The notes represent non-recourse obligations of the Trust only and do not
represent an interest in or obligations of Bear Stearns Asset Backed
Securities, Inc., EMC Mortgage Corporation, Conseco Finance Corp., the
Indenture Trustee, the Owner Trustee or any of their affiliates.
This prospectus supplement may be used to offer and sell the notes only
if accompanied by the prospectus
PROSPECTUS SUPPLEMENT
(To Prospectus dated September 13, 2000)
$557,332,000
Bear Stearns Home Loan Owner Trust 2001-A
Home Loan-Backed Notes, Series 2001-A
EMC Mortgage Corporation
Transferor and Backup Servicer
Bear Stearns Asset Backed Securities, Inc.
Depositor
Conseco Finance Corp.
Originator and Servicer
The Trust
o The Trust is a Delaware business trust formed pursuant to a trust
agreement among Bear Stearns Asset Backed Securities, Inc., Wilmington
Trust Company and U.S. Bank Trust National Association.
o The Trust will issue eight classes of notes, which are offered hereby,
and will issue three classes of certificates, which are not offered
hereby.
The Notes
o The notes are principally secured by the assets of the Trust, which
consist of three pools of home loans that have fixed and adjustable rates
of interest as described in this prospectus supplement and are secured
primarily by junior mortgages on one- to four-family residential
properties in which the borrowers have little or no equity.
o The notes are not insured or guaranteed by any governmental agency.
Credit Enhancement
o The certificates and certain classes of notes will be subordinated to
other classes of notes and provide credit support for those classes of
notes;
o Certain excess interest received on the home loans will be applied as
payments of principal on certain classes of notes to establish and
maintain a level of overcollateralization and to otherwise cover current
losses; and
o A financial guaranty insurance policy issued by Ambac Assurance
Corporation in respect of the Class A-I-1 Notes, the Class A-I-2 Notes,
the Class A-I-3 Notes, the Class A-I-4 Notes, the Class A-II Notes and
the Class A-III Notes.
[Ambac Logo]
Bear, Stearns & Co. Inc. and Lehman Brothers Inc. will offer the
notes to the public at varying prices to be determined at the time of sale.
The proceeds to the depositor from the sale of the notes will be approximately
99.52507% of the principal amount of the notes before deducting expenses.
Review the information in "Risk Factors" on page S-8 in this
prospectus supplement and on page 3 in the prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these notes or passed
upon the adequacy or accuracy of this prospectus supplement and accompanying
prospectus. Any representation to the contrary is a criminal offense.
--------------------------
Bear, Stearns & Co. Inc. Lehman Brothers
The date of this Prospectus Supplement is March 8, 2001
For 90 days following the date of this prospectus supplement, all dealers
selling the notes will deliver a prospectus supplement and prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters of the notes and with respect to their unsold allotments or
subscriptions.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the notes in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and the
accompanying prospectus is accurate as of any date other than the dates stated
on their respective covers.
SUMMARY
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making
your investment decision. Please read this entire prospectus supplement and
the accompanying prospectus for additional information about the notes.
Bear Stearns Home Loan Owner Trust 2001-A
Home Loan-Backed Notes, Series 2001-A
Original Final Scheduled Expected
Principal Maturity Ratings (S&P/
Class of Notes Note Rate Balance(1) Date(2) Moody's/Fitch)
------------------- ------------ ---------------- ------------------ ----------------
Class A-I-1 Notes (3) $ 89,948,000 June 15, 2016 AAA/Aaa/AAA
Class A-I-2 Notes 5.29% $ 89,948,000 June 15, 2016 AAA/Aaa/AAA
Class A-I-3 Notes 5.93% $ 37,445,000 June 15, 2019 AAA/Aaa/AAA
Class A-I-4 Notes 6.82%(4) $ 52,062,000 February 15, 2031 AAA/Aaa/AAA
Class A-II Notes 6.17%(4) $ 200,000,000 February 15, 2031 AAA/Aaa/AAA
Class A-III Notes (4)(5) $ 16,108,000 February 15, 2031 AAA/Aaa/AAA
Class M-1 Notes 7.54%(4) $ 43,093,000 February 15, 2031 A/A2/A
Class M-2 Notes 9.71%(4) $ 28,728,000 February 15, 2031 BBB/Baa2/BBB
---------------
Total for Notes $ 557,332,000
===============
- - - - - - -
(1) This amount is subject to a variance of 10%.
(2) Each date was determined as described under "Prepayment and Yield
Considerations--Maturity Date." We expect the actual maturity date
for the securities will be significantly earlier than the final
scheduled maturity date stated herein.
(3) The lesser of (a) one-month LIBOR plus 0.18% per annum and (b)
14.00% per annum, subject to the related net wac cap rate limitation
described in this prospectus supplement.
(4) After the first payment date on which an optional redemption may be
exercised, the Note Rate applicable to the Class A-I-4 Notes, the
Class A-II Notes, the Class M-1 Notes and the Class M-2 Notes will
increase by 0.50% per annum and the margin on the Class A-III Notes
will double if the option is not so exercised.
(5) The lesser of (a) one-month LIBOR plus 0.32% per annum and (b)
14.00% per annum, subject to the related net wac cap rate limitation
described in this prospectus supplement.
The Originator and Servicer
o Conseco Finance Corp.
o The servicer will receive a monthly fee from payments on the home loans
equal to 0.75% per annum on the principal balance of each home loan.
Servicing compensation will also include late fees and prepayment
penalties.
o The originator will make certain representations and warranties with
respect to the home loans.
Transferor and Backup Servicer
o EMC Mortgage Corporation, an affiliate of Bear, Stearns & Co. Inc. and
the depositor.
o The backup servicer will receive a monthly fee from payments on the home
loans equal to 0.05% per annum on the principal balance of each home
loan.
o The transferor will not make any representations or warranties with
respect to the home loans.
Administrator
o Conseco Finance Servicing Corp., an affiliate of the originator and the
servicer.
The Trust
o Bear Stearns Home Loan Owner Trust 2001-A.
The Depositor
o Bear Stearns Asset Backed Securities, Inc.
The Indenture Trustee/Co-Owner Trustee
o U.S. Bank Trust National Association
o The indenture trustee will receive a monthly fee from payments on the
home loans equal to 0.005% per annum on the principal balance of each
home loan.
The Owner Trustee
o Wilmington Trust Company, acting not in its individual capacity but
solely as owner trustee.
o The owner trustee is entitled to an annual fee as described in this
prospectus supplement.
The Note Insurer
o Ambac Assurance Corporation.
Cut-Off Date
o For each home loan, the close of business on February 1, 2001.
Closing Date
o On or about March 9, 2001.
Payment Dates
o The 15th day of each month, or if such day is not a business day, the
next business day. The first payment date is March 15, 2001.
Due Period
o The calendar month preceding the month of a payment date.
Registration of Notes
The trust will issue the notes in book-entry form. You will hold your
interests either through a depository in the United States or through one of
two depositories in Europe. While the notes are book-entry, they will be
registered in the name of the applicable depository, or in the name of the
depository's nominee.
Transfers within any depository system will be made in accordance with the
usual rules and operating procedures of that system. Cross-market transfers
between two different depository systems may be made through a third-party
bank and/or the related depositories. The limited circumstances under which
definitive notes will replace the book-entry notes are described in this
prospectus supplement.
We refer you to "Description Of The Notes" and "Annex I" in this prospectus
supplement for additional information.
Assets of the Trust
The trust's assets will include:
o three groups of home loans, group I home loans that have fixed rates of
interest, group II home loans that have fixed rates of interest and group
III home loans that have adjustable rates of interest, each secured
primarily by junior mortgages, deeds of trust, or other security
instruments primarily on one- to four-family residential properties in
which the borrowers have little or no equity and the related loan files;
provided, however, that 10.73% of the group I home loans as of the
cut-off date will be unsecured consumer loans;
o payments of interest and principal due on the home loans on and after the
cut-off date;
o a financial guaranty insurance policy to be issued by Ambac Assurance
Corporation irrevocably and unconditionally guaranteeing timely payment
of interest and ultimate payment of principal on the Class A Notes as
described in this prospectus supplement; and
o amounts on deposit in certain accounts described in this prospectus
supplement.
The Home Loans
1. Home Loan Statistics:
On the closing date, the trust will acquire a pool of home loans
consisting of three loan groups. The loan pool will primarily include
conventional home improvement loans and home equity loans.
The group I home loans have the following characteristics as of the
cut-off date:
o all are secured by a lien on the related real property; provided,
however, that 10.73% of the group I home loans as of the cut-off date
will be unsecured consumer loans;
o the related properties are located in 49 states and the District of
Columbia;
o the interest rates range from 5.000% to 22.240%, with a weighted average
of 16.765%;
o the weighted average term to scheduled maturity, as of their dates of
origination, was 225 months;
o the weighted average term to scheduled maturity, as of the cut-off date,
was 215 months; and
o the latest scheduled maturity date was in October 3, 2030.
2. Group II Loans:
The group II home loans have the following characteristics as of the
cut-off date:
o all are secured by a lien on the related real property;
o the related properties are located in 49 states and the District of
Columbia;
o the interest rates range from 6.000% to 21.430%, with a weighted average
of 14.066%;
o the weighted average term to scheduled maturity, as of their dates of
origination, was 238 months;
o the weighted average term to scheduled maturity, as of the cut-off date,
was 222 months; and
o the latest scheduled maturity date was in August 1, 2030.
3. Group III Loans:
The group III home loans have the following characteristics as of the
cut-off date:
o all are secured by a lien on the related real property;
o the related properties are located in 40 states and the District of
Columbia;
o the interest rates range from 15.500% to 22.200%, with a weighted average
of 18.586%;
o the weighted average term to scheduled maturity, as of their dates of
origination, was 180 months;
o the weighted average term to scheduled maturity, as of the cut-off date,
was 173 months; and
o the latest scheduled maturity date was in April 16, 2025.
See "The Loans--Home Equity Loans."
4. Characteristics of Home Loans:
o The home loans will consist of loans for which the related net proceeds
were used to finance (i) property improvements, (ii) debt consolidation,
or (iii) a combination of property improvements, debt consolidation,
cash-out, credit insurance premiums, origination costs or other consumer
purposes.
o The home loans provide for scheduled payments that will be, if timely
paid, sufficient to amortize fully the principal balance of the related
home loan on or before its maturity date.
We refer you to "The Home Loan Pool" in this prospectus supplement for
additional information.
Monthly Expense Advances
The Servicer may make cash advances on behalf of the Trust to cover customary
property protection expenses. The Servicer is not required, nor does it
intend, to advance delinquent principal or interest.
We refer you to "Description of the Transfer and Servicing
Agreements-Servicing" in this prospectus supplement for additional
information.
The Notes
1. General
o Each month, the indenture trustee will calculate the amount of principal
and interest you are owed.
o If you own a note on the business day immediately prior to the related
payment date, you will be entitled to receive payments on the related
payment date.
2. Interest Payments: Interest on the notes for any payment date will accrue
on your note balance at the applicable note rate during the related accrual
period. As to any payment date, the accrual period for the notes shall be the
period commencing on the payment date in the month immediately preceding the
month in which that payment date occurs (or, in the case of the March 2001
payment date, commencing on the closing date) and ending on the day preceding
that payment date. The indenture trustee will calculate interest for the group
I notes (other than the Class A-I-1 Notes) and the group II Notes based on a
360-day year of twelve 30-day months. The indenture trustee will calculate
interest for the Class A-I-1 Notes and the Class A-III Notes based on a
360-day year and the actual number of days elapsed in the related accrual
period.
Noteholders will be entitled to interest payments to the extent and in the
order of priority set forth under "Description of the Notes - -Payments."
3. Principal Payments: Each of the Class A-I notes, the Class A-II notes and
the Class A-III notes represents rights to receive principal primarily from
its respective loan group. The Class M Notes will be entitled to receive
principal (after payments of all principal due on the Class A Notes) from the
entire home loan pool. Noteholders will be entitled to the principal collected
on the related home loans during the prior calendar month to the extent and in
the order of priority set forth under "Description of the Notes - Payments."
We refer you to "Description of the Notes -Payments" in this prospectus
supplement for additional information.
The Certificates
The trust will also issue three classes of certificates which are not being
offered pursuant to this prospectus supplement.
Credit Enhancement
The credit enhancement for the benefit of the notes will consist of:
Policy. On the closing date, Ambac Assurance Corporation will issue a
financial guaranty insurance policy in favor of the indenture trustee. The
policy will unconditionally and irrevocably guaranty interest on the Class A
Notes at the applicable note rates, and will guarantee amounts due on the
Class A Notes on the payment date in February 2031. The policy will not cover
basis risk shortfalls on the Class A-I-1 Notes or Class A-III Notes as a
result of the application of the related net wac cap rates. In addition, the
policy will not cover prepayment interest shortfalls or interest shortfalls
resulting from the application of the Soldiers' and Sailors' Civil Relief Act
of 1940.
In the absence of payments under the policy, Class A noteholders will bear
directly the credit risks associated with their notes.
Excess Interest. Because more interest is expected to be paid by the borrowers
than is necessary to pay the interest due on the notes and other fees and
expenses of the trust, excess interest collections may be available to offset
losses on the home loans and to create and maintain the overcollateralization
described below.
Overcollateralization. The original principal balance of the notes and
certificates will exceed the aggregate cut-off date principal balance of the
home loans. This excess represents undercollateralization of approximately
1.00% of the original principal balance of the notes and certificates. The use
of excess interest to make payments of principal on the notes as described in
this prospectus supplement will cause the aggregate principal balance of the
notes to amortize more quickly than the aggregate principal balance of the
home loans, resulting in, first, the reduction of this undercollateralization
to zero, and, second, overcollateralization of the notes. The amount of any
such overcollateralization will be available to absorb losses realized on
liquidated home loans.
Subordination of Subordinated Notes and Certificates. Subordination is
designed to provide the holders of notes having a higher payment priority with
protection against losses by allocating realized losses among the subordinated
notes and certificates, beginning with the security with the lowest payment
priority, before losses are allocated to the notes with a higher payment
priority.
Optional Redemption
The Servicer, at its option, may effect an early redemption of the notes and
purchase of the certificates (with the consent of the note insurer if the
exercise of such option would result in a draw on the policy) on any payment
date after the aggregate principal balance of the home loans is reduced to any
amount less than or equal to 10% of the aggregate principal balance of the
home loans as of the cut-off date.
After the first payment date on which an optional redemption may be exercised,
the interest rate of the Class A-I-4 Notes, the Class A-II Notes, Class M-1
Notes and Class M-2 Notes will be increased by 0.50% per annum and the margin
on the Class A-III Notes will double if the option is not so exercised.
We refer you to "Description of the Notes -Optional Redemption" in this
prospectus supplement for additional information.
Federal Tax Considerations
For federal income tax purposes:
o Tax counsel is of the opinion that the notes will be treated as debt
instruments.
o You must agree to treat your note as indebtedness for federal, state and
local income and franchise tax purposes.
We refer you to "Certain Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus for additional information.
ERISA Considerations
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA") and the prohibited transaction provisions of
ERISA and Section 4975 of the Internal Revenue Code can limit investments by
certain pension, employee benefit and other plans and retirement arrangements
(collectively, "plans"), such as individual retirement accounts. Plans should
be able to purchase investments like the notes so long as they are treated as
debt under applicable state law and have no "substantial equity features." Any
plan fiduciary considering whether to purchase the notes on behalf of a plan
should consult with its counsel regarding the application of ERISA and Section
4975 of the Internal Revenue Code and the availability of any exemptions.
Notwithstanding the foregoing, prohibited transactions within the meaning of
ERISA or Section 4975 of the Code may arise if Notes are acquired by a plan
with respect to which the Issuer, the Owner Trustee, the Indenture Trustee,
the Servicer, the Backup Servicer, the Depositor, either underwriter or any of
their respective affiliates, is a party in interest (as defined in ERISA) or a
disqualified person (as defined in the Code). Similarly, prohibited
transactions may arise if equity interests in the Trust are acquired by a
person or entity which is a party in interest or disqualified person with
respect to a plan which acquires or holds a Note. Certain exemptions from the
prohibited transaction provisions of ERISA and Section 4975 of the Code may be
applicable, however, depending in part on the type of plan fiduciary making
the decision to acquire a Note or equity interest and the circumstances under
which such decision is made. There can be no assurance that any of these class
exemptions or any other exemption will be available with respect to any
particular transaction involving the Notes or other equity interests in the
Trust. In this regard, prospective investors should be aware that Green Tree
Finance Corp.-Two, an affiliate of the Originator, is expected to hold 100% of
the Class R-2 Certificates on the closing date and Bear, Stearns & Co. Inc.,
an affiliate of the Backup Servicer and the Depositor, is expected to hold
100% of the Class B Certificates on the closing date.
Each purchaser or transferee of a note will be required to represent and
warrant (or will be deemed to represent and warrant) that either (a) it is not
a plan, an entity using the assets of or acting on behalf of such a plan, or
an entity whose underlying assets are deemed to include plan assets of any
such plan, or (b) its acquisition and holding of such Note will not result in
a non-exempt prohibited transaction under ERISA or Section 4975 of the Code.
We refer you to "ERISA Considerations" in this prospectus supplement and the
accompanying prospectus for additional information.
Legal Investment Considerations
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage
related securities" to include only securities backed by first mortgages, and
not second mortgages. Because the pool of home loans consists primarily of
junior home loans, the notes will not be "mortgage related securities" under
that definition.
We refer you to "Legal Investment Matters" in this prospectus supplement and
"Legal Investment" in the accompanying prospectus for additional information.
Note Ratings
The trust will not issue the notes unless the notes receive the ratings set
forth on the table at the beginning of this summary.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by any rating agency.
We refer you to "Ratings" and "Risk Factors-Ratings of the Notes" in this
prospectus supplement for additional information.
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the notes. You should also carefully consider the information set
forth under "Risk Factors" in the accompanying prospectus.
Home Loan Default Risks
Noteholders are protected by the available forms of credit
enhancement against the risk of loss realized on the home loans. However, in
the event that the available credit enhancement is inadequate to provide
protection to the noteholders, any losses on the home loans would be borne by
such holders. The risks presented by the home loans include the following:
o High LTV Ratios: Most of the home loans are secured by liens on the
mortgaged properties in which the borrowers have little or no equity.
Approximately 90.44%, 99.99%, 91.43% of the group I home loans, the group II
home loans and the group III home loans respectively, that are secured by
liens, have original combined loan-to-value ratios in excess of 100%. Home
loans with high original combined loan-to-value ratios will be more sensitive
to declining property values than would those with lower original combined
loan-to-value ratios and therefore may experience a higher incidence of
default and severity of losses. In addition, with respect to home loans with
original combined loan-to-value ratios near or in excess of 100%, if the
related borrowers sell their homes, such borrowers may be unable to repay the
home loans in full from the sale proceeds of the financed properties and other
funds available. Accordingly, such home loans likely may experience higher
rates of delinquencies and defaults and more severe losses.
o Additional Debt: With respect to home loans the proceeds of which
were used in whole or in part for debt consolidation, the related borrower may
incur further consumer debt. This reloading of debt could impair the ability
of such borrowers to repay the home loans, which in turn could result in
higher rates of delinquency and default and more severe losses on the home
loans.
o Unsecured Loans: Approximately 10.73% of the group I home loans are
unsecured consumer loans. Unsecured loans may experience higher rates of
delinquency and default and more severe losses than secured loans. To the
extent that losses are incurred on any of the home loans that are not covered
by the credit enhancement described in this prospectus supplement, the holders
of the notes will bear all risk of loss resulting from defaults by borrowers.
o Junior Liens: Substantially all of the secured home loans are
secured by liens junior to one or more senior liens on the related mortgaged
properties. In general, a junior lienholder may not foreclose on the related
mortgaged property unless it forecloses subject to the senior lien(s), in
which case it must either pay the entire amount due under the senior mortgage
or agree to make payments under the senior mortgage if the borrower is in
default thereunder. When it is uneconomical to foreclose on a mortgaged
property or engage in other loss mitigation procedures, the servicer may write
off the entire outstanding balance of the home loan as a bad debt. These are
risks particularly applicable to home loans secured by junior liens that have
high combined loan-to-value ratios or have small balances relative to the
total indebtedness of the borrower because it is more likely that the servicer
would determine foreclosure to be uneconomical for those types of home loans
than for first lien mortgage loans with low loan-to-value ratios. We refer you
to "Certain Legal Aspects of the Loans-Junior Mortgages; Rights of Senior
Mortgages" in the accompanying prospectus.
o Underwriting Standards: The loans were originated with a limited
expectation of recovering any amounts from the foreclosure of the related
mortgaged property and were underwritten with an emphasis on the
creditworthiness of the borrowers. If the loans go into foreclosure and are
liquidated, there may be no amounts recovered from the related mortgaged
property unless the value of the property has increased or the principal
amount of the related senior liens has been reduced to the point where the
value of the property, less any related foreclosure costs, is greater than the
principal amount of the related senior liens. Because of the relatively high
combined loan-to-value ratios of the home loans and the fact that the home
loans are primarily secured by junior liens, losses on the home loans will
likely be higher than on first lien mortgage loans. To the extent that any
losses are incurred on any of the loans that are not covered by the credit
enhancement described in this prospectus supplement, the holders of the notes
will bear all risk of losses resulting from defaults by borrowers.
The servicing of high loan-to-value ratio loans and unsecured
consumer loans requires special skill and diligence and requires more
attention to each account and earlier and more frequent contact with borrowers
in default. If the servicer does not exercise the requisite level of skill and
effort, the trust could experience higher losses and you could suffer a loss
on your notes.
o Economic Conditions: For the period of time during which the home
loans were originated, economic conditions nationally and in most regions of
the country have been generally favorable. A deterioration in economic
conditions could be expected to adversely affect the ability and willingness
of borrowers to repay their home loans and could result in higher rates of
delinquencies, defaults and losses on such home loans. Because of lenders'
limited experience with loans similar to the home loans, no prediction can be
made as to the severity of the effect of a general economic downturn on the
rate of delinquencies, defaults and losses on the home loans.
Additional Factors Affecting Delinquencies, Defaults and Losses on the Home
Loans
o No Servicer Delinquency Advances. In the event of a delinquency or
a default on a home loan, neither the servicer, any subservicer, the backup
servicer nor any other person will have any obligation, nor do any intend, to
advance scheduled monthly payments of principal and interest with respect to
such home loan. As a result, the amount of principal and interest received on
the home loans during any particular due period may be less than the amount of
principal and interest payable on the notes on the related payment date. Due
to the payment priorities on the notes shortfalls may result in losses on the
subordinate notes. See "Description of the Transfer and Servicing Agreements -
Servicing" in this prospectus supplement.
o Loss Mitigation. The servicer may use a wide variety of practices
to limit losses on defaulted home loans, including writing off part of the
debt, reducing future payments, and deferring the collection of past due
payments.
o Acquisitions from Third Parties. All of the home loans have been
acquired by the transferor by purchase from Conseco Finance Corp. See "The
Transferor - Purchase of Home Loans" in this prospectus supplement. Pursuant
to the underwriting guidelines of the originator, the assessment of the
creditworthiness of the borrower is the primary consideration in underwriting
a home loan. The evaluation of the adequacy of the value of the related
mortgaged property, together with the amount of all liens senior to the lien
of a home loan (i.e., the related "combined loan-to-value ratio") was given
less consideration, and in certain cases no consideration, in underwriting the
home loans. See "The Home Loan Pool --Underwriting Criteria". The credit
quality of some of the borrowers under the home loans is lower than that of
borrowers under mortgage loans conforming to the Fannie Mae or Freddie Mac
underwriting guidelines for first-lien, single family mortgage loans.
Consequently, the home loans are likely to experience higher rates of
delinquencies, defaults and losses (which rates could be substantially higher)
than those that would be experienced by loans underwritten in conformity with
the Fannie Mae or Freddie Mac underwriting guidelines for first-lien, single
family mortgage loans. Also, the losses sustained from defaulted home loans
are likely to be more severe (and will frequently be total losses) because the
costs incurred in the collection and liquidation of defaulted home loans in
relation to the smaller principal balances thereof are proportionately higher
than for first-lien, single family mortgage loans, and because a substantial
number of the home loans are secured by junior liens on mortgaged properties
in which the borrowers had little or no equity at the time of origination of
such home loans and, in the case of the group I home loans, may be unsecured.
Although the creditworthiness of the borrower was the primary consideration in
the underwriting of the home loans, we cannot assure you that the
creditworthiness of a borrower will not deteriorate as a result of future
economic and social factors, which deterioration may result in a delinquency
or default by a borrower on the related home loan. Furthermore, because the
adequacy of the value of the related mortgaged property, if any, was given
less or no consideration in underwriting a home loan, we cannot assure you
that any proceeds will be recovered from the foreclosure or liquidation of the
mortgaged property, if any, for a defaulted home loan. In response to changes
and developments in the consumer finance area as well as the refinement of the
originator's credit evaluation methodology, the originator's underwriting
requirements for certain of the home loans changed from time to time, which in
certain instances, resulted in more stringent, and in other instances less
stringent, underwriting requirements. Depending upon the date on which the
home loans were originated by the originator, such home loans included in the
home loan pool were originated under different underwriting requirements, and
accordingly, certain home loans included in the home loan pool may be of a
different credit quality and have different loan characteristics from other
home loans. Furthermore, to the extent that certain home loans were originated
under less stringent underwriting requirements, such home loans may be more
likely to experience higher rates of delinquencies, defaults and losses than
those home loans originated under more stringent underwriting requirements.
o Dependence on Servicer for Servicing Home Loans. Upon a Servicer
Event of Default under the sale and servicing agreement, a majority of the
Noteholders, the Trust, or the Indenture Trustee or the Owner Trustee with the
consent of the note insurer may, or at the direction of the note insurer,
shall remove the servicer and appoint the Backup Servicer or another successor
servicer. If the servicer is not replaced, noteholders will be dependent upon
the servicer to adequately and timely perform its servicing obligations and
remit to the indenture trustee payments of principal and interest received on
the home loans. The manner in which the servicer performs its servicing
obligations will affect the amount and timing of principal and interest
payments received on the home loans. Those principal and interest payments and
other recoveries in respect of the home loans, together with the financial
guaranty insurance policy for the benefit of the Class A Notes, are the sole
source of funds for the payments due to noteholders.
Non-recordation of Assignments. In most cases, we will not record the
assignment to the trust of the mortgage or deed of trust securing any home
loan, because of the expense and administrative inconvenience involved. In
some states, in the absence of a recordation, the assignment to the trust of
the mortgage or deed of trust securing a loan may not be effective against
creditors of or purchasers from the originator's or the transferor's or a
trustee in the originator's or the transferor's bankruptcy. This could leave
the trust unable to foreclose on the real estate following a loan default,
which could result in increased losses on the home loans. These losses could
result in delays or reductions in payments on your notes.
Although the recordation of the assignments of the mortgages in favor
of the indenture trustee is not generally necessary to effect a transfer of
the home loans to the indenture trustee, if the originator or the transferor
were to sell, assign, satisfy or discharge any home loan prior to recording
the related assignment in favor of the indenture trustee, the other parties to
such sale, assignment, satisfaction or discharge may have rights superior to
those of the indenture trustee. In some states, in the absence of such
recordation of the assignments of the mortgages, the transfer to the indenture
trustee of the home loans may not be effective against certain creditors or
purchasers from the originator or the transferor or a receiver of the
originator or the transferor. If those other parties, creditors or purchasers
have rights to the home loans that are superior to those of the indenture
trustee, the trust could lose the right to future payments of principal and
interest from those home loans and, accordingly, noteholders could suffer a
loss of principal and interest to the extent that such loss is not otherwise
covered by the applicable credit enhancement.
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be Less
than Home Loan Balance
Substantial delays could be encountered in connection with the
liquidation of delinquent home loans. Further, liquidation expenses such as
legal fees, real estate taxes and maintenance and preservation expenses may
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the related home loan, you
will incur a loss on your investment if the credit enhancement described in
this prospectus supplement is insufficient to cover the loss.
We refer you to "Certain Legal Aspects of the Loans - Foreclosure on
Mortgages" in the accompanying prospectus.
Servicing Transfers
In the event of a servicer event of default under the sale and
servicing agreement it may, and if the holder of the Class R-2 Certificate or
Conseco Finance Corp., with the consent of the note insurer, exercises its
option to cause a servicing transfer (in each case subject to the conditions
specified in the sale and servicing agreement) it will, be necessary to
arrange for the transfer of the home loan servicing. Servicing transfers
involve notifying borrowers to remit payments to the new servicer,
transferring physical possession of the home loan files and records to the new
servicer and entering home loan and borrower data on the management
information systems of the new servicer, and such transfers could result in
misdirected notices, misapplied payments, data input errors and other
problems. Industry experience indicates that the rate and severity of home
loan delinquencies, defaults and losses are likely to temporarily increase,
and may increase significantly, during the transition to a new servicer and
immediately following servicing transfers. Any transfer of servicing is
expected to increase the rate of delinquencies on the home loans at least
until all of the related borrowers are informed of such transfer, the servicer
has received all of the related home loan files and records and all relevant
data has been entered on the servicer's management information systems.
There can be no assurance as to the severity or duration of any
increase in the rate of delinquencies, defaults or losses due to transfers of
servicing. If available credit enhancement is insufficient to cover any
resulting losses, you will experience a loss on your note.
Prepayments Affect Timing and Rate of Return on Your Investment
The yield to maturity on your notes will be directly related to the
rate of principal payments on the home loans. Please consider the following:
o Borrowers may fully or partially prepay their home loan at any
time. 0.23% of the group I home loans, 3.66% of the group II home loans and
37.16% of the group III home loans require the payment of prepayment penalties
which may reduce the likelihood of prepayments on such home loans.
o A substantial majority of the home loans contain due-on-sale
provisions. Due-on-sale provisions require the borrower to fully pay the home
loan when the mortgaged property is sold. Generally, the servicer will enforce
the due-on-sale provision unless prohibited by applicable law. We refer you to
"Certain Legal Aspects of the Loans - Due-on-Sale Clauses in Mortgage Loans"
in the accompanying prospectus. o The rate of principal payments on the home
loans is influenced by a variety of factors, including general economic
conditions, interest rates, the availability of alternative financing and
homeowner mobility.
o The types of home loans in the trust generally are not viewed by
borrowers as permanent financing. Accordingly, the home loans may experience a
higher rate of prepayment than purchase money first lien mortgage loans.
o We cannot predict the rate at which borrowers will repay their home
loans, nor are we aware of any publicly available studies or statistics on the
rate of prepayment of home loans similar to the home loans in the home loan
pool.
o If you purchased your note at a premium and you receive your
principal faster than expected, your yield to maturity will be lower than you
anticipated. If you purchased your note at a discount and you receive your
principal slower than expected, your yield to maturity will be lower than you
anticipated.
o The Class A-I-1 Notes, the Class A-I-2 Notes, the Class A-I-3
Notes, the Class A-I-4 Notes, the Class M-1 Notes and the Class M-2 Notes will
receive principal payments primarily from the group I home loans. The Class
A-II Notes will receive principal payments primarily from the group II home
loans. The Class A-III Notes will receive principal payments primarily from
the group III home loans. Therefore, the yields on the notes will be sensitive
to the rate and timing of principal payments primarily from the home loans in
their respective loan groups.
o The originator will be required to purchase home loans from the
trust as a result of certain breaches of representations and warranties or
certain defects in the home loan files, and the servicer will be required to
purchase home loans from the trust as a result of certain breaches of the
covenants with respect to the home loans made by it in the sale and servicing
agreement, in each case that have not been cured. If the originator or the
servicer does purchase those home loans, the purchases will have the same
effect on your yield as a prepayment of the home loans. If the originator or
the servicer fails to purchase those home loans, the home loans will stay in
the trust. Neither the transferor nor the depositor has made any
representations or warranties with respect to the home loans. Accordingly,
neither the transferor, the depositor nor any other entity shall be obligated
to purchase those home loans if the originator or the servicer fails to do so.
In the event any of those home loans defaults and if the available amounts of
credit enhancement are inadequate, noteholders will bear the risk of any
resulting delays in payment or losses.
o As long as credit enhancement is available, liquidations of
defaulted home loans will have the same effect on your yield as a prepayment
of the home loans. See "- Home Loan Default Risks" in this prospectus
supplement for a discussion of the default risks presented by the home loans.
o If the notes are redeemed, you have no assurance that similar
investments offering comparable yields will be available.
We refer you to "Prepayment and Yield Considerations" in this
prospectus supplement.
Changes in Interest Rates
No prediction can be made as to future levels of LIBOR or the Prime
Rate or as to the timing of any changes therein, each of which will directly
affect the yields of the Class A-III Notes and, in the case of LIBOR, the
Class A-I-1 Notes. The holders of the Class A-I-1 Notes will absorb the yield
risk associated with a possible elimination or inversion of the spread between
the interest rate on the Class A-I-1 Notes calculated as the lesser of LIBOR
plus 0.18%, or the Class A-I-1 margin, and 14.00% per annum, subject to the
related net wac cap rate limitation described in this prospectus supplement.
The group I home loans bear interest at a fixed rate. The holders of the Class
A-III Notes will absorb the yield risk associated with a possible elimination
or inversion of the spread between the interest rate on the Class A-III Notes
calculated as the lesser of LIBOR plus 0.32%, or the Class A-III margin, and
14.00% per annum, subject to the related net wac cap rate limitation described
in this prospectus supplement. The group III home loan rates are adjustable
and reset at different times based on the Prime Rate and are subject to
lifetime interest rate caps.
The Class A-I-1 Notes and Class A-III Notes may not always receive
interest at a rate equal to LIBOR plus the applicable margin. If the related
net wac cap rate is less than the lesser of (a) LIBOR plus the applicable
margin and (b) 14.00% per annum, the interest rate on the Class A-I-1 Notes or
Class A-III Notes, as applicable, will be reduced to the related net wac cap
rate. Thus, the yields to investors in the Class A-I-1 Notes and Class A-III
Notes will be sensitive to fluctuations in the level of LIBOR and may be
adversely affected by the application of the related net wac cap rate.
The prepayment of group I home loans or group III home loans with
higher net home loan rates may result in a lower related net wac cap rate. If
on any payment date the application of the net wac cap rate results in an
interest payment lower than LIBOR plus the applicable margin during the
related accrual period, the value of the Class A-I-1 Notes or Class A-III
Notes, as applicable, may be temporarily or permanently reduced.
Investors in the Class A-III Notes should be aware that the home loan
rates on the group III home loans are generally adjustable monthly or
semi-annually based on the Prime Rate. Consequently, the interest that becomes
due on the group III home loans during the related due period may be less than
interest that would accrue on the Class A-III Notes, at the rate of LIBOR plus
the Class A-III margin. In a rising interest rate environment, the Class A-III
Notes may receive interest at the lesser of (a) the related net wac cap rate
or (b) 14.00% per annum for a protracted period of time. In addition,
investors in the Class A-I-1 Notes, the Class A-I-2 Notes, the Class A-I-3
Notes, the Class A-I-4 Notes, the Class M-1 Notes, Class M-2 Notes and the
Class A-II Notes should be aware that, in this situation, there would be
little or no excess cash flow from the group III home loans to cover losses
and to create overcollateralization.
To the extent the related net wac cap rate is paid to the Class A-I-1
Notes or the Class A-III Notes, the difference between the related net wac cap
rate and the lesser of LIBOR plus the related margin and 14.00% per annum,
will create a shortfall that will carry forward with interest thereon.
However, any resulting basis risk carryover shortfall will not be payable by
the financial guaranty insurance policy and will only be payable from the
available excess cash flow on the home loans in the order and priority
described in this prospectus supplement. Basis risk carryover shortfalls may
remain unpaid on the clean-up call date or the related final scheduled
maturity date.
Potential Inadequacy of Credit Enhancement
Credit enhancement will be provided by excess interest,
overcollateralization, subordination, and, in the case of the Class A Notes,
the financial guaranty insurance policy. If the home loans experience higher
rates of delinquencies, defaults or losses than initially anticipated, there
can be no assurance that the amounts available from the applicable credit
enhancement will be adequate to cover the delays or shortfalls in payments
that result from such higher delinquencies, defaults or losses. If the amounts
available from the available credit enhancement are inadequate, noteholders
will bear the risk of any resulting delays in payment or losses. None of the
originator, the transferor, the servicer, the backup servicer, the depositor
or any of their affiliates will have any obligation to replace this credit
enhancement or to take any other action to maintain any rating on the notes.
The payment of excess cashflow to noteholders in the order and
priority specified in this prospectus supplement is intended, first, to
eliminate the approximately 1.00% of undercollateralization that will exist on
the closing date, and then to produce and maintain the level of
overcollateralization as described in this prospectus supplement. However,
there can be no assurance that excess cashflow will be generated in sufficient
amounts to ensure that such overcollateralization level will be achieved or
maintained at all times or in sufficient amounts to reduce the initial
undercollateralization. As a result of delinquencies on the home loans, the
amount of interest received on the home loans during any due period may be
less than the amount of interest payable on the notes on any payment date. The
servicer will not advance delinquent payments.
In addition, if on any Payment Date, principal collected in respect
of the group III home loans and available for distribution to the Class A-III
Notes is insufficient to maintain the group III overcollateralization amount
at or above the group III required overcollateralization amount, amounts
otherwise distributable in respect of principal on the group I notes and group
II notes will first be distributed to the Class A-III Notes until the group
III overcollateralization amount equals the group III required
overcollateralization amount, and the remainder will be distributed to the
group I notes and group II notes as described in this prospectus supplement
under "Description of the Notes -- Payments" and "--Overcollateralization
Provisions."
As a result of delinquencies on the home loans, the amount of
interest received on the home loans during any due period may be less than the
amount of interest payable on the notes on the related payment date. The
servicer is not required, nor does it intend, to advance delinquent payments
of principal and interest.
Any holder of certificates will not be required to refund any amounts
previously distributed to that holder pursuant to the transfer and servicing
agreements, regardless of whether there are sufficient funds on a subsequent
payment date to pay all amounts then payable to noteholders.
Undercollateralization
At the closing date, the aggregate principal balance of the notes and
certificates is expected to exceed the aggregate principal balance of the home
loans by approximately 1.00%. Such undercollateralization is expected to be
eliminated by the application of excess cashflow, which will then be applied
to produce overcollateralization as described in this prospectus supplement.
There can be no assurance, however, that excess cashflow will be generated in
sufficient amounts to eliminate such undercollateralization, or to do so
within the period of time anticipated by investors.
Limited Historical Delinquency, Loss and Prepayment Information
We have not included the originator's historical delinquency and loan
loss and liquidation experience with its portfolio of home improvement loans
and home equity loans because this information is not a meaningful predictor
of the performance of the loans in the trust. As a result, there is no
meaningful historical performance data to permit an accurate assessment of the
likely delinquency, default and loss experience of the home loans over an
extended period of time. Significant uncertainty exists regarding such likely
experience over time and in differing economic and interest rate environments.
Because loans such as the home loans have characteristics that combine
characteristics similar to unsecured consumer debt and secured consumer debt,
the delinquency, default and loss experience of the home loans is unlikely to
be comparable to either of those types of consumer debt and is unlikely to
reflect a blending or averaging of such experience. As a result, noteholders
do not have, and will not have for an indeterminate amount of time,
information available to them to assess with any degree of confidence the
likely delinquency, default and loss experience of the home loans. You should
make your investment determinations based on the underwriting criteria, the
applicable credit enhancement described herein, the characteristics of the
home loans and other information provided herein.
Home Protection Act
As described below, certain of the home loans are subject to The
Homeownership and Equity Protection Act of 1994 (the "Home Protection Act").
The home loans are also subject to various other federal and state laws and
regulations. The Home Protection Act adds certain additional provisions to
Regulation Z, the implementing regulation of the Federal Truth-in-Lending Act.
These provisions impose additional disclosure and other requirements on
creditors for non-purchase money mortgage loans with high interest rates or
up-front fees and charges. A violation of these provisions of the Home
Protection Act can affect the enforceability of the related loan, and it
subjects any assignee of the loan, such as the trust, to all the claims and
defenses that the consumer could assert against the creditor, including the
right to rescind the loan. As of the cut-off date, 60.99% and 0.28% of the
group I home loans and group III home loans, respectively, by principal
balance as of the cut-off date, were subject to the special rules, disclosure
requirements and other provisions of the Home Protection Act. The return on
your investment will depend largely on the performance of the loans in the
loan pool. If the originator is found to have violated the provisions of the
Home Protection Act or other state or federal law or regulation regarding any
loan that is subject to the Home Protection Act or such other law or
regulation, the trust may be unable to collect on that loan. The originator
would, however, be obligated to repurchase that loan because of the breach of
its representation and warranty.
Interest Payments on the Home Loans May Be Reduced
If a borrower prepays a home loan, the borrower is charged interest
only up to the date of the prepayment, instead of a full month. In addition,
the Soldiers' and Sailors' Civil Relief Act of 1940 (the "Relief Act"),
permits certain modifications to the payment terms for mortgage loans,
including a reduction in the amount of interest paid by the borrower, under
certain circumstances. The servicer will not pay for any interest shortfalls
created by prepayments or by the Relief Act. If the available credit
enhancement is insufficient to cover those shortfalls, you may incur a loss.
The financial guaranty insurance policy will not cover shortfalls created by
prepayments or by the Relief Act.
Ratings of the Notes
On the closing date the rating agencies will rate the notes as set
forth in "Ratings" in this prospectus supplement. A rating is not a
recommendation to purchase, hold or sell notes, and it does not comment as to
market price or suitability for a particular investor. The ratings of the
notes address the likelihood of the payment of principal and interest on the
notes pursuant to their terms. The ratings take into consideration, among
other things, the credit quality of the home loans, the structural and legal
aspects associated with the notes and, in the case of the Class A Notes, the
financial strength of the note insurer. An adverse change in any of such
factors or in other factors may be a basis for the downward revision or
withdrawal of the ratings on the notes. The ratings do not address the
possibility that the holders of the Class A-I-1 Notes or the Class A-III Notes
might suffer a lower than anticipated yield or the frequency of payment of any
amounts carried forward as a result of the application of the related net wac
cap rate. We cannot assure you that a rating will remain for any given period
of time, that a rating agency will not lower or withdraw its rating if in its
judgment circumstances in the future so warrant or whether any other rating
agency will rate the notes or, if it does, what rating it will assign to the
notes.
Risk of Losses as a Result of Geographic Concentration
One risk of investing in securities backed by home improvement and
home equity loans is created by any concentration of the related properties,
and the obligors on the loans, in one or more geographic regions. If the
economy or the housing market weakens in that region, the loans in that region
may experience higher rates of delinquency and default, and greater losses
upon default, which could result in a loss on your investment in the notes. A
region's economic condition and housing market may be adversely affected by a
variety of events, including natural disasters such as earthquakes,
hurricanes, floods and eruptions, and civil disturbances such as riots.
Limited Resale
The underwriters intend to make a market for resale in the notes but
have no obligation to do so. There is no assurance that a market will develop
or, if it develops, that it will continue. Consequently, you may not be able
to sell your notes readily or at prices that will enable you to realize your
desired yield. The market values of the notes are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary markets for mortgage-backed and asset-backed securities
have experienced periods of illiquidity and can be expected to do so in the
future. Illiquidity can have a severely adverse effect on the prices of
securities that are especially sensitive to prepayment, credit, or interest
rate risk, or that have been structured to meet the investment requirements of
limited categories of investors.
Bankruptcy or Insolvency of Certain Parties
We intend that any transfer of loans by the originator to the
transferor and by the transferor to the depositor will each constitute a sale,
rather than a pledge of the loans to secure the originator's or the
transferor's indebtedness. However, if the originator or the transferor were
to become a debtor under the federal bankruptcy code or similar applicable
state laws, the originator's or the transferor's trustee in bankruptcy might
argue that such sale of loans by the originator or the transferor was a pledge
of the loans rather than a sale. The originator's or the transferor's trustee
in bankruptcy might also argue that the assets and the liabilities of the
depositor should be consolidated with those of the transferor. If any of these
arguments were accepted by a court, it would cause the trust to experience a
delay in or reduction of collections on the home loans. This delay or
reduction could result in a delay or reduction in payments on your notes.
In addition, if the servicer becomes bankrupt, a bankruptcy trustee
or receiver may have the power to prevent the trustee from appointing a
successor servicer. Any related delays in servicing could result in increased
delinquencies or losses on the home loans.
ERISA Considerations
Pension, employee benefit and other plans subject to ERISA and/or
Section 4975 of the Code generally are permitted to invest in the notes.
Prohibited transactions may arise if equity interests in the Trust are
acquired by a person or entity which is a party in interest (as defined under
ERISA) or a disqualified person (as defined under the Code) with respect to a
plan that acquires or holds a note. Certain exemptions from the prohibited
transaction provisions of ERISA and Section 4975 of the Code may be
applicable; however, there can be no assurance that any of these class
exemptions or any other exemption will be available with respect to any
particular transaction involving the notes or other equity interests in the
Trust.
We refer you to "ERISA Considerations" in this prospectus supplement
and the accompanying prospectus for additional information.
Forward-Looking Information
Certain of the information contained in this prospectus supplement
constitutes "forward-looking statements." These statements may include
projections of average life and maturity dates of the notes. These statements
are intended to convey our projections or expectations as of the date of this
prospectus supplement. These statements are inherently subject to a variety of
risks, uncertainties and other factors that may cause the actual results and
performance of the notes and the trust to be materially different from any
future results or performance expressed or implied by the forward-looking
statements. These factors include general economic and business conditions,
political and/or social conditions, interest rate changes, prepayment amounts,
loss and delinquency history, servicing performance, and the law and
government regulatory initiatives.
We will not update or revise any forward-looking statement to reflect
changes in our expectations or changes in the conditions or circumstances on
which such statements were originally based.
USE OF PROCEEDS
The Depositor will use the proceeds from the sale of the Home Loans
to the Trust for the purchase of the Home Loans from the Transferor.
DESCRIPTION OF THE TRUST
General
The Trust, Bear Stearns Home Loan Owner Trust 2001-A (the "Trust"),
will be a business trust formed under the laws of the State of Delaware
pursuant to the Trust Agreement for the transactions described in this
prospectus supplement. After its formation, the Trust will not engage in any
activity other than (i) acquiring, holding and managing the Home Loans and the
other assets of the Trust and proceeds therefrom, (ii) issuing the Securities,
(iii) making payments on the Securities, and (iv) engaging in related
activities.
On the Closing Date, (i) EMC Mortgage Corporation (the "Transferor")
will purchase the home loans (the "Home Loans") from Conseco Finance Corp.
(the "Originator") pursuant to a home loan purchase agreement dated as of
February 1, 2001 (the "Originator Home Loan Purchase Agreement") between the
Originator, as seller, and the Transferor, as purchaser, (ii) Bear Stearns
Asset Backed Securities, Inc. (the "Depositor") will purchase the Home Loans
from the Transferor pursuant to a home loan purchase agreement dated as of
February 1, 2001 (the "Transferor Home Loan Purchase Agreement" and, together
with the Originator Home Loan Purchase Agreement, the "Home Loan Purchase
Agreements"), between the Transferor, as seller and the Depositor, as
purchaser, and (iii) the Trust will purchase the Home Loans from the
Depositor, pursuant to a Sale and Servicing Agreement to be dated as of
February 1, 2001 (the "Sale and Servicing Agreement"), among the Trust, the
Depositor, the Transferor, the Servicer and the Indenture Trustee.
On the Closing Date, the Trust will include the scheduled principal
balance of each Home Loan as of the Cut-Off Date (the "Cut-Off Date Principal
Balance"). The "Principal Balance" of a Home Loan on any day is equal to its
Cut-Off Date Principal Balance, minus all principal reductions credited
against the principal balance of such Home Loan since such Cut-Off Date;
provided, however, that the Principal Balance of a Liquidated Home Loan will
be zero. With respect to any date, the "Pool Principal Balance" will be equal
to the aggregate Principal Balance of the Home Loans as of such date. On the
closing date, the original principal balance of the notes and the Class B
Certificates will exceed the Pool Principal Balance as of the Cut-Off Date.
This excess represents undercollateralization of approximately 1.00% of the
original principal balance of the notes and the Class B Certificates.
The trust property will consist of:
(1) a pool of conventional home improvement loans and home equity
loans consisting of three loan groups, the Group I Home Loans,
the Group II Home Loans and the Group III Home Loans;
(2) the mortgage, deed of trust or security deed granted by or on
behalf of the related obligor, including the lien on the
related real property;
(3) all other security interests or liens and property subject to
the loans from time to time purporting to secure payment of
such loans, whether pursuant to the agreement giving rise to
such loan or otherwise, together with all financing statements
signed by the obligor describing any collateral securing such
loan;
(4) all rights the Originator may have against the originator of
the loan if other than Conseco Finance Corp.;
(5) all rights the Transferor may have against the Originator under
the Transferor Home Loan Purchase Agreement;
(6) all rights under hazard insurance, if applicable, on the
property described in a loan;
(7) all rights in any title insurance policy with respect to a
loan;
(8) all guarantees, insurance and other agreements or arrangements
of whatever character from time to time supporting or securing
payment of a loan whether pursuant to the agreement giving rise
to such loan or otherwise;
(9) all records in respect of each loan; and
(10) a financial guaranty insurance policy issued by Ambac Assurance
Corporation (the "Note Insurer") irrevocably guaranteeing
timely payments of interest and ultimate payment of principal
on the Class A Notes as described in this prospectus
supplement.
To protect the Trust's ownership interest in the loans, we will file
UCC-1 financing statements in Minnesota and Delaware to give notice of the
trust's ownership of the loans and the related trust property.
Under the indenture, the Trust will grant a security interest in
favor of the Indenture Trustee in the trust property, the rights of the Trust
under the Sale and Servicing Agreement, and the collection account and note
distribution account. Any proceeds of the property will be distributed
according to the Trust, as described below under "Description of the
Notes--Payments."
The indenture trustee or its custodian will hold each original
contract or promissory note, as well as copies of documents and instruments
relating to that loan and evidencing the security interest in the real
property securing the loan.
Payments and recoveries in respect of principal and interest on the
loans will be paid into a separate trust account maintained at an eligible
institution, initially U.S. Bank National Association, Minneapolis, Minnesota,
in the name of the Indenture Trustee, no later than one business day after
receipt. The Indenture Trustee will, on the fifteenth day of each month or, if
such day is not a business day, the next succeeding business day, deposit
funds from the collection account into the note distribution account and the
certificate distribution account. Payments on deposit in the note distribution
account will be applied by the Indenture Trustee on each payment date to make
the distributions to the noteholders as of the immediately preceding record
date and payments on deposit in the certificate distribution account will be
applied by the Owner Trustee on each payment date to make the distributions to
the certificateholders as of the immediately preceding record date, all as
described under "Description of the Notes--Payments."
Following the transfer of the loans from the Originator to the
Transferor, by the Transferor to the Depositor and then by the Depositor to
the Trust, the Originator's obligations are limited to:
(1) its obligations as Servicer to service the loans;
(2) representations and warranties in the Transferor Home Loan
Purchase Agreement as described under "Description of the
Transfer and Servicing Agreements--Sale and Assignment of the
Home Loans" in this prospectus supplement; and
(3) indemnities.
The Originator is obligated under the Transferor Home Loan Purchase
Agreement to repurchase any loan on the first payment date which is more than
90 days after the Originator becomes aware, or receives written notice from
the Indenture Trustee or the owner trustee, of any breach of any
representation and warranty in the Transferor Home Loan Purchase Agreement
that materially and adversely affects the securityholders' interest in the
loan if the breach has not been cured prior to that date. The Sale and
Servicing Agreement and the Transferor Home Loan Purchase Agreement also
provide that the Originator is obligated to repurchase loans and to indemnify
the Indenture Trustee, the Owner Trustee, the Note Insurer and the
securityholders about other matters.
The Servicer will be required to service the Home Loans pursuant to
the Sale and Servicing Agreement (collectively, with the Indenture, the
Administration Agreement (as defined herein), the Home Loan Purchase
Agreements, the Backup Servicing Agreement and the Trust Agreement, the
"Transfer and Servicing Agreements") and will be compensated for such services
as described under "Description of the Transfer and Servicing Agreements -
Servicing" herein.
The Trust's principal offices are located in Wilmington, Delaware, in
care of Wilmington Trust Company, as Owner Trustee, at the address set forth
below under "- The Owner Trustee."
The Owner Trustee/Co-Owner Trustee
Wilmington Trust Company will act not in its individual capacity but
solely as the Owner Trustee under the Trust Agreement. Wilmington Trust
Company is a Delaware banking corporation and its principal offices are
located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890.
Certain functions of the Owner Trustee under the Trust Agreement and
the Sale and Servicing Agreement will be performed by U.S. Bank Trust National
Association, in its capacity as Co-Owner Trustee.
Certain functions of the Owner Trustee under the Trust Agreement and
the Sale and Servicing Agreement will be performed by Conseco Finance
Servicing Corp. (the "Administrator") pursuant to the terms of an
administration agreement dated as of February 1, 2001 (the "Administration
Agreement") among the Trust, the Administrator and the Owner Trustee.
THE HOME LOAN POOL
General
Substantially all of the mortgages for the Home Loans will be junior
in priority to one or more senior liens on the related mortgaged properties,
which will consist primarily of owner occupied single family residences.
Substantially all of the Home Loans will be secured by liens on mortgaged
properties in which the borrowers have little or no equity (i.e., the related
combined loan-to-value ratios approach or exceed 100%); provided, however,
that 10.73% of the Group I Home Loans will be unsecured consumer loans.
"Combined loan-to-value ratio" means, with respect to any Home Loan,
the fraction, expressed as a percentage, the numerator of which is the
principal balance of such Home Loan at origination plus, in the case of a
junior lien Home Loan, the aggregate outstanding principal balance of the
related senior lien loans on the date of origination of such Home Loan, and
the denominator of which is the appraised or stated value of the related
mortgaged property at the time of origination of such Home Loan.
All of the Home Loans were sold by the Originator to the Transferor
pursuant to the Originator Home Loan Purchase Agreement. Pursuant to the
Transferor Home Loan Purchase Agreement, the Home Loans will be sold by the
Transferor to the Depositor. Pursuant to the Sale and Servicing Agreement, the
Home Loans will be transferred by the Depositor to the Trust. Pursuant to the
Indenture, the Trust will pledge and assign the Home Loans to the Indenture
Trustee for the benefit of the Noteholders. The Trust will be entitled to all
payments of interest and principal and all proceeds due in respect of the Home
Loans on or after the cut-off date.
Payments on the Home Loans
The Home Loans provide for a schedule of payments that will be, if
timely paid, sufficient to amortize fully the principal balance of the related
Home Loan on or before its maturity date. The scheduled monthly payment dates
of the Home Loans vary. Each Group I Home Loan and each Group II Home Loan
bears interest at a fixed rate. Each Group III Home Loan bears interest at an
adjustable rate. Interest on substantially all of the Home Loans will accrue
on the "simple interest" method. No Home Loan provides for deferred interest
or negative amortization.
The "simple interest" method provides that as payments are received
on a Home Loan, the amount received is applied first to interest accrued to
the date of payment and the balance, if any, is applied to reduce the unpaid
principal balance of the Home Loan. Accordingly, if a borrower pays a fixed
monthly installment less than 30 days after the previous payment, the portion
of the payment allocable to interest for the period will be less it would have
been had the payment been made exactly 30 days after the preceding payment,
and the portion of the payment applied to reduce the unpaid principal balance
of the Home Loan will be correspondingly greater. Conversely, if a borrower
pays a fixed monthly installment more than 30 days after the previous payment,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be greater than it would have been had the
payment been made exactly 30 days after the preceding payment, and the portion
of the payment applied to reduce the unpaid principal balance of the Home Loan
will be correspondingly less.
Certain of the borrowers are covered by credit life insurance
policies and involuntary unemployment insurance policies, which provide for
payment in full of the outstanding principal balance of the related Home Loans
in the event of the accidental death or disability of the borrower, or for
payment of the applicable monthly payment (up to $500 per month), in the case
of employment interruption. The credit life insurance policies and involuntary
unemployment insurance policies generally have terms of five years. If a
borrower covered by any such policy elects to cancel the policy, the amount of
the premium refund payable in connection with such cancellation will be
applied as a principal payment on the related Home Loan. Any proceeds received
by the Trust in respect of such insurance policies will affect the rate of
prepayments on the Home Loans. See "Prepayment and Yield Considerations"
herein.
Underwriting Criteria
Home Improvement Loans. Through its centralized loan processing
operations in St. Paul, Minnesota, the Originator arranges to purchase
contracts from home improvement contractors located throughout the United
States. The Originator's regional sales managers contact home improvement
contractors and explain its available financing plans, terms, prevailing rates
and credit and financing policies. If the contractor wishes to use the
Originator's available customer financing, the contractor must make an
application for contractor approval. The Originator has a contractor approval
process under the Originator which the financial condition, business
experience and qualifications of the contractor are reviewed prior to his or
her approval to sell contracts to the Originator. In addition, the Originator
has a centralized compliance group which reviews and updates contractor
financial condition and reviews contractors on an annual basis to determine
whether the contractor's approval will be continued. The Originator also
reviews monthly contractor trend reports which show the default and
delinquency trends of the particular contractor on contracts sold to the
Originator. The Originator occasionally will originate directly a home
improvement promissory note involving a home improvement transaction.
All contracts that the Originator originates are written on forms
provided or approved by the Originator and are purchased on an individually
approved basis in accordance with the Originator's guidelines. The contractor
submits the customer's credit application and construction contract to the
Originator's office where an analysis of the creditworthiness of the customer
is made using a proprietary credit scoring system that was implemented by the
Originator in June 1993. If the Originator determines that the application
meets its underwriting guidelines and applicable FHA regulations, for
FHA-insured contracts, and the credit is approved, the Originator purchases
the contract from the contractor when the customer verifies satisfactory
completion of the work, or, in the case of staged funding, the Originator
follows up with the customer for the completion certificate 90 days after
funding.
The types of home improvements the Originator finances include:
(1) exterior renovations, including windows, siding and roofing;
(2) pools and spas;
(3) kitchen and bath remodeling; and
(4) room additions and garages.
The Originator may also, under some limited conditions, extend
additional credit beyond the purchase price of the home improvement for the
purpose of debt consolidation.
The Originator began financing conventional home improvement loans in
September 1992. Conventional home improvement loans are not insured by FHA.
The unsecured conventional program allows for an amount financed from $2,500
to $15,000, except in Massachusetts where the loan limit may be $20,000. The
allowable term of unsecured contracts is 24 to 120 months. The Originator
underwriting standards for unsecured home improvement contracts are, in
general, more stringent than its underwriting standards for secured home
improvement contracts with similar terms. Eligible property includes an
owner-occupied single family home, up to four unit multiple-family dwelling,
owner-occupied condominium or town house, or an owner-occupied manufactured
home located in an Originator-approved park or attached to the real estate.
Home Equity Loans. The Originator has originated closed-end home
equity loans since January 1996. As of December 31, 2000, the Originator had
approximately $10,844,054 aggregate principal amount of outstanding closed-end
home equity loans.
Through a system of regional offices, the Originator markets its home
equity lending directly to consumers using a variety of marketing techniques.
The Originator also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
The Originator's credit approval process analyzes both the equity
position of the requested loan, including both the priority of the lien and
the combined loan-to-value ratio, and the applicant's creditworthiness; to the
extent the requested loan would have a less favorable equity position, the
creditworthiness of the borrower must be stronger, or may be weaker.
Characteristics of the Home Loans
General
This prospectus supplement contains information regarding the Home
Loans, which were originated or acquired by Conseco Finance and will be
transferred to the Transferor, by the Transferor to the Depositor and by the
Depositor to the Trust on the closing date. The loan pool will consist of
three groups of home improvement loans and home equity loans, the Group I Home
Loans, the Group II Home Loans and the Group III Home Loans.
Group I Loans
The information for the Group I home loans is as of the cut-off date
for those loans.
The Group I home loans have an aggregate principal balance as of the
cut-off date of $316,245,586.41. Each group I home loan is (i) a closed-end
home equity loan either acquired by the Originator and originated by a
correspondent lender approved by the Originator or originated by the
Originator directly or (ii) a home improvement installment sales contract
acquired by the Originator and originated by a home improvement contractor
that the Originator approved, or a home improvement promissory note that the
Originator originated directly. Approximately 79.39% of the Group I home loans
by principal balance are for the primary purpose of debt consolidation. Each
Group I home loan is secured by a lien on the related real estate,
substantially all of which are second or third liens; provided, however, that
10.73% of the Group I home loans will be unsecured consumer loans.
The Originator originated or acquired the Group I home loans in the
ordinary course of its business. A detailed listing of the Group I home loans
will be delivered to the indenture trustee. All of the Group I home loans are
conventional loans, except for 152 loans representing 0.50% of Group I which
are FHA-insured. Each of the Group I home loans has a contract rate of at
least 5.000% per year and not more than 22.240% per year and the weighted
average of the contract rates of the Group I home loans as of the cut-off date
is 16.765% per year. As of the cut-off date, the Group I home loans had
remaining maturities of at least 3 months but not more than 357 months and
original maturities of at least 24 months but not more than 360 months. The
Group I home loans had a weighted average term to scheduled maturity, as of
origination, of 225 months, and a weighted average term to scheduled maturity,
as of the cut-off date, of 215 months. The average principal balance per Group
I home loan as of the cut-off date was $19,682.93 and the principal balances
on the Group I home equity loans as of the cut-off date ranged from $5.98 to
$254,922.75. The Group I home loans arise from loans originated in 49 states
and the District of Columbia. By principal balance as of the cut-off date,
approximately 9.03% of the Group I home loans were originated in California;
7.48% in Texas and 5.35% in Florida. No other state represented 5% or more of
the cut-off date pool principal balance of the Group I home loans.
The tables below describe the characteristics of the Group I Home
Loans.
Distribution of Group I Home Loan Current Balances
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Current Balance ($) Cut-Off Date of the Cut-Off Date the Cut-Off Date
Less than 25,000.01.................... 11,641 $167,305,315.51 52.90%
25,000.01 - 50,000.00.................. 4,342 143,401,076.70 45.34
50,000.01 - 75,000.00.................. 70 3,865,475.66 1.22
75,000.01 - 100,000.00................. 6 534,907.14 0.17
100,000.01 - 125,000.00................ 3 361,056.61 0.11
125,000.01 - 150,000.00................ 4 522,832.04 0.17
200,000.01 - 300,000.00................ 1 254,922.75 0.08
------ --------------- -------
Totals........................ 16,067 $316,245,586.41 100.00%
====== =============== =======
The average principal balance of the Group I Home Loans as of the Cut-Off Date
was approximately $19,682.93.
Combined Loan-to-Value Ratios of the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
CLTV Range (%) Cut-Off Date of the Cut-Off Date the Cut-Off Date
Less than 40.001....................... 1,602 $9,277,788.88 2.93%
40.001 - 50.000........................ 13 156,750.24 0.05
50.001 - 60.000........................ 3 53,622.55 0.02
60.001 - 70.000........................ 3 5,525.78 0.00
70.001 - 80.000........................ 6 28,347.91 0.01
80.001 - 90.000........................ 22 72,100.24 0.02
90.001 - 100.000....................... 16 81,716.57 0.03
100.001 - 105.000...................... 618 10,121,042.76 3.20
105.001 - 110.000...................... 4,183 78,548,501.04 24.84
110.001 - 115.000...................... 3,069 63,182,240.72 19.98
115.001 - 120.000...................... 1,446 36,620,736.82 11.58
120.001 - 125.000...................... 1,378 38,595,583.42 12.20
125.001 or higher...................... 2,180 58,955,864.64 18.64
Not Available.......................... 1,528 $20,545,764.84 6.50%
------ --------------- ------
Totals........................ 16,067 $316,245,586.41 100.00%
====== =============== =======
The weighted average Combined Loan-to Value Ratio of the Group I Home Loans as
of the Cut-Off Date was approximately 113.25%.
Distribution of Credit Scores for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Credit Score Range Cut-Off Date of the Cut-Off Date the Cut-Off Date
440 - 459....................... 1 $6,494.61 0.00%
460 - 479....................... 4 37,586.21 0.01
480 - 499....................... 18 260,007.41 0.08
500 - 519....................... 48 747,003.07 0.24
520 - 539....................... 159 2,811,575.92 0.89
540 - 559....................... 338 5,909,017.14 1.87
560 - 579....................... 555 9,860,101.63 3.12
580 - 599....................... 897 16,823,428.65 5.32
600 - 619....................... 2,388 51,688,527.73 16.34
620 - 639....................... 2,957 62,449,498.08 19.75
640 - 659....................... 2,842 59,173,450.84 18.71
660 - 679....................... 2,156 43,876,132.68 13.87
680 - 699....................... 1,376 26,600,578.40 8.41
700 - 719....................... 845 14,945,795.79 4.73
720 - 739....................... 590 9,113,295.84 2.88
740 - 759....................... 319 4,561,311.47 1.44
760 - 779....................... 168 2,043,493.12 0.65
780 - 799....................... 77 939,914.09 0.30
800 - 819....................... 33 317,445.16 0.10
820 - 839....................... 1 14,891.52 0.00
Not Available................ 295 4,066,037.05 1.29
------ --------------- ------
Totals......................... 16,067 $316,245,586.41 100.00%
====== =============== ======
The weighted average credit score for the Group I Home loans as of the Cut-Off
Date was approximately 644.
Debt to Income Ratios for the Group I Home Loans*
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Ratio Range (%) Cut-Off Date of the Cut-Off Date the Cut-Off Date
Less than 5.000................... 386 $4,073,333.74 1.29%
5.000 - 9.999..................... 53 366,713.00 0.12
10.000 - 14.999................... 80 710,884.14 0.22
15.000 - 19.999................... 184 2,007,815.20 0.63
20.000 - 24.999................... 396 5,958,790.56 1.88
25.000 - 29.999................... 965 16,826,382.83 5.32
30.000 - 34.999................... 1,720 32,836,152.99 10.38
35.000 - 39.999................... 2,561 52,815,805.55 16.70
40.000 - 44.999................... 3,655 78,689,857.06 24.88
45.000 - 49.999................... 3,501 74,407,514.87 23.53
50.000 - 54.999................... 1,751 33,802,357.08 10.69
55.000 - 59.999................... 586 10,448,432.15 3.30
60.000 or higher.................. 229 3,301,547.24 1.04
------ --------------- ------
Totals................... 16,067 $316,245,586.41 100.00%
====== ============== ======
* Determined at the time of origination of the related Home Loan.
The weighted average debt-to-income ratio of the Group I Home Loans as of the
Cut-Off Date was approximately 41.14%.
Distribution of Loan Rates for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Loan Rate Range (%) Cut-Off Date of the Cut-Off Date the Cut-Off Date
5.000 - 5.999..................... 1 $9,827.04 0.00%
7.000 - 7.999..................... 8 225,054.34 0.07
8.000 - 8.999..................... 30 1,093,223.39 0.35
9.000 - 9.999..................... 55 1,909,464.30 0.60
10.000 - 10.999................... 91 2,845,792.62 0.90
11.000 - 11.999................... 121 2,217,408.08 0.70
12.000 - 12.999................... 287 4,855,989.66 1.54
13.000 - 13.999................... 707 10,339,988.19 3.27
14.000 - 14.999................... 1,366 24,971,314.20 7.90
15.000 - 15.999................... 2,108 48,148,064.38 15.22
16.000 - 16.999................... 4,073 84,355,955.15 26.67
17.000 - 17.999................... 3,951 74,776,180.77 23.64
18.000 - 18.999................... 2,167 40,523,392.89 12.81
19.000 - 19.999................... 896 16,240,654.85 5.14
20.000 or higher.................. 206 3,733,276.55 1.18
------ --------------- ------
Totals................... 16,067 $316,245,586.41 100.00%
====== =============== =======
The weighted average loan rate for the Group I Home Loans as of the Cut-Off
Date was approximately 16.765%.
Remaining Terms to Scheduled Maturity for the Group I Home Loans
Aggregate
Principal % of Outstanding
Months Remaining to Number of Balance Outstanding Principal
Scheduled Maturity as Loans as of the as Balance as of
of the Cut-Off Date Cut-Off Date of the Cut-Off Date the Cut-Off Date
Less than 61...................... 1,326 $7,656,970.15 2.42%
61 - 120.......................... 2,671 39,083,117.62 12.36
121 - 180......................... 3,182 66,991,863.22 21.18
181 - 240......................... 5,948 114,472,161.05 36.20
241 - 300......................... 2,934 87,574,701.59 27.69
301 - 360......................... 6 466,772.78 0.15
------ --------------- ------
Totals................... 16,067 $316,245,586.4 100.00%
====== ============== ======
The weighted average remaining term to maturity of the Group I Home Loans as
of the Cut-Off Date was approximately 215 months.
Distribution of Loan Ages for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Loan Age Range (months) Cut-Off Date of the Cut-Off Date the Cut-Off Date
0 - 5............................. 2,144 $39,373,358.55 12.45%
6 - 11............................ 8,594 192,733,798.11 60.94
12 - 17........................... 3,824 73,879,448.10 23.36
18 - 23........................... 387 4,043,879.12 1.28
24 - 29........................... 372 2,825,916.64 0.89
30 - 35........................... 246 1,279,710.21 0.40
36 - 41........................... 2 6,603.54 0.00
42 - 47........................... 1 1,234.63 0.00
54 - 59........................... 2 11,903.49 0.00
60 - 65........................... 1 2,272.13 0.00
66 - 71........................... 97 437,213.69 0.14
72 - 77........................... 194 847,570.15 0.27
78 - 83........................... 201 794,926.56 0.25
84 - 89........................... 2 7,751.49 0.00
------ --------------- ------
Totals................... 16,067 $316,245,586.41 100.00%
====== =============== =======
The weighted average age of the Group I Home Loans as of the Cut-Off Dates was
approximately 10 months.
Documentation Types for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Documentation Type Cut-Off Date of the Cut-Off Date the Cut-Off Date
Limited.......................... 8,277 $180,172,196.31 56.97%
Full............................. 7,790 136,073,390.10 43.03
------ --------------- ------
Totals.................. 16,067 $316,245,586.41 100.00%
====== =============== =======
Occupancy Types for the Group I Home Loans*
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Occupancy Type Cut-Off Date of the Cut-Off Date the Cut-Off Date
Owner............................ 14,277 $292,103,744.43 92.37%
Non-Owner........................ 8 145,062.08 0.05
Not Available.................... 1,782 23,996,779.90 7.59
------ --------------- ------
Totals.................. 16,067 $316,245,586.41 100.00%
====== =============== =======
* Based on representations of the borrowers at the time of origination.
Loan Purposes for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Loan Purpose Cut-Off Date of the Cut-Off Date the Cut-Off Date
Debt Consolidation............... 11,479 $251,054,868.55 79.39%
Refinance........................ 1,741 33,193,932.45 10.50
Home Improvement................. 2,789 30,980,559.48 9.80
Purchase......................... 6 347,333.94 0.11
Other............................ 52 668,891.99 0.21
------ --------------- ------
Totals.................. 16,067 $316,245,586.41 100.00%
====== =============== ======
Property Types for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Property Types Cut-Off Date of the Cut-Off Date the Cut-Off Date
Single Family.................... 9,232 $188,239,828.32 59.52%
Two Family....................... 6,095 114,352,500.68 36.16
Manufactured Housing............. 566 10,471,095.65 3.31
Condominium...................... 98 1,768,964.60 0.56
Farm............................. 68 1,213,985.27 0.38
3-4 Family....................... 8 199,211.89 0.06
------ --------------- ------
Totals.................. 16,067 $316,245,586.41 100.00%
====== =============== =======
Lien Positions for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Lien Position Cut-Off Date of the Cut-Off Date the Cut-Off Date
First Lien....................... 29 $ 2,356,423.92 0.75%
Second Lien...................... 10,181 231,020,076.92 73.05
Third Lien....................... 2,328 48,893,333.66 15.46
Fourth Lien...................... 2 52,303.36 0.02
None............................. 3,527 33,923,448.55 10.73
------ --------------- ------
Totals.................. 16,067 $316,245,586.41 100.00%
Origination Dates for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Origination Dates Cut-Off Date of the Cut-Off Date the Cut-Off Date
1980.............................. 1 $12,809.41 0.00%
1990.............................. 2 18,572.25 0.01
1993.............................. 17 71,517.29 0.02
1994.............................. 428 1,827,932.53 0.58
1995.............................. 60 259,027.47 0.08
1996.............................. 13 188,213.98 0.06
1997.............................. 79 414,518.30 0.13
1998.............................. 650 4,910,994.86 1.55
1999.............................. 3,641 67,789,064.47 21.44
2000.............................. 11,176 240,752,935.85 76.13
------ --------------- ------
Totals................... 16,067 $316,245,586.41 100.00%
====== =============== =======
Geographic Distribution for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
State Cut-Off Date of the Cut-Off Date the Cut-Off Date
California......................... 1,070 $28,566,361.24 9.03%
Texas.............................. 1,887 23,653,597.91 7.48
Florida............................ 768 16,909,806.57 5.35
New York........................... 670 14,210,387.59 4.49
Virginia........................... 672 14,195,768.15 4.49
North Carolina..................... 585 11,974,548.22 3.79
Georgia............................ 551 11,820,050.33 3.74
Pennsylvania....................... 584 10,253,356.23 3.24
Maryland........................... 431 10,110,214.63 3.20
Illinois........................... 594 10,049,710.50 3.18
Michigan........................... 486 9,219,421.20 2.92
Ohio............................... 443 8,962,472.85 2.83
Arizona............................ 407 8,875,729.90 2.81
Indiana............................ 421 8,428,736.42 2.67
Alabama............................ 402 8,324,221.50 2.63
New Jersey......................... 348 7,956,236.06 2.52
Minnesota.......................... 324 7,112,361.60 2.25
Missouri........................... 409 6,884,012.61 2.18
Washington......................... 359 6,483,802.40 2.05
Colorado........................... 278 6,375,965.87 2.02
South Carolina..................... 270 5,676,921.08 1.80
Nevada............................. 248 5,674,730.12 1.79
Tennessee.......................... 285 5,673,273.91 1.79
Wisconsin.......................... 259 5,529,981.76 1.75
Connecticut........................ 238 4,726,719.90 1.49
Kansas............................. 247 4,506,502.11 1.43
Arkansas........................... 250 4,018,618.24 1.27
Louisiana.......................... 194 3,931,575.30 1.24
Massachusetts...................... 296 3,915,650.57 1.24
Iowa............................... 204 3,762,587.31 1.19
Oklahoma........................... 217 3,709,640.88 1.17
Kentucky........................... 169 3,539,384.91 1.12
Oregon............................. 143 3,447,607.23 1.09
New Mexico......................... 160 3,274,921.43 1.04
Idaho.............................. 143 3,065,045.10 0.97
Mississippi........................ 146 2,759,946.72 0.87
Nebraska........................... 126 2,530,812.78 0.80
Wyoming............................ 107 2,237,569.35 0.71
Delaware........................... 88 2,024,505.49 0.64
Utah............................... 87 1,828,437.42 0.58
Maine.............................. 77 1,748,565.45 0.55
West Virginia...................... 78 1,637,159.85 0.52
Montana............................ 71 1,454,283.64 0.46
New Hampshire...................... 59 1,238,669.24 0.39
Rhode Island....................... 67 1,136,289.30 0.36
North Dakota....................... 49 960,524.47 0.30
South Dakota....................... 39 752,356.77 0.24
Vermont............................ 35 630,595.80 0.20
District of Columbia............... 25 435,966.50 0.14
Alaska............................. 1 49,982.00 0.02
------ --------------- ------
Totals.................... 16,067 $316,245,586.41 100.00%
====== =============== =======
Delinquency Status for the Group I Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Delinquency (days) Cut-Off Date of the Cut-Off Date the Cut-Off Date
Current............................ 14,500 $285,858,631.90 90.39%
1-29............................... 1,315 25,315,390.95 8.00
30-59.............................. 252 5,071,563.56 1.60
------ --------------- ------
Totals.................... 16,067 $316,245,586.41 100.00%
====== =============== =======
Prepayment Penalties for the Group I Home Loans
% of
Outstanding
Number of Loans Aggregate Principal Principal
as of the Balance Outstanding Balance as of
Prepayment Penalties Cut-Off Date as of the Cut-Off Date the Cut-Off Date
6 months interest if paid within 36 months................. 6 $399,991.78 0.13%
1% of unpaid principal balance if paid within 36 months.... 3 118,078.01 0.04
2% of unpaid principal balance............................. 3 35,389.39 0.01
1% of unpaid principal balance if paid within 60 months.... 1 16,024.35 0.01
5% of unpaid principal balance if paid within 36 months.... 2 28,434.39 0.01
5 year sliding scale....................................... 1 128,137.82 0.04
None....................................................... 16,047 315,414,807.73 99.74
Not Available.............................................. 4 104,722.94 0.03
------ --------------- ------
Totals............................................ 16,067 $316,245,586.41 100.00%
====== =============== ======
The Group II Home Loans
The Group II home loans have an aggregate principal balance as of the
cut-off date of $236,687,105.65. Each group II home loan is (i) a closed-end
home equity loan either acquired by the Originator and originated by a
correspondent lender approved by the Originator or originated by the
Originator directly or (ii) a home improvement installment sales contract
acquired by the Originator and originated by a home improvement contractor
that the Originator approved, or a home improvement promissory note that the
Originator originated directly. Approximately 70.55% of the Group II home
loans by principal balance are for the primary purpose of debt consolidation.
Each Group II home loan is secured by a lien on the related real estate,
substantially all of which are second or third liens.
The Originator originated or acquired the Group II home loans in the
ordinary course of its business. A detailed listing of the Group II home loans
will be delivered to the indenture trustee. All of the Group II home loans are
conventional loans, except for 849 loans, representing 2.03% of the Group II
loans, which are FHA-insured. Each of the Group II home loans has a contract
rate of at least 6.000% per year and not more than 21.430% per year and the
weighted average of the contract rates of the Group II home loans as of the
cut-off date is 14.066% per year. As of the cut-off date, the Group II home
loans had remaining maturities of at least 4 months but not more than 355
months and original maturities of at least 24 months but not more than 360
months. The Group II home loans had a weighted average term to scheduled
maturity, as of origination, of 238 months, and a weighted average term to
scheduled maturity, as of the cut-off date, of 222 months. The average
principal balance per Group II home loan as of the cut-off date was $23,816.37
and the principal balances on the Group II home loans as of the cut-off date
ranged from $1,003.12 to $214,419.91. The Group II home loans arise from loans
relating to real property located in 49 states and the District of Columbia.
By principal balance as of the cut-off date, approximately 10.04% of the Group
II home loans were secured by real property located in California, 8.19% in
Florida, 6.40% in Virginia, 5.73% in Pennsylvania, and 5.34% in New York. No
other state represented 5% or more of the cut-off date pool principal balance
of the Group II home loans.
The tables below describe the characteristics of the Group II home
loans.
Distribution of Group II Home Loan Current Balances
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Current Balance ($) Cut-Off Date of the Cut-Off Date Date
Less than 25,000.01......................... 5,876 $87,735,847.08 37.07%
25,000.01 - 50,000.00..................... 3,714 128,923,270.98 54.47
50,000.01 - 75,000.00..................... 327 17,699,224.87 7.48
75,000.01 - 100,000.00.................... 10 872,709.54 0.37
100,000.01 - 125,000.00..................... 5 525,684.85 0.22
125,000.01 - 150,000.00..................... 3 405,882.49 0.17
150,000.01 - 175,000.00..................... 2 310,065.93 0.13
200,000.01 - 300,000.00..................... 1 214,419.91 0.09
----- --------------- -------
Totals................................. 9,938 $236,687,105.65 100.00%
===== =============== ======
The average principal balance of the Group II Home Loans as of the Cut-Off
Date was approximately $ 23,816.37.
Combined Loan-to-Value Ratios of the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
CLTV Range (%) Cut-Off Date of the Cut-Off Date Date
90.001 - 100.000.......................... 1 $17,959.93 0.01%
100.001 - 105.000........................... 1,185 21,753,494.50 9.19
105.001 - 110.000........................... 3,354 72,631,922.14 30.69
110.001 - 115.000........................... 1,339 36,806,619.04 15.55
115.001 - 120.000........................... 1,061 32,762,457.61 13.84
120.001 - 125.000........................... 1,451 44,433,347.26 18.77
125.001 or higher........................... 1,547 28,281,305.71 11.95
----- --------------- -------
Totals................................. 9,938 $236,687,105.65 100.00%
===== =============== ======
The weighted average Combined Loan-to-Value Ratio of the Group II Home Loans
as of the Cut-Off Date was approximately 115.32%.
Distribution of Credit Scores for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Credit Score Range Cut-Off Date of the Cut-Off Date Date
420 - 439................................... 1 $12,657.66 0.01%
460 - 479................................... 1 14,921.48 0.01
480 - 499................................... 1 20,708.29 0.01
500 - 519................................... 11 236,875.28 0.10
520 - 539................................... 42 826,191.95 0.35
540 - 559................................... 98 1,891,006.39 0.80
560 - 579................................... 155 3,031,435.87 1.28
580 - 599................................... 330 6,630,228.60 2.80
600 - 619................................... 743 16,546,427.99 6.99
620 - 639................................... 1,148 26,273,311.18 11.10
640 - 659................................... 1,488 37,563,512.72 15.87
660 - 679................................... 1,692 46,133,885.28 19.49
680 - 699................................... 1,287 35,005,567.24 14.79
700 - 719................................... 803 22,699,975.10 9.59
720 - 739................................... 553 15,413,838.78 6.51
740 - 759................................... 343 9,289,914.11 3.92
760 - 779................................... 159 4,256,572.33 1.80
780 - 799................................... 41 1,131,881.34 0.48
800 - 819................................... 7 170,679.10 0.07
Not Available............................... 1,035 9,537,514.96 4.03
----- --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
====== =============== ======
The weighted average credit score of the Group II Home loans as of the Cut-Off
Date was 669.
Debt to Income Ratios for the Group II Home Loans*
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Ratio Range (%) Cut-Off Date of the Cut-Off Date Date
Less than 5.000............................. 53 $942,229.86 0.40%
5.000 - 9.999............................. 29 376,788.77 0.16
10.000 - 14.999............................. 56 707,160.96 0.30
15.000 - 19.999............................. 155 2,417,718.11 1.02
20.000 - 24.999............................. 450 8,854,065.83 3.74
25.000 - 29.999............................. 795 17,569,256.36 7.42
30.000 - 34.999............................. 1,376 32,643,416.02 13.79
35.000 - 39.999............................. 1,874 46,041,439.82 19.45
40.000 - 44.999............................. 2,299 56,989,328.94 24.08
45.000 - 49.999............................. 1,832 46,153,422.73 19.50
50.000 - 54.999............................. 762 18,532,738.00 7.83
55.000 - 59.999............................. 177 4,049,840.84 1.71
60.000 or higher............................ 80 1,409,699.41 0.60
------ --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
====== =============== =======
*Determined at the time of origination of the related Home Loan.
The weighted average debt-to-income ratio of the Group II Home Loans as of the
Cut-Off Date was approximately 39.40%.
Distribution of Loan Rates for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Loan Rate Range (%) Cut-Off Date of the Cut-Off Date Date
6.000 - 6.999............................. 2 $57,906.79 0.02%
7.000 - 7.999............................. 19 581,982.79 0.25
8.000 - 8.999............................. 135 4,751,244.35 2.01
9.000 - 9.999............................. 251 8,649,241.38 3.65
10.000 - 10.999............................. 475 15,652,251.25 6.61
11.000 - 11.999............................. 779 22,560,223.52 9.53
12.000 - 12.999............................. 1,022 27,333,462.87 11.55
13.000 - 13.999............................. 1,246 31,097,036.64 13.14
14.000 - 14.999............................. 2,288 56,757,120.25 23.98
15.000 - 15.999............................. 1,542 30,074,189.35 12.71
16.000 - 16.999............................. 926 17,542,126.44 7.41
17.000 - 17.999............................. 683 12,238,688.77 5.17
18.000 - 18.999............................. 432 7,155,441.20 3.02
19.000 - 19.999............................. 126 2,027,051.09 0.86
20.000 or higher............................ 12 209,138.96 0.09
------ --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
===== =============== ======
The weighted average loan rate for the Group II Home Loans as of the Cut-Off
Date was approximately 14.066%.
Remaining Terms to Scheduled Maturity for the Group II Home Loans
Aggregate
Principal % of Outstanding
Months Remaining to Number of Balance Outstanding Principal Balance as
Scheduled Maturity as Loans as of the as of the Cut-Off
of Cut-Off Date Cut-Off Date of the Cut-Off Date Date
Less than 61................................ 535 $2,968,081.60 1.25%
61 - 120.................................. 1,513 21,718,796.91 9.18
121 - 180................................... 2,185 53,865,342.92 22.76
181 - 240................................... 3,023 69,745,902.06 29.47
241 - 300................................... 2,676 88,146,572.00 37.24
301 - 360................................... 6 242,410.16 0.10
------ --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
====== =============== ======
The weighted average remaining term to maturity of the Group II Home Loans as
of the Cut-Off Date was approximately 222 months.
Distribution of Loan Ages for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Loan Age Range (months) Cut-Off Date of the Cut-Off Date Date
0 - 5..................................... 1,851 $45,990,070.87 19.43%
6 - 11.................................. 2,481 74,537,086.94 31.49
12 - 17................................... 3,733 81,554,664.06 34.46
18 - 23................................... 284 7,179,023.59 3.03
24 - 29................................... 225 7,006,481.27 2.96
30 - 35................................... 419 13,271,953.96 5.61
36 - 41................................... 64 1,587,342.79 0.67
42 - 47................................... 24 625,999.12 0.26
48 - 53................................... 1 30,974.39 0.01
54 - 59................................... 1 19,350.91 0.01
60 - 65................................... 3 50,892.39 0.02
78 - 83................................... 3 32,589.52 0.01
84 - 89................................... 1 12,885.65 0.01
90 - 95................................... 3 10,733.27 0.00
96 - 101.................................. 209 1,095,694.20 0.46
102 - 107................................... 3 23,158.45 0.01
108 - 113................................... 264 1,420,175.92 0.60
114 - 119................................... 231 1,369,786.91 0.58
120 - 125................................... 138 868,241.44 0.37
------ --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
====== =============== ======
The weighted average age of the Group II Home Loans as of the Cut-Off Date was
approximately 14 months.
Documentation Types for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Documentation Type Cut-Off Date of the Cut-Off Date Date
Limited..................................... 6,870 $172,312,213.85 72.80%
Full........................................ 3,068 64,374,891.80 27.20
----- --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
===== =============== ======
Occupancy Types for the Group II Home Loans*
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Occupancy Type Cut-Off Date of the Cut-Off Date Date
Owner....................................... 9,766 $235,213,163.27 99.38%
Non-Owner................................... 2 10,352.41 0.00
Not Available............................... 170 1,463,589.97 0.62
----- --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
===== =============== ======
*Based on representations of the borrower at the time of origination.
Loan Purposes for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Loan Purpose Cut-Off Date of the Cut-Off Date Date
Debt Consolidation.......................... 6,234 $166,986,825.76 70.55%
Home Improvement............................ 2,689 45,260,052.25 19.12
Refinance................................... 978 23,411,174.84 9.89
Purchase.................................... 34 965,606.55 0.41
New Construction............................ 2 53,467.98 0.02
Other....................................... 1 9,978.27 0.00
----- --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
===== =============== ======
Property Types for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Property Types Cut-Off Date of the Cut-Off Date Date
Single Family............................... 6,425 $181,782,905.94 76.80%
Two Family.................................. 2,386 44,602,657.58 18.84
Manufactured Housing........................ 1,065 9,166,924.52 3.87
Condominium................................. 30 551,944.72 0.23
Farm........................................ 27 477,269.66 0.20
3-4 Family.................................. 5 105,403.23 0.04
----- --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
===== =============== ======
Lien Positions for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Lien Position Cut-Off Date of the Cut-Off Date Date
First Lien.................................. 55 $2,470,594.24 1.04%
Second Lien................................. 8,627 203,948,745.83 86.17
Third Lien.................................. 1,256 30,267,765.58 12.79
----- --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
===== =============== ======
Issue Years for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Issue Years Cut-Off Date of the Cut-Off Date Date
1990........................................ 131 $813,748.47 0.34%
1991........................................ 502 2,844,455.80 1.20
1992........................................ 211 1,115,723.54 0.47
1993........................................ 5 26,748.03 0.01
1994........................................ 3 32,589.52 0.01
1995........................................ 3 50,892.39 0.02
1996........................................ 2 50,325.30 0.02
1997........................................ 88 2,196,900.23 0.93
1998........................................ 667 20,802,447.64 8.79
1999........................................ 4,065 89,512,974.50 37.82
2000........................................ 4,147 116,458,055.30 49.20
2001........................................ 114 2,782,244.93 1.18
----- --------------- ------
Totals.................................. 9,938 $236,687,105.65 100.00%
===== =============== ======
Geographic Distribution for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
State Cut-Off Date of the Cut-Off Date Date
- -----
California.................................. 776 $23,771,633.64 10.04%
Florida..................................... 777 19,393,735.53 8.19
Virginia.................................... 541 15,157,305.47 6.40
Pennsylvania................................ 525 13,554,190.54 5.73
New York.................................... 534 12,634,640.81 5.34
Illinois.................................... 480 11,285,649.73 4.77
Ohio........................................ 494 10,745,552.27 4.54
New Jersey.................................. 404 10,717,053.78 4.53
Michigan.................................... 348 7,331,263.61 3.10
Maryland.................................... 265 7,265,551.59 3.07
North Carolina.............................. 294 7,196,216.75 3.04
Arizona..................................... 263 6,966,641.87 2.94
Washington.................................. 261 6,787,108.21 2.87
Georgia..................................... 279 6,493,562.84 2.74
Missouri.................................... 316 6,147,759.99 2.60
Nevada...................................... 191 6,046,722.49 2.55
Indiana..................................... 274 5,822,125.09 2.46
Colorado.................................... 204 4,863,248.44 2.05
Texas....................................... 300 4,666,392.59 1.97
Arkansas.................................... 249 4,171,405.75 1.76
Tennessee................................... 189 3,427,722.77 1.45
Alabama..................................... 160 3,361,547.02 1.42
Connecticut................................. 148 3,126,936.46 1.32
South Carolina.............................. 131 2,851,704.90 1.20
Kansas...................................... 122 2,832,366.33 1.20
Utah........................................ 103 2,682,961.93 1.13
Wisconsin................................... 114 2,508,812.91 1.06
Oklahoma.................................... 113 2,234,332.89 0.94
Kentucky.................................... 99 2,044,519.64 0.86
Minnesota................................... 82 1,976,279.55 0.83
Oregon...................................... 72 2,974,351.38 0.83
Delaware.................................... 71 1,861,600.71 0.79
Massachusetts............................... 78 1,768,998.67 0.75
New Mexico.................................. 62 1,627,416.48 0.69
Mississippi................................. 136 1,396,798.60 0.59
Iowa........................................ 61 1,378,996.11 0.58
Louisiana................................... 68 1,225,722.70 0.52
Idaho....................................... 43 1,132,983.55 0.48
Maine....................................... 48 1,108,265.13 0.47
West Virginia............................... 44 849,785.87 0.36
Wyoming..................................... 45 809,082.63 0.34
New Hampshire............................... 33 751,729.36 0.32
Nebraska.................................... 42 726,087.83 0.31
Rhode Island................................ 33 707,190.63 0.30
Montana..................................... 20 381,436.81 0.16
South Dakota................................ 17 297,501.12 0.13
North Dakota................................ 14 256,037.03 0.11
Vermont..................................... 7 171,972.39 0.07
District of Columbia........................ 6 134,330.43 0.06
Alaska...................................... 2 61,772.83 0.03
----- --------------- ------
Totals............................. 9,938 $236,687,105.65 100.00%
===== =============== ======
Delinquency Status for the Group II Home Loans
Aggregate % of Outstanding
Number of Principal Principal Balance as
Loans as of the Balance Outstanding as of the Cut-Off
Delinquency (days) Cut-Off Date of the Cut-Off Date Date
Current..................................... 9,161 $221,722,481.22 93.68%
1 - 29...................................... 612 11,817,813.67 4.99
30 - 59..................................... 165 3,146,810.76 1.33
----- --------------- ------
Totals............................. 9,938 $236,687,105.65 100.00%
===== =============== ======
Prepayment Penalties for the Group II Home Loans
% of
Outstanding
Number of Loans Aggregate Principal Principal
as of the Balance Outstanding Balance as of
Prepayment Penalties Cut-Off Date as of the Cut-Off Date the Cut-Off Date
6 months interest if paid within 36 months................. 197 $5,738,581.71 2.42%
1% of unpaid principal balance if paid within 36 months.... 28 874,250.60 0.37%
2% of unpaid principal balance............................. 2 135,921.73 0.06%
1% of unpaid principal balance if paid within 60 months.... 34 968,279.16 0.41%
5% of unpaid principal balance if paid within 36 months.... 6 157,500.07 0.07%
1% of original balance if paid within 36 months............ 5 271,059.50 0.12%
5 year sliding scale....................................... 4 116,963.26 0.05%
2% of unpaid principal balance if paid within 36 months.... 9 197,689.84 0.08%
2% of unpaid principal balance if paid within 12 months.... 4 139,821.75 0.06%
3 months interest if paid within 36 months................. 2 41,187.70 0.02%
2% months interest if paid within 60 months................ 1 14,758.37 0.01%
None....................................................... 9,025 209,771,690.04 88.63%
Not Available.............................................. 621 18,259,401.92 7.71%
Total............................................. 9,938 $236,687,105.65 100.00%
Group III Loans
The Group III home loans have an aggregate principal balance as of
the cut-off date of 15,948,830.26. Each group III home loan is (i) a
closed-end home equity loan either acquired by the Originator and originated
by a correspondent lender approved by the Originator or originated by the
Originator directly or (ii) a home improvement installment sales contract
acquired by the Originator and originated by a home improvement contractor
that the Originator approved, or a home improvement promissory note that the
Originator originated directly. Approximately 78.39% of the Group III home
loans by principal balance are for the primary purpose of debt consolidation.
Each Group III home loan is secured by a lien on the related real estate,
substantially all of which are second or third liens.
The loan interest rates on the Group III loans adjust based on the
Prime Rate as published under "Money Rates" in the Wall Street Journal from
time to time, plus a specified margin of between 8.50% and 11.24% per annum.
The loan interest rate is adjusted in the next billing cycle following each
change in the Prime Rate.
The Originator originated or acquired the Group III home loans in the
ordinary course of its business. A detailed listing of the Group III home
loans will be delivered to the indenture trustee. All of the Group III home
loans are conventional loans, meaning they are not FHA-insured. Each of the
Group III home loans has a contract rate of at least 15.500% per year and not
more than 22.200% per year and the weighted average of the contract rates of
the Group III home loans as of the cut-off date is 18.586% per year. As of the
cut-off date, the Group III home loans had remaining maturities of at least
109 months but not more than 349 months and original maturities of at least
120 months but not more than 360 months. The Group III home loans had a
weighted average term to scheduled maturity, as of origination, of 180 months,
and a weighted average term to scheduled maturity, as of the cut-off date, of
173 months. The average principal balance per Group III home loan as of the
cut-off date was $17,021.16 and the principal balances on the Group III home
loans as of the cut-off date ranged from $1,760.23 to $30,692.03. The Group
III home loans arise from loans relating to real property located in 40 states
and the District of Columbia. By principal balance as of the cut-off date,
approximately 17.39% of the Group III home loans were secured by real property
located in Virginia, 11.54% in Michigan, 11.16% in California, 8.05% in
Florida 5.79%, in Arizona, and 5.23% in Washington. No other state represented
5% or more of the aggregate principal balance as of the cut-off date of the
Group III home loans.
The tables below describe the characteristics of the Group III Home
Loans.
Distribution of Group III Home Loan Current Balances
Aggregate
Number of Principal % of Outstanding
Loans as of Balance Outstanding Principal
the as Balance as of
Current Balance ($) Cut-Off Date of the Cut-Off Date the Cut-Off Date
Less than 25,000.01....................................... 780 $11,496,970.89 72.09%
25,000.01 - 50,000.00..................................... 157 4,451,859.37 27.91
--- -------------- ------
Totals........................................... 937 $15,948,830.26 100.00%
=== ============== ======
The average principal balance for the Group III Home Loans as of the Cut-Off Date was approximately $17,021.16.
Combined Loan-to-Value Ratios of Group III Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
CLTV Range (%) Cut-Off Date of the Cut-Off Date the Cut-Off Date
Less than 50.001........................................ 8 $125,035.92 0.78%
50.001 - 60.000......................................... 1 25,387.32 0.16
70.001 - 80.000......................................... 6 118,574.13 0.74
80.001 - 90.000......................................... 9 155,322.72 0.97
90.001 - 100.000........................................ 54 942,095.89 5.91
100.001 - 105.000....................................... 97 1,652,533.81 10.36
105.001 - 110.000....................................... 627 10,432,400.66 65.41
110.001 - 115.000....................................... 127 2,346,150.60 14.71
115.001 - 120.000....................................... 6 105,450.50 0.66
120.001 - 125.000....................................... 1 19,458.84 0.12
125.001 or higher....................................... 1 26,419.87 0.17
--- -------------- ------
Totals......................................... 937 $15,948,830.26 100.00%
=== ============== ======
The weighted average Combined Loan-to-Value Ratio of the Group III Home Loans
as of the Cut-Off Date was approximately 107.35%.
Distribution of Credit Scores for the Group III Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Credit Score Loans as of the as Balance as of
Range Cut-Off Date of the Cut-Off Date the Cut-Off Date
480 - 499............................................... 1 $14,457.28 0.09%
500 - 519............................................... 6 107,301.30 0.67
520 - 539............................................... 11 178,269.99 1.12
540 - 559............................................... 35 605,327.46 3.80
560 - 579............................................... 55 864,551.89 5.42
580 - 599............................................... 86 1,557,515.23 9.77
600 - 619............................................... 111 1,973,395.53 12.37
620 - 639............................................... 160 2,694,786.10 16.90
640 - 659............................................... 149 2,527,058.99 15.84
660 - 679............................................... 146 2,575,998.01 16.15
680 - 699............................................... 83 1,392,069.79 8.73
700 - 719............................................... 53 860,335.17 5.39
720 - 739............................................... 27 391,270.75 2.45
740 - 759............................................... 6 103,188.45 0.65
760 - 779............................................... 5 61,549.15 0.39
780 - 799............................................... 2 20,641.55 0.13
Not Available........................................... 1 21,113.62 0.13
--- -------------- ------
Totals......................................... 937 $15,948,830.26 100.00%
=== ============== ======
The weighted average credit score for the Group III Home Loans as of the
Cut-Off Date was approximately 638.
Debt to Income Ratios for the Group III Home Loans*
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Ratio Range (%) Cut-Off Date of the Cut-Off Date the Cut-Off Date
5.000 - 9.999............................................ 8 $133,368.18 0.84%
10.000 - 14.999.......................................... 3 37,052.23 0.23
15.000 - 19.999.......................................... 5 70,851.06 0.44
20.000 - 24.999.......................................... 11 186,332.91 1.17
25.000 - 29.999.......................................... 42 654,387.98 4.10
30.000 - 34.999.......................................... 62 1,049,317.46 6.58
35.000 - 39.999.......................................... 107 1,758,212.95 11.02
40.000 - 44.999.......................................... 205 3,514,582.28 22.04
45.000 - 49.999.......................................... 234 3,888,016.71 24.38
50.000 - 54.999.......................................... 159 2,900,567.33 18.19
55.000 - 59.999.......................................... 78 1,359,851.64 8.53
60.000 or higher......................................... 23 396,298.53 2.48
--- -------------- ------
Totals.......................................... 937 $15,948,830.26 100.00%
=== ============== ======
*Determined at the time of origination of the related Home Loan.
The weighted average debt-to-income ratio of the Group III Home Loans as of
the Cut-Off Date was approximately 44.41%.
Distribution of Loan Rates for the Group III Home Loans
Number of Aggregate % of Outstanding
Loans as of Principal Principal
the Balance Outstanding as Balance as of
Loan Rate Range (%) Cut-Off Date of the Cut-Off Date the Cut-Off Date
15.000 - 15.999............................................ 1 $9,807.54 0.06%
17.000 - 17.999............................................ 148 2,473,781.67 15.51
18.000 - 18.999............................................ 475 8,136,385.68 51.02
19.000 - 19.999............................................ 223 3,727,235.54 23.37
20.000 or higher........................................... 90 1,601,619.83 10.04
--- -------------- ------
Totals............................................ 937 $15,948,830.26 100.00%
=== ============== ======
The weighted average loan rate of the Group III Home Loans as of the Cut-Off
Date was approximately 18.586%.
Remaining Terms to Maturity for the Group III Home Loans
Aggregate
Number of Principal % of Outstanding
Months Remaining to Loans as of Balance Outstanding Principal
Scheduled Maturity as the as Balance as of
of the Cut-Off Date Cut-Off Date of the Cut-Off Date the Cut-Off Date
61 - 120................................................... 7 $93,924.22 0.59%
121 - 180.................................................. 927 15,806,168.29 99.11
181 - 240.................................................. 1 29,475.96 0.18
241 - 300.................................................. 1 13,462.32 0.08
301 - 360.................................................. 1 5,799.47 0.04
--- -------------- ------
Totals............................................ 937 $15,948,830.26 100.00%
=== ============== ======
The weighted remaining term to maturity of the Group III Home Loans as of the
Cut-Off Date was approximately 173 months.
Distribution of Ages for the Group III Home Loans
Aggregate
Number of Principal % of Outstanding
Loans as of Balance Outstanding Principal
Loan Age Range the as Balance as of
(months) Cut-Off Date of the Cut-Off Date the Cut-Off Date
0 - 5....................................................... 250 $4,337,801.76 27.20%
6 - 11...................................................... 610 10,539,341.07 66.08
12 - 17..................................................... 77 1,071,687.43 6.72
--- -------------- ------
Totals............................................. 937 $15,948,830.26 100.00%
=== ============== ======
The weighted average age of the Group III Home Loans as of the Cut-Off Date
was approximately 7 months.
Documentation Types for the Group III Home Loans
Aggregate
Principal % of Outstanding
Number of Balance Outstanding Principal
Loans as of the as Balance as of
Document Type Cut-Off Date of the Cut-Off Date the Cut-Off Date
Full....................................................... 924 $15,718,057.62 98.55%
Limited.................................................... 13 230,772.64 1.45
--- -------------- ------
Totals............................................ 937 $15,948,830.26 100.00%
=== ============== ======
Occupancy Types for the Group III Home Loans*
Aggregate
Number of Principal % of Outstanding
Loans as of Balance Outstanding Principal
the as Balance as of
Occupancy Type Cut-Off Date of the Cut-Off Date the Cut-Off Date
Owner...................................................... 936 $15,921,158.73 99.83%
Non-Owner.................................................. 1 27,671.53 0.17
--- -------------- ------
Totals............................................ 937 $15,948,830.26 100.00%
=== ============== ======
* Based on representations of the borrowers at the time of
origination.
Loan Purposes for the Group III Home Loans
Aggregate
Number of Principal % of Outstanding
Loans as of Balance Outstanding Principal
the as Balance as of
Loan Purpose Cut-Off Date of the Cut-Off Date the Cut-Off Date
Debt Consolidation......................................... 735 $12,501,763.43 78.39%
Refinance.................................................. 198 3,393,532.98 21.28
Home Improvement........................................... 1 9,832.17 0.06
Other...................................................... 3 43,701.68 0.27
--- -------------- ------
Totals............................................ 937 $15,948,830.26 100.00%
=== ============== ======
Property Types for the Group III Home Loans
Aggregate
Number of Principal % of Outstanding
Loans as of Balance Outstanding Principal
the as Balance as of
Property Types Cut-Off Date of the Cut-Off Date the Cut-Off Date
Two Family.................................................. 829 $14,208,750.46 89.09%
Manufactured Housing........................................ 66 1,023,290.60 6.42
Farm........................................................ 15 280,564.38 1.76
Single Family............................................... 14 197,668.32 1.24
Condo....................................................... 10 166,366.69 1.04
3-4 Family.................................................. 3 72,169.81 0.45
--- ------------- ------
Totals............................................. 937 $15,948,830.26 100.00%
=== ============== ======
Lien Positions for the Group III Home Loans
Aggregate
Number of Principal % of Outstanding
Loans as of Balance Outstanding Principal Balance
the as as of the Cut-Off
Lien Position Cut-Off Date of the Cut-Off Date Date
First Lien.................................................. 2 $50,838.88 0.32%
Second Lien................................................. 671 11,476,608.88 71.96
Third Lien.................................................. 263 4,394,962.63 27.56
Fourth Lien................................................. 1 26,419.87 0.17
--- ------------- ------
Totals............................................. 937 $15,948,830.26 100.00%
=== ============== ======
Issue Years for the Group III Home Loans
Aggregate
Number of Principal % of Outstanding
Loans as of Balance Outstanding Principal
the as of the Cut-Off Balance as of
Issue Years Cut-Off Date Date the Cut-Off Date
1999......................................................... 56 $788,177.66 4.94%
2000......................................................... 881 15,160,652.60 95.06
--- ------------- ------
Totals.............................................. 937 $15,948,830.26 100.00%
=== ============== ======
Geographic Distribution for the Group III Home Loans
Aggregate
Number of Principal % of Outstanding
Loans as of Balance Principal
the Cut-Off Outstanding as of Balance as of
State Date the Cut-Off Date the Cut-Off Date
- -----
Virginia..................................................... 153 $2,733,315.59 17.39%
Michigan..................................................... 119 1,840,462.60 11.54
California................................................... 90 1,780,053.18 11.16
Florida...................................................... 76 1,283,087.42 8.05
Arizona...................................................... 53 923,575.05 5.79
Washington................................................... 40 833,345.98 5.23
Connecticut.................................................. 38 635,093.02 3.98
New York..................................................... 27 477,523.08 2.99
Georgia...................................................... 28 450,336.17 2.82
Illinois..................................................... 24 442,296.20 2.77
Nebraska..................................................... 27 434,869.34 2.73
Tennessee.................................................... 26 410,835.99 2.58
Ohio......................................................... 25 358,690.10 2.25
Pennsylvania................................................. 25 345,469.88 2.17
Maryland..................................................... 19 341,167.06 2.14
Utah......................................................... 11 252,502.51 1.58
Wisconsin.................................................... 15 237,940.30 1.49
Nevada....................................................... 11 198,057.04 1.24
Missouri..................................................... 13 194,552.89 1.22
Oregon....................................................... 12 187,922.13 1.18
Indiana...................................................... 12 186,140.58 1.17
Minnesota.................................................... 14 173,879.96 1.09
Delaware..................................................... 11 171,871.48 1.08
Alabama...................................................... 11 157,998.68 0.99
Iowa......................................................... 10 151,579.57 0.95
Massachusetts................................................ 8 125,456.99 0.79
West Virginia................................................ 8 103,749.60 0.65
Kentucky..................................................... 7 99,964.76 0.63
District of Columbia......................................... 3 50,507.51 0.32
New Mexico................................................... 3 49,852.36 0.31
Kansas....................................................... 2 42,113.07 0.26
Arkansas..................................................... 3 35,193.86 0.22
Idaho........................................................ 2 31,958.40 0.20
New Hampshire................................................ 2 31,741.99 0.20
South Carolina............................................... 1 29,334.41 0.18
Colorado..................................................... 2 27,751.51 0.17
Rhode Island................................................. 2 25,843.49 0.16
Louisiana.................................................... 1 16,988.34 0.11
Maine........................................................ 1 13,371.20 0.08
Vermont...................................................... 1 11,861.07 0.07
Oklahoma..................................................... 1 10,575.90 0.07
--- ------------- ------
Totals.............................................. 937 $15,948,830.26 100.00%
=== ============= ======
Delinquency Status for the Group III Home Loans
Aggregate
Number of Principal % of Outstanding
Loans as of Balance Outstanding Principal
the as Balance as of
Delinquency (days) Cut-Off Date of the Cut-Off Date the Cut-Off Date
Current................................................... 755 $12,949,274.38 81.19%
1 - 29.................................................... 163 2,698,213.55 16.92
30 - 59................................................... 19 301,342.33 1.89
--- -------------- ------
Total............................................ 937 $15,948,830.26 100.00%
=== ============== ======
Prepayment Penalties for the Group III Home Loans
Number of Aggregate % of Outstanding
Loans as of Principal Principal
the Cut-Off Balance Outstanding Balance as of
Prepayment Penalty Date as of the Cut-Off Date the Cut-Off Date
6 months interest if paid within 36 months................. 135 $2,225,718.25 13.96%
1% of unpaid principal balance if paid within 36 months.... 90 1,394,137.83 8.74
2% of unpaid principal balance............................. 100 1,873,541.12 11.75
5% of unpaid principal balance if paid within 36 months.... 26 416,342.95 2.61
5 year sliding scale....................................... 1 16,988.34 0.11
None....................................................... 531.00 9,078,817.57 56.92
Not Available.............................................. 54 943,284.20 5.91
--- -------------- ------
Total............................................. 937 $15,948,830.26 100.00%
=== ============== ======
Distribution of Gross Margin Rates for the Group III Home Loans
Aggregate % of Outstanding
Number of Loans Principal Principal
as of the Balance Outstanding Balance as of
Gross Margin Rate Range (%) Cut-Off Date as of the Cut-Off Date the Cut-Off Date
8.000 - 8.999................................ 237 $4,027,946.33 25.26%
9.000 - 9.999................................ 267 4,406,530.88 27.63
10.000 - 10.999.............................. 272 4,692,692.67 29.42
11.000 - 11.999.............................. 161 2,821,660.38 17.69
--- -------------- ------
Total........................................ 937 $15,948,830.26 100.00%
=== ============== ======
The weighted average gross margin of the Group III Home Loans as of the Cut-Off Date was approximately 9.624%.
GROUP I HOME LOANS AND GROUP II HOME LOANS IN THE AGGREGATE
The tables below set forth the characteristics of the Group I Home
Loans and the Group II Home Loans in the aggregate.
Distribution of Current Balances for the Group I and Group II Home Loans
Aggregate
Principal % of Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
Current Balance Range ($) Date Date the Cut-Off Date
Less than 25,000.01....................................... 17,517 $255,041,162.59 46.13%
25,000.01 - 50,000.00..................................... 8,056 272,324,347.68 49.25
50,000.01 - 75,000.00..................................... 397 21,564,700.53 3.90
75,000.01 - 100,000.00.................................... 16 1,407,616.68 0.25
100,000.01 - 125,000.00................................... 8 886,741.46 0.16
125,000.01 - 150,000.00................................... 7 928,714.53 0.17
150,000.01 - 175,000.00................................... 2 310,065.93 0.06
200,000.01 - 300,000.00................................... 2 469,342.66 0.08
------ --------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
The average principal balance of the Group I Home Loans and Group II Home Loans as of the Cut-Off Date was
approximately $21,262.55.
Combined Loan to-Value of the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Balance Outstanding Principal
Number of Loans as as of the Cut-Off Balance as of
CLTV Range (%) of the Cut-Off Date Date the Cut-Off Date
Less than 40.001.......................................... 1,602 $9,277,788.88 1.68%
40.001 - 50.000........................................... 13 156,750.24 0.03
50.001 - 60.000........................................... 3 53,622.55 0.01
60.001 - 70.000........................................... 3 5,525.78 0.00
70.001 - 80.000........................................... 6 28,347.91 0.01
80.001 - 90.000........................................... 22 72,100.24 0.01
90.001 - 100.000.......................................... 17 99,676.50 0.02
100.001 - 105.000......................................... 1,803 31,874,537.26 5.76
105.001 - 110.000......................................... 7,537 151,180,423.18 27.34
110.001 - 115.000......................................... 4,408 99,988,859.76 18.08
115.001 - 120.000......................................... 2,507 69,383,194.43 12.55
120.001 - 125.000......................................... 2,829 83,028,930.68 15.02
125.001 or higher......................................... 3,727 87,236,169.81 15.78
Not Available............................................. 1,528 20,545,764.84 3.72
------ --------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
The weighted average Combined Loan-to-Value Ratio of the Group I Home loans
and Group II Home Loans as of the Cut-Off Date was approximately 114.17%.
Distribution of Credit Scores for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the as of the Cut-Off Balance as of
Credit Score Range % Cut-Off Date Date the Cut-Off Date
420 - 439................................................. 1 $12,657.66 0.00%
440 - 459................................................. 1 6,494.61 0.00
460 - 479................................................. 5 52,507.69 0.01
480 - 499................................................. 19 280,715.70 0.05
500 - 519................................................. 59 983,878.35 0.18
520 - 539................................................. 201 3,637,767.87 0.66
540 - 559................................................. 436 7,800,023.53 1.41
560 - 579................................................. 710 12,891,537.50 2.33
580 - 599................................................. 1,227 23,453,657.25 4.24
600 - 619................................................. 3,131 68,234,955.72 12.34
620 - 639................................................. 4,105 88,722,809.26 16.05
640 - 659................................................. 4,330 96,736,963.56 17.50
660 - 679................................................. 3,848 90,010,017.96 16.28
680 - 699................................................. 2,663 61,606,145.64 11.14
700 - 719................................................. 1,648 37,645,770.89 6.81
720 - 739................................................. 1,143 24,527,134.62 4.44
740 - 759................................................. 662 13,851,225.58 2.51
760 - 779................................................. 327 6,300,065.45 1.14
780 - 799................................................. 118 2,071,795.43 0.37
800 - 819................................................. 40 488,124.26 0.09
820 - 839................................................. 1 14,891.52 0.00
Not Available............................................. 1,330 13,603,552.01 2.46
------ -------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
The weighted average credit score of the Group I and Group II Home Loans as of
the Cut-Off Date was approximately 654.
Debt to Income Ratios for the Group I and Group II Home Loans*
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
Ratio Range (%) Date Date the Cut-Off Date
Less than 5.000........................................... 439 $5,015,563.60 0.91%
5.000 - 9.999............................................. 82 743,501.77 0.13
10.000 - 14.999........................................... 136 1,418,045.10 0.26
15.000 - 19.999........................................... 339 4,425,533.31 0.80
20.000 - 24.999........................................... 846 14,812,856.39 2.68
25.000 - 29.999........................................... 1,760 34,395,639.19 6.22
30.000 - 34.999........................................... 3,096 65,479,569.01 11.84
35.000 - 39.999........................................... 4,435 98,857,245.37 17.88
40.000 - 44.999........................................... 5,954 135,679,186.00 24.54
45.000 - 49.999........................................... 5,333 120,560,937.60 21.80
50.000 - 54.999........................................... 2,513 52,335,095.08 9.47
55.000 - 59.999........................................... 763 14,498,272.99 2.62
60.000 or higher.......................................... 309 4,711,246.65 0.85
------ -------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
*Determined at the time of origination of the related Home Loan.
The weighted average debt-to-income ratio of the Group I Home Loans and Group
II Home Loans as of the Cut-Off Date was approximately 40.39%.
Distribution of Loan Rates for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
Loan Rate Range (%) Date Date the Cut-Off Date
Less than 5.000........................................... 1 $11,927.99 0.00%
5.000 - 5.999............................................. 1 9,827.04 0.00
6.000 - 6.999............................................. 2 57,906.79 0.01
7.000 - 7.999............................................. 27 807,037.13 0.15
8.000 - 8.999............................................. 165 5,844,467.74 1.06
9.000 - 9.999............................................. 306 10,558,705.68 1.91
10.000 - 10.999........................................... 566 18,498,043.87 3.35
11.000 - 11.999........................................... 900 24,777,631.60 4.48
12.000 - 12.999........................................... 1,309 32,189,452.53 5.82
13.000 - 13.999........................................... 1,953 41,437,024.83 7.49
14.000 - 14.999........................................... 3,654 81,728,434.45 14.78
15.000 - 15.999........................................... 3,650 78,222,253.73 14.15
16.000 - 16.999........................................... 4,999 101,898,081.59 18.43
17.000 - 17.999........................................... 4,633 87,002,941.55 15.73
18.000 - 18.999........................................... 2,599 47,678,834.09 8.62
19.000 - 19.999........................................... 1,022 18,267,705.94 3.30
20.000 or higher.......................................... 218 3,942,415.51 0.71
------ -------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
The weighted average loan rate for the Group I Home Loans and Group II Home
Loans as of the Cut-Off Date was approximately 15.609%.
Remaining Terms to Maturity for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Months Remaining Number of Loans Balance Outstanding Principal
to Scheduled Maturity as as of the Cut-Off as of the Cut-Off Balance as of
of Cut-Off Date (months) Date Date the Cut-Off Date
Less than 61.............................................. 1,861 $10,625,051.75 1.92%
61 - 120.................................................. 4,184 60,801,914.53 11.00
121 - 180................................................. 5,367 120,857,206.14 21.86
181 - 240................................................. 8,971 184,218,063.11 33.32
241 - 300................................................. 5,610 175,721,273.59 31.78
301 - 360................................................. 12 709,182.94 0.13
------ -------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
The weighted average remaining term to maturity of the Group I Home Loans and
Group II Home Loans as of the Cut-Off Date was approximately 218 months.
Distribution of Loan Ages for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
Loan Age Range (months) Date Date the Cut-Off Date
0 - 5..................................................... 3,995 $85,363,429.42 15.44%
6 - 11.................................................... 11,075 267,270,885.05 48.34
12 - 17................................................... 7,557 155,434,112.16 28.11
18 - 23................................................... 671 11,222,902.71 2.03
24 - 29................................................... 597 9,832,397.91 1.78
30 - 35................................................... 665 14,551,664.17 2.63
36 - 41................................................... 66 1,593,946.33 0.29
42 - 47................................................... 25 627,233.75 0.11
48 - 53................................................... 1 30,974.39 0.01
54 - 59................................................... 3 31,254.40 0.01
60 - 65................................................... 4 53,164.52 0.01
66 - 71................................................... 97 437,213.69 0.08
72 - 77................................................... 194 847,570.15 0.15
78 - 83................................................... 204 827,516.08 0.15
84 - 89................................................... 3 20,637.14 0.00
90 - 95................................................... 3 10,733.27 0.00
96 - 101.................................................. 209 1,095,694.20 0.20
102 - 107................................................. 3 23,158.45 0.00
108 - 113................................................. 264 1,420,175.92 0.26
114 - 119................................................. 231 1,369,786.91 0.25
120 - 125................................................. 138 868,241.44 0.16
------ --------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
The weighted average loan age of the Group I and Group II Home Loans as of the
Cut-Off Date was approximately 12 months.
Documentation Types for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
Documentation as of the Cut-Off as of the Cut-Off Balance as of
Type Date Date the Cut-Off Date
Limited................................................... 15,147 $352,484,410.16 63.75%
Full...................................................... 10,858 200,448,281.90 36.25
Totals........................................... ------ --------------- ------
26,005 $552,932,692.06 100.00%
====== =============== ======
Occupancy Types for the Group I and Group II Home Loans*
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
Occupancy Type Date Date the Cut-Off Date
Owner..................................................... 24,043 $527,316,907.70 95.37%
Non-Owner................................................. 10 155,414.49 0.03
Not Available............................................. 1,952 25,460,369.87 4.60
------ --------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
* Based on representations of the borrowers at the time of origination.
Loan Purposes for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
Loan Purpose Date Date the Cut-Off Date
Debt Consolidation........................................ 17,713 $418,041,694.31 75.60%
Home Improvement.......................................... 5,478 76,240,611.73 13.79
Refinance................................................. 2,719 56,605,107.29 10.24
Purchase.................................................. 40 1,312,940.49 0.24
New Construction.......................................... 2 53,467.98 0.01
Other..................................................... 53 678,870.26 0.12
------ --------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
Property Types for the Group I and Group II Home Loans
% of
Aggregate Outstanding
Number of Loans Principal Principal
as of the Cut-Off Balance Outstanding Balance as of
Property Types Date as of the Cut-Off Date the Cut-Off Date
Single Family............................................. 15,657 $370,022,734.26 66.92%
Two Family................................................ 8481 158,955,158.26 28.75
Manufactured Housing...................................... 1631 19,638,020.17 3.55
Condo..................................................... 128 2,320,909.32 0.42
Farm...................................................... 95 1,691,254.93 0.31
3-4 Family................................................ 13 304,615.12 0.06
------ --------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
Lien Position for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
Lien Position Date Date the Cut-Off Date
First Lien................................................ 84 $4,827,018.16 0.87%
Second Lien............................................... 18,808 434,968,822.75 78.67
Third Lien................................................ 3,584 79,161,099.24 14.32
Fourth Lien............................................... 2 52,303.36 0.01
None...................................................... 3,527 33,923,448.55 6.14
------ --------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
Issue Years for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
Issue Years Date Date the Cut-Off Date
1980...................................................... 1 $12,809.41 0.00%
1990...................................................... 133 832,320.72 0.15
1991...................................................... 502 2,844,455.80 0.51
1992...................................................... 211 1,115,723.54 0.20
1993...................................................... 22 98,265.32 0.02
1994...................................................... 431 1,860,522.05 0.34
1995...................................................... 63 309,919.86 0.06
1996...................................................... 15 238,539.28 0.04
1997...................................................... 167 2,611,418.53 0.47
1998...................................................... 1,317 25,713,442.50 4.65
1999...................................................... 7,706 157,302,038.97 28.45
2000...................................................... 15,323 357,210,991.15 64.60
2001...................................................... 114 2,782,244.93 0.50
------ --------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
Geographic Distribution for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
State Date Date the Cut-Off Date
California................................................ 1,846 $52,337,994.88 9.47%
Florida................................................... 1,545 36,303,542.10 6.57
Virginia.................................................. 1,213 29,353,073.62 5.31
Texas..................................................... 2,187 28,319,990.50 5.12
New York.................................................. 1,204 26,845,028.40 4.86
Pennsylvania.............................................. 1,109 23,807,546.77 4.31
Illinois.................................................. 1,074 21,335,360.23 3.86
Ohio...................................................... 937 19,708,025.12 3.56
North Carolina............................................ 879 19,170,764.97 3.47
New Jersey................................................ 752 18,673,289.84 3.38
Georgia................................................... 830 18,313,613.17 3.31
Maryland.................................................. 696 17,375,766.22 3.14
Michigan.................................................. 834 16,550,684.81 2.99
Arizona................................................... 670 15,842,371.77 2.87
Indiana................................................... 695 14,250,861.51 2.58
Washington................................................ 620 13,270,910.61 2.40
Missouri.................................................. 725 13,031,772.60 2.36
Nevada.................................................... 439 11,721,502.61 2.12
Alabama................................................... 562 11,685,768.52 2.11
Colorado.................................................. 482 11,239,214.31 2.03
Tennessee................................................. 474 9,100,996.68 1.65
Minnesota................................................. 406 9,088,641.15 1.64
South Carolina............................................ 401 8,528,625.98 1.54
Arkansas.................................................. 499 8,190,023.99 1.48
Wisconsin................................................. 373 8,038,794.67 1.45
Connecticut............................................... 386 7,853,656.36 1.42
Kansas.................................................... 369 7,338,868.44 1.33
Oklahoma.................................................. 330 5,943,973.77 1.07
Massachusetts............................................. 374 5,684,649.24 1.03
Kentucky.................................................. 268 5,583,904.55 1.01
Oregon.................................................... 215 5,421,958.61 0.98
Louisiana................................................. 262 5,157,348.00 0.93
Iowa...................................................... 265 5,141,583.42 0.93
New Mexico................................................ 222 4,902,337.91 0.89
Utah...................................................... 190 4,511,399.35 0.82
Idaho..................................................... 186 4,198,028.65 0.76
Mississippi............................................... 282 4,156,745.32 0.75
Delaware.................................................. 159 3,886,106.20 0.70
Nebraska.................................................. 168 3,256,900.61 0.59
Wyoming................................................... 152 3,046,651.98 0.55
Maine..................................................... 125 2,856,830.58 0.52
West Virginia............................................. 122 2,486,945.72 0.45
New Hampshire............................................. 92 1,990,398.60 0.36
Rhode Island.............................................. 100 1,843,479.93 0.33
Montana................................................... 91 1,835,720.45 0.33
North Dakota.............................................. 63 1,216,561.50 0.22
South Dakota.............................................. 56 1,049,857.89 0.19
Vermont................................................... 42 802,568.19 0.15
District of Columbia...................................... 31 570,296.93 0.10
Alaska.................................................... 3 111,754.83 0.02
------ --------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
------ --------------- ------
Delinquency Status for the Group I and Group II Home Loans
Aggregate % of
Principal Outstanding
Number of Loans Balance Outstanding Principal
as of the Cut-Off as of the Cut-Off Balance as of
Delinquency (days) Date Date the Cut-Off Date
Current................................................... 23,661 $507,581,113.12 91.80%
1-29...................................................... 1,927 37,133,204.62 6.72
30-59..................................................... 417 8,218,374.32 1.49
------ -------------- ------
Totals........................................... 26,005 $552,932,692.06 100.00%
====== =============== ======
Prepayment Penalties for the Group I and Group II Home Loans
% of
Aggregate Outstanding
Principal Principal
Number of Loans Balance Outstanding Balance as of
as of the Cut-Off as of the Cut-Off the Cut-Off
Prepayment Penalties Date Date Date
6 months interest if paid within 36 months................. 203 $6,138,573.49 1.11%
1% of unpaid principal balance if paid within 36 months.... 31 992,328.61 0.18
2% of unpaid principal balance............................. 5 171,311.12 0.03
1% of unpaid principal balance if paid within 60 months.... 35 984,303.51 0.18
5% of unpaid principal balance if paid within 36 months.... 8 185,934.46 0.03
1% of original balance if paid within 36 months............ 5 271,059.50 0.05
5 year sliding scale....................................... 5 245,101.08 0.04
2% of unpaid principal balance if paid within 36 months.... 9 197,689.84 0.04
2% of unpaid principal balance if paid within 12 months.... 4 139,821.75 0.03
3 months interest if paid within 36 months................. 2 41,187.70 0.01
2% of unpaid principal balance is paid within 60 months.... 1 14,758.37 0.00
None....................................................... 25,072 525,186,497.77 94.98
Not Available.............................................. 625 18,364,124.86 3.32
------ --------------- ------
Total............................................. 26,005 $552,932,692.06 100.00%
====== =============== ======
THE TRANSFEROR AND BACKUP SERVICER
General
The information set forth in the following paragraphs has been
provided by EMC Mortgage Corporation ("EMC"). None of the Depositor, the
Originator, the Owner Trustee, the Indenture Trustee, the Underwriters or any
affiliate has made or will make any representation as to the accuracy or
completeness of such information.
EMC, a wholly-owned subsidiary of The Bear, Stearns Companies Inc.,
was established as a full-line mortgage banking company to facilitate the
purchase and servicing of whole loan portfolios containing various levels of
quality from "investment grade" to varying degrees of "non-investment grade"
up to and including mortgaged properties acquired through foreclosure or
deed-in-lieu of foreclosure. EMC was incorporated in the State of Delaware on
September 26, 1990 and commenced operation in Texas on October 9, 1990.
The principal business of EMC has been the resolution of
non-performing residential mortgage loan portfolios acquired from Resolution
Trust Corporation ("RTC"), from private investors and from the Department of
Housing and Urban Development through its auctions of defaulted Federal
Housing Authority mortgage loans. EMC's servicing portfolio consists primarily
of two categories; (x) performing investment-quality loans serviced for EMC's
own account or the account of Fannie Mae, Freddie Mac, private mortgage
conduits and various institutional investors; and (y) non-investment grade,
sub-performing loans, non-performing loans and REO Properties serviced for
EMC's own account and for the account of investors in securitized performing
and non-performing collateral transactions.
EMC's operations resemble those of most mortgage banking companies,
except that significant emphasis is placed on the collection and due diligence
areas, due to the nature of the mortgage portfolios purchased. As of September
30, 2000, EMC was servicing approximately $3.8 billion of mortgage loans and
REO Property.
The principal executive offices of EMC are located at 909 Hidden
Ridge Drive, Irving, Texas 75038. Its telephone number is (972) 444-2800.
Because of the unique nature of the Home Loans in the Mortgage Pool
as compared with the portfolio of EMC, the delinquency and foreclosure
experience of EMC, if presented in this prospectus supplement, would not show
information about EMC's portfolio of home loans similar to the Home Loans.
EMC, whether as an acquirer or servicer of mortgage loans, does not have
representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of examining the performance
of home loans similar to the Home Loans. Accordingly, the delinquency and
foreclosure experience of EMC is not presented in this prospectus supplement.
THE ORIGINATOR AND SERVICER
General
The Servicer will service the Home Loans in accordance with the terms
set forth in the Sale and Servicing Agreement and will be entitled to the
Servicing Fee and to certain additional servicing compensation. The Servicer
may perform specific duties through subcontractors as specified in the Sale
and Servicing Agreement. Notwithstanding any such arrangement, the Servicer
will remain liable for its servicing duties and obligations under the Sale and
Servicing Agreement as if the Servicer alone were servicing the home loans.
The Originator and Servicer
Conseco Finance Corp. (in its capacity as servicer, the "Servicer"
and in its capacity as originator, the "Originator") provided the information
set forth in the following paragraphs. None of the Depositor, the Transferor,
the Backup Servicer, the Underwriters, the Owner Trustee, the Indenture
Trustee or any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
General
Conseco Finance is a Delaware corporation which, on September 30,
2000, had stockholders' equity of approximately $2.323 billion. Conseco
Finance purchases, pools, sells and services conditional sales contracts for
manufactured homes and other consumer installment sales contracts, as well as
home equity loans. Conseco Finance is the largest servicer of
government-insured manufactured housing contracts and conventional
manufactured housing contracts in the United States. Servicing functions are
performed through Conseco Finance Servicing Corp., a wholly owned subsidiary
of Conseco Finance. Through its principal offices in St. Paul, Minnesota, and
service centers throughout the United States, Conseco Finance serves all 50
states. Conseco Finance began financing FHA-insured home improvement loans in
1990, conventional home improvement loans in 1992, and home equity loans in
January 1996. Conseco Finance also purchases, pools and services installment
sales contracts for various consumer products. Conseco Finance's principal
executive offices are located at 1100 Landmark Towers, 345 St. Peter Street,
Saint Paul, Minnesota 55102-1639 (telephone (651) 293-3400). Conseco Finance's
quarterly and annual reports are available from Conseco Finance upon written
request.
Recent Developments
During 2000, rating agencies lowered their ratings of the debt
obligations of Conseco Finance and placed some ratings of Conseco Finance's
debt obligations on review as the rating agencies analyze the impact of
developing events. The uncertainty surrounding the ultimate outcome of
Conseco, Inc.'s efforts to sell Conseco Finance, which Conseco, Inc. announced
in March 2000, made it more difficult for Conseco Finance to complete new
public securitization transactions.
On July 27, 2000, Conseco Inc. announced a restructuring program for
Conseco Finance that includes selling or running off five of Conseco Finance's
business units. Conseco Finance's home equity division is not one of these
five units, but Conseco Finance does plan to streamline operations in its
mortgage services division by, among other actions, reducing the number of
field offices from 158 to 127.
On August 8, 2000, Moody's reduced the rating of the long-term senior
unsecured debt obligations of Conseco Finance to B1 from Ba3. We cannot assure
you that further downgrades will not occur.
Conseco Finance has been served with various lawsuits in the United
States District Court for the District of Minnesota. These lawsuits were
generally filed as purported class actions on behalf of persons or entities
who purchased common stock or options to purchase common stock of Conseco
Finance during alleged class periods that generally run from February 1995 to
January 1998. One of these lawsuits did not include class action claims. In
addition to Conseco Finance, some of Conseco Finance's current and former
officers and directors are named as defendants in one or more of the lawsuits.
The lawsuits have been consolidated into two complaints, one relating to an
alleged class of purchasers of Conseco Finance's common stock and the other
relating to an alleged class of traders in options for Conseco Finance's
common stock. In addition to these two complaints, a separate non-class action
lawsuit containing similar allegations was also filed. Plaintiffs in the
lawsuits assert claims under Section 10(b) and 20(a) of the Securities
Exchange Act of 1934. In each case, plaintiffs allege that Conseco Finance and
the other defendants violated federal securities laws by making false and
misleading statements about Conseco Finance's current state and Conseco
Finance's future prospects, particularly about prepayment assumptions and
performance of some of our loan portfolios, which allegedly rendered Conseco
Finance's financial statement false and misleading. Conseco Finance filed
motions to dismiss these lawsuits. On August 24, 1999, Conseco Finance's
motions to dismiss were granted with prejudice. The plaintiffs subsequently
appealed the decision to the U.S. Court of Appeals for the 8th Circuit, and
the appeal is currently pending. Conseco Finance believes that the lawsuits
are without merit and intends to defend the lawsuits vigorously. However, the
ultimate outcome of these lawsuits cannot be predicted with certainty.
In addition, Conseco Finance and its subsidiaries are involved on an
ongoing basis in lawsuits related to its operations. Although the ultimate
outcome of some of these matters cannot be predicted, none of these lawsuits
currently pending against Conseco Finance or its subsidiaries is expected,
individually or in the aggregate, to have a material adverse effect on Conseco
Finance's consolidated financial condition, cash flows or results of
operations.
Repurchase or Substitution of Home Loans
The Originator is required (i) within 60 days after discovery by the
Originator or notice thereof to cure in all material respects any breach of
the representations or warranties made with respect to a Home Loan (a
"Defective Home Loan") or (ii) on or before the Determination Date next
succeeding the end of such 60-day period, to repurchase such Defective Home
Loan, at a price (the "Purchase Price") equal to the Principal Balance of such
Defective Home Loan as of the date of repurchase, plus all accrued and unpaid
interest on such Defective Home Loan to and including the due date in the most
recent Due Period computed at the applicable Home Loan Rate. The repurchase of
any Home Loan will result in accelerated principal payments on the Notes.
The Originator will represent and warrant with respect to each Home
Loan that, among other things:
o no Home Loan is more than 59 days delinquent as of the Cut-Off Date
o no provision of a Home Loan has been waived, altered or modified in any
respect, except by instruments or documents included in the Home Loan
file and reflected on the list of Home Loans delivered to the Trust;
o each Home Loan is a legal, valid and binding obligation of the obligor and
is enforceable in accordance with its terms, except as may be limited by
laws affecting creditors' rights generally;
o no Home Loan is subject to any right of rescission, set-off, counterclaim
or defense;
o each Home Loan was originated by a home improvement contractor or home
equity lender in the ordinary course of its business or was originated by
the Originator directly;
o no Home Loan was originated in or is subject to the laws of any
jurisdiction whose laws would make the transfer of the Home Loan or an
interest therein pursuant to the Trust Agreement, the Indenture or the
Securities unlawful;
o each Home Loan complies with all requirements of law;
o no Home Loan has been satisfied, subordinated as a lower lien ranking than
original position or rescinded;
o all parties to each contract had full legal capacity to execute the Home
Loan;
o no Home Loan has been sold, conveyed and assigned or pledged to any other
person and the Trust will have good and marketable title to each Home
Loan free and clear of any encumbrance, equity, lien, pledge, charge,
claim or security interest, and is the sole owner and has full right to
transfer the Home Loan to the Trust;
o as of the Cut-Off Date, there was no default, breach, violation or event
permitting acceleration under any Home Loan and, except for payment
delinquencies permitted by the first two bullet points, above, no event
that with notice and the expiration of any grace or cure period would
constitute a default, breach, violation or event permitting acceleration
under the Home Loan, and the Originator has not waived any of the above;
o except for 53 balloon Home Loans representing 0.34% of the total pool of
Home Loans, each Home Loan is a fully-amortizing Home Loan and provides
for level monthly payments based on its applicable Home Loan rate, except
for the final monthly payment, over the term of such Home Loan;
o each secured Home Loan contains customary and enforceable provisions such
as to render the rights and remedies of the holder adequate for
realization against the collateral;
o the description of each Home Loan in the list delivered to the Trust is
true and correct;
o there is only one original of each Home Loan; and
o each Home Loan was originated or purchased in accordance with the
Originator's then-current underwriting guidelines.
o The repurchase of any Home Loan will result in accelerated principal
payments on the Notes.
THE POLICY
The Note Insurer will issue a financial guaranty insurance policy for
the Class A Notes. This policy unconditionally guarantees the payment of
Insured Amounts and Preference Amounts on the Class A Notes. The Note Insurer
will make each required Insured Payment to the Indenture Trustee on the later
of (1) the Payment Date the Insured Payment is distributable to the holders
under the Indenture, and (2) the next Business Day (as defined in the policy)
following the Business Day the Note Insurer shall have received telephonic or
telegraphic notice, subsequently confirmed in writing, or written notice by
registered or certified mail, from the Indenture Trustee, specifying that an
Insured Payment is due in accordance with the terms of the policy.
The Note Insurer's obligation under the policy will be discharged to
the extent that funds are received by the Indenture Trustee for distribution
to the holders of the Class A Notes, whether or not those funds are properly
distributed by the Indenture Trustee.
For purposes of the policy, a holder as to a particular Class A Note
does not and may not include the Trust, the Servicer, the Transferor or the
Originator.
The Note Insurer only insures the timely receipt of interest on the
Class A Notes, calculated at the applicable Note Rate, the amount of any
Overcollateralization Deficit and the principal balance of the Class A Notes
on February 15, 2031. The policy will not cover the Mortgage Loan Interest
Shortfalls, nor does the policy guarantee to the holders of the Class A Notes
any particular rate of principal payment. The policy expires and terminates
without any action on the part of the Note Insurer or any other person on the
date that is one year and one day following the date the Class A Notes have
been paid in full.
In the absence of payments under the policy, holders will directly
bear the credit risks associated with their notes.
The policy is non-cancelable.
The policy is issued under and shall be construed under, the laws of
the State of New York, without giving effect to the conflict of laws
principles of the State of New York.
The policy is not covered by the property casualty insurance security
fund specified in Article 76 of the New York Insurance Law.
The following terms shall have the following meanings:
Available Interest Amount means, for any Payment Date, the amount of
Interest Funds for that Payment Date.
Deficiency Amount means, (a) for any Payment Date occurring prior to
the Payment Date in February 2031, the sum of (1) the excess, if any, of
Required Interest Distributions over the Net Available Interest Amount and (2)
the Class A Overcollateralization Deficit, and (b) for the Payment Date
occurring in February 2031, the sum of (x) the amount set forth in clause
(a)(1) above and (y) the aggregate outstanding Class Principal Balance, if
any, of the Class A Notes, after giving effect to all other payments of
principal on the Class A Notes on that Payment Date.
Due for Payment means, the Payment Date on which Insured Amounts are
due.
Insured Amounts means, with respect to any Payment Date, any
Deficiency Amount for such Payment Date.
Insured Payments shall mean, the aggregate amount actually paid by
the Note Insurer to the Indenture Trustee in respect of (i) Insured Amounts
for a Payment Date and (ii) Preference Amounts for any given business day.
Mortgage Loan Interest Shortfalls means Basis Risk Carryover
Shortfalls, Relief Act Shortfalls and Prepayment Interest Shortfalls.
Net Available Interest Amount means, for any Payment Date, the
Available Interest Amount, less the Servicing Fee, the Backup Servicing Fee,
the Indenture Trustee Fee, the Owner Trustee Fee and the premium due to the
Note Insurer on that Payment Date.
Preference Amount means any payment of principal or interest on a
Class A Note which has become Due for Payment and which is made to an owner of
a Class A Note by or on behalf of the Indenture Trustee which has been deemed
a preferential transfer and was previously recovered from its owner pursuant
to the United States Bankruptcy Code in accordance with a final, nonappealable
order of a court of competent jurisdiction.
Prepayment Interest Shortfall means, for any Payment Date, an amount
equal to the excess, if any, of (a) one month's interest on the outstanding
principal balance of each Home Loan that was subject to a prepayment during
the prior Due Period at the related Net Home Loan Rate, or at such lower Net
Home Loan Rate as may be in effect for such Home Loan because of application
of the Soldiers' and Sailors' Civil Relief Act of 1940, over (b) for each Home
Loan that was subject to a prepayment in full during the prior Due Period, the
amount of interest actually remitted by the related mortgagor for the month in
which such prepayment in full occurred.
Relief Act Shortfalls are interest shortfalls resulting from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940.
Required Interest Distributions means, with respect to any Payment
Date, the aggregate amount of Current Interest payable to the Class A Notes,
net of any Mortgage Loan Interest Shortfalls.
Drawings Under the Policy
Prior to each Payment Date, the Indenture Trustee is required to
determine for the next Payment Date, the Net Available Amount to be on deposit
in the Note Payment Account on that Payment Date. If there is a Deficiency
Amount for a Payment Date, the Indenture Trustee is required to complete a
telephone or telegraphic notice, promptly confirmed in writing by telecopy
substantially in the form of Exhibit A to the policy, the original of which is
subsequently delivered by registered or certified mail and submit the notice
to the Note Insurer no later than 12:00 noon New York City time on the second
Business Day preceding the Payment Date as a claim for an Insured Payment in
an amount equal to the Deficiency Amount.
THE NOTE INSURER
The following information has been obtained from the Note Insurer for
inclusion in this prospectus supplement. No representation is made by the
Transferor, the Originator, the Servicer, the Depositor, the Trust, the Owner
Trustee or the Underwriters or any of their affiliates as to the accuracy or
completeness of the information.
The Note Insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the Territory of Guam. The Note Insurer
primarily insures newly issued municipal and structured finance obligations.
The Note Insurer is a wholly-owned subsidiary of Ambac Financial Group, Inc.
(formerly, AMBAC Inc.), a 100% publicly-held company. Moody's Investors
Service, Inc., Standard & Poor's, a division of The McGraw Hill Companies,
Inc. and Fitch, Inc. have each assigned a triple-A financial strength rating
to the Note Insurer.
The consolidated financial statements of the Note Insurer and
subsidiaries as of December 31, 1999 and December 31, 1998 and for each of the
years in the three-year period ended December 31, 1999, prepared in accordance
with generally accepted accounting principles, included in the Annual Report
on Form 10-K of Ambac Financial Group, Inc. - which was filed with the
Securities and Exchange Commission on March 30, 2000; Securities and Exchange
Commission File No. 1-10777 - and the unaudited consolidated financial
statements of the note insurer and subsidiaries as of September 30, 2000 and
for the periods ending September 30, 2000 and September 30, 1999, included in
the Quarterly Report on Form 10-Q of Ambac Financial Group, Inc. for the
period ended September 30, 2000 - which was filed with the Securities and
Exchange Commission on November 13, 2000 - are incorporated by reference into
this prospectus supplement and are deemed to constitute a part of this
prospectus supplement. Any statement contained in a document incorporated by
reference shall be modified or superseded for the purposes of this prospectus
supplement to the extent that a statement contained by reference in this
prospectus supplement also modified or supersedes that statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus supplement.
All financial statements of the Note Insurer and its subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Securities
and Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, subsequent to the date of this prospectus
supplement and prior to the termination of the offering of the Class A Notes
are deemed to be incorporated by reference into this prospectus supplement and
to be a part of this prospectus supplement from the respective dates of filing
of the financial statements.
The following table sets forth the capitalization of the Note Insurer
as of December 31, 1998, December 31, 1999 and September 30, 2000,
respectively, in conformity with generally accepted accounting principles.
Ambac Assurance Corporation
Capitalization Table
(Dollars in Millions)
December 31, 1998 December 31, 1999 September 30, 2000
(unaudited)
Unearned premiums......................... $1,303 $1,442 $1,508
Other liabilities......................... 548 524 479
------ ----- -----
Total liabilities.................... 1,851 1,966 1,987
====== ===== =====
Stockholder's equity:
Common Stock......................... 82 82 82
Additional paid-in capital........... 541 752 757
Accumulated other
Comprehensive income (loss).......... 138 (92) (17)
Retained earnings.................... 1,405 1,674 1,915
Total stockholder's equity................ 2,166 2,416 2,737
------ ------ -----
Total liabilities and
- -----------------------------------------------
Stockholder's equity...................... $4,017 $4,382 $4,724
====== ====== ======
For additional financial information concerning the Note Insurer, see
the audited financial statements of the Note Insurer incorporated by reference
in this prospectus supplement. Copies of the financial statements of the Note
Insurer incorporated by reference in this prospectus supplement and copies of
the Note Insurer's annual statement for the year ended December 31, 1999
prepared in accordance with statutory accounting standards are available,
without charge, from the Note Insurer. The address of the Note Insurer's
administrative offices and its telephone number are One State Street Plaza,
17th Floor, New York, New York 10004 and (212) 668-0340.
The Note Insurer makes no representation regarding the Class A Notes
or the advisability of investing in the Class A Notes and makes no
representation regarding, nor has it participated in the preparation of, this
prospectus supplement other than the information supplied by the Note Insurer
and presented under the headings "The Note Insurer" and "The Policy" in this
prospectus supplement and in the financial statements incorporated in this
prospectus supplement by reference.
DESCRIPTION OF THE NOTES
General
The Trust will issue the Class A-I-1 Notes, Class A-I-2 Notes, Class
A-I-3 Notes and Class A-I-4 Notes (together, the "Class A-I Notes"), the Class
A-II Notes (the "Class A-II Notes"), and the Class A-III Notes (the "Class
A-III Notes" and, together with the Class A-I Notes and the Class A-II Notes,
the "Class A Notes"), the Class M-1 Notes and the Class M-2 Notes (together,
the "Class M Notes" and together with the Class A Notes, the "Notes"). The
Class M-1 and Class M-2 Notes are referred to as the "Subordinated Notes." The
Trust will also issue the Class B Certificates, a Class R-1 Certificate and a
Class R-2 Certificate (together, the "Certificates" and together with the
Notes, the "Securities") pursuant to the Trust Agreement dated as of February
1, 2001 (the "Trust Agreement") among the Depositor, the Owner Trustee and the
Co-Owner Trustee. The Subordinated Notes and the Certificates are referred to
as the "Subordinated Securities." The Notes and the Certificates are referred
to herein as the "Securities." The Notes will be secured by the assets of the
Trust pursuant to the Indenture. The Certificates will represent the ownership
interest in the Trust. The Certificates are not being offered hereby.
On each Payment Date, the Indenture Trustee or its designee will pay
to the persons in whose names the Notes are registered on the day immediately
preceding the related Payment Date (the "Record Date") the portion of the
aggregate payment to be made to each Noteholder as described below. Payments
on the Notes will be made to Beneficial Owners only through DTC, Clearstream
or Euroclear and their respective Participants (except under certain limited
circumstances).
Book-Entry and Definitive Notes
The Notes will be issued in the form of beneficial interests in one
or more restricted global certificates (the "Book-Entry Notes"), deposited
with a custodian for The Depository Trust Company ("DTC" and, together with
any successor depository selected by the Depositor, the "Depository"). The
Notes will not be issued in bearer form. Beneficial interests in the Notes may
be held in denominations of $25,000 or any integral multiples of $1 in excess
thereof. The registered holders of the Notes are sometimes referred to in this
section as "Noteholders" and the owners of beneficial interests in the
Book-Entry Notes as "Note Owners".
Book-Entry Notes. The Notes will be represented initially by one or
more Book-Entry Notes and will be deposited with DTC or its custodian and
registered in the name of Cede & Co., as nominee of DTC. DTC is a limited
purpose trust company organized under the laws of the State of New York, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to Section 17A of the Securities and Exchange Act of 1934.
DTC was created to hold securities for its participating organizations
("Participants") and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others
such as the Underwriters of the Notes banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Notes may be held through DTC in the United States, or Clearstream,
Luxembourg or the Euroclear System in Europe, if a Note Owner is a participant
of those systems, or indirectly through organizations that are participants in
those systems.
Owners of beneficial interests in Book-Entry Notes that are not
Participants or Indirect Participants of DTC who desire to purchase, sell or
otherwise transfer ownership of, or other interests in, Notes may do so only
through Participants and Indirect Participants. In addition, Note Owners will
receive all distributions of principal of and interest on the Notes through
Participants, as described below. It is anticipated that the only "Noteholder"
of record of the Book-Entry Notes will be Cede & Co., as nominee of DTC. Note
Owners will not be recognized by the Indenture Trustee as Noteholders, as such
term is used in the Indenture, and Note Owners will be permitted to exercise
the rights of Noteholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting
DTC and its operations (the "Rules"), DTC is required to make book-entry
transfers of Book-Entry Notes among Participants on whose behalf it acts with
respect to the Book-Entry Notes. Participants and Indirect Participants with
which Note Owners have accounts with respect to the Notes similarly are
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Note Owners. Accordingly, although
Note Owners will not hold physical certificates for Notes represented by the
Book-Entry Notes, the Rules provide a mechanism by which Note Owners will
receive payments and will be able to transfer their interests in such Notes.
Because DTC can act only on behalf of Participants, who in turn act
on behalf of Indirect Participants and certain banks, the ability of a holder
to pledge Book-Entry Notes to persons or entities that do not participate in
the DTC system, or to otherwise act with respect to such Book-Entry Notes, may
be limited due to the lack of a physical certificate.
DTC has advised the Trust that, unless and until Notes are issued in
registered form, it will take any action permitted to be taken by a Noteholder
under the Indenture only at the direction of one or more Participants to whose
accounts with DTC the Book-Entry Notes are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
DTC may discontinue providing its services as securities depositary
with respect to any class of Notes at any time by giving reasonable notice to
the Trustee or the Indenture Trustee, as applicable. Under these
circumstances, in the event that a successor securities depositary is not
obtained, fully registered, certificated Notes are required to be printed and
delivered. The Trust may decide to discontinue use of the system of book-entry
transfers through DTC or a successor securities depositary. In that event,
fully registered, certificated Notes will be delivered to the Note Owners. See
"--Definitive Notes" below.
The information in this section concerning DTC and DTC's book-entry
system are from sources that the Depositor believes to be reliable, but the
Depositor does not take any responsibility for the accuracy of this
information.
Clearstream, Luxembourg and Euroclear will hold omnibus positions on
behalf of the participants in the Clearstream, Luxembourg and Euroclear
systems, respectively, through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective
depositaries which in turn will hold these positions in customers' securities
accounts in the depositaries' names on the books of DTC.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg
as a professional depositary. Clearstream holds securities for its
participants and facilities the clearance and settlement of securities
transactions between its participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates.
Indirect access to Clearstream, Luxembourg is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Clearstream, Luxembourg
participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear's
participants through simultaneous electronic book entry delivery against
payment, thereby eliminating the need for physical movement of certificates
and any risk from lack of simultaneous transfers of securities and cash. On
December 31, 2000, Euroclear Bank S.A./N.V. took over the Euroclear-related
operating and banking responsibilities formerly performed by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York. Euroclear Bank
S.A./N.V. currently operates Euroclear, under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation. Euroclear's
operator conducts all operations and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with Euroclear's operator.
Euroclear Clearance Systems S.C. establishes policy for Euroclear on behalf of
Euroclear's participants, including banks, securities brokers and dealers, and
other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear
participant, either directly or indirectly.
Euroclear holds all securities on a fungible basis without
attribution of specific certificates to specific securities clearance
accounts. The Euroclear operator acts under the Euroclear terms and conditions
only on behalf of Euroclear's participants, and has no record of or
relationship with persons holding through Euroclear's participants.
Transfers between direct participants will comply with DTC rules.
Transfers between Clearstream's participants and Euroclear's participants will
comply with their rules and operating procedures.
DTC will effect under DTC rules, cross-market transfers between
persons holding directly or indirectly through DTC in the United States, on
the one hand, and directly or indirectly through Clearstream or Euroclear, on
the other, through the relevant European international clearing system through
its depository; however, these cross-market transactions will require delivery
of instructions to the relevant European international clearing system by the
counterparty in this system as required by its rules and procedures and within
its established deadlines, European time. The relevant European international
clearing system will, if the transaction meets its settlement requirement,
deliver instructions to its depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment using its normal procedures for same-day funds
settlement applicable to DTC. Clearstream participants and Euroclear
participants may not deliver instructions directly to the depositories.
Because of time-zone differences, credits of securities in
Clearstream or Euroclear as a result of a transaction with a DTC participant
will be made during the subsequent securities settlement processing day, dated
the business day following the DTC settlement date, and the credits or any
transactions in the securities settled during the processing day will be
reported to the relevant Clearstream participant or Euroclear participant on
that business day. Cash received in Clearstream or Euroclear as a result of
sales of securities by or through a Clearstream participant or a Euroclear
participant to a DTC participant will be received with value on the DTC
settlement date but will be available in the relevant Clearstream or Euroclear
cash account only as of the business day following settlement in DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants
of DTC, Clearsteam and Euroclear, they are under no obligation to perform or
continue to perform these procedures and these procedures may be discontinued
at any time.
Except as required by law, none of the Depositor, the Trust, the
Owner Trustee, the Transferor or the Indenture Trustee will have any liability
for any aspect of the records relating to or distributions made on account of
beneficial ownership interests in the Book-Entry Notes held by Cede & Co., as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
Definitive Notes. The Notes will be issued in registered form to
Noteholders, or their nominees, rather than to DTC, only if (i) DTC advises
the Indenture Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Notes and the Indenture Trustee is unable to locate a qualified
successor; (ii) the Depositor, at its sole option and with the consent of the
Indenture Trustee, elects to terminate the book-entry system through DTC or
(iii) after the occurrence of any Indenture Event of Default, DTC, at the
direction of Noteholders having a majority in interest of the Notes, advises
the Indenture Trustee in writing that the continuation of a book-entry system
through DTC (or a successor thereto) to the exclusion of any physical
securities being issued to Noteholders is no longer in the best interest of
Noteholders. Upon issuance in registered form of physical Notes, such Notes
will be transferable directly (and not exclusively on a book-entry basis), and
registered holders will deal directly with the Indenture Trustee with respect
to transfers, notices and distributions.
The holder of any Definitive Note may exchange the same in whole or
in part (in an original principal amount equal to $25,000 or any integral
multiple of $1 in excess thereof) for other Definitive Notes or, if such
holder is entitled to hold an interest in Book-Entry Notes (subject to the
rules and procedures of DTC), for a beneficial interest in Book-Entry Notes by
surrendering such Definitive Note to the Indenture Trustee (and completing the
form of transfer on the reverse thereof) together with any certificate or
other required documentation. No service charge will be imposed for any
registration of transfer or exchange, but the Indenture Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
Payments
For the definitions of certain of the defined terms used in the
following subsection, see "- Related Definitions" below.
Available Collection Amount. Payments on the Notes on each Payment
Date will be made from the Available Collection Amount. The Servicer will
withdraw from the Collection Account and remit to the Indenture Trustee for
deposit in the Note Payment Account and the Certificate Distribution Account
the applicable portion of the Available Collection Amount on the first
Business Day prior to each Payment Date (each such day, a "Determination
Date"). With respect to each Payment Date, the "Available Collection Amount"
is the sum of the Interest Funds and the Principal Funds for that Payment
Date.
Payments of Interest. Interest on the Class Principal Balance of each
Class of Notes will accrue during each Accrual Period at the applicable Note
Rate and will be payable to Noteholders on each Payment Date, commencing in
March 2001. The Note Rate for the Class A-I-1 Notes for any Accrual Period
will be the lesser of (a) LIBOR plus 0.18% (the "Class A-I-1 Margin") and (b)
14.00% per annum, subject to the related Net WAC Cap Rate. The Note Rate for
the Class A-III Notes for any Accrual Period will be the lesser of (a) LIBOR
plus 0.32% (the "Class A-III Margin") and (b) 14.00% per annum, subject to the
related Net WAC Cap Rate. The Note Rate for the Class A-I-2 Notes, Class A-I-3
Notes, Class A-I-4 Notes, Class A-II Notes, Class M-1 Notes and Class M-2
Notes will be 5.29%, 5.93%, 6.82%, 6.17%, 7.54% and 9.71% per annum,
respectively; provided, however, that the Note Rate on the Class A-I-4 Notes,
Class A-II Notes, M-1 Notes and M-2 Notes will increase by 0.50% per annum and
the related Margin on the Class A-III Notes will double on the payment date
following the first payment date on which the Servicer can exercise its option
to purchase the home loans from the Trust as described in "Optional
Redemption" in this prospectus supplement. The "Accrual Period" for each Class
of Notes will be the period commencing on the Payment Date in the month
immediately preceding the month in which that Payment Date occurs (or, in the
case of the March 2001 Payment Date, commencing on the closing date) and
ending on the day preceding that Payment Date. The Indenture Trustee will
calculate interest for the Class A-I Notes (other than the Class A-I-1 Notes),
the Class A-II Notes and Class M Notes based on a 360-day year of twelve
30-day months and for the Class A-I-1 Notes and Class A-III Notes based on a
360-day year and the actual number of days elapsed in the related Accrual
Period. The Certificate Rate for the Class B Certificates is 10.00% per annum;
provided, however, that the Certificate Rate on the Class B Certificates will
increase by 0.50% per annum on the payment date following the first payment
date on which the Servicer can exercise its option to purchase the home loans
from the Trust as described in "Optional Redemption" in this prospectus
supplement.
The "Net WAC Cap Rate" with respect to any Payment Date and the Class
A-I-1 Notes, will equal the weighted average of the Net Home Loan Rates of the
Group I Home Loans. The "Net WAC Cap Rate" with respect to any Payment Date
and the Class A-III Notes, will equal the weighted average of the Net Home
Loan Rates of the Group III Home Loans.
The "Net Home Loan Rate" with respect to any Home Loan, will equal
the Home Loan rate thereon minus the rates at which (a) the Trustee Fees, (b)
the Servicing Fee, (c) the Backup Servicing Fee, and (d) the premium under the
Policy, are paid; each expressed as a percentage of the Pool Principal Balance
of the Home Loans in the related home loan group.
On each Payment Date, the Interest Funds for such Payment Date and
any Insured Payment in respect of interest are required to be distributed in
the following order of priority, until such amounts have been fully
distributed:
(1) concurrently, to the Note Insurer, the Servicer, the Backup
Servicer, the Indenture Trustee and the Owner Trustee, the premium
due under the Policy, the Servicing Fee, the Backup Servicing Fee,
the Indenture Trustee Fee and the Owner Trustee Fee, respectively;
(2) concurrently, to the Class A-I-1 Notes, Class A-I-2 Notes, Class
A-I-3 Notes, Class A-I-4 Notes, Class A-II Notes and Class A-III
Notes, the Current Interest and any Interest Carry Forward Amount
for each such Class; provided, however, that if the Interest Funds
are not sufficient to make a full distribution of the aggregate
Current Interest and the aggregate Interest Carry Forward Amount for
the Class A-I-1 Notes, Class A-I-2 Notes, Class A-I-3 Notes, Class
A-I-4 Notes, Class A-II Notes and Class A-III Notes, such Interest
Funds will be distributed pro rata among each such Class based upon
the ratio of (x) the Current Interest and any Interest Carry Forward
Amount for such Class to (y) the aggregate Current Interest and the
aggregate Interest Carry Forward Amount for all such Classes;
(3) to the Note Insurer, reimbursement for any prior draws made under
the Policy, with interest;
(4) to the Class M-1 Notes, the Current Interest for such Class;
(5) to the Class M-2 Notes, the Current Interest for such Class;
(6) to the Class A-I-1 Notes any Unpaid Class A-I-1 Basis Risk Carryover
Shortfall and to the Class A-III Notes, any Unpaid Class A-III Basis
Risk Carryover Shortfall, in each case, together with interest
thereon at the applicable Note Rate (without giving effect to the
related Net WAC Cap Rate), pro rata on the basis of such unpaid
amounts, until all such unpaid amounts have been reduced to zero;
(7) to the Class B Certificates, the Current Interest for such Class;
(8) to the Note Insurer, any other amounts owed under the insurance
agreement; and
(9) any remainder to be distributed as described below under "--
Overcollateralization Provisions."
The "Interest Funds" are equal to:
(a) the sum, without duplication, of:
(1) all scheduled interest collected in respect of the Home Loans during
the related Due Period;
(2) all Net Liquidation Proceeds collected in respect of the Home Loans
during the related Due Period (to the extent such Net Liquidation
Proceeds relate to interest);
(3) all Post-Liquidation Proceeds collected in respect of the Home Loans
during the related Due Period (to the extent such Post-Liquidation
Proceeds relate to interest), and
(4) investment earnings on the funds in the Collection Account; less
(b) (1) the aggregate amount of Group III Additional Advance Interest
collected in respect of the Group III Home Loans during the related
Due Period, and (2) any reimbursable expenses of the trust as and to
the extent provided in the Sale and Servicing Agreement.
"Group III Additional Advance Interest" means, with respect to each
Payment Date, the aggregate amount collected in respect of interest on any
Group III Additional Advance Principal during the related Due Period pursuant
to clauses (1) through (3) of the definition of Interest Funds.
"Current Interest" with respect to (i) each Class of the Notes and
each Payment Date, is the interest accrued at the applicable Note Rate for the
applicable Accrual Period on the Class Principal Balance of such Class and
(ii) the Class B Certificates and each Payment Date, is the interest accrued
at the Certificate Rate for the applicable Accrual Period on the Certificate
Principal Balance of such Class.
"Interest Carry Forward Amount," with respect to each Class of Notes
and the Class B Certificates and each Payment Date, is the sum of:
(1) the sum of the excess of:
(a) Current Interest for such Class with respect to prior Payment
Dates over
(b) the amount actually distributed to such Class with respect to
interest on such prior Payment Dates and
(2) interest on such excess (to the extent permitted by applicable law)
at the applicable Note Rate or Certificate Rate.
Determination of LIBOR. The Note Rates on the Class A-I-1 Notes and
the Class A-III Notes for any Accrual Period, including the initial Accrual
Period, will be determined on the second LIBOR business day prior to the first
day of that Accrual Period - the LIBOR rate adjustment date.
On each LIBOR rate adjustment date, LIBOR shall be established by the
Indenture Trustee and as to any Accrual Period, LIBOR will equal the rate for
United States dollar deposits for one month which appears on the Dow Jones
Telerate Screen Page 3750 as of 11:00 A.M., London time, on that LIBOR rate
adjustment date. Dow Jones Telerate Screen Page 3750 means the display
designated as page 3750 on the Telerate Service or any other page as may
replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks. If the rate does not appear on that
page or any other page as may replace that page on that service, or if the
service is no longer offered, any other service for displaying LIBOR or
comparable rates as may be selected by the Indenture Trustee after
consultation with the Servicer and the Note Insurer, the rate will be the
reference bank rate.
The reference bank rate will be determined on the basis of the rates
at which deposits in the U.S. Dollars are offered by the reference banks,
which shall be three major banks that are engaged in transactions in the
London interbank market, selected by the Indenture Trustee after consultation
with the Servicer and the Note Insurer. The reference bank rate will be
determined as of 11:00 A.M., London time, on the LIBOR rate adjustment date to
prime banks in the London interbank market for a period of one month in
amounts approximately equal to the aggregate Class Principal Balance of the
Class A-I-1 Notes and Class A-III Notes. The Indenture Trustee will request
the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two quotations are provided, the rate will
be the arithmetic mean of the quotations. If on that date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
Indenture Trustee after consultation with the Servicer and the Note Insurer,
as of 11:00 A.M., New York City time, on that date for loans in U.S. Dollars
to leading European banks for a period of one month in amounts approximately
equal to the Class Principal Balance of the Class A-I-1 Notes and Class A-III
Notes. If no quotations can be obtained, the rate will be LIBOR for the prior
payment date; provided, however, if, under the priorities listed previously in
this paragraph, LIBOR for a payment date would be based on LIBOR for the
previous payment date for the third consecutive payment date, the Indenture
Trustee shall select an alternative comparable index over which the Indenture
Trustee has no control, used for determining one-month Eurodollar lending
rates that is calculated and published or otherwise made available by an
independent party. LIBOR business day means any day other than (a) a Saturday
or a Sunday or (b) 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 by the Indenture Trustee and the Indenture
Trustee's subsequent calculation of the Note Rates applicable to the Class
A-I-1 Notes and Class A-III Notes for the relevant Accrual Period, in the
absence of manifest error, will be final and binding.
Payments of Principal. On each Payment Date, the Principal Payment
Amount for each Home Loan Group and such Payment Date and any Insured Payments
in respect of principal are required to be distributed as follows until such
amounts have been fully distributed:
(1) For each Payment Date prior to the Stepdown Date or on which a
Trigger Event is in effect:
(A) to the Note Insurer, reimbursement for any prior draws made
under the Policy, with interest, to the extent not reimbursed
as described under "-- Payments of Interest" above;
(B) to the Note Insurer, any other amounts owed under the insurance
agreement, to the extent not paid as described under "--
Payments of Interest" above;
(C) concurrently, (x) to the Class A-I Notes, the Principal Payment
Amount for the Group I Home Loans (y) to the Class A-II Notes,
the Principal Payment Amount for the Group II Home Loans and
(z) to the Class A-III Notes, the Principal Payment Amount for
the Group III Home Loans, in the order and the priorities set
forth below;
(D) to the Class M-1 Notes, until the Class Principal Balance
thereof is reduced to zero;
(E) to the Class M-2 Notes, until the Class Principal Balance
thereof is reduced to zero;
(F) to the Class A-I-1 Notes any Unpaid Class A-I-1 Basis Risk
Carryover Shortfall and to the Class A-III Notes, any Unpaid
Class A-III Basis Risk Carryover Shortfall, in each case,
together with interest thereon at the applicable Note Rate
(without giving effect to the related Net WAC Cap Rate), pro
rata on the basis of such unpaid amounts, until all such unpaid
amounts have been reduced to zero;
(G) to the Class B Certificates, until the Certificate Principal
Balance thereof is reduced to zero; and
(H) any remainder to be distributed as described under "--
Overcollateralization Provisions" below.
(2) For each Payment Date on and after the Stepdown Date and so long as
a Trigger Event is not in effect:
(A) to the Note Insurer, reimbursement for any prior draws made
under the Policy, with interest to the extent not reimbursed as
described under "--Payments of Interest" above;
(B) to the Note Insurer, any amounts owed under the insurance
agreement to the extent not paid as described under "--Payments
of Interest" above;
(C) concurrently, (x) to the Class A-I Notes, the Class A Principal
Payment Amount for the Group I Home Loans (y) to the Class A-II
Notes, the Class A Principal Payment Amount for the Group II
Home Loans and (z) to the Class A-III Notes, the Class A
Principal Payment Amount for the Group III Home Loans, in the
order and priorities set forth below; provided, however, if the
allocations in clauses (x), (y) and (z) of this clause (C)
result in the Group III Required Overcollateralization Amount
exceeding the Group III Overcollateralization Amount, then the
Principal Payment Amount for the Group I Home Loans, Group II
Home Loans and Group III Home Loans shall be aggregated and
applied in the following order of priority: first, to the Class
A-III Notes, until the Group III Overcollateralization Amount
equals the Group III Required Overcollateralization Amount, and
second, to the Class A-I Notes (in the order and priorities set
forth below) and Class A-II Notes, pro rata in accordance with
the amount of principal collected in respect of the Group I
Home Loans and Group II Home Loans during the related Due
Period;
(D) to the Class M-1 Notes, the Class M-1 Principal Payment Amount
until the Class Principal Balance thereof is reduced to zero;
(E) to the Class M-2 Notes, the Class M-2 Principal Payment Amount
until the Class Principal Balance thereof is reduced to zero;
(F) to the Class A-I-1 Notes any Unpaid Class A-I-1 Basis Risk
Carryover Shortfall and to the Class A-III Notes, any Unpaid
Class A-III Basis Risk Carryover Shortfall, in each case,
together with interest thereon at the applicable Note Rate
(without giving effect to the related Net WAC Cap Rate), pro
rata on the basis of such unpaid amounts, until all such unpaid
amounts have been reduced to zero;
(G) to the Class B Certificates, the Class B Principal Payment
Amount until the Certificate Principal Balance thereof is
reduced to zero; and
(H) any remainder to be distributed as described under "--
Overcollateralization Provisions" below.
The Principal Payment Amount for the Group I Home Loans or the Class
A Principal Payment Amount for the Group I Home Loans, as applicable, is
required to be distributed (subject to the proviso in clause (2)(C) above),
first, concurrently to the Class A-I-1 Notes and Class A-I-2 Notes, on a pro
rata basis in accordance with their outstanding Class Principal Balances,
until the Class Principal Balances thereof have been reduced to zero, second,
to the Class A-I-3 Notes, until the Class Principal Balance thereof is reduced
to zero, and third, to the Class A-I-4 Notes, until the Class Principal
Balance thereof is reduced to zero. The Principal Payment Amount for the Group
II Home Loans or the Class A Principal Payment Amount for the Group II Home
Loans, as applicable, is required to be distributed (subject to the proviso in
clause (2)(C) above) to the Class A-II Notes, until the Class Principal
Balance thereof is reduced to zero. The Principal Payment Amount for the Group
III Home Loans or the Class A Principal Payment Amount for the Group III Home
Loans, as applicable, is required to be distributed to the Class A-III Notes,
until the Class Principal Balance thereof is reduced to zero.
"Principal Funds" for any Home Loan Group and Payment Date are equal to:
(a) the sum, without duplication, of:
(1) the scheduled principal collected in respect of the Home Loans
in that Home Loan Group during the related Due Period;
(2) prepayments collected in respect of the Home Loans in that Home
Loan Group during the related Due Period;
(3) the Principal Balance of each Home Loan in that Home Loan Group
that was repurchased by the Originator during the related Due
Period;
(4) all Net Liquidation Proceeds in respect of the Home Loans in
that Home Loan Group collected during the related Due Period
(to the extent such Net Liquidation Proceeds relate to
principal); and
(5) all Post-Liquidation Proceeds collected in respect of the Home
Loans in that Home Loan Group during the related Due Period (to
the extent such Post-Liquidation Proceeds relate to principal),
less
(b) in the case of the Group III Home Loans, the aggregate amount of
Group III Additional Advance Principal collected in respect of the
Group III Home Loans during the related Due Period.
"Group III Additional Advance Principal" means, for each Group III
Home Loan and any Payment Date, the excess, if any, of (x) the aggregate
amount collected in respect of such Group III Home Loan pursuant to clauses
(a)(1) through (a)(5) of the definition of Principal Funds above during the
period commencing on the Cut-Off Date and ending on the last day of the
related Due Period, over (y) the Cut-Off Date Principal Balance of such Group
III Home Loan.
"Principal Payment Amount," with respect to:
(a) the Group I Home Loans and each Payment Date, is the sum of:
(1) the Principal Funds in respect of the Group I Home Loans for
such Payment Date; and
(2) any Group I Extra Principal Payment Amount for such Payment
Date; and
(b) the Group II Home Loans and each Payment Date, is the sum of:
(1) the Principal Funds in respect of the Group II Home Loans for
such Payment Date; and
(2) any Group II Extra Principal Payment Amount for such Payment
Date; and
(c) the Group III Home Loans and each Payment Date, is the sum of:
(1) the Principal Funds in respect of the Group III Home Loans for
such Payment Date; and
(2) any Group III Extra Principal Payment Amount for such Payment
Date.
"Class A Principal Payment Amount" with respect to each Payment Date is
the excess of:
(a) the Class Principal Balance of the Class A Notes immediately prior
to such Payment Date over
(b) the lesser of (I) 57.00% of the aggregate Principal Balance of the
Home Loans as of the last day of the related Due Period and (II)
the aggregate Principal Balance of the Home Loans as of the last
day of the related Due Period, minus the OC Floor, but in no event
less than zero.
"Class M-1 Principal Payment Amount" is the excess of:
(1) the sum of:
(a) the Class Principal Balance of the Class A Notes (after giving
effect to the distributions of the Class A Principal Payment
Amount for such Payment Date) and
(b) the Class Principal Balance of the Class M-1 Notes immediately
prior to such Payment Date over
(2) the lesser of:
(a) 72.00% of the aggregate Principal Balance of the Home Loans as
of the last day of the related Due Period and
(b) the aggregate Principal Balance of the Home Loans as of the
last day of the related Due Period, minus the OC Floor, but in
no event less than zero.
"Class M-2 Principal Payment Amount" is the excess of:
(1) of the sum of:
(a) the Class Principal Balance of the Class A Notes (after giving
effect to the distributions of the Class A Principal Payment
Amount for such Payment Date);
(b) the Class Principal Balance of the Class M-1 Notes (after
giving effect to the distribution of the Class M-1 Principal
Payment Amount for such Payment Date); and
(c) the Class Principal Balance of the Class M-2 Notes immediately
prior to such Payment Date over
(2) the lesser of:
(a) 82.00% of the aggregate Principal Balance of the Home Loans as
of the last day of the related Due Period and
(b) the aggregate Principal Balance of the Home Loans as of the
last day of the related Due Period, minus the OC Floor, but in
no event less than zero.
"Class B Principal Payment Amount" is the excess of:
(1) of the sum of
(a) the Class Principal Balance of the Class A Notes (after giving
effect to the distributions of the Class A Principal Payment
Amount for such Payment Date);
(b) the Class Principal Balance of the Class M-1 Notes (after
giving effect to the distribution of the Class M-1 Principal
Payment Amount for such Payment Date);
(c) the Class Principal Balance of the Class M-2 Notes (after
giving effect to the distributions of the Class M-2 Principal
Payment Amount for such Payment Date); and
(d) the Certificate Principal Balance of the Class B Certificates
immediately prior to such Payment Date over
(2) the aggregate Principal Balance of the Home Loans as of the last
day of the related Due Period, minus the OC Floor, but in no event
less than zero;
provided, however, that after the Class Principal Balances of the Class A,
Class M-1 and Class M-2 Notes are reduced to zero, the Class B Principal
Payment Amount for such Payment Date will equal 100% of the Principal Payment
Amount for the Home Loans.
"Extra Principal Payment Amount," with respect to each Payment Date, is
the lesser of:
(1) the excess, if any, of:
(a) the Required Overcollateralization Amount for such Payment
Date over
(b) the Overcollateralization Amount (after giving effect to
distributions of principal for such Payment Date other than
any Extra Principal Payment Amount) for such Payment Date and
(2) the Excess Cashflow for such Payment Date available therefor.
"Excess Cashflow," with respect to any Payment Date, is the excess,
if any, of the Interest Funds in respect all Home Loan Groups and Principal
Funds in respect of all Home Loan Groups for such Payment Date over required
payments of interest and principal (excluding any Extra Principal Payment
Amount) on the Notes and Class B Certificates on such Payment Date.
"Group I/II Required Overcollateralization Amount" means:
o prior to the Stepdown Date, an amount equal to 6.0% of the
aggregate Cut-Off Date Principal Balance of the Group I Home Loans
and Group II Home Loans, and
o on and after the Stepdown Date, an amount equal to 12.0% of the
aggregate Principal Balance of the Group I Home Loans and Group II
Home Loans as of the last day of the related Due Period;
in each case subject to a minimum amount equal to the Group I/II OC Floor and
a maximum amount equal to the aggregate Principal Balance of the Group I Home
Loans and Group II Home Loans as of the last day of the related Due Period.
"Group I/II OC Floor" equals 0.50% of the aggregate Cut-Off Date
Principal Balance of the Group I Home Loans and Group II Home Loans.
"Group III OC Floor" equals 0.50% of the Cut-Off Date Principal
Balance of the Group III Home Loans.
"Group III Overcollateralization Amount", with respect to any Payment
Date, is the excess, if any, of:
(a) the aggregate Principal Balance of the Group III Home Loans as of
the last day of the related Due Period, over
(b) the Class Principal Balance of the Class A-III Notes as of such
Payment Date (after taking into account the payment of principal
on the Class A-III Notes on such Payment Date).
"Group III Required Overcollateralization Amount" means:
o prior to the Stepdown Date, an amount equal to 6.0% of the Cut-Off
Date Principal Balance of the Group III Home Loans, and
o on and after the Stepdown Date, an amount equal to 12.0% of the
aggregate Principal Balance of the Group III Home Loans as of the
last day of the related Due Period;
in each case subject to a minimum amount equal to the Group III OC Floor and a
maximum amount equal to the aggregate Principal Balance of the Group III Home
Loans as of the last day of the related Due Period;
"OC Floor" equals 0.50% of the Cut-Off Date Principal Balance of the
Home Loans.
"Overcollateralization Amount," with respect to any Payment Date, is
the excess, if any, of:
(a) the aggregate Principal Balance of the Home Loans as of the last
day of the related Due Period, over
(b) the sum of the aggregate Class Principal Balance of the Notes and
the Certificate Principal Balance of the Class B Certificates as
of such Payment Date (after taking into account the payment of
principal on such Notes and Certificates on such Payment Date).
"Class A Overcollateralization Deficit" with respect to any Payment Date on
which the aggregate Class Principal Balance of the Class M Notes has been
reduced to zero, is the excess, if any, of:
(a) the aggregate Class Principal Balance of the Class A Notes (after
taking into account the payment of principal on such Payment
Date), over
(b) the aggregate Principal Balance of the Home Loans as of the last
day of the related Due Period.
"Required Overcollateralization Amount" means, with respect to any
Payment Date, the sum of the Group I/II Required Overcollateralization Amount
and the Group III Required Overcollateralization Amount.
"Stepdown Date" is the later to occur of:
(1) the Payment Date in March 2004 or
(2) the first Payment Date on which the aggregate Class Principal
Balance of the Class A Notes is less than 57.00% of the aggregate
principal balance of the Home Loans as of the last day of the
related Due Period.
A "Trigger Event," with respect to each Payment Date after the
Stepdown Date, exists if (a) more than 10% of the Home Loans, by aggregate
principal balance of the Home Loans as of the last day of the related Due
Period, are 60 or more days delinquent (including loans in bankruptcy, loans
in foreclosure and real estate owned) or (b) cumulative Realized Losses exceed
the corresponding percentage of the Cut-Off Date Principal Balance of the Home
Loans set forth below for such Payment Date:
Months from Cut-Off Date
37-48 11.00%
49-60 12.00%
61-84 14.00%
85 and thereafter 15.00%
Related Definitions
Certificate Principal Balance: For the Class B Certificates, as of
any date of determination, the balance equal to the Original Certificate
Balance thereof reduced by (i) all amounts previously distributed to the Class
B Certificates in reduction of the Certificate Principal Balance thereof on
all prior Payment Dates and (ii) any Applied Realized Loss Amounts previously
applied thereto. The Class R-1 and Class R-2 Certificates have no Certificate
Principal Balance.
Class Principal Balance: For each class of Notes, as of any date of
determination, the balance equal to the Original Class Principal Balance
thereof reduced by (i) all amounts previously paid to the Noteholders of such
Class in reduction of the Class Principal Balance thereof on all previous
Payment Dates and (ii) in the case of the Class M Notes only, any Applied
Realized Loss Amounts previously applied thereto.
Group I Home Loans: The Home Loans that correspond primarily to the
Class A-I Notes, Class M Notes and Class B Certificates as further described
in "The Home Loan Pool" in this prospectus supplement.
Group II Home Loans: The Home Loans that correspond primarily to the
Class A-II Notes as further described in "The Home Loan Pool" in this
prospectus supplement.
Group III Home Loans: The Home Loans that correspond primarily to the
Class A-III Notes as further described in "The Home Loan Pool" in this
prospectus supplement.
Liquidated Home Loan: A defaulted Home Loan as to which the Servicer
has determined that all recoverable liquidation and insurance proceeds have
been received, which will be deemed to occur upon the earlier of: (a) the
liquidation of the related Mortgaged Property acquired through foreclosure or
similar proceedings, (b) the Servicer's determination in accordance with
customary servicing practices that no further amounts are collectible from the
Home Loan and any related collateral securing such Home Loan, or (c) any
portion of a scheduled monthly payment of principal and interest is in excess
of 180 days past due.
Net Liquidation Proceeds: With respect to any Payment Date, any cash
amounts received in respect of Liquidated Home Loans, whether through
trustee's sale, foreclosure sale, disposition of REO, whole loan sale or
otherwise, and any other cash amounts received in connection with the
management of the Mortgaged Properties related to defaulted Home Loans, in
each case, net of any reimbursements to the Servicer and the Indenture Trustee
made from such amounts for any unreimbursed Servicing Advances (including such
Servicing Advances deemed to be nonrecoverable Servicing Advances) made and
any other fees and expenses paid or owed to the Servicer, the Indenture
Trustee, the Note Insurer or any other party in connection with the
foreclosure, conservation and liquidation of the related Liquidated Home Loans
or Mortgaged Properties.
Post-Liquidation Proceeds: Any proceeds received by the Servicer with
respect to a Home Loan after the date on which such Home Loan becomes a
Liquidated Home Loan.
Original Certificate Principal Balance: The initial principal balance
of the Class B Certificates on the Closing Date will equal $17,238,000.
Original Class Principal Balance: The principal balance for each
class of Notes on the Closing Date as set forth in the table on page S-3 in
this prospectus supplement.
Termination Price: An amount equal to the sum of (a) the sum of the
aggregate outstanding Class Principal Balance of the Notes and the outstanding
Certificate Principal Balance of the Class B Certificates plus all accrued and
unpaid interest thereon at the applicable Note Rate or Certificate Rate, as
applicable, (b) any Servicing Compensation due and unpaid, (c) any
unreimbursed Servicing Advances, including such Servicing Advances deemed to
be nonrecoverable and (d) all amounts due and owing to the Note Insurer.
Overcollateralization Provisions
Credit enhancement with respect to each Class of Notes will be
provided in part by overcollateralization. On the Closing Date the aggregate
principal balance of the Notes and the Class B Certificates is expected to
exceed the Pool Principal Balance by approximately 1.00%. A limited
acceleration of the principal amortization of the Class A Notes relative to
the principal amortization of the Home Loans has been designed, first, to
eliminate such undercollateralization, and then to increase the
Overcollateralization Amount over time by making additional payments of
principal to the Noteholders from Excess Cashflow until the
Overcollateralization Amount is equal to the Required Overcollateralization
Amount. The Indenture requires that the Overcollateralization Amount be
increased to, and thereafter maintained at, an amount equal to the Required
Overcollateralization Amount. This increase and subsequent maintenance is
intended to be accomplished by the application of monthly Excess Cashflow. In
addition, if on any Payment Date, principal collected in respect of the Group
III Home Loans and available for distribution to the Class A-III Notes is
insufficient to maintain the Group III Overcollateralization Amount at or
above the Group III Required Overcollateralization Amount, amounts otherwise
distributable in respect of principal on the Class A-I Notes and Class A-II
Notes will first be distributed to the Class A-III Notes until the Group III
Overcollateralization Amount equals the Group III Required
Overcollateralization Amount, and the remainder will be distributed to the
Class A-I Notes and Class A-II Notes as described in this prospectus
supplement under "Description of the Notes -- Payments" and
"--Overcollateralization Provisions."
The application of monthly Excess Cashflow to reduce the aggregate
Class Principal Balance of the Class A Notes on any Payment Date, other than
the March 15, 2001 Payment Date, will have the effect of accelerating the
amortization of the Class A Notes relative to the amortization of the Home
Loans and of thereby creating and increasing the Overcollateralization Amount.
The Excess Cashflow will be required to be applied as an Extra Principal
Payment Amount as described below whenever the Overcollateralization Amount is
less than the Required Overcollateralization Amount. If on any Payment Date,
after giving effect to any Extra Principal Payment Amount, the sum of the
aggregate Class Principal Balance of the Notes and the Certificate Principal
Balance of the Class B Certificates exceed the aggregate Principal Balance of
the Home Loans as of the last day of the related Due Period, the Certificate
Principal Balance of the Class B Certificates and the Class Principal Balance
of the Class M Notes (but not the Class A Notes) will be reduced, in inverse
order of seniority (beginning with the Class B Certificates) by an amount
equal to such excess. Any such reduction is an "Applied Realized Loss Amount."
If the Certificate Principal Balance of the Class B Certificates or
the Class Principal Balance of any Class of Class M Notes is reduced, that
Class thereafter will be entitled to distributions of interest and principal
only with respect to the Certificate Principal Balance or Class Principal
Balance, as applicable, as so reduced. On subsequent Payment Dates, however,
as described below, Excess Cashflow will be applied to reduce Unpaid Realized
Loss Amounts (without interest) previously allocated to such Notes and
Certificates in order of seniority.
On each Payment Date, other than the March 15, 2001 Payment Date, the
Excess Cashflow will be required to be distributed as follows:
(1) the Extra Principal Payment Amount, to the Class A Notes,
pro rata based on the aggregate Principal Balance of the Home Loans
in the related Home Loan Group as of the first day of the related Due
Period, in the order and priority described under "-- Payments of
Principal" above without giving effect to the proviso to clause
(2)(C) thereof; provided, however, if the allocations of Excess
Cashflow to the Class A Notes in the priority described above result
in the Group III Required Overcollateralization Amount exceeding the
Group III Overcollateralization Amount, then the Extra Principal
Payment Amount shall be applied pursuant to this clause (1) in the
following order of priority: first, to the Class A-III Notes, until
the Group III Overcollateralization Amount equals the Group III
Required Overcollateralization Amount, and second, to the Class A-I
Notes (in the order and priority described under "--Payments of
Principal" above), and Class A-II Notes pro rata in accordance with
the outstanding Principal Balance of the Home Loans in the related
Home Loan Group as of the first day of the related Due Period;
(2) to the Class M-1 Notes, any Interest Carry Forward Amount
for such Class;
(3) to the Class M-1 Notes, any Unpaid Realized Loss Amount for
such Class;
(4) to the Class M-2 Notes, any Interest Carry Forward Amount
for such Class;
(5) to the Class M-2 Notes, any Unpaid Realized Loss Amount for
such Class;
(6) to the Class B Certificates, any Interest Carry Forward
Amount for such Class;
(7) to the Class B Certificates, any Unpaid Realized Loss Amount
for such Class; and
(8) any Remaining Excess Cashflow, to the holder of the Class
R-2 Certificates. ??? All Excess Cashflow for the March 15, 2001
Payment Date will be paid to the holder of the Class R-1 Certificate.
In addition, on each Payment Date, all Group III Additional Advance
Principal and Group III Additional Advance Interest received during
the related Due Period shall be paid to the holder of the Class R-1
Certificate.
"Applied Realized Loss Amount," with respect to the Class B
Certificates or any Class of Class M Notes and as to any Payment Date, means
the sum of the Realized Losses with respect to Home Loans which have been
applied in reduction of the Certificate Principal Balance or Class Principal
Balance of such Class, as applicable.
"Basis Risk Carryover Shortfall" means the Class A-I-1 Basis Risk
Carryover Shortfall or the Class A-III Basis Risk Carryover Shortfall, as
applicable.
"Class A-I-1 Basis Risk Carryover Shortfall" means, with respect to
any Payment Date, the excess, if any of:
(1) the amount of interest that the Class A-I-1 Notes would have
been entitled to receive on such Payment Date (but not in excess of
14.00% per annum) had the Note Rate for the Class A-I-1 Notes not
been calculated based on the related Net WAC Cap Rate, over
(2) the amount of interest that the Class A-I-1 Notes received
on such Payment Date based on the related Net WAC Cap Rate (but not
in excess of 14.00% per annum).
"Class A-III Basis Risk Carryover Shortfall" means, with respect to
any Payment Date, the excess, if any of
(1) the amount of interest that the Class A-III Notes would have
been entitled to receive on such Payment Date (but not in excess of
14.00% per annum) had the Note Rate for the Class A-III Notes not
been calculated based on the related Net WAC Cap Rate, over
(2) the amount of interest that the Class A-III Notes received
on such Payment Date based on the related Net WAC Cap Rate (but not
in excess of 14.00% per annum).
"Realized Loss" is the excess of the Principal Balance of a defaulted
Home Loan over the Net Liquidation Proceeds with respect thereto that are
allocated to principal.
"Unpaid Class A-I-1 Basis Risk Carryover Shortfall," with respect to
the Class A-I-1 Notes and as to any Payment Date, is the excess of:
(1) the aggregate amount of Class A-I-1 Basis Risk Carryover
Shortfalls over
(2) the sum of all payments in reduction of Class A-I-1 Basis
Risk Carryover Shortfalls on all previous Payment Dates.
"Unpaid Class A-III Basis Risk Carryover Shortfall," with respect to
the Class A-III Notes and as to any Payment Date, is the excess of:
(1) the aggregate amount of Class A-III Basis Risk Carryover
Shortfalls over
(2) the sum of all payments in reduction of Class A-III Basis
Risk Carryover Shortfalls on all previous Payment Dates.
"Unpaid Realized Loss Amount," with respect to the Class B
Certificates or any Class of Class M Notes and as to any Payment Date, is the
excess of:
(1) Applied Realized Loss Amounts with respect to such Class
over
(2) the sum of all distributions in reduction of the Applied
Realized Loss Amounts on all previous Payment Dates.
Any amounts distributed to the Class B Certificates or a Class of
Class M Notes in respect of any Unpaid Realized Loss Amount will not be
applied to reduce the Certificate Principal Balance or Class Principal Balance
of such Class, as applicable.
In the event that the Required Overcollateralization Amount is
permitted to decrease or "step down" on a Payment Date in the future, or in
the event that an Excess Overcollateralization Amount (as defined below)
otherwise exists, then any amounts relating to principal which would otherwise
be distributed to the holders of the Class A Notes on such Payment Date will
instead be distributed to the holders of the Class R-2 Certificate (in each
case as provided in the Sale and Servicing Agreement) on such Payment Date
until the applicable Excess Overcollateralization Amount is reduced to zero.
This may have the effect of decelerating the amortization of the Class A
Notes, Class M Notes and Class B Certificates relative to the amortization of
the Home Loans, and of reducing the Overcollateralization Amount to the
Required Overcollateralization Amount. With respect to any Payment Date, the
excess, if any, of (a) the Overcollateralization Amount on such Payment Date
over (b) the Required Overcollateralization Amount for such Payment Date is
the "Excess Overcollateralization Amount" with respect to such Payment Date.
Optional Redemption
The Servicer may effect an early redemption of the Notes and purchase
of the Certificates on any Payment Date on or after which the Pool Principal
Balance declines to 10% or less of the Original Pool Principal Balance by
depositing with the Indenture Trustee an amount equal to the Termination Price
(the first such Payment Date, the "Initial Call Date"). This right is subject
to the consent of the Note Insurer if the exercise thereof would result in a
draw on the Policy. All such amounts will be paid first, to the Note Insurer,
for all amounts due and owing to the Note Insurer, second, to the Indenture
Trustee for the payment of any outstanding Indenture Trustee Fees or expenses
due to the Indenture Trustee under the Transfer and Servicing Agreements,
third, to the Servicer for payment of outstanding Servicing Fees, fourth, to
the Servicer for payment of unreimbursed Servicing Advances (including such
Servicing Advances deemed to be nonrecoverable), fifth, to the Noteholders in
an amount equal to the aggregate of the aggregate outstanding Class Principal
Balance of the Notes, plus all accrued and unpaid interest thereon at the
applicable Note Rates, sixth, to the Class B Certificateholders in an amount
equal to the outstanding Certificate Principal Balance thereof, plus all
accrued and unpaid interest thereon at the Certificate Rate, and seventh, to
the Class R-2 Certificateholder. On the first Payment Date after the Initial
Call Date, the Note Rate of the Class A-I-4, Class A-II, Class M-1 and Class
M-2 Notes will be increased by 0.50% per annum and the Margin on the Class
A-III Notes will double if the early redemption is not effected.
Rights of Noteholders Upon Occurrence of Event of Default
Events of default under the Indenture (the "Indenture Events of
Default" and together with the Servicer Events of Default, the "Events of
Default") will include, without limitation (i) default for a period in excess
of five days in the payment of any interest on any Note or default in the
payment of the entire Class Principal Balance of any Note on the Final Stated
Maturity Date; (ii) default in the observance or performance of any covenant
or agreement of the Trust made in the Indenture, or any representation or
warranty of the Trust made in the Indenture or the Sale and Servicing
Agreement which is not eliminated or otherwise cured, for a period of 30 days
after notice to the Trust; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings relating to the Trust and certain actions by the Trust indicating
insolvency, reorganization or inability to pay its obligations or if the Trust
shall dissolve or liquidate, in whole or in part, in any material respect.
Under the Indenture, a failure to pay the full amount of the portion
of the Current Interest within five days of the Payment Date on which such
payment is due (without regard to the amount of Available Funds) will
constitute an Event of Default. Until the Notes have been declared due and
payable upon an Event of Default, the holders of the Certificates may not
request the Indenture Trustee to take any action, other than the application
of Available Funds to principal and interest as provided in the Transfer and
Servicing Agreements, and may not otherwise take or cause any action to be
taken to enforce the obligation of the Trust to pay principal and interest on
the Certificates. If the Event of Default also constitutes a Servicer Event of
Default, the Trust or the Note Insurer may have the right to terminate the
Servicer.
Subject to the conditions specified herein under "Description of the
Transfer and Servicing Agreements - Duties of Owner Trustee and Indenture
Trustee", upon the occurrence of an Indenture Event of Default, holders of the
Notes representing more than 66 2/3% of the then outstanding principal
amount of Notes may, with the consent of the Note Insurer and subject to its
acceleration and waiver rights, exercise their remedies under the Indenture.
These remedies include the right to cause accrued interest and principal on
the outstanding Notes to be paid (either in lump sum in redemption of the
Notes or from monthly collections on the Home Loans) in accordance with the
priorities described in this prospectus supplement (an "acceleration"). On
each Payment Date on and after any such acceleration of the Notes, and
following the reduction to zero of the Class Principal Balance of all Classes
of Notes, any remaining available funds will be applied in repayment, first,
of all other amounts owed on the Notes, second, to pay the Note Insurer and,
third, any remaining amounts will be paid to the Certificateholders. Such
remedies will also include the right to direct the Indenture Trustee's actions
under the Indenture unless such right is otherwise granted to holders of the
Notes after an acceleration of the Notes and to consent to the sale of the
assets pledged to secure the Notes. See "Description of the Securities - The
Indenture" in the accompanying Prospectus.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Home Loan
Purchase Agreements, the Indenture, the Sale and Servicing Agreement, the
Administration Agreement, the Backup Servicing Agreement and the Trust
Agreement (collectively, the "Transfer and Servicing Agreements"). Copies of
the Transfer and Servicing Agreements will be filed with the Commission
following the issuance of the Notes. The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
the provisions of the Transfer and Servicing Agreements. The following summary
supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Transfer and Servicing
Agreements set forth under the heading "Description of the Agreements" in the
Prospectus.
Sale and Assignment of the Home Loans
On the Closing Date, (i) the Transferor will purchase the Home Loans
from the Originator pursuant to the Originator Home Loan Purchase Agreement,
(ii) the Depositor will purchase the Home Loans from the Transferor pursuant
to the Transferor Home Loan Purchase Agreement and (iii) the Trust will
purchase the Home Loans from the Depositor pursuant to the Sale and Servicing
Agreement. The Trust will, concurrently with such sale of the Home Loans,
deliver or cause to be delivered the Securities to the Depositor. The Trust
will pledge and assign the Home Loans to the Indenture Trustee in exchange for
the Notes. Each Home Loan will be identified in a schedule appearing as an
exhibit to the Sale and Servicing Agreement.
In addition, the Originator will, as to each Home Loan, deliver to
the Indenture Trustee the related mortgage note endorsed to the order of the
Indenture Trustee without recourse, any assumption and modification agreements
and the Mortgage with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office), an assignment of the
Mortgage in the name of the Indenture Trustee in recordable form, and any
intervening assignments of the Mortgage (each, collectively, a "Home Loan
File"). Assignments of the Mortgages to the Indenture Trustee will be recorded
in the real property records for those states in which such recording is
deemed necessary to protect the Trust and the Indenture Trustee's interest in
the Home Loans against the claims of certain creditors of the Originator or
subsequent purchasers. In these circumstances, the Originator will deliver
such assignments to the Indenture Trustee after recordation. In the event
that, with respect to any Home Loan as to which recordation of the related
assignment is required, the Originator cannot deliver the Mortgage or any
assignment with evidence of recording thereon concurrently with the conveyance
thereof under the Sale and Servicing Agreement because they have not yet been
returned by the public recording office, the Originator will deliver or cause
to be delivered to the Indenture Trustee a certified true photocopy of such
Mortgage or assignment. The Originator will deliver or cause to be delivered
to the Indenture Trustee any such Mortgage or assignment with evidence of
recording indicated thereon upon receipt thereof from the public recording
office. The Indenture Trustee will review (or cause to be reviewed) each Home
Loan File within 90 days after the conveyance of the related Home Loan to the
Trust to ascertain that all required documents have been executed and
received. Furthermore, on or before the closing date, the Indenture Trustee
shall receive a list of loans, which shall include, for each loan: the Cut-Off
Date Principal Balance, the amount of monthly payments due on the loan, the
loan interest rate and the maturity date.
Servicing
In consideration for the performance of the loan servicing functions
for the Home Loans, the Servicer is entitled to a monthly fee (the "Servicing
Fee") equal to 0.75% per annum (the "Servicing Fee Rate") of the Pool
Principal Balance as of the first day of the Due Period for the related
Payment Date. The fees of the Owner Trustee will be paid by the Trust. In
addition to the Servicing Fee, the Servicer is entitled to retain additional
servicing compensation in the form of assumption and other administrative
fees, release fees, insufficient funds charges, late payment charges and any
other servicing-related penalties and fees (collectively, such additional
compensation and Servicing Fee, the "Servicing Compensation").
In the event of a delinquency or default with respect to a Home Loan,
neither the Servicer nor any other person will have an obligation to advance
scheduled monthly payments of principal or interest with respect to such Home
Loan. However, the Servicer will make reasonable servicing advances with
respect to the Home Loans (each, a "Servicing Advance") and will be entitled
to reimbursement for Servicing Advances as described herein (including such
Servicing Advances deemed to be nonrecoverable). Servicing Advances may
include costs and expenses advanced for the preservation, restoration and
protection of any Mortgaged Property, including advances to pay delinquent
real estate taxes and insurance. Any Servicing Advances by the Servicer will
be netted from the Available Collection Amount prior to any payments to
Noteholders, as described under "- Collection Account and Note Payment
Account" below.
Servicer Events of Default
"Servicer Events of Default" will consist of, subject to applicable
cure periods, without limitation: (i) any failure of the Servicer to deposit
in the Collection Account any amount required to be deposited under the Sale
and Servicing Agreement, which failure continues unremedied for five Business
Days; (ii) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Sale and
Servicing Agreement, which failure continues unremedied for a period of 30
days after notice; (iii) the loss or delinquency experience with respect to
the Home Loans exceeds certain levels as specified in the Sale and Servicing
Agreement; (iv) any unpermitted assignment or attempt to assign the duties or
rights of the Servicer under the Sale and Servicing Agreement (v) certain
events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings relating to the Servicer and certain
actions by the Servicer indicating insolvency, reorganization or inability to
pay its obligations or the Servicer shall dissolve or liquidate, in whole or
part, in any material respect; and (vi) failure of the Servicer to qualify as
an eligible servicer under the Sale and Servicing Agreement.
If a Servicer Event of Default occurs, the Indenture Trustee may,
with the consent of the Note Insurer, and at the direction of (i) the Note
Insurer or (ii) if the Class A Notes have been paid in full and all amounts
owed to the Note Insurer under the insurance agreement have been paid in full,
a majority in interest of the Noteholders and the Certificateholders, shall,
remove the Servicer. The Servicer may resign, only in accordance with the
terms of the Sale and Servicing Agreement. In addition, (i) the holder of the
Class R-2 Certificate shall have the right, at its option, to cause a transfer
of servicing and (ii) Conseco Finance Corp. shall have the right, at its
option, to transfer its servicing rights to another servicer, in each case
with the consent of the Note Insurer and the rating agencies, but without the
consent of the Noteholders and subject to any conditions specified in the sale
and servicing agreement. No removal, resignation or transfer shall become
effective until the Backup Servicer, the Indenture Trustee or a successor
servicer acceptable to the Indenture Trustee, the Note Insurer and the Rating
Agencies shall have assumed the Servicer's responsibilities and obligations in
accordance therewith.
Backup Servicing
EMC Mortgage Corporation has agreed to act as backup servicer (in
such capacity, the "Backup Servicer") pursuant to the Backup Servicing
Agreement. Pursuant to the Backup Servicing Agreement, the Backup Servicer
shall agree to be ready, willing and able to assume the duties of Servicer
under the Sale and Servicer Agreement in the event the Note Insurer appoints
the Backup Servicer as successor Servicer. In consideration for the
performance of the backup servicing function, the Backup Servicer is entitled
to a fee (the "Backup Servicing Fee") equal to 0.05% per annum (the "Backup
Servicing Fee Rate") of the Pool Principal Balance as of the first day of the
Due Period for the related Payment Date.
Collection Account and Note Payment Account
The Servicer is required to deposit in an Eligible Account (the
"Collection Account"), within two Business Days of receipt, all payments
received after the Cut-Off Date on account of principal and interest on the
Home Loans, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, any amounts payable in connection with the
repurchase or substitution of any Home Loan and any amount required to be
deposited in the Collection Account in connection with the redemption of the
Notes and purchase of the Certificates. The foregoing requirements for deposit
in the Collection Account will be exclusive of payments on account of
principal and interest collected on the Home Loans on or before the Cut-Off
Date. The Indenture Trustee will be entitled to withdraw the Servicing
Compensation, Servicing Advances and any unreimbursed Servicing Fees and
Servicing Advances from the Collection Account or net such amounts prior to
deposit. Withdrawals will be made from the Collection Account only for the
purposes specified in the Sale and Servicing Agreement. The Collection Account
may be maintained at any depository institution that satisfies the
requirements set forth in the definition of Eligible Account in the Sale and
Servicing Agreement.
Amounts on deposit in the Collection Account will be invested in
Permitted Investments at the direction of the Servicer.
The Indenture Trustee will establish and maintain with the Indenture
Trustee an account, in the name of the Indenture Trustee on behalf of the
Noteholders, into which amounts released from the Collection Account for
payment to the Noteholders will be deposited and from which all payments to
the Noteholders will be made (the "Note Payment Account"). The Indenture
Trustee will be entitled to withdraw from the Note Payment Account the
Indenture Trustee Fee and any expenses due to it under the Transfer and
Servicing Agreements.
The Owner Trustee and Indenture Trustee
The Owner Trustee, the Co-Owner Trustee, the Indenture Trustee and
any of their respective affiliates may hold Notes in their own names or as
pledgees. For the purpose of meeting the legal requirements of certain
jurisdictions, the Owner Trustee and the Indenture Trustee acting jointly (or
in some instances, the Owner Trustee or the Indenture Trustee acting alone)
will have the power to appoint co-trustees or separate trustees of all or any
part of the Trust. In the event of such an appointment, all rights, powers,
duties and obligations conferred or imposed upon the Owner Trustee by the
Trust Agreement and upon the Indenture Trustee by the Indenture will be
conferred or imposed upon the Owner Trustee and the Indenture Trustee,
respectively, and in each such case such separate trustee or co-trustee,
jointly, or, in any jurisdiction in which the Owner Trustee or Indenture
Trustee will be incompetent or unqualified to perform certain acts, singly
upon such separate trustee or co-trustee, which will exercise and perform such
rights, powers, duties and obligations solely at the direction of the Owner
Trustee or the Indenture Trustee, as applicable.
The Owner Trustee, the Co-Owner Trustee, and the Indenture Trustee
may resign at any time, in which event the Issuer will be obligated to appoint
a successor thereto. The Noteholders may also remove the Owner Trustee, the
Co-Owner Trustee or the Indenture Trustee if either ceases to be eligible to
continue as such under the Trust Agreement or the Indenture, as the case may
be, becomes legally unable to act or becomes insolvent. In such circumstances,
the Depositor will be obligated to appoint a successor Owner Trustee, a
successor Co-Owner Trustee or a successor Indenture Trustee, as applicable.
Any resignation or removal of the Owner Trustee, the Co-Owner Trustee or
Indenture Trustee and appointment of a successor thereto will not become
effective until acceptance of the appointment by such successor.
In consideration for the performance of its duties and obligations
under the Transfer and Servicing Agreements, the Indenture Trustee is entitled
to a monthly fee (the "Indenture Trustee Fee") equal to 0.005% per annum of
the Pool Principal Balance as of the first day of the Due Period for the
related Payment Date. The Owner Trustee is entitled to a fee (the "Owner
Trustee Fee"), payable annually, equal to $2,500.
The Trust Agreement and Indenture will provide that the Owner Trustee
and Indenture Trustee will be entitled to indemnification by Conseco Finance
Corp. for, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee or Indenture Trustee, in connection with the
performance of its duties and obligations or the exercise of its rights under
any of the Transfer and Servicing Agreements, in whatever capacity it is
acting under any of such Transfer and Servicing Agreements, not resulting from
its own willful misfeasance, bad faith or gross negligence (other than by
reason of a breach of any of its representations or warranties to be set forth
in the Trust Agreement or Indenture, as the case may be).
Duties of the Owner Trustee and Indenture Trustee
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Certificates (other than the execution
and authentication thereof), the Notes or any Home Loans or related documents,
and will not be accountable for the use or application by the Originator, the
Transferor or the Servicer of any funds paid to the Originator, the Transferor
or the Servicer in respect of the Notes or the Home Loans, or the investment
of any monies by the Servicer of funds in the Collection Account. So long as
no Event of Default has occurred and is continuing, the Owner Trustee will be
required to perform only those duties specifically required of it under the
Trust Agreement. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the Owner Trustee under the Trust Agreement, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Trust Agreement. The Owner Trustee will not be charged with knowledge
of a failure by the Servicer to perform its duties under the Transfer and
Servicing Agreements which failure constitutes an Event of Default, unless the
Owner Trustee obtains actual knowledge of such failure.
The Owner Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Trust Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any holder of the Certificates, unless such Certificateholder has
offered to the Owner Trustee reasonable security or indemnity against the
costs, expenses and liabilities that may be incurred therein or thereby.
Subject to the rights or consent of the Note Insurer, Noteholders and
Indenture Trustee, no Certificateholder will have any right under the Trust
Agreement to institute any proceeding with respect to the Trust Agreement,
unless such holder previously has given to the Owner Trustee written notice of
the occurrence of an Event of Default and (i) the Event of Default arises from
the Servicer's failure to remit payments when due or (ii) the Holders of the
Certificates have made a written request upon the Owner Trustee to institute
such proceeding in its own name as the Owner Trustee thereunder and have
offered to the Owner Trustee reasonable indemnity, and the Owner Trustee for
30 days has neglected or refused to institute any such proceedings.
The Indenture Trustee will make no representations as to the validity
or sufficiency of the Indenture, the Certificates, the Notes (other than the
execution and authentication thereof) or any Home Loans or related documents,
and will not be accountable for the use or application by the Originator, the
Transferor, the Servicer or the Owner Trustee of any funds paid to the
Originator, the Transferor, the Servicer or the Owner Trustee in respect of
the Notes or the Home Loans, or the investment of any monies by the Servicer
of funds in the Collection Account. So long as no Event of Default under the
Indenture or the Sale and Servicing Agreement has occurred or is continuing,
the Indenture Trustee will be required to perform only those duties
specifically required of it under the Transfer and Servicing Agreements.
Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
Indenture Trustee under the Indenture, in which case it will only be required
to examine them to determine whether they conform to the requirements of the
Indenture. The Indenture Trustee will not be charged with knowledge of a
failure by the Servicer to perform its duties under the Transfer and Servicing
Agreements, which failure constitutes an Event of Default under the Transfer
and Servicing Agreements, unless the Indenture Trustee obtains actual
knowledge of such failure.
The Indenture Trustee will be under no obligation to exercise any of
the rights or powers vested in it by the Indenture or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Noteholders, unless such Noteholders have offered to
the Indenture Trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred therein or thereby. No
Noteholder will have any right under the Indenture to institute any proceeding
with respect to the Indenture, unless such holder previously has given to the
Indenture Trustee written notice of the occurrence of an Event of Default and
(i) the Event of Default arises from the Servicer's failure to remit payments
when due or (ii) Noteholders evidencing not less than 25% of the outstanding
amount of each such Class of Notes, acting together as a single class, have
made written request upon the Indenture Trustee to institute such proceeding
in its own name as the Indenture Trustee thereunder and have offered to the
Indenture Trustee reasonable indemnity, and the Indenture Trustee for 30 days
has neglected or refused to institute any such proceedings. See "Description
of the Notes - Rights of Noteholders Upon Occurrence of Event of Default"
herein.
Modification of Indenture
With the consent of the holders of a majority of the outstanding
Class Principal Balance of Notes, and the Note Insurer, 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 by that
modification and the Note Insurer, however, no supplemental indenture will:
o Change the due date of any installment of principal of
or interest on any Note or reduce its Class Principal Balance, its
interest rate specified or change any place of payment where or the coin
or currency in which any note or any of its interest is payable;
o Impair the right to institute suit for the enforcement of some
provisions of the Indenture regarding payment;
o Reduce the percentage of the aggregate amount 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 some provisions of the Indenture or of some
defaults thereunder and their consequences as provided for in the
Indenture;
o Decrease the percentage of the aggregate Class Principal Balance of Notes
required to amend the sections of the Indenture which specify the
applicable percentage of aggregate Class Principal Balance of Notes
necessary to amend the Indenture to some other related agreements;
o Modify any of the provisions of the Indenture in a 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 the calculation; or
o 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 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 Note Insurer and without obtaining the
consent of the Noteholders, for the purpose of, among other things, curing any
ambiguity, correcting any error, or correcting or supplementing any provision
in the Indenture that may be inconsistent with any other provision in this
prospectus supplement.
PREPAYMENT AND YIELD CONSIDERATIONS
No principal payments will be made on any Class of Notes on any
Payment Date until the Class Principal Balance of each Class of Notes having a
higher principal payment priority received all principal to which it is
entitled for such Payment Date. See "Description of the Notes - Payments"
herein. As the rate of payment of principal of the Notes depends primarily on
the rate and timing of payment (including prepayments) of the principal
balance of the Home Loans, final payment of any Class of Notes could occur
significantly earlier than the applicable Final Scheduled Maturity Date.
Noteholders will bear the risk of being able to reinvest principal payments on
the Notes at yields at least equal to the yield on their respective Notes. No
prediction can be made as to the rate or timing of prepayments on the Home
Loans in either stable or changing interest rate environments. Any
reinvestment risk due to the rate of prepayment of the Home Loans will be
borne entirely by Noteholders.
The subordination of each Class of Notes having a lower principal
payment priority to each Class of Notes having a higher principal payment
priority will provide limited protection to Holders of the Notes against
losses on the Home Loans. If the actual rate and amount of losses experienced
on the Home Loans exceed the rate and amount of such losses anticipated by an
investor, the yields to maturity (or to redemption, as described under
"Description of the Notes - Optional Redemption" herein) on such Subordinated
Notes may be lower than anticipated.
Approximately 0.23%, 3.66% and 37.16% of the Group I Home Loans,
Group II Home Loans and the Group III Home Loans, respectively, have
prepayment penalties. Approximately 1.70% of the Group I Home Loans and Group
II Home Loans in the aggregate have prepayment penalties. The rate of
prepayment on the Home Loans cannot be accurately predicted. The prepayment
experience of the Trust with respect to the Home Loans may be affected by a
wide variety of factors, including, without limitation, economic conditions,
prevailing interest rate levels, the availability of alternative financing,
homeowner mobility and changes affecting the deductibility for federal income
tax purposes of interest payments on the Home Loans. Generally, however,
because the Group I Home Loans and Group II Home Loans bear interest at fixed
rates, and the rate of prepayment on fixed rate loans is sensitive to
prevailing interests rates, if prevailing interest rates fall significantly
below the interest rates on the Group I Home Loans or the Group II Home Loans,
the Group I Home Loans or the Group II Home Loans, as applicable, are likely
to be subject to higher prepayment rates than if prevailing rates remain at or
above the interest rates on the related Home Loans. Conversely, if prevailing
interest rates rise significantly above the interest rates on the Group I Home
Loans or the Group II Home Loans, as applicable, the rate of prepayments on
the related Home Loans would be likely to decrease. No representations are
made as to the particular factors that will affect the prepayment of the Home
Loans, as to the relative importance of such factors, or as to the percentage
of the principal balance of the Home Loan that will be paid as of any date.
No prediction can be made as to future levels of LIBOR or the Prime
Rate or as to the timing of any changes therein. The yields of the Class A-I-1
Notes and Class A-III Notes will be affected by LIBOR and, in the case of the
Class A-III Notes, the Prime Rate. In addition, the holders of the Class A-I-1
Notes and Class A-III Notes will absorb the yield risk associated with a
possible elimination or inversion of the spread between the Class A-I-1 Note
Rate and Class A-III Note Rate (which rates, except as otherwise provided, are
based on LIBOR) and are subject to the related Net WAC Cap Rate. If such
spread disappears (i.e., if LIBOR plus the applicable Margin exceeds the
lesser of 14.00% per annum and the related Net WAC Cap Rate), then the Class
A-I-1 Note Rate or the Class A-III Note Rate, as applicable, for such Payment
Date will be limited to such lower rate.
Because the loan rates on the Group I Home Loans and the Group II
Home Loans and the Note Rates on the Class A-I Notes (other than the Class
A-I-1 Notes), Class A-II Notes and Class M Notes are fixed as set forth under
"Description of the Notes--Interest Payments" in this prospectus supplement,
these rates will not change in response to changes in market interest rates.
Accordingly, if market interest rates or market yields for securities similar
to these Notes were to rise, the market value of these Notes may decline.
The Class A-I-1 Notes and Class A-III Notes may not always receive
interest at a rate equal to LIBOR plus the applicable Margin. If LIBOR plus
the applicable Margin increases to greater than the lesser of 14.00% per annum
and the related Net WAC Cap Rate, the Note Rate on the Class A-I-1 Notes or
Class A-III Notes, as applicable, will be subject to the applicable Net WAC
Cap Rate. To the extent that the Note Rate for the Class A-I-1 Notes or the
Class A-III Notes is limited by the related Net WAC Cap Rate, the resulting
Class A-I-1 Basis Risk Carryover Shortfall or Class A-III Basis Risk Carryover
Shortfall, as applicable, will carry forward, with interest at the applicable
Note Rate (without giving effect to the related Net WAC Cap Rate) and will be
payable only from the available excess cashflow, if any, as described in this
prospectus supplement under "Description of the Notes - Overcollateralization
Provisions." The Policy will not cover any such Basis Risk Carryover
Shortfalls. Basis Risk Carryover Shortfalls may remain unpaid on the Initial
Call Date or the related Final Scheduled Maturity Date.
The rate of principal payments on the Notes, the aggregate amount of
distributions on the Notes and the yields to maturity of the Notes will be
directly affected by the rate and timing of principal reductions on the Home
Loans. Such principal reductions may be in the form of scheduled amortization
payments or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other disposition. On any Payment Date on or after the Payment Date on
which the Pool Principal Balance declines to 10% or less of the Original Pool
Principal Balance, the Class R-2 Certificateholder may effect a redemption of
the Notes and purchase of the Certificates as described herein under
"Description of the Notes - Optional Redemption"
The rate and timing of principal payments on and the weighted average
lives of the Class A-I Notes, Class M Notes, Class A-II Notes and Class A-III
Notes will be affected primarily by the rate and timing of principal payments
(including prepayments, defaults, liquidations and purchases) on the Group I
Home Loans, in the case of the Class A-I Notes and Class M Notes, Group II
Home Loans, in the case of the Class A-II Notes, and Group III Home Loans, in
the case of the Class A-III Notes. However, as a result of the cash flow
provisions herein, (i) Interest Funds from one loan group may be applied to
cover principal losses in one or more other loan groups and (ii) Interest
Funds from all loan groups may be applied to build overcollateralization with
respect to the Notes. In addition, once the Class Principal Balances of the
Class A Notes related to a loan group have been reduced to zero, principal
payments in respect of the loan group will be distributed to the remaining
class or classes of Notes related to the other loan groups until their Class
Principal Balances have been reduced to zero.
In addition, if on any Payment Date, principal collected in respect
of the Group III Home Loans and available for distribution to the Class A-III
Notes is insufficient to maintain the Group III Overcollateralization Amount
at or above the Group III Required Overcollateralization Amount, amounts
otherwise distributable in respect of principal on the Class A-I Notes and
Class A-II Notes will first be distributed to the Class A-III Notes until the
Group III Overcollateralization Amount equals the Group III Required
Overcollateralization Amount, and the remainder will be distributed to the
Class A-I Notes and Class A-II Notes as described in this prospectus
supplement under "Description of the Notes -- Payments" and
"--Overcollateralization Provisions."
The "weighted average life" of a Class of Notes refers to the average
amount of time that will elapse from the Closing Date to the date each dollar
in respect of principal of such Class is repaid. The weighted average life of
each Class of Notes will be influenced by, among other factors, the rate at
which principal reductions occur on the Home Loans in the related loan group
as described herein. If substantial principal prepayments on the Home Loans in
a loan group are received as a result of unscheduled payments, liquidations or
repurchases, payments to the related Noteholders due to such prepayments may
significantly shorten the weighted average lives of their Notes. If the Home
Loans in a loan group experience delinquencies and defaults in the payment of
principal, then the related Noteholders will experience a delay in the receipt
of principal payments attributable to such delinquencies and defaults, which
in certain instances may result in longer actual average weighted lives of
their Notes than would otherwise be the case. Interest shortfalls on the Home
Loans due to principal prepayments in full and curtailments, and any resulting
shortfall in amounts payable on the Notes, will be covered to the extent of
amounts available from the applicable credit enhancement. See "Risk Factors -
Potential Inadequacy of Credit Enhancement" herein.
The weighted average life and yield to maturity of each Class of
Notes will also be influenced in varying degrees by the amount of Excess
Cashflow generated by the Home Loans and applied in reduction of the Class
Principal Balances of such Notes. The level of Excess Cashflow available on
any Payment Date to be applied in reduction of the Class Principal Balances of
the Notes will be influenced by, among other factors:
(1) the applicable overcollateralization amount at such time (i.e.,
the extent to which interest on the Home Loans is accruing on a higher
principal balance than the Class Principal Balance of the Notes),
(2) the delinquency and default experience of the Home Loans, and
(3) the provisions of the Sale and Servicing Agreement that permit
any principal to be distributed to the Certificates (as provided in the Sale
and Servicing Agreement) when required overcollateralization levels have been
met.
To the extent that greater amounts of Excess Cashflow are distributed
in reduction of the Class Principal Balance of a Class of Class A Notes, the
weighted average life thereof can be expected to shorten. No assurance,
however, can be given as to the amount of Excess Cashflow distributed at any
time or in the aggregate. See "Description of the Notes--Overcollateralization
Provisions" herein.
The rate and timing of principal payments on the Home Loans will be
influenced by a variety of economic, geographic, social and other factors.
These factors may include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity, if any, in the mortgaged properties,
servicing decisions, homeowner mobility, the existence and enforceability of
"due-on-sale" clauses, seasoning of loans, market interest rates for similar
types of loans and the availability of funds for such loans. Substantially all
of the Home Loans contain due-on-sale provisions and the Servicer intends to
enforce such provisions unless (i) the Servicer, in a manner consistent with
its servicing practices, permits the purchaser of the related Mortgaged
Property to assume the Home Loan, or (ii) such enforcement is not permitted by
applicable law. In certain cases, the Servicer may, in a manner consistent
with its servicing practices, simply release its lien on the existing
collateral, leaving the related Home Loan unsecured. In such event, the
Servicer will generally require the borrower to make a partial prepayment in
reduction of the principal balance of the Home Loan to the extent that the
borrower has received proceeds from the sale of the prior residence that will
not be applied to the purchase of the new residence.
Payments of principal at a faster rate than anticipated will decrease
the yield on Notes purchased at a premium; payments of principal at a slower
rate than anticipated will decrease the yield on Notes purchased at a
discount. The effect on an investor's yield due to payments of principal
occurring at a rate that is faster (or slower) than the rate anticipated by
the investor during any period following the issuance of the Notes will not be
entirely offset by a subsequent like reduction (or increase) in the rate of
payments of principal during any subsequent period.
The yield to maturity of the Notes will depend, in part, on whether,
to what extent, and the timing with respect to which, any Extra Principal
Payment Amount is used to accelerate payments of principal on these Notes or
the Required Overcollateralization Amount is reduced. The amount of the Extra
Principal Payment Amount paid to the Class A or Class M Notes on any Payment
Date will be affected by, among other things, delinquencies on the Home Loans,
and the level of LIBOR, to the extent the Class A-I-1 or Class A-III Notes are
outstanding. See "Description of the Notes - Payments" in this prospectus
supplement.
The rate of delinquencies and defaults on the Home Loans and of
recoveries, if any, on defaulted Home Loans and foreclosed properties will
affect the rate and timing of principal payments on the Home Loans, and,
accordingly, the weighted average lives of the Notes, and could cause a delay
in the payment of principal to the holders of Notes. Certain factors may
influence delinquencies and defaults, including origination and underwriting
standards, loan-to-value ratios and delinquency history. In general, defaults
on Home Loans are expected to occur with greater frequency in their early
years, although little data is available with respect to the rate of default
on similar types of Home Loans. The rate of default on Home Loans with high
loan-to-value ratios, or on Home Loans secured by junior liens, may be higher
than that of Home Loans with lower loan-to-value ratios or secured by first
liens on comparable properties. In addition, the rate and timing of
prepayments, defaults and liquidations on the Home Loans will be affected by
the general economic condition of the area in which the related Mortgaged
Properties are located or the related borrower is residing. See "The Home Loan
Pool" herein. The risk of delinquencies and losses is greater and voluntary
principal prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values.
Although certain data have been published with respect to the
historical prepayment experience of certain residential mortgage loans, such
mortgage loans differ in material respects from the Home Loans and such data
may not be reflective of conditions applicable to the Home Loans. No
significant historical prepayment data is generally available with respect to
the types of Home Loans included in the Home Loan Pool or similar types of
loans, and there can be no assurance that the Home Loans will achieve or fail
to achieve any particular rate of principal prepayment. A number of factors
suggest that the prepayment experience of the Home Loan Pool may be
significantly different from that of a pool of conventional first-lien, single
family mortgage loans with equivalent interest rates and maturities. One such
factor is that the principal balance of the average Home Loan is smaller than
that of the average conventional first-lien mortgage loan. A smaller principal
balance may be easier for a borrower to prepay than a larger balance and,
therefore, a higher prepayment rate may result for the Home Loan Pool than for
a pool of first-lien mortgage loans, irrespective of the relative average
interest rates and the general interest rate environment. In addition, in
order to refinance a first-lien mortgage loan, the borrower must generally
repay any junior liens. However, a small principal balance may make
refinancing a Home Loan at a lower interest rate less attractive to the
borrower as the perceived impact to the borrower of lower interest rates on
the size of the monthly payment may not be significant. Other factors that
might be expected to affect the prepayment rate of the Home Loan Pool include
the relative creditworthiness of the borrowers, the amounts of and interest
rates on the underlying senior mortgage loans, and the tendency of borrowers
to use real property mortgage loans as long-term financing for home purchase
and junior liens as shorter-term financing for a variety of purposes, which
may include the direct or indirect financing of home improvement, education
expenses, debt consolidation, purchases of consumer durables such as
automobiles, appliances and furnishings and other consumer purposes.
Furthermore, because at origination most of the Home Loans had combined
loan-to-value ratios that approached or exceeded 100%, the related borrowers
may have less opportunity to refinance the indebtedness secured by the related
Mortgaged Properties, including the Home Loans, and a lower prepayment rate
may result for the Home Loan Pool than for a pool of mortgage (including first
or junior lien) loans that have combined loan-to-value ratios less than 100%.
However, the availability of credit from an increased number of lenders making
loans similar to the Home Loans may result in faster rates of prepayment of
the Home Loans than would otherwise be the case. In addition, any increase in
the market values of Mortgaged Properties, and the resulting decrease in the
combined loan-to-value ratios of the related Home Loans, may make alternative
sources of financing available to the related borrowers at lower interest
rates.
Reinvestment Risk
During periods of falling interest rates, Noteholders may receive an
increased amount of principal payments at a time when such holders may be
unable to reinvest such payments in investments having a yield and rating
comparable to the Notes. Conversely, during periods of rising interest rates,
Noteholders are likely to receive a decreased amount of principal payments at
a time when such holders may have an opportunity to reinvest such payments in
investments having a yield and rating comparable to the Notes.
Maturity Dates
The "Final Scheduled Maturity Date" of each Class of Notes is set
forth in the table at the beginning of the summary. The Final Scheduled
Maturity Date for the Class A-I-1 Notes, Class A-I-2 Notes and Class A-I-3
Notes was determined by calculating the final Payment Date with respect to
each such Class on the basis of the Modeling Assumptions and an assumed
constant prepayment rate of 0% of the Prepayment Assumption (as defined
herein), and no required overcollateralization. The Final Scheduled Maturity
Date for each other Class of Notes is February 15, 2031. The actual maturity
of any Class of Notes may be significantly earlier than the applicable Final
Scheduled Maturity Date. The "Final Stated Maturity Date" of each Class of
Notes is February 15, 2031.
Weighted Average Lives
Generally, greater than anticipated prepayments of principal will
increase the yield on Notes purchased at a price less than par. Generally,
greater than anticipated prepayments of principal will decrease the yield on
Notes purchased at a price greater than par. The effect on an investor's yield
due to principal payments on the Home Loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the Notes will not be entirely offset by
a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of the Notes will also be affected by the amount
and timing of delinquencies and defaults on the Home Loans and the recoveries,
if any, on Home Loans and foreclosed properties.
The following information illustrates the effect of prepayments of
the Home Loans on the weighted average lives of the Notes under certain stated
assumptions and is not a prediction of the prepayment rate that might actually
be experienced on the Home Loans. Weighted average life refers to the average
amount of time that will elapse from the date of delivery of a security until
each dollar of principal of such security will be repaid to the investor. The
weighted average lives of the Notes will be influenced by the rate at which
principal of the Home Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
unscheduled reductions of principal, including without limitation those
resulting from full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions, substitutions
and repurchases by or on behalf of the Originator).
Prepayments on loans such as the Home Loans are commonly measured
relative to a prepayment standard or model. The model used in this Prospectus
Supplement (the "Prepayment Assumption") represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of
the pool of loans for the life of such loans. A 100% Prepayment Assumption
assumes a constant prepayment rate ("CPR") of 0.0% per annum of the
outstanding principal balance of such loans in the first month of the life of
the loans and an additional approximately 2.181818% (expressed as a percentage
per annum) in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter during the life of the loans, a CPR
of 24% per annum each month is assumed. As used in the table below, 0%
Prepayment Assumption assumes prepayment rates equal to 0% of the Prepayment
Assumption (i.e., no prepayments), 100% Prepayment Assumption assumes
prepayment rates equal to 100% of the Prepayment Assumption, and so forth. The
Prepayment Assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of loans, including the Home Loans. The Depositor does not make any
representations about the appropriateness of the Prepayment Assumption or the
CPR model.
Modeling Assumptions. For purposes of preparing the tables below, the
actual characteristics of the Home Loans as of the Cut-Off Date have been used
and the following assumptions (the "Modeling Assumptions") have been made: (i)
all scheduled payments on the Home Loans are timely received on the first day
of each month, commencing February 1, 2001; (ii) there are no defaults, losses
or delinquencies on the Home Loans; (iii) the Home Loans prepay monthly at the
respective specified constant annual percentages of CPR specified in the
table; (iv) the Closing Date is March 9, 2001; (v) all principal prepayments
represent prepayments in full of the Home Loans and include 30 days of
interest thereon; (vi) there are no repurchases of or substitutions for the
Home Loans; (vii) except as indicated with respect to the weighted average
lives, the clean-up call is not exercised; (viii) in the case of the
adjustable rate mortgage loan, each mortgage loan bears interest at the
applicable current mortgage rate specified in the table below until the next
applicable interest adjustment date and thereafter bears interest at the sum
of the applicable index and margin specified in the table below; (ix) none of
the indices on the mortgage loans are converted into a new index; (x) no early
redemption of the Notes is effected (except in the case of "Weighted Average
Life with Optional Redemption"); (xi) cash distributions are received by the
Noteholders on the 15th day of each month, commencing in March 2001;(xii) the
aggregate fees payable by the Trust, exclusive of the premium on the Policy,
equal 0.80% per annum; and (xiii) the Home Loans have the approximate
characteristics described below.
GROUP I
Original Original Remaining
Gross Amortization Term to Term to
Principal Loan Term Maturity Maturity
Balance Rate (Months) (Months) (Months)
$ 1,590,964.59 13.292% 360 178 163
$20,130,924.02 14.093% 114 114 100
$56,477,799.15 14.149% 179 179 159
$70,078,244.13 14.947% 239 239 226
$88,409,173.76 13.321% 300 300 289
GROUP II
Original Original Remaining
Gross Amortization Term to Term to
Principal Loan Term Maturity Maturity
Balance Rate (Months) (Months) (Months)
$ 358,604.06 13.729% 360 207 200
$ 46,536,102.69 16.609% 110 110 97
$ 66,847,763.37 16.625% 179 179 169
$114,441,335.89 17.475% 239 239 230
$ 88,061,780.40 16.040% 300 300 291
GROUP III
Original Original Remaining
Gross Amortization Term to Term to
Principal Loan Term Maturity Maturity Gross
Balance Rate (Months) (Months) (Months) Margin Index
$15,948,830.26 18.530% 180 180 173 9.598% PRIME
In addition, it is assumed that the following indices have the
following per annum values:
One Month LIBOR....................................... 5.2925%
Prime Rate............................................ 8.5000%
The tables on the following pages indicate the percentage of the Original
Class Principal Balance of each Class of Notes that would be outstanding at
each of the dates shown at the specified percentages of the Prepayment
Assumption and the corresponding weighted average life of each Class of Notes.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Home
Loans). There are discrepancies between the characteristics of the actual Home
Loans and the characteristics of the Home Loans assumed in preparing the
tables. Any such discrepancy may have an effect upon the percentages of Class
Principal Balances outstanding and weighted average lives of the Notes set
forth in the tables. In addition, since the actual Home Loans have
characteristics which differ from those assumed in preparing the tables set
forth below, the distributions of principal on the Notes may be made earlier
or later than as indicated in the tables.
The weighted average life of a Class of Notes is determined by (a)
multiplying the amount of each payment of principal thereof by the number of
years from the date of issuance to the related Payment Date, (b) summing the
results and (c) dividing the sum by the aggregate payments of principal
referred to in clause (a) and rounding to one decimal place.
Percent of Initial Class Principal Balance Outstanding at the Following
Percentages of the Prepayment Assumption
Class A-I-1 Class A-I-2
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ------------ -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 15, 2002...... 85 64 54 44 35 25 85 64 54 44 35 25
February 15, 2003...... 81 43 26 10 0 0 81 43 26 10 0 0
February 15, 2004...... 77 25 3 0 0 0 77 25 3 0 0 0
February 15, 2005...... 72 8 0 0 0 0 72 8 0 0 0 0
February 15, 2006...... 66 0 0 0 0 0 66 0 0 0 0 0
February 15, 2007...... 59 0 0 0 0 0 59 0 0 0 0 0
February 15, 2008...... 51 0 0 0 0 0 51 0 0 0 0 0
February 15, 2009...... 42 0 0 0 0 0 42 0 0 0 0 0
February 15, 2010...... 36 0 0 0 0 0 36 0 0 0 0 0
February 15, 2011...... 30 0 0 0 0 0 30 0 0 0 0 0
February 15, 2012...... 23 0 0 0 0 0 23 0 0 0 0 0
February 15, 2013...... 14 0 0 0 0 0 14 0 0 0 0 0
February 15, 2014...... 4 0 0 0 0 0 4 0 0 0 0 0
February 15, 2015...... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
In Years............... 6.9 1.9 1.3 1.0 0.8 0.6 6.9 1.9 1.3 1.0 0.8 0.6
Weighted Average Life
to Call In Years....... 6.9 1.9 1.3 1.0 0.8 0.6 6.9 1.9 1.3 1.0 0.8 0.6
The weighted average life to maturity of a Note is determined by (i)
multiplying the net reduction, if any, of the Class Principal Balance of the
Note by the number of years from the date of issuance of the Note to the
related payment date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reduction of the Class Principal Balance of the Note
described in (i) above.
This table has been prepared based on the Modeling Assumptions, which may
differ from the actual characteristics and performance of the Home Loans. This
table should be read in conjunction with these structuring assumptions.
* Indicates a number that is greater than zero but less than 0.5%.
Percent of Initial Class Principal Balance Outstanding at the
Following Percentages of the Prepayment Assumption
Class A-I-3 Class A-I-4
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ------------ -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 15, 2002...... 100 100 100 100 100 100 100 100 100 100 100 100
February 15, 2003...... 100 100 100 100 78 13 100 100 100 100 100 100
February 15, 2004...... 100 100 100 27 0 0 100 100 100 100 64 18
February 15, 2005...... 100 100 60 9 0 0 100 100 100 100 64 18
February 15, 2006...... 100 84 19 0 0 0 100 100 100 78 53 18
February 15, 2007...... 100 48 0 0 0 0 100 100 89 58 36 18
February 15, 2008...... 100 17 0 0 0 0 100 100 70 42 25 14
February 15, 2009...... 100 0 0 0 0 0 100 92 54 30 17 10
February 15, 2010...... 100 0 0 0 0 0 100 78 43 23 12 7
February 15, 2011...... 100 0 0 0 0 0 100 66 34 17 9 3
February 15, 2012...... 100 0 0 0 0 0 100 55 26 13 7 0
February 15, 2013...... 100 0 0 0 0 0 100 45 21 10 3 0
February 15, 2014...... 100 0 0 0 0 0 100 36 16 7 0 0
February 15, 2015...... 87 0 0 0 0 0 100 28 12 5 0 0
February 15, 2016...... 67 0 0 0 0 0 100 23 9 2 0 0
February 15, 2017...... 45 0 0 0 0 0 100 18 7 0 0 0
February 15, 2018...... 19 0 0 0 0 0 100 14 6 0 0 0
February 15, 2019...... 0 0 0 0 0 0 91 11 2 0 0 0
February 15, 2020...... 0 0 0 0 0 0 65 7 0 0 0 0
February 15, 2021...... 0 0 0 0 0 0 54 6 0 0 0 0
February 15, 2022...... 0 0 0 0 0 0 45 3 0 0 0 0
February 15, 2023...... 0 0 0 0 0 0 35 * 0 0 0 0
February 15, 2024...... 0 0 0 0 0 0 23 0 0 0 0 0
February 15, 2025...... 0 0 0 0 0 0 3 0 0 0 0 0
February 15,. 2026..... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
to Maturity In Years... 15.7 6.0 4.2 3.0 2.2 1.8 20.7 12.3 9.4 7.3 5.5 3.6
Weighted Average
Life to Call In
Years.................. 15.7 6.0 4.2 3.0 2.2 1.8 20.1 11.0 8.1 6.2 4.6 2.9
The weighted average life to maturity of a Note is determined by (i)
multiplying the net reduction, if any, of the Class Principal Balance of the
Note by the number of years from the date of issuance of the Note to the
related payment date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reduction of the Class Principal Balance of the Note
described in (i) above.
This table has been prepared based on the Modeling Assumptions, which may
differ from the actual characteristics and performance of the Home Loans. This
table should be read in conjunction with these structuring assumptions.
* Indicates a number that is greater than zero but less than 0.5%.
Percent of Initial Class Principal Balance Outstanding at the
Following Percentages of the Prepayment Assumption
Class A-II Class A-III
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ------------ -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial Percentage...... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 15, 2002....... 89 76 69 62 55 49 91 81 75 70 64 59
February 15, 2003....... 87 61 50 39 29 20 90 69 59 51 42 35
February 15, 2004....... 84 49 35 22 11 2 87 58 46 36 27 20
February 15, 2005....... 81 38 27 20 11 2 85 49 37 27 20 14
February 15, 2006....... 77 30 21 14 9 2 81 41 29 20 13 9
February 15, 2007....... 73 26 16 10 6 2 78 34 23 14 9 5
February 15, 2008....... 68 21 13 7 4 2 73 29 18 10 6 3
February 15, 2009....... 63 18 10 5 2 1 67 23 13 7 4 2
February 15, 2010....... 58 14 7 3 1 * 61 19 10 5 2 1
February 15, 2011....... 52 12 6 2 1 0 53 15 7 3 1 *
February 15, 2012....... 47 10 4 1 * 0 43 11 5 2 1 0
February 15, 2013....... 40 8 3 1 0 0 32 7 3 1 * 0
February 15, 2014....... 32 6 2 * 0 0 18 4 1 * 0 0
February 15, 2015....... 29 5 1 0 0 0 7 1 0 0 0 0
February 15, 2016....... 26 4 1 0 0 0 0 0 0 0 0 0
February 15, 2017....... 23 3 * 0 0 0 0 0 0 0 0 0
February 15, 2018....... 20 2 * 0 0 0 0 0 0 0 0 0
February 15, 2019....... 16 1 0 0 0 0 0 0 0 0 0 0
February 15, 2020....... 11 1 0 0 0 0 0 0 0 0 0 0
February 15, 2021....... 10 * 0 0 0 0 0 0 0 0 0 0
February 15, 2022....... 7 0 0 0 0 0 0 0 0 0 0 0
February 15, 2023....... 5 0 0 0 0 0 0 0 0 0 0 0
February 15, 2024....... 2 0 0 0 0 0 0 0 0 0 0 0
February 15, 2025....... 0 0 0 0 0 0 0 0 0 0 0 0
February 15,. 2026...... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
In Years................ 10.5 4.3 3.1 2.3 1.8 1.3 9.1 4.9 3.7 2.9 2.4 1.9
Weighted Average
Life to Call
In Years................ 10.4 4.1 2.9 2.2 1.6 1.2 9.1 4.8 3.6 2.7 2.2 1.8
The weighted average life to maturity of a Note is determined by (i)
multiplying the net reduction, if any, of the Class Principal Balance of the
Note by the number of years from the date of issuance of the Note to the
related payment date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reduction of the Class Principal Balance of the Note
described in (i) above.
This table has been prepared based on the Modeling Assumptions, which may
differ from the actual characteristics and performance of the Home Loans. This
table should be read in conjunction with these structuring assumptions.
* Indicates a number that is greater than zero but less than 0.5%.
Percent of Initial Class Principal Balance Outstanding at the
Following Percentages of the Prepayment Assumption
Class M-1 Class M-2
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- ------------ -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial Percentage..... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
February 15, 2002...... 100 100 100 100 100 100 100 100 100 100 100 100
February 15, 2003...... 100 100 100 100 100 100 100 100 100 100 100 100
February 15, 2004...... 100 100 100 100 100 100 100 100 100 100 100 100
February 15, 2005...... 100 100 82 60 70 100 100 100 82 60 44 41
February 15, 2006...... 100 92 65 44 29 53 100 92 65 44 29 19
February 15, 2007...... 100 77 51 32 20 20 100 77 51 32 20 12
February 15, 2008...... 100 65 39 23 13 7 100 65 39 23 13 7
February 15, 2009...... 100 53 30 16 9 4 100 53 30 16 9 2
February 15, 2010...... 100 44 24 12 6 1 100 44 24 12 6 0
February 15, 2011...... 100 37 18 9 4 0 100 37 18 9 1 0
February 15, 2012...... 100 30 14 6 * 0 100 30 14 6 0 0
February 15, 2013...... 100 24 10 4 0 0 100 24 10 2 0 0
February 15, 2014...... 100 19 8 2 0 0 100 19 8 0 0 0
February 15, 2015...... 88 15 5 * 0 0 88 15 5 0 0 0
February 15, 2016...... 79 12 4 * 0 0 79 12 2 0 0 0
February 15, 2017...... 70 9 2 0 0 0 70 9 * 0 0 0
February 15, 2018...... 60 7 0 0 0 0 60 7 * 0 0 0
February 15, 2019...... 48 5 0 0 0 0 48 4 * 0 0 0
February 15, 2020...... 35 2 0 0 0 0 35 0 0 0 0 0
February 15, 2021...... 29 0 0 0 0 0 29 0 0 0 0 0
February 15, 2022...... 23 0 0 0 0 0 23 0 0 0 0 0
February 15, 2023...... 17 0 0 0 0 0 17 0 0 0 0 0
February 15, 2024...... 10 0 0 0 0 0 10 0 0 0 0 0
February 15, 2025..... . 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to Maturity
In Years............... 18.1 9.4 7.0 5.6 5.0 5.3 18.1 9.4 7.0 5.5 4.7 4.4
Weighted Average
Life to Call
In Years............... 17.8 8.8 6.4 5.1 4.6 4.7 17.8 8.8 6.4 5.0 4.3 4.1
The weighted average life to maturity of a Note is determined by (i)
multiplying the net reduction, if any, of the Class Principal Balance of the
Note by the number of years from the date of issuance of the Note to the
related payment date, (ii) adding the results, and (iii) dividing the sum by
the aggregate of the net reduction of the Class Principal Balance of the Note
described in (i) above.
This table has been prepared based on the Modeling Assumptions, which may
differ from the actual characteristics and performance of the Home Loans. This
table should be read in conjunction with these structuring assumptions.
* Indicates a number that is greater than zero but less than 0.5%.
The paydown scenarios for the Notes set forth in the foregoing tables
are subject to significant uncertainties and contingencies (including those
discussed above under "Prepayment and Yield Considerations"). As a result,
there can be no assurance that any of the foregoing paydown scenarios and the
Modeling Assumptions on which they were made will prove to resemble the actual
performance of the Home Loans and the Notes, or that the actual weighted
average lives of the Notes will not vary substantially from those set forth in
the foregoing tables, which variations may be shorter or longer, and which
variations may be greater with respect to later years. Furthermore, it is not
expected that the Home Loans will prepay at a constant rate or that all of the
Home Loans will prepay at the same rate. Moreover, the Home Loans actually
included in the Home Loan Pool, the payment experience of such Home Loans and
certain other factors affecting the payments on the Notes will not conform to
the Modeling Assumptions made in preparing the above tables. In fact, the
characteristics and payment experience of the Home Loans will differ in many
respects from such Modeling Assumptions. See "The Home Loan Pool" herein. To
the extent that the Home Loans actually included in the Home Loan Pool have
characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Notes are likely to have weighted average
lives that are shorter or longer than those set forth in the foregoing tables.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
In the opinion of Brown & Wood LLP, for federal income tax purposes,
the Notes will be characterized as debt, and the Trust will not be a business
entity classified as a corporation or taxable mortgage pool (or a publicly
traded partnership) treated as a corporation. Each Noteholder, by the
acceptance of a Note, will agree to treat the Notes as indebtedness for
federal income tax purposes. See "Certain Federal Income Tax Consequences" in
the Prospectus for additional information concerning the application of
federal income tax laws to the Trust and the Notes.
Certain Classes of Notes may be treated as having been issued with
original issue discount. As a result, holders of such Notes may be required to
recognize income with respect to such Notes in advance of the receipt of cash
attributable to that income.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA") and the prohibited transaction
provisions of ERISA and Section 4975 of the Internal Revenue Code of 1986 (the
"Code") can limit investments by certain pension, employee benefit and other
plans and other individual retirement accounts and arrangements (collectively,
"plans"). Plans should be able to purchase investments like the notes so long
as they are treated as debt under applicable state law and have no
"substantial equity features." Except as described below, the Notes may be
purchased by, on behalf of or with plan assets of, a plan. A fiduciary of a
Plan must determine that the purchase of a Note is consistent with its
fiduciary duties under ERISA and does not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code.
Notwithstanding the foregoing, prohibited transactions within the
meaning of ERISA or Section 4975 of the Code may arise if Notes are acquired
by a Plan with respect to which the Issuer, the Owner Trustee, the Indenture
Trustee, the Servicer, the Backup Servicer, the Depositor, either underwriter
or any of their respective affiliates, is a party in interest (as defined in
ERISA) or a disqualified person (as defined in the Code). Accordingly, the
Notes may not be purchased with the assets of a Plan if the Originator, the
Transferor, the Servicer, the Indenture Trustee, the Owner Trustee or any of
their affiliates (a) has investment or administrative discretion with respect
to such plan assets; (b) has authority or responsibility to give, or regularly
gives, investment advice with respect to such plan assets, for a fee and
pursuant to an agreement or understanding that such advice (i) will serve as a
primary basis for investment decisions with respect to such plan assets and
(ii) will be based on the particular investment needs for such plan; or (c) is
an employer maintaining or contributing to such plan. Similarly, prohibited
transactions may arise if equity interests in the Trust are acquired by a
person or entity which is a party in interest or disqualified person with
respect to a Plan which acquires or holds a Note. Certain exemptions from the
prohibited transaction provisions of ERISA and Section 4975 of the Code may be
applicable, however, depending in part on the type of plan fiduciary making
the decision to acquire a Note or equity interest and the circumstances under
which such decision is made. There can be no assurance that any of these class
exemptions or any other exemption will be available with respect to any
particular transaction involving the Notes or other equity interests in the
Trust. In this regard, prospective investors should be aware that Green Tree
Finance Corp.-Two, an affiliate of the Originator, is expected to hold 100% of
the Class R-2 Certificates on the closing date and Bear, Stearns & Co. Inc.,
an affiliate of the Backup Servicer, is expected to hold 100% of the Class B
Certificates on the closing date.
Each purchaser or transferee of a Note will be required to represent
and warrant (or will be deemed to represent and warrant) that either (a) it is
not a plan, an entity using the assets of or acting on behalf of a plan, or an
entity whose underlying assets are deemed to include plan assets of any such
plan, or (b) its acquisition and holding of such Note will not result in a
non-exempt prohibited transaction under ERISA or Section 4975 of the Code.
For additional information regarding treatment of the Notes under
ERISA, See "ERISA Considerations" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting
Agreement (the "Underwriting Agreement"), the Depositor has agreed to sell to
Bear, Stearns & Co. Inc. and Lehman Brothers Inc. (the "Underwriters"), and
the Underwriters have severally agreed to purchase, the principal amount of
Notes set forth opposite its respective name in the table below:
Class of Notes Bear, Stearns & Co. Lehman Brothers Inc.
Inc.
Class A-I-1................ $44,974,000 $44,974,000
Class A-I-2................ 44,974,000 44,974,000
Class A-I-3................ 18,723,000 18,722,000
Class A-I-4................ 26,031,000 26,031,000
Class A-II................. 100,000,000 100,000,000
Class A-III................ 8,054,000 8,054,000
Class M-1.................. 43,093,000 0
Class M-2.................. 28,728,000 0
Total.................. $314,577,000 $242,755,000
Bear, Stearns & Co. Inc. and Lehman Brothers Inc. may distribute
their respective Notes to the public from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the depositor from the sale of the Notes will be
approximately 99.52507% of the principal amount of the Notes before deducting
expenses. The Underwriters may effect such transactions by selling the Notes
to or through dealers, and such dealers may receive compensation in the form
of underwriting discounts, concessions or commissions from the Underwriters.
In connection with the sale of the Notes, each Underwriter may be deemed to
have received compensation from the Depositor in the form of underwriting
compensation. The Underwriters and any dealers that participate with the
Underwriters in the distribution of their respective Notes may be deemed to be
underwriters and any commissions received by them and any profit on the resale
of the Notes positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended (the "Act").
The Depositor has been advised by each Underwriter that it presently
intends to make a market in the Note underwritten by it; however, it is not
obligated to do so, any market-making may be discontinued at any time, and
there can be no assurance that an active public market for the Notes will
develop or, if it does develop, that it will continue.
The Depositor, the Transferor and the Backup Servicer are affiliates
of Bear, Stearns & Co. Inc.
The Underwriting Agreement provides that the Depositor and the
Originator will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Act.
LEGAL INVESTMENT MATTERS
The Notes will not constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest in "mortgage related securities"
may not be legally authorized to invest in the Notes.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Notes or to purchase
Notes representing more than a specified percentage of the investor's assets.
Investors should consult their own legal advisors in determining whether and
to what extent the Notes constitute legal investments for such investors.
RATINGS
It is a condition to the issuance of the Notes that (i) the Class A
Notes be rated "AAA" by each of Fitch, Inc. ("Fitch") and Standard and Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P") and
"Aaa" by Moody's Investors Service, Inc. ("Moody's", and together with Fitch
and S&P, the "Rating Agencies"), (ii) the Class M-1 Notes be rated "A" by each
of Fitch and S&P and "A2" by Moody's and (iii) the Class M-2 Notes be rated
"BBB" by each of Fitch and S&P and "Baa2" by Moody's.
The ratings on the Notes address the likelihood of the receipt by
Noteholders of all payments on the Home Loans to which they are entitled. The
ratings on the Notes also address the structural, legal and issuer-related
aspects associated with the Notes, including the nature of the Home Loans. In
general, the ratings on the Notes address credit risk and not prepayment risk.
The ratings on the Notes do not represent any assessment of the likelihood
that principal prepayments of the Home Loans will be made by borrowers or the
degree to which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the Notes do not
address the possibility that Noteholders might suffer a lower than anticipated
yield in the event of principal payments on the Notes resulting from rapid
prepayments of the Home Loans, or in the event that the Trust is terminated
prior to the applicable Maturity Dates of the Notes. In addition, the ratings
on the Class A-I-1 Notes and the Class A-III Notes do not address the
likelihood or frequency of payment of any Basis Risk Carryover Shortfall.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to any of the Notes by the Rating Agencies are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to such Notes.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries, as of December 31, 1999 and 1998 and for each of the years
in the three-year period ended December 31, 1999 are incorporated by reference
in this prospectus supplement and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference in this prospectus supplement, and upon the
authority of said firm as experts in accounting and auditing.
LEGAL OPINIONS
In addition to the legal opinions described in the Prospectus,
certain legal matters relating to the issuance of the Notes will be passed
upon for the Underwriters, the Depositor, the Transferor and the Backup
Servicer by Brown & Wood LLP, New York, New York. Brown & Wood LLP will also
pass on certain federal income tax matters. Dorsey & Whitney LLP, Minneapolis,
Minnesota, will pass upon certain legal matters on behalf of the Originator
and the Servicer.
INDEX OF TERMS
acceleration..............................................S-72
Administration Agreement..................................S-18
Backup Servicer...........................................S-73
Backup Servicing Fee......................................S-73
Backup Servicing Fee Rate.................................S-73
Book-Entry Notes:.........................................S-58
Certificates..............................................S-57
Class A Notes.............................................S-57
Class A-II Notes..........................................S-57
Class M Notes.............................................S-57
Collection Account........................................S-74
CPR.......................................................S-80
Cut-Off Date Principal Balance............................S-16
Defective Home Loan.......................................S-53
Depositor.................................................S-16
Depository................................................S-58
Determination Date........................................S-60
DTC:......................................................S-58
EMC.......................................................S-51
ERISA......................................................S-6
Events of Default.........................................S-71
Final Scheduled Maturity Date.............................S-79
Final Stated Maturity Date................................S-79
Fitch.....................................................S-88
Global Securities..........................................S-1
Home Loan File............................................S-72
Home Loan Purchase Agreements.............................S-16
Home Loans................................................S-16
Home Protection Act.......................................S-13
Indenture Events of Default...............................S-71
Indenture Trustee Fee.....................................S-74
Indirect Participants.....................................S-58
Initial Call Date.........................................S-71
Modeling Assumptions......................................S-80
Moody's...................................................S-88
Note Owners:..............................................S-58
Note Payment Account......................................S-74
Noteholder:...............................................S-58
Noteholders:..............................................S-58
Notes.....................................................S-57
OC Floor..................................................S-67
Originator..........................................S-16, S-52
Originator Home Loan Purchase Agreement..................S-16
Participants..............................................S-58
Prepayment and Yield Considerations.......................S-86
Prepayment Assumption.....................................S-80
Purchase Price............................................S-53
Rating Agencies...........................................S-88
Record Date...............................................S-57
RTC.......................................................S-51
Rules.....................................................S-58
S&P.......................................................S-88
Sale and Servicing Agreement..............................S-16
Securities................................................S-57
Servicer..................................................S-52
Servicing Advance.........................................S-73
Servicing Compensation....................................S-73
Servicing Fee.............................................S-73
Servicing Fee Rate........................................S-73
SMMEA.....................................................S-87
Transfer and Servicing Agreements...................S-17, S-72
Transferor................................................S-16
Transferor Home Loan Purchase Agreement...................S-16
Trust.....................................................S-16
Trust Agreement...........................................S-57
U.S. Person................................................S-3
Underwriters..............................................S-87
Underwriting Agreement....................................S-87
Weighted Average Life with Optional Redemption............S-80
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Notes
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
Euroclear or Clearstream. The Global Securities will be tradable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Euroclear and Clearstream will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Euroclear or Clearstream and
DTC Participants holding Global Securities will be effected on a
delivery-against-payment basis through the respective depositaries of
Euroclear and Clearstream (in such capacity) and as DTC participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect participants in DTC. As a result, Euroclear and
Clearstrream will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold such positions in accounts as
DTC participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to similar debt issues. Investors'
securities custody accounts will be credited with their holdings against
payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Euroclear
or Clearstream accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payments in
same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading between DTC Participants. Secondary market trading between
DTC participants will be settled using the procedures applicable to similar
issues of book-entry securities in same-day funds.
Trading between Euroclear and/or Clearstream Participants. Secondary
market trading between Euroclear participants or Clearstream participants will
be settled using the procedures applicable to conventional eurobonds in
same-day funds.
Trading between DTC seller and Euroclear or Clearstream purchaser.
When Global Securities are to be transferred from the account of a DTC
participant to the account of a Euroclear participant or a Clearstream
participant, the purchaser will send instructions to Euroclear or Clearstream
through a Euroclear participant or Clearstream participant at least one
business day prior to settlement. Euroclear or Clearstream, as applicable,
will instruct the respective depositary, as the case may be to receive the
Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by such depositary to
the DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Euroclear participant's or Clearstream's
participant's account. The Global Securities credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the Euroclear or
Clearstream cash debit will be valued instead as of the actual settlement
date.
Euroclear participants and Clearstream participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within Euroclear or
Clearstream. Under this approach, they may take on credit exposure to
Euroclear or Clearstream until the Global Securities are credited to their
accounts one day later.
As an alternative, if Euroclear or Clearstream has extended a line of
credit to them, Euroclear participants or Clearstream participants can elect
not to pre-position funds and allow that credit line to be drawn upon the
finance settlement. Under this procedure, Euroclear participants or
Clearstream participants purchasing Global Securities would incur overdraft
charges for one day, assuming they cleared the overdraft when the Global
Securities were credited to their accounts. However, interest on the Global
Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period
may substantially reduce or offset the amount of such overdraft charges,
although this result will depend on each Euroclear participant's or
Clearstream participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC participants can employ their usual procedures for sending Global
Securities to the respective Depositary for the benefit of Euroclear
participants or Clearstream participants. The sale proceeds will be available
to the DTC seller on the settlement date. Thus, to the DTC participant a
cross-market transaction will settle no differently than a trade between two
DTC participants.
Trading between Cedelbank or Euroclear seller and DTC purchaser. Due
to time zone differences in their favor, Euroclear participants and
Clearstream participants may employ their customary procedures for
transactions in which Global Securities are to be transferred by the
respective clearing systems, through their respective Depositary, to a DTC
participant. The seller will send instructions to Cedelbank or Euroclear
through a Euroclear participant or Clearstream participant at least one
business day prior to settlement. In these cases, Euroclear or Clearstream
will instruct their respective Depositary, as appropriate, to deliver the
bonds to the DTC participant's account against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date. The payment will then be
reflected in the account of the Euroclear participant or Clearstream
participant the following day, and receipt of the cash proceeds in the
Euroclear participant's or Clearstream participant's account would be
back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Euroclear participant or
Clearstream participant have a line of credit with its clearing system and
elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the Euroclear
participant's or Clearstream participant's account would instead be valued as
of the actual settlement date. Finally, day traders that use Cedelbank or
Euroclear and that purchase Global Securities from DTC participants for
delivery to Euroclear participants or Clearstream participants should note
that these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
(a) borrowing through Euroclear or Clearstream for one day (until the
purchase side of the day trade is reflected in their Euroclear or
Clearstream accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Euroclear or
Clearstream account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Euroclear
participant or Clearstream participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Euroclear or Clearstream (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally
applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons, unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption of non-U.S. Persons (Form W-8BEN). Beneficial owners of
Notes that are non-U.S. Persons generally can obtain a complete exemption
from the withholding tax by filing a signed Form W-8BEN (Certificate of
Foreign Status). Non-U.S. Persons that are beneficial owners of Notes
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form W-8BEN (Holdership, Exemption or Reduced Rate Certificate).
Form W-8BEN may be filed by the beneficial owner of Notes or such owner's
agent. If the information shown on Form W-8 changes, a new Form W-8BEN
must be filed within 30 days of such change.
Exemption for non-U.S. Person with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with
a U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form W-8ECI (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security or, in the case of a Form W-8BEN or a Form W-8ECI filer,
such owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8BEN
and Form W-8ECI are effective for three calendar years.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States, any State thereof or the District of Columbia, (iii) an estate the
income of which is includible in gross income for United States tax purposes,
regardless of its source, or (iv) a trust if a court within the United States
is able to exercise primary supervision of the administration of the trust and
one or more United States fiduciaries have the authority to control all
substantial decisions of the trust. This summary does not deal with all
aspects of U.S. federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own
tax advisors for specific tax advice concerning their holding and disposing of
the Global Securities.
PROSPECTUS
ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
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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.
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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.
SEPTEMBER 13, 2000
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.
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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.
8
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,
33
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% 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% of the total outstanding principal amount of
the Securities of the Series (or, if only certain Classes are affected by the
amendment, 66% 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, Morgan, Lewis &
Bockius LLP or such other counsel so designated in the Prospectus Supplement,
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
53
interpretations on which this interpretation is based are subject to change,
and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances. This summary focuses primarily upon investors who
will hold Securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code. Prospective
investors may wish to consult their own tax advisers concerning the federal,
state, local and any other tax consequences as relates specifically to such
investors in connection with the purchase, ownership and disposition of the
Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit (a "REMIC") under the
Code; (iii) the Securities represent an ownership interest in some or all of
the assets included in the Trust Fund for a Series; or (iv) an election is made
to treat the Trust Fund relating to a particular Series of Certificates as a
partnership; or (v) an election is made to treat the Trust Fund relating to a
particular Series of Securities as a Financial Asset Securitization Investment
Trust ("FASIT") under the Code. The Prospectus Supplement for each Series of
Securities will specify how the Securities will be treated for federal income
tax purposes and will discuss whether a REMIC election, if any, will be made
with respect to such Series.
As used herein, the term "U.S. Person" means a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States, any state thereof or the
District of Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), an estate whose
income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence, to the extent provided in regulations, certain trusts
in existence on August 20, 1996 and treated as United States persons prior to
such date that elect to continue to be treated as United States persons shall
be considered U.S. Persons as well.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided
in the related Prospectus Supplement, if the Securities are regular interests
in a REMIC ("Regular Interest Securities") or represent interests in a grantor
trust, Tax Counsel is of the opinion that: (i) Securities held by a domestic
building and loan association will constitute "loans... secured by an interest
in real property" within the meaning of Code section 7701(a)(19)(C)(v); and
(ii) Securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code section 856(c)(4)(A) and interest on
Securities will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
section 856(c)(3)(B).
Interest and Acquisition Discount. In the opinion of Tax Counsel,
Regular Interest Securities are generally taxable to Holders in the same manner
as evidences of indebtedness issued by the REMIC. Stated interest on the
Regular Interest Securities will be taxable as ordinary income and taken into
account using the accrual method of accounting, regardless of the Holder's
normal accounting method. Interest (other than original issue discount) on
Securities (other than Regular Interest Securities) that are characterized as
indebtedness for federal income tax purposes will be includible in income by
Holders thereof in accordance with their usual methods of accounting.
Securities characterized as debt for federal
54
income tax purposes and Regular Interest Securities will be referred to
hereinafter collectively as "Debt Securities."
Tax Counsel is of the opinion that Debt Securities that are Compound
Interest Securities will, and certain of the other Debt Securities issued at a
discount may, be issued with "original issue discount" ("OID"). The following
discussion is based in part on the rules governing OID, which are set forth in
Sections 1271-1275 of the Code and the Treasury regulations issued thereunder
on February 2, 1994 and amended on June 11, 1996 (the "OID Regulations"). A
Holder should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities, such as the Debt
Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. In the
opinion of Tax Counsel, a Holder of a Debt Security must include such OID in
gross income as ordinary interest income as it accrues under a method taking
into account an economic accrual of the discount. In general, OID must be
included in income in advance of the receipt of the cash representing that
income. The amount of OID on a Debt Security will be considered to be zero if
it is less than a de minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that Class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular Class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such Class will be treated as
the fair market value of such Class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security Holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
"qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as
described below); provided, that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Debt
Security. The OID Regulations state that interest payments are unconditionally
payable only if a late payment or nonpayment is expected to be penalized or
reasonable remedies exist to compel payment. Certain Debt Securities may
provide for default remedies in the event of late payment or nonpayment of
interest. Although the matter is not free from doubt, the Trustee intends to
treat interest on such Debt Securities as unconditionally payable and as
constituting 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 longer than the interval between
subsequent Distribution Dates, the greater of (i) the interest foregone and
(ii) the excess of the stated principal amount over the issue price will be
included in the stated redemption price at maturity and tested under the de
minimis rule described below. Where the interval between the issue date and the
first Distribution Date on a Debt Security is shorter than the interval between
subsequent Distribution Dates, all of the additional interest 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
55
price at maturity and the Debt Security will generally have OID. Holders of
Debt Securities should consult their own tax advisors to determine the issue
price and stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered
to be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of
the Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Debt Security and the denominator of which is the stated redemption price at
maturity of the Debt Security. Holders generally must report de minimis OID pro
rata as principal payments are received, and such income will be capital gain
if the Debt Security is held as a capital asset. However, accrual method
Holders may elect to accrue all de minimis OID as well as market discount under
a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest
is unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price at
maturity.
The Internal Revenue Service (the "IRS") 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.
56
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events that have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method
is to increase the portions of OID required to be included in income by a
Holder to take into account prepayments with respect to the Loans at a rate
that exceeds the Prepayment Assumption, and to decrease (but not below zero for
any period) the portions of OID required to be included in income by a Holder
of a Pay-Through Security to take into account prepayments with respect to the
Loans at a rate that is slower than the Prepayment Assumption. Although OID
will be reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular
Interest Securities (or other regular interests in a REMIC) in a manner that it
believes to be appropriate, to take account of realized losses on the Loans,
although the OID Regulations do not provide for such adjustments. If the IRS
were to require that OID be accrued without such adjustments, the rate of
accrual of OID for a Class of Regular Interest Securities could increase.
Certain Classes of Regular Interest Securities may represent more than
one Class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the applicable Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to
include OID in gross income, but such a Holder who purchases such Debt Security
for an amount that exceeds its adjusted issue price will be entitled (as will
an initial Holder who pays more than a Debt Security's issue price) to offset
such OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. In the opinion of Tax Counsel,
Holders will be required to report income with respect to the related
Securities under an accrual method without giving effect to delays and
reductions in distributions attributable to a default or delinquency on the
Loans, except possibly to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income (including OID)
reported by a Holder of such a Security in any period could significantly
exceed the amount of cash distributed to such Holder in that period. The Holder
will eventually be allowed a loss (or will be allowed to report a lesser amount
of income) to the extent that the aggregate amount of distributions on the
Securities is reduced as a result of a Loan default. However, the timing and
character of such losses or reductions in income are uncertain and,
accordingly, Holders of Securities should consult their own tax advisors on
this point.
Interest Weighted Securities. It is not clear how income should be
accrued with respect to Regular Interest Securities or Stripped Securities (as
defined under "--Tax Status as a Grantor Trust; General" herein) the payments
on which consist solely or primarily of a specified portion of the interest
57
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 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
58
such Holder during the taxable year such election is made and thereafter, in
which case the interest deferral rule will not apply.
Premium. In the opinion of Tax Counsel, a Holder who purchases a Debt
Security (other than an Interest Weighted Security to the extent described
above) at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the Security at a premium, which
it may elect to amortize as an offset to interest income on such Security (and
not as a separate deduction item) on a constant yield method. Although no
regulations addressing the computation of premium accrual on securities similar
to the Securities have been issued, the legislative history of the 1986 Act
indicates that premium is to be accrued in the same manner as market discount.
Accordingly, it appears that the accrual of premium on a Class of Pay-Through
Securities will be calculated using the prepayment assumption used in pricing
such Class. If a Holder makes an election to amortize premium on a Debt
Security, such election will apply to all taxable debt instruments (including
all REMIC regular interests and all pass-through certificates representing
ownership interests in a trust holding debt obligations) held by the Holder at
the beginning of the taxable year in which the election is made, and to all
taxable debt instruments acquired thereafter by such Holder, and will be
irrevocable without the consent of the IRS. Purchasers who pay a premium for
the Securities should consult their tax advisers regarding the election to
amortize premium and the method to be employed.
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
59
described in Code Section 7701(a)(19)(C)); and (ii) Securities held by a real
estate investment trust will constitute "real estate assets" within the meaning
of Code Section 856(c)(4)(A), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (i) or (ii) above, then a Security will qualify for the tax
treatment described in (i) or (ii) in the proportion that such REMIC assets are
qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of Tax Counsel, all of the expenses
of a REMIC will be taken into account by Holders of the Residual Interest
Securities. In the case of a "single class REMIC," however, the expenses will
be allocated, under Treasury regulations, among the Holders of the Regular
Interest Securities and the Holders of the Residual Interest Securities on a
daily basis in proportion to the relative amounts of income accruing to each
Holder on that day. In the case of a Holder of a Regular Interest Security who
is an individual or a "pass-through interest holder" (including certain
pass-through entities but not including real estate investment trusts), such
expenses will be deductible only to the extent that such expenses, plus other
"miscellaneous itemized deductions" of the Holder, exceed 2% of such Holder's
adjusted gross income. In addition, for taxable years beginning after December
31, 1990, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable
amount (which amount will be adjusted for inflation for taxable years beginning
after 1990) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of
the Regular Interest Security to such a Holder. In general terms, a single
class REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and that is structured
with the principal purpose of avoiding the single class REMIC rules. Unless
otherwise specified in the related Prospectus Supplement, the expenses of the
REMIC will be allocated to Holders of the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of Tax Counsel, a REMIC is not generally subject to
entity-level tax. Rather, the taxable income or net loss of a REMIC is taken
into account by the Holders of residual interests. As described above, the
regular interests are generally taxable as debt of the REMIC. Qualification as
a REMIC requires ongoing compliance with certain conditions. Although a REMIC
is not generally subject to federal income tax, the Code provides that 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", would cause
the Trust not to 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
60
respect to Loans, and servicing fees and other expenses of the REMIC. A Holder
of a Residual Interest Security that is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such Holder's
other miscellaneous itemized deductions for that year, do not exceed two
percent of such Holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). That aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals
originated on or after March 2, 1984, and the market discount provisions apply
to loans originated after July 18, 1984. Subject to possible application of the
de minimis rules, the method of accrual by the REMIC of OID income on such
loans will be equivalent to the method under which Holders of Pay-Through
Securities accrue original issue discount (i.e., under the constant yield
method taking into account the Prepayment Assumption). The REMIC will deduct
OID on the Regular Interest Securities in the same manner that the Holders of
the Regular Interest Securities include such discount in income, but without
regard to the de minimis rules. See "Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant
yield method. Although the law is somewhat unclear regarding recovery of
premium attributable to loans originated on or before such date, it is possible
that such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be
subject to a 100% tax on any net income derived from a "prohibited
transaction." For this purpose, net income will be calculated without taking
into account any losses from prohibited transactions or any deductions
attributable to any prohibited transaction that resulted in a loss. In general,
prohibited transactions include: (i) subject to limited exceptions, the sale or
other disposition of any qualified mortgage transferred to the REMIC; (ii)
subject to a limited exception, the sale or other disposition of a cash flow
investment; (iii) the receipt of any income from assets not permitted to be
held by the REMIC pursuant to the Code; or (iv) the receipt of any fees or
other compensation for services rendered by the REMIC. It is anticipated that a
REMIC will not engage in any prohibited transactions in which it would
recognize a material amount of net income. In addition, subject to a number of
exceptions, a tax is imposed at the rate of 100% on amounts contributed to a
REMIC after the close of the three-month period beginning on the Startup Day.
The Holders of Residual Interest Securities will generally be responsible for
the payment of any such taxes imposed on the REMIC. To the extent not paid by
such Holders or otherwise, however, such taxes will be paid out of the Trust
Fund and will be allocated pro rata to all outstanding Classes of Securities of
such REMIC.
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
61
portion of the taxable income or net loss of the REMIC for such quarter, and by
allocating that amount among the Holders (on such day) of the Residual Interest
Securities in proportion to their respective holdings on such day.
In the opinion of Tax Counsel, the Holder of a Residual Interest
Security must report its proportionate share of the taxable income of the REMIC
whether or not it receives cash distributions from the REMIC attributable to
such income or loss. The reporting of taxable income without corresponding
distributions could occur, for example, in certain REMIC issues in which the
loans held by the REMIC were issued or acquired at a discount, since mortgage
prepayments cause recognition of discount income, while the corresponding
portion of the prepayment could be used in whole or in part to make principal
payments on REMIC Regular Interests issued without any discount or at an
insubstantial discount (if this occurs, it is likely that cash distributions
will exceed taxable income in later years). Taxable income may also be greater
in earlier years of certain REMIC issues as a result of the fact that interest
expense deductions, as a percentage of outstanding principal on REMIC Regular
Interest Securities, will typically increase over time as lower yielding
Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on
the net income of the REMIC, the taxable income derived from a Residual
Interest Security in a given taxable year will not be equal to the taxable
income associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pretax yield. Therefore, the
after-tax yield on the Residual Interest Security may be less than that of such
a bond or instrument.
Limitation on Losses. In the opinion of Tax Counsel, the amount of the
REMIC's net loss that a Holder may take into account currently is limited to
the Holder's adjusted basis at the end of the calendar quarter in which such
loss arises. A Holder's basis in a Residual Interest Security will initially
equal such Holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the Holder, and decreased
(but not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the Holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income of the REMIC
generated by the same REMIC. The ability of Holders of Residual Interest
Securities to deduct net losses may be subject to additional limitations under
the Code, as to which such Holders should consult their tax advisers.
Distributions. In the opinion of Tax Counsel, distributions on a
Residual Interest Security (whether at their scheduled times or as a result of
prepayments) will generally not result in any additional taxable income or loss
to a Holder of a Residual Interest Security. If the amount of such payment
exceeds a Holder's adjusted basis in the Residual Interest Security, however,
the Holder will recognize gain (treated as gain from the sale of the Residual
Interest Security) to the extent of such excess.
Sale or Exchange. In the opinion of Tax Counsel, a Holder of a
Residual Interest Security will recognize gain or loss on the sale or exchange
of a Residual Interest Security equal to the difference, if any, between the
amount realized and such Holder's adjusted basis in the Residual Interest
Security at the time of such sale or exchange. 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 Holder's adjusted basis in the newly
acquired asset.
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Excess Inclusions. In the opinion of Tax Counsel, the portion of the
REMIC taxable income of a Holder of a Residual Interest Security consisting of
"excess inclusion" income may not be offset by other deductions or losses,
including net operating losses, on such Holder's federal income tax return.
Further, if the Holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such Holder's excess inclusion income will be treated as unrelated business
taxable income of such Holder. In addition, under Treasury regulations yet to
be issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Security is owned by a foreign person, excess inclusion
income is subject to tax at a rate of 30%, which may not be reduced by treaty,
is not eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "Tax Treatment of Foreign Investors." The Small
Business Job Protection Act of 1996 has eliminated the special rule permitting
Section 593 institutions ("thrift institutions") to use net operating losses
and other allowable deductions to offset their excess inclusion income from
Residual Interest Securities that have "significant value" within the meaning
of the REMIC Regulations, effective for taxable years beginning after December
31, 1995, except with respect to Residual Interest Securities continuously held
by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect of 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
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applicable Pooling and Servicing Agreement will prohibit Disqualified
Organizations from owning a Residual Interest Security. In addition, no
transfer of a Residual Interest Security will be permitted unless the proposed
transferee shall have furnished to the Trustee an affidavit representing and
warranting that it is neither a Disqualified Organization nor an agent or
nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. Such a purpose exists if the transferor, at
the time of the transfer, either knew or should have known that the transferee
would be unwilling or unable to pay taxes due on its share of the taxable
income of the REMIC. However, a safe harbor exists under which a transferor is
presumed to lack such knowledge provided that two conditions are met: (i) the
transferor conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee and found that the transferee had
historically paid its debts as they became due and found no significant
evidence to indicate that the transferee will not continue to pay its debts as
they become due, and (ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual interest, it may
incur tax liabilities in excess of any cash flows generated by the interest and
that it intends to pay taxes associated with holding the residual interest as
they become due.
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. 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."
Proposed Treasury regulations issued on February 4, 2000 (the "New
Proposed Regulations") would add a third condition to the safe harbor under
which transfers of noneconomic residual interests would not be disregarded for
federal income tax purposes. Under the New Proposed Regulations, a transfer of
a noneconomic residual interest will qualify under this safe harbor only if the
present value of the anticipated tax liabilities associated with holding the
residual interest does not exceed the present value of the sum of (i) any
consideration given to the transferee to acquire the interest, (ii) future
distributions on the interest, and (iii) any anticipated tax savings associated
with holding the interest as the REMIC generates losses. For purposes of this
calculation, the present value generally is calculated using a discount rate
equal to the applicable federal rate. The New Proposed Regulations have a
proposed effective date of February 4, 2000.
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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 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
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market values, determined as of the time of purchase of the Securities. In the
typical case, the Trustee (to the extent necessary to fulfill its reporting
obligations) will treat each Loan as having a fair market value proportional to
the share of the aggregate Principal Balances of all of the Loans that it
represents, since the Securities, unless otherwise specified in the related
Prospectus Supplement, will have a relatively uniform interest rate and other
common characteristics. To the extent that the portion of the purchase price of
a Pass-Through Security allocated to a Loan (other than to a right to receive
any accrued interest thereon and any undistributed principal payments) is less
than or greater than the portion of the Principal Balance of the Loan allocable
to the Security, the interest in the Loan allocable to the Pass-Through
Security will be deemed to have been acquired at a discount or premium,
respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of
a prescribed de minimis amount or a Stripped Security, a Holder of a Security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a Loan could arise, for example, by virtue of the financing
of points by the originator of the Loan, or by virtue of the charging of points
by the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a
Loan will be includible in income, generally in the manner described above,
except that in the case of Pass-Through Securities, market discount is
calculated with respect to the Loans underlying the Certificate, rather than
with respect to the Security. A Holder that acquires an interest in a Loan
originated after July 18, 1984 with more than a de minimis amount of market
discount (generally, the excess of the principal amount of the Loan over the
purchaser's allocable purchase price) will be required to include accrued
market discount in income in the manner set forth above. See "--Taxation of
Debt Securities Market Discount" and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable
to Loans originated on or before July 18, 1984, the Holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. Such treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in
income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to
receive only a portion of the interest payments on the Loans, a right to
receive only principal payments on the Loans, or a right to receive certain
payments of both interest and principal. Certain Stripped Securities ("Ratio
Strip Securities") may represent a right to receive differing 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
66
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
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.
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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 more
than one year and short-term capital gain or loss if the holding period of the
Security is one year or less. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss
realized on the sale or exchange of a Regular Interest Security will be taxable
as ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the Holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such Holder's holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular Interest
Security.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to
Trust Funds as to which a partnership election is made, a Holder, other than a
Holder of a REMIC Residual Security, may, under certain circumstances, be
subject to "backup withholding" at a rate of 31% with respect to distributions
or the proceeds of a sale of certificates to or through brokers that represent
interest or original issue discount on the Securities. This withholding
generally applies if the Holder of a Security (i) fails to furnish the
applicable Trustee with its taxpayer identification number (the "TIN"); (ii)
furnishes the applicable Trustee an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the applicable
Trustee or such Holder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN provided is its correct number and that
the Holder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Holders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below). Holders should consult their tax
advisers as to their qualification for exemption from backup withholding and
the procedure for obtaining the exemption.
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,
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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 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."
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TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
Tax Counsel is of the opinion that a Trust Fund structured as a
partnership will not be an association (or publicly traded partnership) taxable
as a corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates
has been structured as a private placement under an IRS safe harbor, so that
the Trust Fund will not be characterized as a publicly traded partnership
taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, in the opinion of Tax Counsel, the Trust Fund would be subject to
corporate income tax on its taxable income. The Trust Fund's taxable income
would include all its income, possibly reduced by its interest expense on the
Notes. Any such corporate income tax could materially reduce cash available to
make payments on the Notes and distributions on the Certificates, and
Certificateholders could be liable for any such tax that is unpaid by the Trust
Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. In such a circumstance, Tax Counsel is,
except as otherwise provided in the related Prospectus Supplement, of the
opinion that the Notes will be classified as debt for federal income tax
purposes. The discussion below assumes this characterization of the Notes is
correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that
the interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any
given Series of Notes, additional tax considerations with respect to such Notes
will be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except
as discussed in the following paragraph, in the opinion of Tax Counsel, the
Notes will not be considered issued with OID. The stated interest thereon will
be taxable to a Noteholder as ordinary interest income when received or accrued
in accordance with such Noteholder's method of tax accounting. Under the OID
Regulations, a Holder of a Note issued with a de minimis amount of OID must
include such OID in income, on a pro rata basis, as principal payments are made
on the Note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
A Holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis Holder of a Short-Term Note (and certain cash
method Holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis Holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier,
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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 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
71
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, 2000, 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.
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
72
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
In the opinion of Tax Counsel, the tax items of a partnership are
allocable to the partners in accordance with the Code, Treasury regulations and
the partnership agreement (here, the Trust Agreement and related documents).
The Trust Agreement will provide, in general, that the Certificateholders will
be allocated taxable income of the Trust Fund for each month equal to the sum
of (i) the interest that accrues on the Certificates in accordance with their
terms for such month, including interest accruing at the Pass-Through Rate for
such month and interest on amounts previously due on the Certificates but not
yet distributed; (ii) any Trust Fund income attributable to discount on the
Loans that corresponds to any excess of the principal amount of the
Certificates over their initial issue price; (iii) prepayment premium payable
to the Certificateholders for such month; and (iv) any other amounts of income
payable to the Certificateholders for such month. Such allocation will be
reduced by any amortization by the Trust Fund of premium on Loans that
corresponds to any excess of the issue price of Certificates over their
principal amount. All remaining taxable income of the Trust Fund will be
allocated to the Depositor. Based on the economic arrangement of the parties,
in the opinion of Tax Counsel, this approach for allocating Trust Fund income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of
income to be allocated to Certificateholders. Moreover, in the opinion of Tax
Counsel, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire Pass-Through Rate plus the other items
described above even though the Trust Fund might not have sufficient cash to
make current cash distributions of such amount. Thus, cash basis Holders will
in effect be required to report income from the Certificates on the accrual
basis and Certificateholders may become liable for taxes on Trust Fund income
even if they have not received cash from the Trust Fund to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust Fund.
In the opinion of Tax Counsel, all of the taxable income allocated to
a Certificateholder that is a pension, profit sharing or employee benefit plan
or other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
In the opinion of Tax Counsel, an individual taxpayer's share of
expenses of the Trust Fund (including fees to the Servicer but not interest
expense) would be miscellaneous itemized deductions. Such deductions might be
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.)
73
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as
it accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. In the opinion of Tax Counsel, under Section
708 of the Code, the Trust Fund will be deemed to terminate for federal income
tax purposes if 50% or more of the capital and profits interests in the Trust
Fund are sold or exchanged within a 12-month period. Pursuant to final Treasury
regulations issued May 9, 1997 under Section 708 of the Code, if such a
termination occurs, the Trust Fund (the "old partnership") would be deemed to
contribute its assets to a new partnership (the "new partnership") in exchange
for interests in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof,
which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of Tax Counsel,
capital gain or loss will be recognized on a sale of Certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the Certificates sold. A Certificateholder's tax basis in a Certificate will
generally equal the Holder's cost increased by the Holder's share of Trust Fund
income (includible in income) and decreased by any distributions received with
respect to such Certificate. In addition, both the tax basis in the
Certificates and the amount realized on a sale of a Certificate would include
the Holder's share of the Notes and other liabilities of the Trust Fund. A
Holder acquiring Certificates at different prices may be required to maintain a
single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a
separate tax basis in each Certificate for purposes of computing gain or loss
on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's
share of unrecognized accrued market discount on the Loans would generally be
treated as ordinary income to the Holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
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.
74
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust Fund's assets will not be adjusted to reflect
that higher (or lower) basis unless the Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, Certificateholders might be allocated
a greater or lesser amount of Trust Fund income than would be appropriate based
on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable share
of items of Trust Fund income and expense to Holders and the IRS on Schedule
K-1. The Trust Fund will provide the Schedule K-l information to nominees that
fail to provide the Trust Fund with the information statement described below
and such nominees will be required to forward such information to the
beneficial owners of the Certificates. Generally, Holders must file tax returns
that are consistent with the information return filed by the Trust Fund or be
subject to penalties unless the Holder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii) as
to each beneficial owner (a) the name, address and identification number of
such person, (b) whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization or any wholly
owned agency or instrumentality of either of the foregoing, and (c) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust Fund information as to themselves and their ownership of
Certificates. A clearing agency registered under Section 17A of the Exchange
Act is not required to furnish any such information statement to the Trust
Fund. The information referred to above for any calendar year must be furnished
to the Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust Fund with the information
described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear
whether the Trust Fund would be considered to be engaged in a trade or business
in the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is not
expected that the Trust Fund would be engaged in a trade or business in the
United States for such purposes, the Trust Fund will
75
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, 2000, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in
"Certain Federal Income Tax Considerations," potential investors should
consider the state and local income tax consequences of the acquisition,
ownership, and disposition of the Securities. State and local income tax law
may differ substantially from the corresponding federal law, and this
discussion does not purport to describe any aspect of the income tax laws of
any state or locality. Therefore, potential investors should consult their own
tax advisors with respect to the various state and local tax consequences of an
investment in the Securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities ("FASIT
Securities") effective on September 1, 1997. On February 4, 2000, the IRS and
Treasury issued proposed Treasury regulations on FASITs. The regulations
generally would not be effective until final regulations are filed with the
federal register. However, it appears that certain anti-abuse rules would apply
as of February 4, 2000. Investors also should note that the FASIT discussions
76
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.
However, the qualification as a FASIT of any Trust Fund for which a
FASIT election is made (a "FASIT Trust") depends on the trust's ability to
satisfy the requirements of the FASIT provisions on an ongoing basis,
including, without limitation, the requirements of any final Treasury
regulations that may be promulgated in the future under the FASIT provisions or
as a result of any change in applicable law. Thus, no assurances can be made
regarding the qualification as a FASIT of any FASIT Trust for which a FASIT
election is made at any particular time after the issuance of securities by the
FASIT Trust.
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.
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
77
(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."
Anti-Abuse Rule. Under proposed Treasury regulations, the Commissioner
may make appropriate adjustments with regard to the FASIT and any arrangement
or transaction involving the FASIT if a principal purpose of forming or using
the FASIT is to achieve results inconsistent with the intent of the FASIT
provisions and the FASIT regulations. This determination would be based on all
of the facts and circumstances, including a comparison of the purported
business purpose for a transaction and the claimed tax benefits resulting from
the transaction.
Consequences of the Failure of the FASIT Trust to Qualify as a FASIT.
If a FASIT Trust fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, proposed Treasury
regulations provide that its FASIT status would be lost for that year and the
FASIT Trust will be unable to elect FASIT status without the Commissioner's
approval. If FASIT status is lost, under proposed Treasury regulations the
entity classification of the former FASIT (the "New Arrangement") is determined
under general federal income tax principles. The holder of the FASIT Ownership
Security is treated as exchanging the New Arrangement's assets for an amount
equal to their value and gain recognized is treated as gain from a prohibited
transaction that is subject to the 100 percent tax, without exception. Loss, if
any, is disallowed. In addition, the holder of the FASIT Ownership Security
must recognize cancellation of indebtedness income, on a regular interest by
regular interest basis, in an amount equal to the adjusted issue price of each
FASIT Regular Security outstanding immediately before the cessation over its
fair market value. If the holder of the FASIT Ownership Security has a
continuing economic interest in the New Arrangement, the characterization of
this interest is determined under general federal income tax principles.
Holders of FASIT Regular Securities are treated as exchanging their Securities
for interests in the New Arrangement, the classification of which is determined
under general federal income tax principles. Gain is recognized to the extent
the new interest either does not qualify as debt or differs either in kind or
extent. The basis of the interest in the New Arrangement equals the basis in
the FASIT Regular Security increased by any gain recognized on the exchange.
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
78
issue discount or acquired with market discount or premium, interest paid or
accrued on a FASIT Regular Security generally will be treated as ordinary
income to the Holder and a principal payment on such Security will be treated
as a return of capital to the extent that the Holder's basis is allocable to
that payment. FASIT Regular Securities issued with original issue discount or
acquired with market discount or premium generally will treat interest and
principal payments on such Securities in the same manner described for REMIC
Regular Securities. See "Certain Federal Income Tax Considerations--Taxation of
Debt Securities,""--Market Discount," and "--Premium" above. High-Yield
Securities may be held only by fully taxable domestic corporations, other
FASITs, and certain securities dealers. Holders of High-Yield Securities are
subject to limitations on their ability to use current losses or net operating
loss carryforwards or carrybacks to offset any income derived from those
Securities.
If a FASIT Regular Security is sold or exchanged, the Holder generally
will recognize gain or loss upon the sale in the manner described above for
REMIC Regular Securities. See "Certain Federal Income Tax Considerations--Sale
or Exchange." In addition, if a FASIT Regular Security becomes wholly or
partially worthless as a result of Default and Delinquencies of the underlying
assets, the Holder of such Security should be allowed to deduct the loss
sustained (or alternatively be able to report a lesser amount of income). See
"Certain Federal Income Tax Considerations--Taxation of Debt
Instruments--Effects of Default and Delinquencies."
FASIT Regular Securities held by a REIT will qualify as "real estate
assets" within the meaning of section 856(c) (4)(A) of the Code, and interest
on such Securities will be considered Qualifying REIT Interest to the same
extent that REMIC Securities would be so considered. FASIT Regular Securities
held by a Thrift Institution taxed as a "domestic building and loan
association" will represent qualifying assets for purposes of the qualification
requirements set forth in Code Section 7701(a)(19) to the same extent that
REMIC Securities would be so considered. See "Certain Federal Income Tax
Considerations--Taxation of Debt Securities--Status as Real Property Loans." In
addition, FASIT Regular Securities held by a financial institution to which
Section 585 of the Code applies will be treated as evidences of indebtedness
for purposes of Section 582(c)(1) of the Code. FASIT Securities will not
qualify as "Government Securities" for either REIT or RIC qualification
purposes.
Treatment of High-Yield Interests. High-Yield Interests are subject to
special rules regarding the eligibility of Holders of such interests, and the
ability of such Holders to offset income derived from their FASIT Security with
losses. High-Yield Interests may be held only by Eligible Corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an Eligible Corporation) initially acquires a
High-Yield Interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
High-Yield Interest multiplied by the highest corporate income tax rate. In
addition, transfers of High-Yield Interests to disqualified Holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the Holder of the High-Yield Interest.
The Holder of a High-Yield Interest may not use non-FASIT current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from the High-Yield Interest, for either regular federal income tax
purposes or for alternative minimum tax purposes. In addition, the FASIT
provisions contain an anti-abuse rule that imposes corporate income tax on
income derived from a FASIT Regular Security that is held by a pass-through
entity (other than another FASIT) that issues debt or equity securities backed
by the FASIT Regular Security and that have the same features as High-Yield
Interests.
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
79
is treated as ordinary income. In determining that taxable income, the Holder
of a FASIT Ownership Security must determine the amount of interest, original
issue discount, market discount and premium recognized with respect to the
FASIT's assets and the FASIT Regular Securities issued by the FASIT according
to a constant yield methodology and under an accrual method of accounting. In
addition, Holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
Security as are the Holders of High-Yield Interests. See "Certain Federal
Income Tax Considerations--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses
on dispositions of a FASIT Ownership Security generally will be disallowed
where, within six months before or after the disposition, the seller of such
Security acquires any other FASIT Ownership Security or, in the case of a FASIT
holding mortgage assets, any interest in a Taxable Mortgage Pool that is
economically comparable to a FASIT Ownership Security. In addition, if any
security that is sold or contributed to a FASIT by the Holder of the related
FASIT Ownership Security was required to be marked-to-market under Code section
475 by such Holder, then section 475 will continue to apply to such securities,
except that the amount realized under the mark-to-market rules will be a
greater of the securities' value under present law or the securities' value
after applying special valuation rules contained in the FASIT provisions. Those
special valuation rules generally require that the value of debt instruments
that are not traded on an established securities market be determined by
calculating the present value of the reasonably expected payments under the
instrument using a discount rate of 120% of the applicable federal rate,
compounded semiannually.
The Holder of a FASIT Ownership Security will be subject to a tax
equal to 100% of the net income derived by the FASIT from any "prohibited
transactions." Prohibited transactions include (i) the receipt of income
derived from assets that are not permitted assets, (ii) certain dispositions of
permitted assets, (iii) the receipt of any income derived from any loan
originated by a FASIT and (iv) in certain cases, the receipt of income
representing a servicing fee or other compensation. Any Series for which a
FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
Securities will be subject to backup withholding to the same extent Holders of
REMIC Securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, Holders of record of FASIT Securities
generally will be treated in the same manner as Holders of REMIC Securities.
Under proposed Treasury regulations, if a non-U.S. Person holds
(either directly or through a vehicle which itself is not subject to U.S.
federal income tax, such as a partnership or a trust) a FASIT Regular Security
and a "conduit debtor" pays or accrues interest on a debt instrument held by
such FASIT, any interest received or accrued by the non-U.S. Person FASIT
Regular Security holder is treated as received or accrued from the conduit
debtor. The proposed Treasury regulations state that a debtor is a conduit
debtor if the debtor is a U.S. Person or the United States branch of a non-U.S.
Person and the non-U.S. Person regular interest holder is (1) a "10 percent
shareholder" of the debtor, (2) a "controlled foreign corporation" and the
debtor is a related person with respect to the controlled foreign corporation
or (3) related to the debtor. As set forth above, the proposed Treasury
regulations would not be effective until final regulations are filed with the
federal register.
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
80
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 Employee
Retirement Security Act of 1974, as amended ("ERISA"), and Section 4975 of 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 and Section 4975 of the Code impose 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 or to
Section 4975 of the Code and on persons who are fiduciaries with respect to
such Plans. Generally, ERISA applies to investments made by Plans. Among other
things, ERISA requires in general 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 discretionary 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 Sections 401(a) and 501(a) of the
Code, however, is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
On January 5, 2000, the United States Department of Labor (the "DOL")
issued final regulations under Section 401(c) of ERISA describing a safe harbor
for insurers that issued nonguaranteed policies supported by their general
accounts to Plans, and under which an insurer would not be considered an ERISA
fiduciary with respect to its general account by virtue of a Plan's investment
in such a policy. In general, to meet the safe harbor, an insurer must (a)
disclose certain specified information to investing Plan fiduciaries initially
and on an annual basis; (b) allow Plans to terminate or discontinue a policy on
90 days' notice to the insurer, and to elect, without penalty, (i) a lump-sum
payment, or (ii) annual installment payments over a ten-year period, with
interest; and (c) give Plans written notice of "insurer-initiated amendments"
60 days before the amendments take effect.
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 excise taxes 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 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, trusts 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.
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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 certificates of the Trust Fund, because of its activities or the
activities of its respective affiliates, may be deemed to be a Party in
Interest with respect to certain Plans, including but not limited to Plans
sponsored by such holder. In either case, the acquisition or holding of Notes
by or on behalf of such a Plan could be considered to give rise to 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's 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, or if equity participation
by benefit plan investors is not significant. In general, 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 assets of a Plan by reason of
a Plan's investment in the entity.
82
If no exception under the Plan Asset Regulation applies and 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 an
equity interest, an investment in the equity interests by a Plan might be a
prohibited transaction under Sections 406 and 407 of ERISA and subject to an
excise tax under Section 4975 of the Code and may cause transactions undertaken
in the course of operating the Trust Fund to constitute prohibited
transactions, unless a statutory or administrative exemption applies.
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 exempts from the
application of the prohibited transaction rules transactions relating to (1)
the acquisition, sale and holding by Plans of certain certificates representing
an interest in asset-backed pass-through trusts that hold certain types of
receivables or obligations and with respect to which Bear, Stearns & Co. Inc.
is the underwriter, or the manager or co-manager of an underwriting syndicate.
The Exemption sets forth the following general conditions which must
be satisfied before a transaction involving the acquisition, sale and holding
of the certificates or a transaction in connection with the servicing,
operation and management of the trust fund may be eligible for exemptive relief
thereunder:
(1) The acquisition of the certificates by a Plan is on terms
(including the price for such certificates) that are at least as favorable to
the investing Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by other
certificates of the same trust fund;
(3) The certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic rating
categories from any of Duff & Phelps, Inc., Fitch IBCA, Inc., Moody's Investors
Service, Inc. and Standard & Poor's Ratings Group (each, a "rating agency");
(4) The trustee is not an affiliate of the underwriters, the
depositor, the servicers, any borrower whose obligations under one or more
mortgage loans constitute more than 5% of the aggregate unamortized principal
balance of the assets in the trust, or any of their respective affiliates
(together with the trustee, the "Restricted Group");
(5) The sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting or placing such certificates; the
sum of all payments made to and retained by the Depositor pursuant to the sale
of the mortgage loans to the trust represents not more than the fair market
value of such mortgage loans; and the sum of all payments made to and retained
by the servicers represent not more than reasonable compensation for the
servicers' services under the agreements and reimbursement of the servicers'
reasonable expenses in connection therewith; and
(6) The Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire certificates in a trust containing
83
receivables on which such person (or its affiliate) is an obligor, provided
that, among other requirements: (i) such person (or its affiliate) is not an
obligor with respect to more than five percent of the fair market value of the
obligations or receivables contained in the trust; (ii) the Plan is not a plan
with respect to which any member of the Restricted Group is the "plan sponsor"
(as defined in Section 3(16)(B) of ERISA); (iii) in the case of an acquisition
in connection with the initial issuance of certificates, at least fifty percent
of each class of certificates in which Plans have invested is acquired by
persons independent of the Restricted Group and at least fifty percent of the
aggregate interest in the trust fund is acquired by persons independent of the
Restricted Group; (iv) a Plan's investment in certificates of any class does
not exceed twenty-five percent of all of the certificates of that class
outstanding at the time of the acquisition; and (v) immediately after the
acquisition, no more than twenty-five percent of the assets of any Plan with
respect to which such person has discretionary authority or renders investment
advice are invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity.
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
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 "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 "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 a rating agency; provided that the terms and conditions for
determining the eligibility of an obligation may be changed if
such changes receive prior approval either by a majority vote of
the outstanding certificate holders or by a rating agency.
(3) The transfer of such additional obligations to the trust during
the Funding Period must not result in the certificates to be
covered by the Exemption receiving a lower credit rating from a
rating agency upon termination of the 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 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:
84
(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 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.
(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 Funding Limit
for the trust; and
(iv) that the amounts remaining in the pre-funding account at
the end of the 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 the
related prospectus or Prospectus Supplement, the terms and
conditions for eligibility of Additional Obligations.
The DOL has proposed amendments to the Underwriter Exemption (the
"Proposed Amendments") that, if finalized in current form, generally will be
effective as of August 23, 2000. Among other things, it is anticipated that the
amended Underwriter Exemption would permit Plans to purchase subordinated
certificates rated in any of the four highest ratings categories (provided that
all other requirements of the Underwriter Exemption are met). It is not certain
if and when the Proposed Amendments will be issued in final form, and it is not
certain that the Proposed Amendments, if finalized, will contain the same
relief as is currently proposed. Plan fiduciaries should, and other potential
investors who may be analyzing the potential liquidity of their investment may
wish to, consult with their advisors regarding the Proposed Amendments
85
Neither PTCE 83-1, which exempts certain transactions involving plan
investments in mortgage trusts, 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, New York, New York or Morgan, Lewis
& Bockius LLP, New York, New York.
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 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
86
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 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
87
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.
88
INDEX OF DEFINED TERMS
additional obligations:............................84
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..............................67
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....................................55
Deleted Primary Asset..............................35
Depositor...........................................8
Depositor Securities...............................53
Disqualified Organization..........................63
Distribution Account................................9
Distribution Date...................................9
DOL................................................81
Eligible Investments...............................21
Enhancement....................................13, 22
EPA................................................45
ERISA..............................................81
Escrow Account.....................................25
Events of Default..............................37, 38
FASIT..............................................54
FASIT Qualification Test...........................77
FASIT Securities...................................76
FHA................................................16
Final Mark-to-Market Regulations...................65
Final Scheduled Distribution Date..................11
Funding Limit......................................84
Funding Period.....................................84
Garn-St. Germain Act...............................48
High-Yield Interest................................78
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.......................58
IRS................................................56
Liquidation Proceeds...............................26
Loans..............................................10
Mortgage...........................................33
Mortgage Loans......................................9
New Regulations....................................68
Nonresidents.......................................69
Notes...............................................8
OID................................................55
OID Regulations....................................55
OTS................................................49
Parties in Interest................................81
Pass-Through Securities............................65
Pay-Through Security...............................57
Plan Asset Regulation..............................81
Plans..............................................81
Pool Insurance Policy..............................23
Pooling and Servicing Agreement.....................8
Pre-Funded Amount..................................21
Pre-Funding Account................................21
Pre-Funding Period.................................21
Prepayment Assumption..............................57
Primary Assets......................................9
Private Securities.................................10
Property...........................................16
PS Agreement.......................................19
PS Servicer........................................19
PS Sponsor.........................................19
PS Trustee.........................................19
PTCE...............................................82
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
Short-Term Note....................................70
89
Single Family Property.............................15
Special Redemption Date............................11
Stripped Securities................................65
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..............................83
VA ................................................16
90
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus Supplement or the Prospectus and,
if given or made, such information or representations must not be relied upon.
This Prospectus Supplement and the Prospectus do not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
securities offered hereby, nor an offer of the securities in any state or
jurisdiction in which, or to any person to whom, such offer would be unlawful.
The delivery of this Prospectus Supplement or the Prospectus at any time does
not imply that the information herein or therein is correct as of any time
subsequent to its date.
TABLE OF CONTENTS
Page
Prospectus Supplement
SUMMARY.......................................S-3
RISK FACTORS..................................S-8
USE OF PROCEEDS..............................S-16
DESCRIPTION OF THE TRUST.....................S-16
THE HOME LOAN POOL...........................S-18
THE TRANSFEROR AND BACKUP SERVICER...........S-51
THE ORIGINATOR AND SERVICER..................S-52
THE POLICY...................................S-54
THE NOTE INSURER.............................S-56
DESCRIPTION OF THE NOTES.....................S-57
DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS.......................S-72
PREPAYMENT AND YIELD
CONSIDERATIONS.............................S-76
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES...............................S-86
ERISA CONSIDERATIONS.........................S-86
UNDERWRITING.................................S-87
LEGAL INVESTMENT MATTERS.....................S-87
RATINGS......................................S-88
EXPERTS......................................S-88
LEGAL OPINIONS...............................S-88
INDEX OF TERMS...............................S-89
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES..................1
Prospectus
Prospectus Supplement......................
Available Information......................
Incorporation of Certain Documents by
Reference..................................
Table of Contents..........................
Summary of Terms...........................
Risk Factors...............................
Description of the Notes...................
Description of the Certificates............
Pool Factors and Trading Information.......
Certain Information Regarding the
Securities The Trusts......................
The Trustee................................
Description of the Trust Property..........
Credit Enhancement.........................
Servicing of the Loan Assets...............
The Seller and the Issuer..................
The Servicer...............................
Description of the Transfer and Servicing
Agreements...............................
Certain Legal Aspects of the Loan Assets...
Certain Federal Income Tax Consequences....
Trusts For Which a Partnership Election
is Made....................................
Trusts Treated as Grantor Trusts...........
Notes Issued by FIC........................
ERISA Considerations.......................
Legal Investment Matters...................
Plan of Distribution.......................
Use of Proceeds............................
Legal Opinions.............................
Index of Terms.............................
$557,332,000
Bear Stearns Home Loan Owner Trust 2001-A
Home Loan-Backed Notes, Series 2001-A
EMC Mortgage Corporation
Transferor and Backup Servicer
Bear Stearns Asset Backed Securities, Inc.
Depositor
Conseco Finance Corp.
Originator and Servicer
---------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------
Bear, Stearns & Co. Inc.
Lehman Brothers Inc.
March 8, 2001