fund. In each case, the specified portion may equal
from 0% to 100%. A series may include one or more classes of securities that are
senior in right of payment to one or more other classes. One or more classes of
securities may be entitled to receive distributions of principal, interest or
both prior to one or more other classes, or before or after certain specified
events have occurred. The related prospectus supplement will specify each of
these features.
The Trust Fund and Its Assets
As specified in the related prospectus supplement, each trust fund will
consist primarily of assets from one of the following categories:
o closed-end and/or revolving home equity loans secured by senior or
subordinate liens on one- to four-family residential or mixed-use
properties;
o home improvement installment sales contracts and installment loan
agreements that are either unsecured or secured by senior or
subordinate liens on one- to four-family residential or mixed-use
properties or by purchase money security interests in the related
home improvements; and
o private asset backed securities.
Each trust fund may be subject to early termination in certain
circumstances.
Market for the Securities
No market will exist for the securities of any series before they are
issued. In addition, even after the securities of a series have been issued and
sold, there can be no assurance that a resale market will develop.
Offers of the Securities
Offers of the securities are made through Bear, Stearns & Co. Inc. and the
other underwriters listed in the related prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved these securities or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
Bear, Stearns & Co. Inc.
August 5, 1999
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in the following
documents:
o this prospectus, which provides general information, some of which
may not apply to a particular series; and
o the accompanying prospectus supplement for a particular series,
which describes the specific terms of the securities of that series.
If the prospectus supplement contains information about a particular
series that differs from the information contained in this
prospectus, you should rely on the information in the prospectus
supplement.
You should rely only on the information contained in this prospectus and
the accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the accompanying prospectus supplement. The information in this prospectus
is accurate only as of the date of this prospectus.
Each prospectus supplement generally will include the following
information with respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the home equity loans, home improvement
contracts and/or private securities in the related trust fund;
o information concerning the seller or sellers of the home equity
loans, home improvement contracts and/or private securities and
information concerning any servicer;
o the terms of any credit enhancement with respect to particular
classes of the securities;
o information concerning other trust fund assets, including any
reserve fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to
each class of securities, and the timing and order of priority of
principal payments;
o information about any REMIC or FASIT tax elections for some or all
of the trust fund assets; and
o particulars of the plan of distribution for the securities.
If you require additional information, the mailing address of our
principal executive offices is Bear Stearns Asset Backed Asset Securities, Inc.,
245 Park Avenue, New York, New York 10167 and our telephone number is (212)
272-4095. For other means of acquiring additional information about us or a
series of securities, see "The Trust Funds -- Incorporation of Certain
Information by Reference" beginning on page 85 of this prospectus.
2
RISK FACTORS
You should consider the following information carefully, since it
identifies certain significant sources of risk associated with an investment in
the securities.
Limited Liquidity
No market will exist for the securities of any series before they are
issued. In addition, we cannot give you any assurance that a resale market will
develop following the issuance and sale of any series of the securities. Even if
a resale market does develop, it might not provide you with liquidity of
investment or continue for the life of the securities.
Limited Assets for Making Payments
The securities of each series will be payable solely from the assets of
the related trust fund, including any credit enhancement that may be applicable
to certain classes. In the case of securities that are in the form of notes, the
related indenture will require that noteholders proceed only against the assets
of the related trust fund. We cannot give you any assurance that the market
value of the assets in any trust fund will be equal to or greater than the total
principal amount of the related series of securities then outstanding, plus
accrued interest. Moreover, if the assets of a trust fund are ever sold, the
sale proceeds will be applied first to reimburse any related trustee, servicer
and credit enhancement provider for their unpaid fees and expenses before any
remaining amounts are distributed to securityholders.
In addition, at the times specified in the related prospectus supplement,
certain assets of the trust fund and the related security accounts may be
released to the depositor, the servicer, the credit enhancement provider or
other persons, if
o all payments then due on the related securities have been made, and
o any other payments specified in the related prospectus supplement
have been made.
Once released, such assets will no longer be available to make payments to
securityholders.
You will have no recourse against the depositor or any other person if any
required distribution on the securities is not made or for any other default.
The only obligations of the depositor with respect to the related trust fund or
the securities would result from a breach of the representations and warranties
that the depositor may make concerning the trust assets. However, because of the
depositor's very limited assets, even if the depositor should be required to
repurchase a loan from a particular trust fund because of the breach of a
representation or warranty, its sole source of funds for the repurchase would
be:
o funds obtained from enforcing any similar obligation of the
originator of the loan, or
o monies from any reserve fund established to pay for loan
repurchases.
Limited Protection Against Losses
Credit enhancement is intended to reduce the effect of delinquent payments
or loan losses on those classes of securities that have the benefit of the
credit enhancement. Nevertheless, the amount of any credit enhancement is
subject to the limits described in the related prospectus supplement. Moreover,
the amount of credit enhancement may decline or be depleted under certain
circumstances before the related securities are paid in full. As a result,
securityholders may suffer losses.
Your Yields on the Securities May Vary
The timing of principal payments on the securities of a series will be
affected by a number of factors, including the following:
o the extent of prepayments on the underlying loans in the trust fund
or, if the trust fund contains underlying
3
securities, on the loans backing the underlying securities;
o the method by which payments of principal are allocated among the
classes of securities of that series as specified in the related
prospectus supplement;
o if any party has an option to terminate the related trust early, the
effect of the exercise of the option;
o the rate and timing of defaults and losses on the assets in the
related trust fund;
o repurchases of assets in the related trust fund as a result of
material breaches of representations and warranties made by the
depositor or a seller; and
o in the case of a trust fund that contains revolving credit line
loans, any provisions for non-amortization, early amortization or
scheduled amortization periods described in the related prospectus
supplement.
All the above factors may affect the yield to maturity of the securities.
Interest payable on the securities on any given distribution date will
include all interest accrued during the related interest accrual period. Each
prospectus supplement will specify the interest accrual period for the
securities of the related series. If interest accrues during the calendar month
before the related distribution date, your effective yield will be less than it
would be if the interest accrual period ended the day before the distribution
date. As a result, your effective yield at par may be less than the indicated
coupon rate.
Some Loans Require Balloon Payments
Certain of the underlying loans may not be fully amortizing over their
terms to maturity and may require a substantial principal payment (i.e., a
"balloon" payment) at their stated maturity. Loans of this type involve a
greater degree of risk than fully amortizing loans since the related borrower
generally must be able to refinance the loan or sell the related property prior
to the loan's maturity date. The borrower's ability to do so will depend on such
factors as the level of available mortgage rates at the time of sale or
refinancing, the relative strength of the local housing market, the borrower's
equity in the property, the borrower's general financial condition and tax laws.
Adjustable Rate Loans May Be Underwritten Differently
A trust fund may include adjustable rate loans that were underwritten on
the assumption that the borrowers would be able to make higher monthly payments
in a relatively short period of time. In fact, however, the borrowers' income
may not be sufficient to meet their loan payments as payment amounts increase,
thus increasing the risk of default.
Property Values May Be Insufficient
If the home equity loans in a trust fund are primarily in a junior lien
position, any proceeds from liquidations, insurance recoveries or condemnations
must be used first to satisfy the claims of the related senior lien loans (and
related foreclosure expenses) before being available to satisfy the junior lien
loans. In addition, a junior mortgage lender may only foreclose subject to the
related senior mortgage. As a result, the junior mortgage lender must either pay
the related senior mortgage lender in full, at or before the foreclosure sale,
or agree to make the regular payments on the senior mortgage. The trust will not
have a source of funds to satisfy any senior mortgages or to continue making
payments on them. As a result, the trust's ability, as a practical matter, to
foreclose on any junior mortgage loan will be quite limited. The following
factors, among others, could adversely affect property values in such a way that
the outstanding balance of the related loans, together with any senior financing
on the same properties, would equal or exceed those values:
o an overall decline in the residential real estate markets where the
properties are located;
4
o failure of borrowers to maintain their properties adequately; and
o natural disasters that may not be covered by hazard insurance, such
as earthquakes and floods.
If property values decline, actual rates of delinquencies, foreclosures
and losses on the underlying loans could be higher than those currently
experienced by the mortgage lending industry in general.
Home Improvement Contracts and Other Loans May Not Have Sufficient Security
A trust fund may include home improvement contracts that are not secured
by an interest in real estate or otherwise. It may also include home equity
loans with original loan-to-value ratios (or combined loan-to-value ratios in
the case of junior loans) greater than 100%. In these cases, the trust fund
could be treated as a general unsecured creditor for the unsecured portion of
these loans.
If a loan of this type goes into default, the trust fund will have
recourse only against the borrower's assets generally for the unsecured portion
of the loan, along with the borrower's other general unsecured creditors. In a
bankruptcy proceeding, the unsecured portion of the loan may be discharged, even
if the value of the borrower's assets available to the trust fund would be
insufficient to pay the remaining amounts owing on the loan.
Home Improvement Contracts Will Not Be Stamped
The depositor will ensure that a UCC-1 financing statement is filed that
identifies as collateral the home improvement contracts included in a trust
fund. However, unless the related prospectus supplement provides otherwise, the
home improvement contracts themselves will not be stamped or marked to reflect
their assignment to the trust fund. Thus, if as a result of negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
contracts without notice of the assignment to the trust fund, the interests of
the related securityholders in those contracts could be defeated.
Pre-Funding May Adversely Affect Your Investment
The related prospectus supplement may provide that the depositor or seller
will deposit a specified amount in a pre-funding account on the date the
securities are issued. In this case, the deposited funds may be used only to
acquire additional assets for the trust during a specified period after the
initial issuance of the securities. Any amounts remaining in the account at the
end of that period will be distributed as a prepayment of principal to the
holders of the related securities. As a result, the yield to maturity on your
investment may be adversely affected.
Bankruptcy Laws May Adversely Affect Trust Fund Assets
The federal bankruptcy code and state debtor relief laws may adversely
affect the ability of the trust fund, as a secured lender, to realize upon its
security. For example, in a federal bankruptcy proceeding, a lender may not
foreclose on mortgaged property without the bankruptcy court's permission.
Similarly, the debtor may propose a rehabilitation plan, in the case of
mortgaged property that is not his principal residence, that would reduce the
amount of the lender's secured indebtedness to the value of the property as of
the commencement of the bankruptcy. As a result, the lender would be treated as
a general unsecured creditor for the reduced amount, the amount of the monthly
payments due on the loan could be reduced, and the interest rate and loan
payment schedule could be changed.
Any such actions could result in delays in receiving payments on the loans
underlying the securities and result in the reduction of total payments.
Environmental Risks May Adversely Affect Trust Fund Assets
Federal, state and local laws and regulations impose a wide range of
requirements on activities
5
that may affect the environment, health and safety. In certain circumstances,
these laws and regulations impose obligations on owners or operators of
residential properties such as those that secure the loans. Failure to comply
with these laws and regulations can result in fines and penalties that could be
assessed against the trust fund as owner of the related property.
In some states, a lien on the property due to contamination has priority
over the lien of an existing mortgage. Further, a mortgage lender may be held
liable as an "owner" or "operator" for costs associated with the release of
petroleum from an underground storage tank under certain circumstances. If the
trust fund is considered the owner or operator of a property, it will suffer
losses as a result of any liability imposed for environmental hazards on the
property.
Consumer Protection Laws May Adversely Affect Trust Fund Assets
The loans and contracts in each trust fund also may be subject to federal
laws relating to loan origination and underwriting. These laws
o require certain disclosures to the borrowers regarding the terms of
the loans;
o prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the consumer credit
protection act, in the extension of credit;
o regulate the use and reporting of information related to the
borrower's credit experience; and
o require additional application disclosures, limit changes that may
be made to the loan documents without the borrower's consent and
restrict a lender's ability to declare a default or to suspend or
reduce a borrower's credit limit to certain enumerated events.
Certain loans are also subject to federal laws that impose additional
disclosure requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates or high up-front fees and charges. These laws can
impose specific liabilities upon creditors that fail to comply and may affect
the enforceability of the related loans. In addition, the trust fund, as
assignee of the creditor, would generally be subject to all claims and defenses
that the borrower could assert against the creditor, including the right to
rescind the loan.
Certain home improvement contracts are subject to federal laws that
protect the borrower from defective or incomplete work by a contractor. These
laws permit the borrower to withhold payment if the work does not meet the
quality and durability standards agreed to between the borrower and the
contractor. These laws have the effect of subjecting the trust fund, as assignee
of the creditor, to all claims and defenses which the borrower in a sale
transaction could assert against the seller of defective goods.
If certain provisions of these federal laws are violated, the servicer may
be unable to collect all or part of the principal or interest on the loans. The
trust fund also could be subject to damages and administrative enforcement.
Subordinate Securities Are Subject to Additional Risk
If you invest in any class of subordinate securities, your rights as an
investor to receive payments otherwise due you will be subordinate to the rights
of the servicer and the holders of the related senior securities. As a result,
before investing in any subordinate securities, you must be prepared to bear the
risk that payments on your securities may be delayed and that you might not
recover all of your initial investment.
Financial Instruments May Not Perform As Expected
As described under "Enhancement--Financial Instruments," a trust fund may
include
6
financial instruments to protect against certain risks or to provide certain
cash flow characteristics for particular classes of the securities of a series.
If you invest in such a class and the issuer of the financial instruments fails
to perform its obligations, the yield to maturity, market price and liquidity of
your securities could be materially adversely affected. In addition, if the
issuer of the related financial instruments experiences a credit rating
downgrade, the market price and liquidity of your securities could be reduced.
Finally, if the financial instruments are intended to provide an approximate or
partial hedge for certain risks or cashflow characteristics, the yield to
maturity, market price and liquidity of your securities could be adversely
affected to the extent that the financial instrument does not provide a perfect
hedge.
REMIC Residual Securities Are Subject to Additional Risk
If you invest in any class of securities that represent the "residual
interest" in a real estate mortgage investment conduit (REMIC), you will be
required to report as ordinary income your pro rata share of the REMIC's taxable
income, whether or not you actually received any cash. Thus, as the holder of a
REMIC residual interest security, you could have taxable income and tax
liabilities in a year that are in excess of your ability to deduct servicing
fees and any other REMIC expenses. In addition, because of their special tax
treatment, your after-tax yield on a REMIC residual interest security may be
significantly less than that of a corporate bond with similar cash-flow
characteristics and pre-tax yield. Transfers of REMIC residual interest
securities are also restricted.
FASIT Ownership Securities Are Subject to Additional Risk
If you are a fully taxable domestic corporation that invests in any class
of securities representing the "ownership interest" in a financial asset
securitization investment trust (FASIT), you will be required to report as
ordinary income your pro rata share of the FASIT's taxable income, whether or
not you actually received any cash. Thus, as the holder of a FASIT ownership
interest security, you could have taxable income and tax liabilities in a year
that are in excess of your ability to deduct servicing fees and any other FASIT
expenses. In addition, because of their special tax treatment, your after-tax
yield on a FASIT ownership interest security may be significantly less than that
of a corporate bond with similar cash-flow characteristics and pre-tax yield.
Transfers of FASIT ownership interest securities are also restricted.
Book Entry Registration
Limit on Liquidity of Securities. Securities issued in book-entry form may
have only limited liquidity in the resale market, since investors may be
unwilling to purchase securities for which they cannot obtain physical
instruments.
Limit on Ability to Transfer or Pledge. Transactions in book-entry
securities can be effected only through The Depository Trust Company (DTC), its
participating organizations, its indirect participants and certain banks. As a
result, your ability to transfer or pledge securities issued in book-entry form
may be limited.
Delays in Distributions. You may experience some delay in the receipt of
distributions on book-entry securities since the distributions will be forwarded
by the trustee to DTC for credit to the accounts of its participants. In turn,
these participants will credit the distributions to your account either directly
or indirectly through indirect participants.
Security Ratings Are Not Recommendations
Any class of securities issued under this prospectus and the accompanying
prospectus supplement will be rated in one of the four highest rating categories
of a nationally recognized rating agency. A rating is based on the adequacy of
the value of the trust fund assets and any credit enhancement for that class and
reflects the rating agency's assessment of the likelihood that holders of the
class of securities will receive the payments to which they are entitled. A
rating is not an assessment of the likelihood that principal prepayments on the
7
underlying loans will be made, the degree to which the rate of prepayments might
differ from that originally anticipated or the likelihood of an early
termination of the securities. You should not view a rating as a recommendation
to purchase, hold or sell securities because it does not address the market
price or suitability of the securities for any particular investor.
There is no assurance that any rating will remain in effect for any given
period or that the rating agency will not lower or withdraw the rating in the
future. The rating agency could lower or withdraw its rating due to:
o any decrease in the adequacy of the value of the trust fund assets
or any related credit enhancement, or
o an adverse change in the financial or other condition of a credit
enhancement provider.
DESCRIPTION OF THE SECURITIES
General
Bear Stearns Asset Backed Securities, Inc. (the "Depositor") will
establish a trust fund (each, a "Trust Fund") for each series (a "Series") of
its Asset-Backed Notes (the "Notes") and of its Asset-Backed Certificates (the
"Certificates").
Each Series of Notes will be issued pursuant to an indenture (each, an
"Indenture") between the Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to that Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this prospectus forms a part. If the Trust Fund includes Loans, the Trust
Fund and the related servicer (the "Servicer") will also enter into a Servicing
Agreement (each, a "Servicing Agreement") with respect to the Loans.
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 related Servicer (if the Trust Fund includes Loans) and
the related 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. We refer to both Notes and
Certificates in this prospectus as "Securities."
The seller or sellers named in the related Prospectus Supplement
(collectively, the "Seller"), from which the Depositor will have purchased
certain of the assets included in the Trust Fund, may agree to reimburse the
Depositor for certain fees and expenses that the Depositor incurs in connection
with the offering of the related Securities.
The following summaries describe certain provisions in the Pooling and
Servicing Agreement or Trust Agreement, in the case of a Series of Certificates,
and the Indenture and the Servicing Agreement, in the case of a Series of Notes
(collectively, 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 in this prospectus
by reference as part of such summaries.
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Each Series of Securities will consist of one or more classes (each, a
"Class"), one or more of which may be compound interest Securities, variable
interest Securities, planned balance (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 any conditions, applicable to a
particular Class as described in the related Prospectus Supplement, the transfer
of the Securities may be registered and the Securities may be exchanged at the
office of the Trustee without the payment of any service charge, other than any
tax or governmental charge payable in connection with the 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 (each, a "Distribution
Date") by check mailed to holders of that Series, registered as such at the
close of business on the record date (specified in the Prospectus Supplement)
that is applicable to that Distribution Date at their addresses appearing on the
security register (each, a "Holder"). However, payments may be made by wire
transfer (at the expense of the Holder requesting payment by wire transfer) in
certain circumstances described in the Prospectus Supplement. In addition final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of the Security at the office of the related Trustee.
Notice of the final payment on a Security will be mailed to the Holder of that
Security before the Distribution Date on which the final principal payment is
expected to be made.
Payments of principal of and interest on the Securities will be made by
the Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, the following amounts will be deposited directly into an
account (each, a "Collection Account") established for a particular Series with
the Trustee (or with the Servicer in the name of the Trustee):
o all payments with respect to the Primary Assets (as defined below)
for a Series, together with reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating agencies
identified in the Prospectus Supplement as rating that Series (each,
a "Rating Agency") deposited in one or more reserve funds
established in the name of the Trustee (each, a "Reserve Fund'); and
o amounts available pursuant to any other credit enhancement.
If provided in the related Prospectus Supplement, the deposits may be net
of certain amounts payable to the Servicer and any other person specified in the
Prospectus Supplement. Those amounts thereafter will be deposited into the
separate distribution account (each, a "Distribution Account") established for
that Series and will be available to make payments on the Securities of that
Series on the next Distribution Date. See "The Trust Funds--Collection and
Distribution Accounts" in this prospectus.
The Primary Assets and Their Valuation
The "Primary Assets" of each Trust Fund may include one or more pools of
the following:
o closed-end and/or revolving home equity loans (the "Mortgage
Loans"), secured by senior or subordinate liens on one- to
four-family residential or mixed-use properties;
9
o 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 related home improvements (the "Home
Improvements"); and
o securities (the "Private Securities") backed or secured by Mortgage
Loans, Contracts and/or Home Improvement Contracts (the "Underlying
Loans").
The Mortgage Loans and the Home Improvement Contracts are collectively
referred to in this prospectus as the "Loans". The residential or mixed-use
properties that secure the Mortgage Loans are collectively referred to in this
prospectus as the "Mortgaged Properties".
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund 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
o the product of the Asset Value Percentage as set forth in the
Indenture and
o 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
that 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.
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 or reinvestment agreement or other
arrangement satisfactory to the Rating Agencies. If the Assumed Reinvestment
Rate is insured in this way, the related Prospectus Supplement will set forth
the terms of the arrangement.
Payments of Interest
The Securities of each Class that by their terms are entitled to receive
interest will bear interest (calculated, unless otherwise specified in the
related Prospectus Supplement, on the basis of a 360-day year of twelve 30-day
months) from the date and at the rate specified, or will be entitled to receive
interest payment amounts calculated in the method described, in the related
Prospectus Supplement. Interest on the interest-bearing 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 interest rates of the Loans (or Underlying
Loans) included in the related Trust Fund and/or as prepayments occur with
respect to the Loans (or Underlying Loans). 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
principal on such Distribution Date.
10
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 that Distribution Date.
Payments of Principal
On each Distribution Date for a Series, principal payments will be made to
the Holders of the related Securities on which principal is then payable, to the
extent set forth in the related Prospectus Supplement. The payments will be made
in a total amount determined as specified in the related Prospectus Supplement
and will be allocated among the respective Classes of the 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 total principal balance of
that Class will be fully paid, and with respect to each Class of a Series of
Certificates is the date on which the principal balance of that Class is
expected to be reduced to zero, in each case calculated on the basis of the
assumptions applicable to that 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 that reduce the outstanding
principal amount of the Securities, it is likely that the actual final
Distribution Date of any Class will occur earlier, and may occur substantially
earlier, than its Final Scheduled Distribution Date. Furthermore, with respect
to a Series of Certificates, unless otherwise specified in the related
Prospectus Supplement, the actual final Distribution Date of any Certificate may
occur later than its Final Scheduled Distribution Date as a result of
delinquencies, defaults and liquidations of the Primary Assets in the Trust
Fund. No assurance can be given as to the actual prepayment experience with
respect to a Series. See "-Weighted Average Lives 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 that 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 related Loans (or
Underlying Loans) or low yields then available for reinvestment, the entity
specified in the Prospectus Supplement determines, based on assumptions set
forth in the applicable Agreement, that the amount available for the payment of
interest that will have accrued on those 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 those Securities to that date. In this event and as further described in the
Prospectus Supplement, the Trustee will redeem a principal amount of outstanding
Securities of that Series sufficient to cause the Available Interest Amount to
equal the amount of interest that will have accrued through the designated
interest accrual date for that Series of Securities outstanding immediately
after the redemption.
Optional Redemption, Purchase or Termination
The Depositor or the Servicer or any other entity that may be designated
in the related Prospectus Supplement will have the option to redeem, in whole or
in part, one or more Classes of Notes or purchase
11
one or more Classes of Certificates of any Series on any Distribution Date under
the circumstances, if any, specified in the related Prospectus Supplement.
Alternatively, if the Prospectus Supplement for a Series of Certificates so
provides, the Depositor, the Servicer or another entity designated in the
related Prospectus Supplement will have the option to cause an early termination
of the Trust Fund by repurchasing all of the Primary Assets from the Trust Fund
on or after a date specified in the Prospectus Supplement, or on or after such
time as the total outstanding principal amount of the Certificates or Primary
Assets (as specified in the Prospectus Supplement) is equal to or less than the
amount or percentage specified in the 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 Prospectus Supplement. If specified in the 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 Internal Revenue Code of 1986, as amended (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 Lives 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
the 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, whether 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, that is used
and may contain tables setting forth the projected weighted average life of each
Class of Securities of the Series and the percentage of the original principal
amount of each Class of Securities of the Series that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Loans (or Underlying
Loans relating to the Private Securities, as applicable) included in the related
Trust Fund are made at rates corresponding to various percentages of the
prepayment standard or model specified in the 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 others. The
deductibility of mortgage interest payments, servicing decisions and other
factors also can 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 the
Loans (or Underlying Loans).
12
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) for a Series, those loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by those loans. In this regard, it should be noted that the Loans
(or Underlying Loans) for a Series may have different interest rates. In
addition, the weighted average life of a Class of the Securities may be affected
by the varying maturities of the Loans (or Underlying Loans). If any Loans (or
Underlying Loans) for a Series have actual terms to stated maturity that are
less than those that were 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 by the Depositor from the Seller composed of:
o the Primary Assets;
o amounts available from the reinvestment of payments on the Primary
Assets at the Assumed Reinvestment Rate, if any, specified in the
related Prospectus Supplement;
o any credit enhancement ("Enhancement") in the form of an irrevocable
letter of credit, surety bond, insurance policy or other form of
credit support;
o any Mortgaged Property or Home Improvement that secured a Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or
repossession "REO Property"); and
o 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 the Prospectus Supplement indicates otherwise,
will serve as collateral only for that Series of Securities. Holders of a Series
of Notes may only proceed against the collateral securing that Series of Notes
in the case of a default with respect to that Series of Notes and may not
proceed against any assets of the Depositor or the related Trust Fund not
pledged to secure those 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) that is
specified in the related Prospectus Supplement. The Servicer will service the
Loans pursuant to a Pooling and Servicing Agreement, with respect to a Series of
Certificates or a Servicing Agreement between the Trust Fund and Servicer, with
respect to a Series of Notes.
If the Prospectus Supplement so provides, a Trust Fund relating to a
Series of Securities may be a business trust formed under the laws of the state
specified in the Prospectus Supplement pursuant to a trust agreement (each, a
"Trust Agreement") between the Depositor and the Trustee.
13
Each Trust Fund, prior to the initial offering of the related Series of
Securities, will have no assets or liabilities. No Trust Fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related Primary Assets and other
assets contemplated in this prospectus and in the related Prospectus
Supplement, and the proceeds thereof;
o to issue the Securities;
o to make payments and distributions on the Securities; and
o to perform 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, as and to the extent the related
Prospectus Supplement specifies.
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 forming a part of the revolving
loans (the "Revolving Credit Line Loans" and, together with the Closed-End
Loans, the "Mortgage Loans") secured by mortgages, primarily on one- to
four-family residential or mixed-use 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 date designated in the Prospectus
Supplement as the cut-off date (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 that 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
under which only the amount of interest that accrues on the loan during the
billing cycle must be paid. 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 to be lower than, or
14
similar to, those of traditional fully-amortizing first mortgage loans. 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 first 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 Mortgage Loans. Moreover, the
enforcement of a "due-on-sale" provision (as described below) will have the same
effect as a prepayment of the related Mortgage Loan. See "Certain Legal Aspects
of the Loans--Due-on-Sale Clauses in Mortgage Loans."
Collections on Revolving Credit Line Loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that is as
little as the minimum monthly payment for that 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, fees and charges for that month.
o A borrower may make a payment that is as much as the entire
Principal Balance plus accrued interest and related fees and charges
during a month.
o A borrower may fail to make the required periodic payment.
o Collections on the Mortgage Loans may vary due to seasonal
purchasing and the payment habits of borrowers.
The Mortgage Loans will be secured by "Single Family Properties" (i.e.,
one- to four-family residential housing, including condominium units and
cooperative dwelling units) and mixed-use properties. 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 Single Family 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 dwelling units consist of a lien on the shares issued by the
cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
15
The aggregate Principal Balance of Loans secured by Single Family
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
o a representation by the borrower at origination of the Mortgage Loan
either that the underlying Mortgaged Property will be used by the
borrower for a period of at least six months every year or that the
borrower intends to use the Mortgaged Property as a primary
residence, or
o a finding that the address of the underlying Mortgaged Property is
the borrower's mailing address as reflected in the Servicer's
records.
To the extent specified in the related Prospectus Supplement, Single
Family Properties may include non-owner occupied investment properties and
vacation and second homes.
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 senior or junior Mortgages primarily on Single Family
Properties, or by purchase money security interests in the related Home
Improvements. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the "Home Improvements") securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. As used in this prospectus, the term "Property" includes
the Mortgaged Properties and the Home Improvements.
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 under various FHA
programs as authorized under the United States Housing Act of 1937, as amended..
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.
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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 borrower'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
borrower. 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
borrower 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 a Loan upon default for
an amount equal to the principal amount of the 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 the date of foreclosure but in general only to the extent it was allowed
pursuant to a forbearance plan approved by HUD. When entitlement to insurance
benefits results from assignment of the Loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself, upon foreclosure of an FHA-insured Loan,
bears interest from a date 30 days after the borrower's first uncorrected
failure to perform any obligation to make any payment due under the Loan and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended. 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
17
guaranty exceed the amount of the original guaranty. The VA may, at its option
and without regard to its 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
guaranteed amount is submitted to the VA after liquidation of the Mortgaged
Property.
The amount payable under a VA guaranty will be the percentage of the VA-
insured loan originally guaranteed by the VA applied to the 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:
o the aggregate unpaid Principal Balance of the Loans;
o the range and weighted average interest rates on the Loans, and, in
the case of adjustable rate Loans, the range and weighted average of
the current interest rates and the lifetime interest rate caps, if
any;
o the range and average Principal Balance of the Loans;
o the weighted average original and remaining terms to stated maturity
of the Loans and the range of original and remaining terms to stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the Loans, as applicable;
o the percentage (by Principal Balance as of the Cut-off Date) of
Loans that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Loans;
o 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;
o the geographic distribution of any Mortgaged Properties securing the
Loans;
o for Loans that are secured by Single Family Properties, the
percentage (by Principal Balance as of the Cut-off Date) secured by
shares relating to cooperative dwelling units, condominium units,
investment property and vacation or second homes;
o the lien priority of the Loans;
o the delinquency status and year of origination of the Loans;
o whether such Loans are Closed-End Loans and/or Revolving Credit Line
Loans; and
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o in the case of Revolving Credit Line Loans, the general payments and
credit line terms of those Loans and other pertinent features.
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, more
general or approximate 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 the Securities.
Private Securities
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities that include:
o pass-through certificates representing beneficial interests in loans
of the type that would otherwise be eligible to be Loans (the
"Underlying Loans") or
o collateralized obligations secured by Underlying Loans.
The pass-through certificates or collateralized obligations will have previously
been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering from a
person that is not an affiliate of the issuer of the Private
Securities at the time of sale (nor its affiliate at any time during
the three preceding months) and a period of two years has elapsed
since the date the Private Securities were acquired from the issuer
or from its affiliate, whichever is later.
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 insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (each, 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
o a financial institution or other entity engaged generally in the
business of lending;
o a public agency or instrumentality of a state, local or federal
government; or
o 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 generally will be
limited to certain representations and warranties that
19
it makes 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.
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. The 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, 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:
o the total approximate principal amount and type of the Private
Securities to be included in the Trust Fund for that Series;
o certain characteristics of the Underlying Loans, including
(a) the payment features of the 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 the
Underlying Loans insured or guaranteed by a governmental
entity;
(c) the servicing fee or range of servicing fees for the
Underlying Loans;
(d) the minimum and maximum stated maturities of the Underlying
Loans at origination;
(e) the lien priority of the Underlying Loans; and
(f) the delinquency status and year of origination of such
Underlying Loans;
o the maximum original term to stated maturity of the Private
Securities;
o the weighted average term to stated maturity of the Private
Securities;
20
o the pass-through or certificate rate or range of rates for the
Private Securities;
o the PS Sponsor, the PS Servicer (if other than the PS Sponsor) and
the PS Trustee for the Private Securities;
o certain characteristics of any credit support such as reserve funds,
security policies or guarantees relating to the Underlying Loans or
to the Private Securities themselves;
o 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
o the terms on which Underlying Loans may be substituted for those
originally underlying the Private Securities.
The above disclosure may be on an approximate basis and will be as of the
date specified in the related Prospectus Supplement. If information of the
nature described above for the Private Securities is not known to the Depositor
at the time the Securities are initially offered, more general or approximate
information of a similar nature 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 SEC 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 any cash 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 that may be 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 the Series, a portion of the proceeds of the
sale of the related Securities (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
21
Pre-Funded Amount exceed 50% of the total principal amount of the related
Securities, and in no case will the Pre-Funding Period exceed one year. The
Primary Assets to be 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 to them. 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 the
Series, a portion of the proceeds of the sale of the Securities of the Series
will be deposited into the Capitalized Interest Account and used to fund the
excess, if any, of
o the sum of
(i) the amount of interest accrued on the Securities of the Series
and
(ii) if specified in the related Prospectus Supplement, certain
fees or expenses during the Pre-Funding Period,
over
o the amount of interest available from the Primary Assets in the
Trust Fund.
Any amounts on deposit in the Capitalized Interest Account at the end of
the Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus Supplement.
ENHANCEMENT
If so provided 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 the 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
the Prospectus Supplement. Enhancement for a Series may include one or more of
the forms described below, or such other form as may be specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, any
Enhancement may be structured so as to protect against losses relating to more
than one Trust Fund, in the manner described in that Prospectus Supplement.
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 Holders of subordinated Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of senior Securities of the same Series, but only to the extent
described in the related Prospectus Supplement.
22
Insurance
If specified in the related Prospectus Supplement, Enhancement for a
Series may consist of pool insurance policies, 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 related Prospectus
Supplement, 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 the 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 the Property, or
(ii) upon transfer of the Property to the special hazard insurer, the
unpaid Principal Balance of the Loan at the time of acquisition of
the 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 the 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 that amount less any net
proceeds from the sale of the Property. Any amount paid as the cost of repair of
the Property will reduce coverage by that 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 clause (i)
in the second previous paragraph is expected to satisfy the condition under any
Pool Insurance Policy that the Property be restored before a claim under the
Pool Insurance Policy may be validly presented with respect to the defaulted
Loan secured by the Property. The payment described under clause (ii) in the
second previous paragraph will render unnecessary presentation of a claim in
respect of the Loan under any Pool Insurance Policy. Therefore, so long as a
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.
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 the Loan.
The amount of the secured debt could be reduced to that value, and the holder of
the Loan thus would become an unsecured creditor to the extent the Principal
Balance of the Loan exceeds
23
the value 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" in this prospectus. If the
related Prospectus Supplement so provides, the Depositor or other entity
specified in the Prospectus Supplement will obtain a bankruptcy bond or similar
insurance contract covering losses resulting from proceedings with respect to
borrowers under the Federal 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 the court of
the principal amount of a Loan and will cover certain unpaid interest on the
amount of any 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 Prospectus Supplement for all Loans in the Trust Fund for the
related Series. Such amount will be reduced by payments made under the
bankruptcy bond in respect of the Loans, unless otherwise specified in the
related Prospectus Supplement, and will not be restored.
Reserve Funds
If the Prospectus Supplement relating to a Series of Securities so
specifies, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for that Series or for the benefit of
any provider of Enhancement with respect to that 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 in
the amount specified in such Prospectus Supplement. In the alternative or in
addition to such an initial 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 the 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 the related Series, to pay
expenses, to reimburse any provider of Enhancement for the Series 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 provided 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 the
entity will provide certain payments on the Securities of the Series in the
event that aggregate scheduled principal payments and/or prepayments on the
Primary Assets for the Series are not sufficient to make certain payments on the
Securities of the 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 the
related 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
24
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.
Financial Instruments
If provided in the related Prospectus Supplement, the Trust Fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the Loans and Private
Securities from fixed to floating payments, or from floating to
fixed, or from floating based on a particular index to floating
based on another index;
o to provide payments if any index rises above or falls below
specified levels; or
o to provide protection against interest rate changes, certain types
of losses or other payment shortfalls to one or more Classes of the
related Series.
If a Trust Fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act of 1933, as amended.
The related Prospectus Supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
SERVICING OF LOANS
General
Customary servicing functions with respect to Loans comprising the Primary
Assets in a 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 a borrower a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on a Loan.
If the related Prospectus Supplement so provides, 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 borrowers
to pay taxes, assessments, mortgage and hazard insurance policy premiums, and
other comparable items will be deposited. In the case of Loans that do not
require such payments under the related loan documents, the Servicer will not be
required to establish any Escrow Account for those Loans. The Servicer will make
withdrawals from the Escrow Accounts to effect timely payment of taxes,
assessments and mortgage and hazard insurance, to refund to borrowers amounts
determined to be overages, to pay interest to borrowers on balances in the
Escrow Account to the extent required by law, to repair or otherwise protect the
related Property and to clear and terminate such Escrow
25
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 the related Prospectus Supplement specifies otherwise, the Trustee
or the Servicer will establish a separate account (the "Collection Account") in
the name of the Trustee. Unless the related Prospectus Supplement provides
otherwise, the Collection Account will be an account maintained
o at a depository institution, the long-term unsecured debt
obligations of which at the time of any deposit are rated by each
Rating Agency that rates the related the Securities of that Series
at levels satisfactory to each Rating Agency; or
o 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, all scheduled payments of principal and interest on the Primary
Assets ("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 the Cut-off Date):
(i) All payments in respect of principal, including prepayments, on the
Primary Assets;
(ii) All payments in respect of interest on the 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 fee payable to the Servicer (the "Servicing Fee") in respect of
such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or the related Property, whether
through foreclosure sale, repossession or otherwise, including
payments in connection with the Primary Assets received from the
borrower, other than amounts required to be paid or refunded to the
borrower pursuant to the terms of the applicable loan documents or
otherwise pursuant to law, net of related liquidation expenses (such
net amount, the "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 borrower in accordance with the related
Agreement;
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(v) All amounts required to be deposited therein from any Reserve Fund
for the Series pursuant to the related Agreement;
(vi) All advances of cash made by the Servicer in respect of delinquent
Scheduled Payments on a Loan and for any other purpose as required
pursuant to the related Agreement ("Advances"); and
(vii) All repurchase prices of any 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 made by it in connection with that
Series 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 proceeds of insurance policies covering the
related Loans and Mortgaged Properties ("Insurance Proceeds")) that
represent late recoveries of Scheduled Payments with respect to
which the Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse itself
for any Advances that it made in connection with the Series which
the Servicer determines in good faith to be nonrecoverable from
amounts representing late recoveries of Scheduled Payments
respecting which the 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 the Loan next succeeding
the date of its receipt of the Liquidation Proceeds, to pay to
itself out of the 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 the 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 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 related REO Property 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;
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(vii) to make payments to the Trustee of the Series for deposit into the
related Distribution Account, if any, or for remittance to the
Holders of the 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, the Servicer may, at any
time, withdraw the amount from the Collection Account.
Advances and Limitations on Advances
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. Its obligation to make Advances 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 Scheduled Payments, Insurance Proceeds or Liquidation Proceeds
respecting which any 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 borrower under each Loan to maintain) a standard hazard
insurance policy providing the standard form of fire insurance coverage 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, the 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 the Property, to the extent available.
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The standard hazard insurance policies covering Properties typically will
contain a "coinsurance" clause, which in effect will require that the insured at
all times 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, the coinsurance 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 (i.e., 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 the Property and improvements. Since
the amount of hazard insurance to be maintained on the improvements securing the
Loans declines as their Principal Balances 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 a standard hazard insurance policy in an amount that is at least
equal to the maximum insurable value of the REO Property. No earthquake or other
additional insurance will be required of any borrower or will be maintained on
REO Property other than pursuant to such applicable laws and regulations as
shall at any time be in force and shall require the additional insurance.
Any amounts collected by the Servicer under any those insurance policies
(other than amounts to be applied to the restoration or repair of the Property,
released to the borrower 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 the related 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 the policy absent the
deductible clause, to deposit into the Collection Account the amount not
otherwise payable under the blanket policy because of the application of the
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 that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, 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 that it services. 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 of
the related Loan available to the Holders after reimbursement to itself for its
expenses and (ii) its expenses will be recoverable 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 REO Property by the end of the third
calendar year after the Trust Fund acquires beneficial ownership of the REO
Property. While the holder of an REO Property can often maximize its recovery
29
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 borrower on a defaulted Loan a change in
the terms of such Loan to the extent provided in the related Prospectus
Supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the Servicer in servicing
receivables for its own account and meets 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 the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related Loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if the enforcement of the clause would result in loss of
coverage under any primary mortgage insurance policy. In that event, the
Servicer is authorized to accept from or enter into an assumption agreement with
the person to whom the Property has been or is about to be conveyed. Under the
assumption, the transferee of the Property becomes liable under the Loan and the
original borrower is released from liability and the transferee is substituted
as the borrower 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 Servicing Fee in an amount to be
determined as specified in the related Prospectus Supplement. The Servicing Fee
may be fixed or variable, as specified in the related Prospectus Supplement. In
addition, unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to additional 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 a borrower makes a principal prepayment in full between due dates on
the related Loan, the borrower generally will 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
Securities 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 total 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 that it incurs
in connection with the liquidation of defaulted Loans.
30
The related Holders will suffer no loss by reason of the Servicer's expenses to
the extent the 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 its
expenses in connection with the restoration of REO Property This right of
reimbursement is prior to the rights of the Holders to receive any related
Insurance Proceeds, Liquidation Proceeds or amounts derived from other
Enhancement. The Servicer generally is 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 Securities of the Series.
Evidence as to Compliance
If so specified in the related Prospectus Supplement, the applicable
Agreement will provide that, each year, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that the firm has examined
certain documents and records relating to the servicing of the Loans by the
Servicer and that, on the basis of the examination, the firm is of the opinion
that the servicing has been conducted in compliance with the Agreement, except
for (i) such exceptions as the firm believes to be immaterial and (ii) any other
exceptions set forth in the statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement will also provide for delivery to the Trustee of an annual statement
signed by an officer of the Servicer to the effect that the Servicer has
fulfilled its obligations under the 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 (defined below) 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, the Events of Default and the rights of a Trustee upon a
default under the Agreement for the related Series will be substantially similar
to those described under "The Agreements--Events of Default; Rights upon Event
of Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the Prospectus Supplement, the Servicer does
not have the right to assign its rights and delegate its duties and obligations
under the related Agreement unless the successor Servicer accepting such
assignment or delegation
o services similar loans in the ordinary course of its business;
o is reasonably satisfactory to the Trustee;
o has a net worth of not less than the amount specified in the
Prospectus Supplement;
31
o would not cause any Rating Agency's rating of the related Securities
in effect immediately prior to the assignment, sale or transfer to
be qualified, downgraded or withdrawn as a result of the assignment,
sale or transfer; and
o executes and delivers to the Trustee an agreement, in form and
substance reasonably satisfactory to the Trustee, that contains an
assumption by the successor Servicer of the due and punctual
performance and observance of each covenant and condition required
to be performed or observed by the Servicer under the Agreement from
and after the date of the agreement.
No 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, the 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 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 Agreement provided that the 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.
However, neither the Servicer nor any such person will be protected against any
breach of warranty or representations made under the Agreement, or the failure
to perform its obligations in compliance with any standard of care set forth in
the 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 under the
Agreement. 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 under the Agreement or by reason of reckless disregard
of those obligations and duties. In addition, the 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 the
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 Agreement and the rights and duties
of the parties thereto and the interests of the Holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
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, the
provisions or terms are as specified in the related Agreements.
32
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 related Trust Fund all right,
title and interest of the Depositor in the Primary Assets and other property to
be transferred to the Trust Fund. Such assignment will include all principal and
interest due on or with respect to the Primary Assets after the Cut-off Date
(except for any retained interests). The Trustee will, concurrently with the
assignment, execute and deliver the Securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will deliver or cause to be delivered to
the Trustee (or, if specified in the Prospectus Supplement, a custodian on
behalf of the Trustee (the "Custodian")), as to each Mortgage Loan, the related
note endorsed without recourse to the order of the Trustee or in blank, the
original mortgage, deed of trust or other security instrument (each, a
"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 those documents in trust for the
benefit of the Holders.
If so specified in the related Prospectus Supplement, at the time of
issuance of the Securities, the Depositor will cause assignments to the Trustee
of the Mortgages relating to the Loans 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, recording is not required to protect the
Trustee's interest in the related Loans. If specified in the Prospectus
Supplement, the Depositor will cause the assignments to be recorded within the
time after issuance of the Securities as is specified in the related Prospectus
Supplement. In this event, the Prospectus Supplement will specify whether the
Agreement requires the Depositor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within that time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the 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.
Assignment of Home Improvement Contracts. Unless otherwise specified in
the related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or the Custodian), as to each Home Improvement
Contract, the original Home Improvement Contract and copies of related documents
and instruments and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the related Home Improvements. 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" in this prospectus.
Loan Schedule. Each Loan will be identified in a schedule appearing as an
exhibit to the related and will specify with respect to each Loan:
o the original principal amount,
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o its unpaid Principal Balance as of the Cut-off Date,
o the current interest rate,
o the current Scheduled Payment of principal and interest,
o the maturity date, if any, of the related note, and
o 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" in this prospectus. Each Private Security
will be identified in a schedule appearing as an exhibit to the related
Agreement, 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 that:
o the information contained in the Private Securities schedule is true
and correct in all material respects;
o immediately prior to the conveyance of the Private Securities, the
Depositor had good title, and was their sole owner (subject to any
retained interest);
o there has been no other sale by the Private Securities; and
o there is no existing lien, charge, security interest or other
encumbrance (other than any retained interest) on the Private
Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee, within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date), to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, (or within any other period specified in the related Prospectus
Supplement), the Depositor or Seller will, not later than 90 days (or within
such any 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. Unless otherwise specified in the related Prospectus
Supplement, the repurchase shall be effected at a price equal to the:
(a) the lesser of
(i) the Principal Balance of the Primary Asset, and
(ii) the Trust Fund's federal income tax basis in the Primary
Asset;
plus
(b) accrued and unpaid interest to the date of the next Scheduled
Payment on the Primary Asset at the rate set forth in the related
Agreement;
34
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 the repurchased 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 the non-conforming 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, the
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, on the date of substitution,
o have 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),
o have an interest rate not less than (and not more than 2% greater
than) the interest rate of the Deleted Primary Asset,
o have a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the Deleted Primary Asset;
and
o 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 the other
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 the breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or the other entity will be obligated to repurchase the
affected Primary Asset or, if provided in the Prospectus Supplement, provide a
Qualifying Substitute Primary Asset, 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 the non-conforming Primary
Assets. See "Risk Factors--Limited Assets for Making Payments" in this
prospectus.
No Holder of Securities of a Series, solely by virtue of the Holder's
status as a Holder, will have any right under the applicable Agreement to
institute any proceeding with respect to Agreement, unless Holder previously has
given to the Trustee for the Series written notice of default and unless the
Holders of Securities evidencing not less than 51% of the aggregate voting
rights of the Securities of the Series
35
have made written request upon the Trustee to institute the proceeding in its
own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 60 days has neglected or refused to institute any
such proceeding.
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 the Securities
following the distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on the Securities;
(iii) the amount of
(a) any overdue accrued interest included in such distribution,
(b) any remaining overdue accrued interest with respect to the
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 the
distribution,
(b) any remaining overdue principal amounts with respect to the
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 the
Securities;
(v) the amount received under any related Enhancement, and the remaining
amount available under the 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
the calendar year:
o the total of the amounts reported pursuant to clauses (i), (ii) and
(iv)(d) above for the calendar year, and
36
o the information specified in the related Agreement to enable Holders
to prepare their tax returns including, without limitation, the
amount of any original issue discount accrued on the Securities.
Information in the Distribution Date Statements and annual statements
provided to the Holders will not have been examined and reported upon by an
independent public accountant. However, the Servicer will provide to the Trustee
a report by independent public accountants with respect to its servicing of the
Loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the Prospectus Supplement, the related Series of
Securities (or one or more Classes of the Series) will be issued in book-entry
form. In that event, owners of beneficial interests in those Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The 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 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
o any failure by the Servicer to deposit amounts in the Collection
Account and Distribution Account(s) to enable the Trustee to
distribute to Holders of Securities of the Series any required
payment, provided that this failure continues unremedied for the
number of days specified in the related Prospectus Supplement after
the giving of written notice to the Servicer by the Trustee, or to
the Servicer and the Trustee by Holders having not less than 25% of
the total voting rights of the Series;
o any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
Agreement provided that this failure continues unremedied for the
number of days specified in the related Prospectus Supplement after
the giving of written to the Servicer by the Trustee, or to the
Servicer and the Trustee by the Holders having not less than 25% of
the total voting rights of the of the Series; and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
the Servicer indicating its insolvency, reorganization or inability
to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee or Holders
of Securities of the Series having not less than 51% of the total voting rights
of the 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 the 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 the 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 the 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
37
specified in the related Prospectus Supplement to act as successor Servicer
under the provisions of the 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 the Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the Holders of Securities of the Series, and, unless otherwise
specified in the related Prospectus Supplement, Holders of Securities having not
less than 51% of the total voting rights of the Series may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred upon the Trustee. However,
the Trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the Holders have offered the
Trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the Trustee as a result. The Trustee may
decline to follow any such direction if it 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:
o a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of the Series;
o failure to perform any other covenant of the Depositor or the Trust
Fund in the Indenture, provided that the failure continues for a
period of sixty (60) days after notice is given in accordance with
the procedures described in the related Prospectus Supplement;
o any representation or warranty made by the Depositor or the Trust
Fund in the Indenture or in any certificate or other writing
delivered pursuant to it or in connection with it with respect to or
affecting such Series having been incorrect in a material respect as
of the time made, provided that the breach is not cured within sixty
(60) days after notice is given in accordance with the procedures
described in the related Prospectus Supplement;
o certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; and
o any other Event of Default specified with respect to Notes of that
Series.
If an Event of Default with respect to the then-outstanding Notes of any
Series occurs and is continuing, either the Indenture Trustee or the Holders of
a majority of the total amount of those Notes may declare the principal amount
of all the Notes of the Series (or, if the Notes of that Series are Zero Coupon
Securities, such portion of the principal amount as may be specified in the
related Prospectus Supplement) to be due and payable immediately. Under certain
circumstances of this type the declaration may be rescinded and annulled by the
Holders of a majority of the total amount of those Notes.
If, following an Event of Default with respect to any Series of Notes, the
related Notes have been declared to be due and payable, the Indenture Trustee
may, in its discretion, and notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the Notes as they would have
become due if there had not been 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
38
(other than a default in the payment of any principal of or interest on any Note
of the Series for thirty (30) days or more), unless:
(a) the Holders of 100% of the total amount of the then-outstanding
Notes of the Series consent to such sale;
(b) the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest due and unpaid on the
outstanding Notes of the Series at the date of sale; or
(c) the Indenture Trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the Notes as
such payments would have become due if the Notes had not been
declared due and payable, and the Indenture Trustee obtains the
consent of the Holders of 66 2/3% of the total amount of the
then-outstanding Notes of the 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 liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an Event of Default of this type, 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 that the principal of the Notes of a Series is declared due and payable as
described above, Holders of the Notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those Notes less the amount of the discount that remains 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 its rights or powers under the Indenture at the
request or direction of any of the Holders of Notes of the Series, unless the
Holders offer security or indemnity satisfactory to the Indenture Trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of
amount of the then-outstanding Notes of the 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 those Notes, and the Holders of a majority
of the amount of the amount of the then- outstanding Notes of the Series may, in
certain cases, waive any default with respect to the Notes, 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 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 an appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee
39
by the related Agreement will be conferred or imposed upon that Trustee and each
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
Trustee shall be incompetent or unqualified to perform certain acts, singly upon
the separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee. The
Trustee may also appoint agents to perform any of its responsibilities, which
agents will have any or all of the rights, powers, duties and obligations of the
Trustee conferred on them by their appointment; provided, however, that the
Trustee will continue to be responsible for its duties and obligations under the
Agreement.
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 the Agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the Trustee will be required to examine them to determine whether they
are in the form required by the related Agreement. However, the Trustee will not
be responsible for the accuracy or content of any such documents furnished to it
by the Holders or the Servicer under the Agreement.
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 that Trustee ceases to be eligible to continue as
such under the related Agreement, (ii) if that Trustee becomes insolvent or
(iii) by the Holders of Securities having more than over 50% of the total voting
rights of the Securities in the Trust Fund upon written notice to the Trustee
and to the Depositor. Any resignation or removal of a Trustee and appointment of
a successor Trustee will not become effective until the successor Trustee
accepts its appointment.
Amendment of Agreement
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Loans), and the Trustee, 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,
40
(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, however, that any such amendment (other than pursuant to clause (vi)
above) will not adversely affect in any material respect the interests of any
Holders of the Series, as evidenced by an opinion of counsel delivered to the
Trustee. Unless otherwise specified in the Prospectus Supplement, any such
amendment shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
applicable Rating Agency rating that the amendment will not cause the Rating
Agency to reduce its then-current rating.
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 the consent of the Holders possessing not
less than 66 2/3% of the total outstanding principal amount of the Securities of
the Series (or, if only certain Classes are affected by the amendment, 66 2/3%
of the total outstanding principal amount of each affected Class), for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the Agreement, or modifying in any manner the rights of
Holders of the Series. In no event, however, shall any such amendment
(a) reduce the amount or delay the timing of payments on any Security
without the consent of the Holder of the Security; or
(b) reduce the aforesaid percentage of the total outstanding principal
amount of Securities of each Class, the Holders of which are
required to consent to any such amendment, without the consent of
the Holders of 100% of the total outstanding principal amount of
each affected Class.
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 Trustee will afford them access during
business hours to the most recent list of Holders of that Series held by the
Trustee.
No Agreement will provide for the holding of any annual or other meeting
of Holders.
Book-Entry Securities
If specified in the related Prospectus Supplement for a Series of
Securities, the Securities (or one or more Classes of the Securities) may be
issued in book-entry form. In that event, beneficial owners of those 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.
41
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 the Agreement under the circumstances described in the related
Prospectus Supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination" in this prospectus.
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 that 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 the Series.
In addition to such discharge with certain limitations, , if so specified
with respect to the Notes of any Series, the Indenture will provide that the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of that Series (except for certain obligations relating to temporary
Notes and exchange of Notes, registration of the transfer or exchange of those
Notes, replacing stolen, lost or mutilated Notes, to, maintaining paying
agencies and holding 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 accordance with their terms, will provide money in
an amount sufficient to pay the principal of and each installment of interest on
those Notes on the Final Scheduled Distribution Date for the Notes and any
installment of interest on the Notes in accordance with the terms of the
Indenture and the Notes. In the event of any such defeasance and discharge of
Notes of a Series, Holders of Notes of that 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 legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or reflect
the laws of any particular state, or 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 that 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
42
liens pursuant to the laws of the jurisdiction in which the mortgaged property
is located. Priority with respect to the 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, 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.
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 its rights in a
43
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 the 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
44
hazardous substances, or arrange for the transportation, disposal or treatment
of hazardous substances, at off-site locations may also be held liable if there
are releases or threatened releases of hazardous substances at such off-site
locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against such property. Under CERCLA, such
a lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by a current or prior owner or operator. CERCLA 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 enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which 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 ACA
specifies 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 ACA states 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 ACA also specifies 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.
45
The ACA also specifies 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 ACA specifically addresses the potential liability of lenders who hold
mortgages or similar conventional security interests in real property, such as
the Trust Fund does in connection with the 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
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
of 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 the 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.
46
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 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 the 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 of 1940 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
rehabilitation plan under chapter 13 of the federal bankruptcy code to cure a
monetary default with respect to a loan on his residence by paying arrearages
within a reasonable time period and reinstating the
47
original loan payment schedule even though the lender accelerated the loan and
the lender has taken all steps to realize upon its 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 federal 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 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
48
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.
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
49
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, generally
are "chattel paper" or constitute "purchase money security interests," each as
defined in the Uniform Commercial Code (the "UCC") in effect in the applicable
jurisdiction. 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 Home
Improvement Contracts to the Trustee or 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 Home Improvement 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 Home
Improvement Contracts without notice of such assignment, the Trustee's interest
in the contracts could be defeated.
Security Interests in Home Improvements
The Home Improvement 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. Purchase money security interests of this
type 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 the 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 Home Improvement
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
(i.e., without breach of the peace) or, in the absence of
50
voluntary surrender and the ability to repossess without breach of the peace, by
judicial process. The holder of a Home Improvement 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 the resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgement.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods that gave rise to the transaction (and
certain related lenders and assignees) to transfer the contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of the 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 Home Improvement 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
51
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 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 those statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the 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
related loss may reduce the amounts available to be paid to the Holders of the
related Securities. Unless otherwise specified in the related Prospectus
Supplement, any shortfalls in interest collections on Loans (or Underlying
Loans), 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 the 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 the interest shortfall not occurred.
52
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"). The Depositor
Securities must be collateralized or otherwise secured or backed by, or
otherwise represent 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, In connection therewith or otherwise, the depositor may purchase,
acquire, own, hold, transfer, convey, service, sell, pledge, assign, finance and
otherwise deal 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
those purposes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
o to purchase the related Primary Assets,
o to repay indebtedness incurred to obtain funds to acquire such
Primary Assets,
o to establish any Reserve Funds described in the related Prospectus
Supplement and
o to pay costs of structuring and issuing the Securities, including
the costs of obtaining any Enhancement.
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 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.
53
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).
Interest and Acquisition Discount. In the opinion of Tax Counsel, Regular
Interest 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."
54
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
55
average maturity of the Debt Security. For this purpose, the weighted average
maturity of the Debt Security is computed as the sum of the amounts determined
by multiplying the number of full years (i.e., rounding down partial years) from
the issue date until each distribution in reduction of stated redemption price
at maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at maturity
of the Debt Security and the denominator of which is the stated redemption price
at maturity of the Debt Security. Holders generally must report de minimis OID
pro rata as principal payments are received, and such income will be capital
gain if the Debt Security is held as a capital asset. However, accrual method
Holders may elect to accrue all de minimis OID as well as market discount under
a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The Internal Revenue Service (the "IRS") 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 original issue discount. The
amount of OID includible in income by a Holder will be computed by allocating to
each day during a taxable year a pro rata portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the Loans, the amount
of OID includible in income of a Holder for an accrual period (generally the
period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals 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
56
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-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
(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 Internal Revenue Service could assert that income derived from an Interest
Weighted Security should be calculated as if the Security were a security
57
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 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
58
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.
On December 30, 1997, the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. The
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6). Absent further guidance from the IRS, the Trustee
intends to account for amortizable bond premium in the manner described above.
Prospective Purchasers of the Debt Securities should consult their tax advisors
regarding the possible application of the Amortizable Bond Premium Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Tax Counsel, if a REMIC election is made with
respect to a Series of Securities, then the arrangement by which the Securities
of that Series are issued will be treated as a REMIC as long as all of the
provisions of the applicable Agreement are complied with and the statutory and
regulatory requirements are satisfied. Securities will be designated as "Regular
Interests" or "Residual Interests" in a REMIC, as specified in the related
Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, in the opinion of
Tax Counsel (i) Securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the meaning of
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.
59
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. Qualification as a
REMIC requires ongoing compliance with certain conditions. Although a REMIC is
not generally subject to federal income tax, failure to comply with one or more
of the ongoing requirements of the Code for REMIC status during any taxable
year, including the implementation of restrictions on the purchase and transfer
of the residual interests in a REMIC as described below under "Taxation of
Owners of Residual Interest Securities", the Code provides that the Trust will
not be treated as a REMIC for such year and thereafter. In that event, such
entity may be taxable as a separate corporation and the related certificates may
not be accorded the status or given the tax treatment described below.
Calculation of REMIC Income. In the opinion of Tax Counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between (i) the gross income produced by the REMIC's assets, including stated
interest and any original issue discount or market discount on loans and other
assets, and (ii) deductions, including stated interest and original issue
discount accrued on Regular Interest Securities, amortization of any premium
with respect to Loans, and servicing fees and other expenses of the REMIC. A
Holder of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such Holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such Holder's adjusted gross income.
60
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which Holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the Holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The Holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such Holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding Classes of Securities of such REMIC.
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
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distributions could occur, for example, in certain REMIC issues in which the
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interests issued without any discount or at an
insubstantial discount (if this occurs, it is likely that cash distributions
will exceed taxable income in later years). Taxable income may also be greater
in earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on REMIC Regular
Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the
net income of the REMIC the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a Holder may take into account currently is limited to the
Holder's adjusted basis at the end of the calendar quarter in which such loss
arises. A Holder's basis in a Residual Interest Security will initially equal
such Holder's purchase price, and will subsequently be increased by the amount
of the REMIC's taxable income allocated to the Holder, and decreased (but not
below zero) by the amount of distributions made and the amount of the REMIC's
net loss allocated to the Holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of Holders of Residual Interest Securities to deduct
net losses may be subject to additional limitations under the Code, as to which
such Holders should consult their tax advisers.
Distributions. In the opinion of Tax Counsel distributions on a Residual
Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a Holder of a Residual Interest Security. If the amount of such payment
exceeds a Holder's adjusted basis in the Residual Interest Security, however,
the Holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel a Holder of a Residual
Interest Security will recognize gain or loss on the sale or exchange of a
Residual Interest Security equal to the difference, if any, between the amount
realized and such Holder's adjusted basis in the Residual Interest Security at
the time of such sale or exchange. A Holder's adjusted basis in a Residual
Certificate generally equals the cost of such Residual Certificate increased by
the taxable income of the REMIC that was included in the income of such Residual
Certificate Holder and decreased by distributions received thereon by such
Residual Certificateholder. 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. In that event, the loss will be used to increase such Residual
Interest Security Holders adjusted basis in the newly acquired asset.
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
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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 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.
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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.
Tax Status as a Grantor Trust
General. As further specified in the related Prospectus Supplement, if a
REMIC election is not made and the Trust Fund is not structured as a
partnership, then, in the opinion of Tax Counsel, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a Holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases ("Stripped Securities"), sale of the Securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
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
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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 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
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each principal payment in ordinary income at the time such principal payment is
made. Such treatment would generally result in discount being included in income
at a slower rate than discount would be required to be included in income using
the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on 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 original issue discount rules are to apply
to Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made 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 original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the 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 Internal Revenue
Service could contend that (i) in certain Series, each non-Interest
66
Weighted Security is composed of an unstripped undivided ownership interest in
Loans and an installment obligation consisting of stripped principal payments;
(ii) the non-Interest Weighted Securities are subject to the contingent payment
provisions of the Proposed Regulations; or (iii) each Interest Weighted Stripped
Security is composed of an unstripped undivided ownership interest in Loans and
an installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there
is no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be, and, although
the matter is not free from doubt, Stripped Securities should be considered to
represent "real estate assets" within the meaning of Section 856(c)(4)(A) of the
Code, and "loans secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; and interest income 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
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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.
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,
2000, 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 nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), in the opinion of Tax Counsel, such interest will normally
qualify as portfolio interest (except where (i) the recipient is a holder,
directly or by attribution, of 10% or more of the capital or profits interest in
the issuer, 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 Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to Holders of Residual Interest Securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable
68
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 United States person, and if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "--Excess Inclusions."
Tax Characterization of the Trust 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,
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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.
Sale or Other Disposition. In the opinion of Tax Counsel, if a Noteholder
sells a Note, the Holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the Holder's adjusted tax
basis in the Note. The adjusted tax basis of a Note to a particular Noteholder
will equal the Holder's cost for the Note, increased by any market discount,
acquisition discount, OID and gain previously included by such Noteholder in
income with respect to the Note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments previously
received by such Noteholder with respect to such Note. Any such gain or loss
will be capital gain or loss if the Note was held as a capital asset, except for
gain representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Foreign Holders. In the opinion of Tax Counsel, interest payments made (or
accrued) to a Noteholder who is a nonresident alien, foreign corporation or
other non-United States person (a "foreign person") generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person (i) is not actually or constructively a "10
percent shareholder" of the Trust 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 foreign person
and providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
70
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each Holder of a Note (other than an exempt Holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the Holder's name,
address, correct federal taxpayer identification number and a statement that the
Holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the Holder, and remit the
withheld amount to the IRS as a credit against the Holder's federal income tax
liability.
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 foreign Holders generally would be subject to U.S.
tax and U.S. tax return filing and withholding requirements, and individual
Holders might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets 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.
71
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single Class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. If the Trust Fund is a partnership, in the opinion
of Tax Counsel, the Trust Fund will not be subject to federal income tax.
Rather, in the opinion of Tax Counsel, each Certificateholder will be required
to separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that the Certificateholders will be
allocated taxable income of the Trust Fund for each month equal to the sum of
(i) the interest that accrues on the Certificates in accordance with their terms
for such month, including interest accruing at the Pass-Through Rate for such
month and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust Fund income attributable to discount on the Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price (iii) prepayment premium payable to the
Certificateholders for such month; and (iv) any other amounts of income payable
to the Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Loans that corresponds to any
excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Depositor.
Based on the economic arrangement of the parties, in the opinion of Tax Counsel,
this approach for allocating Trust Fund income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, in the opinion of Tax Counsel, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis Holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
72
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.
73
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a Holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust 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
74
the Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust Fund with the information
described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign Holders that are taxable as corporations
and 39.6% for all other foreign Holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust 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.
75
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 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 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.
76
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 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
77
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.
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
78
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 the Employment
Retirement Security Act of 1974, as amended ("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 "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
79
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 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 impose
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, unless certain exceptions apply.
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, the Underwriter 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 Backup Servicer, the Indenture Trustee, the Owner Trustee, the
Underwriter, 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
80
considered to give rise to a 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 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, of if equity participation by
benefit plan investors is not significant. 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. Equity participation in an
entity by benefit plan investors is not significant if, after the most recent
acquisition of an equity interest in the entity, less than 25% of the value of
each class of equity interest in the entity is held by "benefit plan investors,"
which include benefit plans described in ERISA or under section 4975 of the
Code, whether or not they are subject to ERISA, as well as entities whose
underlying assets include plan assets by reason of a plan's investment in the
entity.
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"), 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
81
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, in either case, the Securities,
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 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"
82
with respect to which Bear, Stearns & Co. Inc. is the underwriter, or the
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. Finally, 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.
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
83
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.
(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
84
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 counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the Underwriter Exemption, or any other 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 for each Series of Securities. No Trust
Fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related Series of Securities. Accordingly, no
financial statements with respect to any Trust Fund will be included in this
prospectus or in the related Prospectus Supplement.
AVAILABLE INFORMATION
The Depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Securities. This
Prospectus, which forms a part of the Registration Statement, and the Prospectus
Supplement relating to each Series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the SEC at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. In addition, the SEC
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Depositor, that file electronically with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Prospectus incorporates by reference all documents and reports filed
on behalf of the Depositor with respect to a Trust Fund pursuant to Section
13(a), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, prior to
the termination of the offering the related Securities. Upon request by any
person to whom this prospectus is delivered in connection with the offering of
one or more Classes Securities, the Depositor will provide or cause to be
provided without charge a copy of any of the
85
documents and/or reports incorporated herein by reference, in each case to the
extent the documents or reports relate to such Classes of Securities, other than
the exhibits to such documents (unless those exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to: Bear Stearns Asset Backed Securities Inc., 245 Park
Avenue, New York, New York 10167, Telephone number (212) 272-4095 . The
Depositor has determined that its financial statements are not material to the
offering of any Certificates.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each Trust Fund, that file
electronically with the SEC.
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 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
86
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 the Secondary Market Mortgage Enhancement Act. 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.
87
Index of Defined Terms
Additional Obligations:.......................................................83
Advances......................................................................27
Agreements.....................................................................8
Amortizable Bond Premium Regulations..........................................59
Asset Value...................................................................10
Assumed Reinvestment Rate.....................................................10
Available Interest Amount.....................................................11
Capitalized Interest Account..................................................22
Cash Flow Bond Method.........................................................66
CERCLA........................................................................45
Certificates...................................................................8
Class..........................................................................9
Closed-End Loans..............................................................14
Code..........................................................................12
Collection Account.........................................................9, 26
Contingent Payment Regulations................................................56
Custodian.....................................................................33
Cut-off Date..................................................................14
Debt Securities...............................................................54
Deleted Primary Asset.........................................................35
Depositor......................................................................8
Depositor Securities..........................................................53
Disqualified Organization.....................................................63
Distribution Account...........................................................9
Distribution Date..............................................................9
DOL...........................................................................80
Eligible Investments..........................................................21
Enhancement...............................................................13, 22
EPA...........................................................................45
ERISA.........................................................................79
Escrow Account................................................................25
Events of Default.........................................................37, 38
FASIT.........................................................................54
FASIT Qualification Test......................................................76
FASIT Securities..............................................................76
FHA...........................................................................16
Final Mark-to-Market Regulations..............................................64
Final Scheduled Distribution Date.............................................11
Garn-St. Germain Act..........................................................48
High-Yield Interest...........................................................77
Holder.........................................................................9
Holders.......................................................................41
Home Improvement Contracts................................................10, 16
Home Improvements.........................................................10, 16
HUD...........................................................................17
Indenture......................................................................8
Installment Sales Contract....................................................51
Insurance Proceeds............................................................27
Interest Weighted Securities..................................................57
IRS...........................................................................56
Liquidation Proceeds..........................................................26
Loans.........................................................................10
Mortgage......................................................................33
Mortgage Loans.................................................................9
New Regulations...............................................................68
Nonresidents..................................................................68
Notes..........................................................................8
Obligations:..................................................................83
OID...........................................................................55
OID Regulations...............................................................55
OTS...........................................................................49
Parties in Interest...........................................................80
Pass-Through Securities.......................................................64
Pay-Through Security..........................................................56
Permitted Investments.........................................................84
Plan Asset Regulation.........................................................80
Plans.........................................................................79
Pool Insurance Policy.........................................................23
Pooling and Servicing Agreement................................................8
Pre-Funded Amount.............................................................21
Pre-Funding Account...........................................................21
Pre-Funding Period............................................................21
Prepayment Assumption.........................................................56
Primary Assets.................................................................9
Private Securities............................................................10
Property......................................................................16
PS Agreement..................................................................19
PS Servicer...................................................................19
PS Sponsor....................................................................19
PS Trustee....................................................................19
PTCE..........................................................................81
PTCE 83-1.....................................................................81
Qualifying Substitute Primary Asset...........................................35
Rating Agency..............................................................9, 86
Ratio Strip Securities........................................................66
Regular Interest Securities...................................................54
Regular Interests.............................................................59
REMIC.....................................................................12, 54
REO Property..................................................................13
Reserve Fund...............................................................9, 24
Residual Interest Security....................................................61
Residual Interests............................................................59
Revolving Credit Line Loans...................................................14
Revolving Mortgage Loans......................................................14
Scheduled Payments............................................................26
Securities.....................................................................8
Seller.........................................................................8
Servicing Fee.............................................................26, 65
88
Short-Term Note...............................................................70
Single Family Property........................................................15
Single Family Securities......................................................81
Special Redemption Date.......................................................11
Specified Funding Limit.......................................................83
Specified Funding Period......................................................83
Stripped Securities...........................................................64
Tax Counsel...................................................................53
TIN...........................................................................68
Title V.......................................................................49
Trust Agreement............................................................8, 13
Trust Fund.....................................................................8
Trustee........................................................................8
U.S. Person...................................................................54
UCC...........................................................................50
Underlying Loans..........................................................10, 19
Underwriter Exemption.........................................................82
VA............................................................................16
89
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$305,000,000
GMAC MORTGAGE CORPORATION
SELLER AND SERVICER
GMACM HOME EQUITY LOAN TRUST 1999-2
ISSUER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 1999-2
------------------------
PROSPECTUS SUPPLEMENT
------------------------
BEAR, STEARNS & CO. INC.
NOVEMBER 3, 1999
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION 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
TERM NOTES OFFERED HEREBY, NOR AN OFFER OF THE TERM NOTES 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 INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
UNTIL FEBRUARY 9, 1999, ALL DEALERS SELLING THE TERM NOTES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, WILL DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.